July 28, 2013

Volume 1

&

A New Beginning Among all the British poets of the English Romantic Era, Samuel Taylor

Coleridge was definitely a class apart. An erstwhile friend and confidant of

William Wordsworth, Coleridge was extremely famous for his imagery of the

supernatural. It was in his poem, The Rime of the Ancient Mariner where he

penned down one of the world’s famous adages, “Water, water everywhere/

And all the boards did shrink/ Water, water everywhere/ Nor any drop to

drink.”

It felt as if we ran into this above-mentioned clichéd situation when we

thought about revamping the FinXpress. We could do so much more with

our magazine but few seemed sustainable for a publication published

weekly. Yet, we persisted in presenting you, our readers, a new, changed

FinXpress. One of our objectives was to become more opinionated so as to

integrate all us students to discuss key happenings of our times.

Much effort has been spent on the design of the magazine. We looked to

keep it simple and innovative by introducing new design templates for the

pages. Additionally, we realized that discussion and drawing implications

from subject issues are also important from collecting mere facts. Thus we

have introduced an “Opinions” section where readers can publish their

opinionated articles. These articles could be about public policy seen

through the lens of economics and finance, corporate news or any other

write-ups along these lines.

Our “In Focus” section still remains as our cover article. In future, we plan

to cover financial topics, companies and personalities to increase our

corporate knowledge. Hopefully they’ll also be beneficial for students

preparing for placements and interviews. As always, we look to your

continued readership and feedback. We hope you enjoy this edition of

FinXpress.

Regards!

Team FinNiche

From The Editorial FinXpress

Volume 1

July 28, 2013

FinXpress

Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.

FinNiche

July 2013 Page 1

CONTENTS

From The Editorial

In Focus: Mergers &

Acquisitions - What

Brings Synergies?

Opinion: Beware of

The Food Security

Bill

Term of The Week

Market This Week

News

Fun Corner

Page 2

IN FOCUS

A merger or an acquisition is one of the

most material and crucial information for

an investor from a financial perspective.

It can significantly influence the stock

price and thereby increase or decrease

the valuation of the company. An M&A

transaction involves one company

acquiring the other in exchange for

cash, stock, debt or a combination of the

three. It is done for many reasons

including industry consolidation,

increasing market share, combining

talent and technology, entering a new

market, booking supply of raw materials,

reducing competition etc. M&A

transactions involve a plethora of legal,

financial, political and accounting

procedures which can take days and in

some cases years to complete. Once

the transaction is complete, the target

company is either merged with the

acquiring company or operates

independently as a subsidiary. The fact

that the target company is merged or

remains independent depends on the

terms of the definitive agreement signed

between the parties.

Mergers in the manufacturing industry

are largely dependent on the occurrence

of synergies. Technically, synergies

occur when the merged company is

bigger and better than the sum of

individual buyer and seller. In other

words, a merger is synergistic if it leads

to increase in combined revenue or

decrease in overalls costs. It comes

from the Greek word “synergia” which

means which means joint work and

cooperative action. Hence, occurrence

of synergies is a very important factor in

determining the post merger value of the

combined company. If the future cash

flow stream of two companies is not

positively correlated then combining the

two will reduce the variability of cash

flow and thus increase the value by

having cheaper financing available.

When Proctor & Gamble acquired

Gillette in 2005, a P&G news release

cited that "The increases to the

company's growth objectives are driven

by the identified synergy opportunities

from the P&G/Gillette combination. The

company continues to expect cost

synergies of approximately $1 to $1.2

billion…and an increase in the annual

sales run-rate of about $750 million by

2008". According to P&Gs 2012 annual

report, Gillette sales now account for

close to 14% of its total sales.

To predict whether a potential merger

involves synergies, an analyst studies

two parameters. The type of merger and

the nature of consideration. A vertical

FinNiche

Mergers & Acquisitions

What Brings Synergies?

Did You Know?

Vodafone acquired the German

company Mannesmann for

whooping $200 billion in 1999.

—- By Mukul Gupta

July 2013

Page 3

IN FOCUS

merger where the buying company either

integrates forward by purchasing the

distributors or backwards by acquiring the

suppliers, leads to decreased costs. In

case of a horizontal merger however, the

objective is to bring about an overall

increase in revenues as two competitors

from the same industry combine as one.

The Tata-Jaguar Land Rover deal is a

classic example that showcases

importance of synergy in horizontal

mergers and how it can bring about a

drastic turnaround in a firm's operations.

Jaguar and Land Rover were ailing

brands before they were taken over. Five

years hence, it has become one of the

most profitable businesses in the Tata

conglomerate and is one of the major

employers in United Kingdom.

Thus, both vertical and horizontal

mergers focus on specific synergistic

benefits. Another type of merger called

conglomerate merger does not lead to

synergies as two companies from totally

unrelated industries combine into one.

Such type of mergers are primarily done

for tax advantages and to mask poor

performance in an industry. For example,

if a highly profitable company decides to

equate high taxes by investing in a loss

making entity of a different sector, it

would classify as a conglomerate merger.

Companies on the other hand cite

diversification as the purpose behind

conglomerate mergers.

The nature of consideration also plays a

very important role in determining

potential synergies. If the acquiring

company decides to pay in cash, the

target shareholders do not become

shareholders of the combined company

and there is no dilution. This indicates

that the acquirer is reasonably certain of

occurrence of synergies and does not

wish to share the potential benefits. In

such a case however, the target

shareholders would solicit a stock deal.

On the other hand, if the acquirer issues

new shares to the target shareholders as

consideration, it exhibits an apprehensive

attitude towards synergies. Shareholders

in this case long for payment for their

shares in cash. However, sometimes

payment of stock is also considered as

an indication that the acquirer's stock is

overvalued. This works to the detriment

of the acquirer as analysts change their

recommendation from "buy" to "sell" on

overvalued stock.

The primary objective of any takeover is

to create value for shareholders that

exceeds the cost of the acquisition. Thus,

synergies are fundamentally the only

tangible justification for a takeover.

FinNiche

July 2013

What is Hostile Takeover?

An attempt to take over a com-

pany without the approval of the

company's board of directors i.e.

by approaching directly the

shareholders to sell their shares.

Page 4

OPINION

The articles by Pratap Bhanu Mehta, a

contributing editor for “The Indian

Express”, are usually a treat to read. One

could disagree with him; yet in all

respects she/he would surely appreciate

Mr. Mehta’s lucid rationality in analyzing

public policy issues. In his article, “A

Great Deal of Agreement”, Mr. Mehta

argues that political parties in India

actually suffer from way too much

consensus rather than the feigning

worldview that these parties face gridlock

due to a dearth of agreement. He claims

that all parties are essentially the same –

populist, lovers of big government,

believers of entitlements and of a welfare

state and advocates of affirmative action.

In short, their ideologies are very similar

with hardly any substantial divergence in

their philosophies. Further, he asserts

that the only game antagonistic political

parties play is in opposing policy. Thus,

it’s very much possible for a party to

support a political stance once and stymie

it the very next instant.

Nevertheless, it is lamentable that the

Food Security Bill (now an Ordinance), in

all probability, would not be opposed in

the Parliament. According to the analysts,

the opposing parties would be labeled as

anti-poor and would essentially lose their

vote bank. Further, there’s Mr. Mehta’s

motif throughout this political situation –

political parties love populism,

entitlements and the welfare state. Only

this time, they would choose not to

“thwart”. This is indeed regrettable politics

since the Food Security Bill is burdened

with problems.

This Bill seeks to provide 5 kg of food

grains (rice, wheat) per month to nearly

66% of India’s population at super

subsidized rates of Rs. 1-3 per kg.

Consequently, the government proposes

to spend a staggering Rs. 1,25,000

crores every year to supply 62 million

tons of food grains. One should make a

note that the government has always

been doling out food subsidies.

According to a research paper by Dr. V

P Sharma, professor of IIM Ahmedabad,

Rs. 72,283 crores was spent as food

subsidy in the 2011-12 year alone.

Question arises whether India can afford

to spend taxpayer’s money in such a

grand scale. FICCI states that such

measures are unsustainable from a

financial perspective. With a high CAD, a

falling rupee and a sluggish growth,

heavy subsidies would simply “add

pressure on the fiscal situation”.

Economists such as Surjit Bhalla,

estimate the entire cost of the Food

Security Operations to actually amount

to nearly 3% of the GDP! One can

conclude that such expenditure would

surely make a severe dent in the

country’s finances. With less money

available for investments amid a bearish

market, growth would surely take a hit.

And how does the government propose

to transfer food grains to the poor? The

FinNiche

Beware Of The Food Security Bill

—- By Subhankar Halder

JULY 2013

Page 5

OPINION

administration plans to move the food

grains through the same old notoriously,

corrupt Public Distribution System

(PDS). The Planning Commission notes

that the Food Corporation of India (FCI),

an integral part of the PDS, has its

depositories piled up with food surpluses

while there’s “widespread incidence of

hunger outside!” Additionally, the final

food grains that are sold to the poor via

the fair price shops are extremely low on

quality signifying a substantial black

market existence. And now, the

government proposes to do the same

thing through the same process, only in

a much grandiose scale. Without

meaningful steps being taken to

eradicate the existing corruption present

in the PDS, is it justified to pump in vast

amounts of taxpayer’s money only to be

looted through corrupt practices? Yet,

the government will present the

ordinance in the House and there will be

no opposition.

The finances and the supply chain

operations of this grand agenda are

fraught with such problems. But now,

one should spare some moments

deliberating about the public policy of

entitlements in general. It’s true that all

countries, including America, are welfare

states and food security schemes surely

sound noble. But are welfare states and

entitlements good in execution? Aren’t

we making the poor more dependent on

the government by providing numerous

schemes like cash transfers and food

security? Aren’t such schemes a way to

keep the parties’ vote bank intact? Why

should someone trust the government

again and again when they have shown

to be incompetent to execute any

scheme of importance?

The solution to the problem of hunger is

to rely on the market rather than the

government. Let FDI be allowed freely to

come to India so as to integrate the food

distribution supply chain efficiently.

Encourage companies to come up with

CSR activities to uplift the rural poor.

Importantly, ease the requirements for

businesses to start in rural areas. Lesser

regulation would mean lesser corruption

on the part of government officials. Let

there be freedom and liberty for a person

to start a legitimate business in the food

sector rather than absurd regulations and

high-handedness of the PDS.

FinNiche

JULY 2013

Page 6

FINANCIAL KNOWLEDGE

Definition

FCCB’s (Foreign Currency Convertible

Bonds) are a type of convertible bond that are

issued in a currency different from the issuing

company’s currency. A FCCB holder has the

option of redeeming their investment or

converting the bonds into equity at/before

maturity at a market-linked pre-determined

price.

How they work

Now that we have taken a look at the

definition, let us attempt to demystify the

jargon a bit. This financial instrument is

basically a convertible bond, which means it’s

a hybrid of a debt and an equity instrument.

Let us say company X wishes to raise funds

for itself through the FCCB route. It can issue

such a bond with a certain maturity period to a

lender in another country, and in return has to

make an interest payment to the lender, like

any regular debt instrument. The payment has

to be made in the currency of the lender.

Now on the date of maturity, the lenders or

the investors have two options – they can

redeem their investment or they can opt for

conversion to equity. This conversion is done

at a market linked initially agreed price. So if

our company X had agreed the conversion

price to be Rs 400 with Mr. Y, an investor

who had invested Rs 2000 total, he would be

eligible to get 2000/400 = 5 shares at

maturity. Mr Y would stand to gain by

converting to equity if the share price at this

point in time had gone up, as he would in

effect, be getting the shares at a discount. If

on the other hand the share price had gone

down, Mr Y can go for full redemption of the

invested amount.

Regulatory framework in India

The Indian Government treats the money

raised through this route as FDI. Stringent

regulations have been laid down by the RBI

for ECCB’s in their master circular on ECB’s

(External Commercial Borrowings).

It clearly defines the eligibility criterion for both

borrowers and lenders, and also stipulates

End Use conditions which lay down what the

company raising these funds can use them

for.

Why companies opt for them

FCCB’s are a cheaper form of raising capital

for companies as they can access

international markets which demand lower

interest rates, and partly because the

borrowing rate is lower than pure debt due to

the inherent option of conversion to equity.

A large number of FCCB’s raised by Indian

companies are unsecured i.e. do not need

any collateral which helps in making it a

cheaper form of financing.

What’s in it for investors

Investors receive the safety of guaranteed

payments on the bond and can take

advantage of any large appreciation in the

share price.

The tax liability is also lower than pure debt

instruments due to lower coupon rate.

The FCCB landscape in India

A large number of FCCB’s were raised by

Indian companies in the period of 2006 –

2008 as rates were much cheaper than what

they were getting in domestic markets and

companies believed that their stock prices

would continue trending up and investors

would chose the equity conversion route.

However a series of global and domestic

macroeconomic factors have contributed to

plummeting share prices of a lot of these

companies , and therefore they have to re pay

the debt. Along with this the rupee has

depreciated , which makes repayment in the

foreign currency more expensive.

FinNiche

Term of The Week - FCCBs

—- By Anshuman Singh

July 2013

Page 7

FINANCIAL KNOWLEDGE FinNiche

Market This Week

In the week July 22 - 26, the SENSEX slumped 2% and close at the 19748.19 mark. The

Nifty also fell by more than 2.3% to close at 5886.2. Hindustan Unilever slumped after its

June-quarter sales missed forecast, while banks such as HDFC Bank fell on caution ahead

of the RBI’s policy review next week. Maruti Suzuki failed to hold on to earlier gains and fell

2.7% after analysts raised concerns about the carmaker’s cautious outlook on car sales. Re-

liance Infrastructure (RLIN.NS) fell 1.6% while Ranbaxy Laboratories ended 1.9% own as

brokers expected both stocks to be removed from the Nifty at a review next month. Property

developer DLF fell 1.5% after Citigroup downgraded the stock to “sell” from “neutral”, citing

high leverage and mounting interest costs.

SENSEX Simple Moving Averages

BSE SENSEX

CNX Nifty

Thirty Days 19477.3

Fifty Days 19554.3

Hundred Days 19379.5

Two Hundred Days 19314.2

JULY 2013

Page 8

FINANCIAL KNOWLEDGE FinNiche

Bank Rate 10.25%

Repo Rate 7.25%

Reverse Repo Rate 6.25%

Cash Reserve Ratio 4%

Statutory Liquidity Ratio 23%

INR / 1 USD 58.9133

INR / 1 Euro 78.218

INR / 100 Jap. YEN 59.67

INR / 1 Pound Sterling 90.6794

Commodity Unit Rs / Unit % Change

Gold 10 grams 27631 0.82

Silver 1 Kg 41080 0.71

Crude Oil 1 bbl 6197 0.22

Base Rate 9.70% - 10.25%

Savings Deposit Rate 4.00%

Term Deposit Rate 7.50% - 9.00%

Nifty Simple Moving Averages

Top 5 Stocks of the Week

Commodities

Lending / Deposit Rates

Thirty Days 5856.87

Fifty Days 5899

Hundred Days 5857.41

Two Hundred Days 5850.43

Key Policy Rates and Reserve Ratios

Stock Last Trade Price Change % Change

Jet Air India 395.5 58.7 17.43

Biocon 321.55 22 7.34

Ambuja Cements 178.85 7.85 4.59

TTK Prestige 3,565.30 155.75 4.57

Bata India 907.45 29.45 3.35

Exchange Rates

JULY 2013

Page 9

FINANCIAL KNOWLEDGE

Blackstone to acquire majority

stake in Igarashi Motors

Global private equity major

Blackstone will buy majority stake in

domestic auto component maker

Igarashi Motors India in a multi-

layered deal. The Chennai-based

Igarashi Motors board has approved

the transaction. Under the deal,

Blackstone along with another entity

plans to acquire over 97 per cent

stake in the company.

At Rs 50,000 cr, Lakshmi Mittal's

ArcelorMittal in India's biggest

FDI pullout

In the biggest foreign investment

pullout, world's largest steel maker

ArcelorMittal scrapped its USD 12

billion (Rs 50,000 crore) steel plant in

Odisha over inordinate delays,

problems in acquiring land and

securing iron ore linkages.

Tata Consultancy Services net

profit jumps 15.5% to Rs 3,831 cr

in first quarter

The country's largest software

exporter Tata Consultancy Services

(TCS) reported consolidated net profit

of Rs 3,831 crore for the June quarter,

up 15.5 per cent from Rs 3,318 crore

in the same period last year.

Bajaj Auto quarterly net profit up

3 percent at Rs 737.68 cr

Bajaj Auto reported 2.68 per cent

increase in standalone net profit for

the first quarter ended June 30, 2013

at Rs 737.68 crore, while its sales

volume dipped in a difficult market.

The company had posted standalone

net profit of Rs 718.39 crore in the

same period of previous fiscal.

Reliance Industries logs 19

percent profit growth in quarter

on strong margins

Mukesh Ambani-led Reliance

Industries (RIL) posted a 19 per cent

jump in its first-quarter net profit at Rs

5,352 crore on back of stronger

margins in its core oil refining and

petrochemical businesses.

Rupee bounces back by 32 paise

to Rs. 59.35 vs USD after 2-days

of losses

The rupee snapped two days of

losses and appreciated by 32 paise

today to close at 59.35 against the

dollar as the US currency weakened

overseas and traders wound up

positions at the end of the week. The

rupee was also helped by fresh dollar

sales by exporters and some banks

and around Rs 250 crore capital

inflows in stocks.

FIIs pull out Rs 18,500 crore from

Indian capital market in July

The weakness in the Indian currency

was instrumental in overseas

investors exiting the debt markets as

the rising cost of hedging a volatile

rupee hurts the yield differential FIIs

work with.

FinNiche

NEWS

July 2013

FinNiche

Fun Corner

FinQuiz 1. What is the usual service offered by Bank of Baroda in

Tirupati?

2. Name the person who introduced "Double Entry" book-

keeping concept.

3. "Don't dream it, Drive it" is the punch line for which com-

pany?

4. Who is the CFO of Google?

5. What is the practice of calculating forward rates using

spot rates called?

Last Week’s Answers

1. Mercedes

2. Market Capilisation

3. Citibank

4. Dundee Mutual Fund

5. Security Paper Mill, MP

Last Week’s Winner

Vamsi Prakash Batchu

CARTOONS

FUN CORNER

Page 10

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issue of FinXpress. So hit the quiz fast & get yourself

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Volume 1 Publisher : Mukul Gupta

JULY 2013

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