July 06, 2014

Volume 2

Warm Welcome!

Club FinNiche takes this opportunity to welcome the junior batch to

IMT Ghaziabad. Every week we bring to you an illuminating edition of

FinXpress, which updates the student fraternity with current financial

updates and terms.

This week, the In Focus section throws light on the topic “The Biggest

IPO Still a Mystery to many: Alibaba.com”. The Opinion makes a

critical analysis of the growth in India considering the scenario of jobs.

The term of the week gives an idea about the financial instrument

"Derivatives". Do have a look at the Market and News section to bring

yourself up to speed with market volatility and the reasons behind it.

Club FinNiche welcomes any comments, suggestions or criticism

regarding the magazine. Please do write to us and share your ideas.

Happy Reading!

Regards

The Editorial Team

Club FinNiche

From The Editorial FinXpress Volume 2

July 06, 2014

FinXpress

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

FinNiche

July 2014 Page 1

CONTENTS

From The Editorial

In Focus: The Biggest IPO

still a mystery to many:

Alibaba.com

Term of the Week: Deriva-

tives

Opinion: India: Pushing

Jobs and Growth

Market This Week

News

Fun Corner

PAGE 2

IN FOCUS

On 8th of August (8 is lucky number in china), the Chinese e-commerce giant, Alibaba will go on sale to public under the ticker symbol “BABA”. It is evaluated to be the largest IPO in the history with an evaluation of some $20 billion making it a $150 billion company. Alibaba is known to be the largest e-commerce company on EARTH reflected by the fact it processed more than $248 billion of online transactions in 2013 which is more than double the total transactions of Amazon (the second largest e-commerce company) standing at $100 billion worth of transactions . Yet Alibaba remains a mystery and an unknown quantity to business people, investors and consumers who are from outside China. Apart from people who work in china or deal with Chinese consumers, no one have a full understanding of Alibaba, it’s working and the future prospects of the company. According to the a survey of more than 300 institutional investors conducted by the ConvergEx Group, it was revealed that US buyers who have not yet invested in Chinese stocks are still unclear about investing in the IPO. The survey shows that although people are optimistic about Alibaba’s business model and its potential performance as a publicly-traded stock, yet they do not plan to buy into the company. Only 43% of those surveyed planned to buy shares of the company although around 63% believed Alibaba to be a good long-term investment. Fund managers who have not yet invested in Chinese stocks appear to be the least likely to buy

Alibaba. According to Mr. Nicholas Colas, ConvergEx Group’s chief market strategist, this skepticism isn’t over the company but the country it belongs to.

In the past about 168 companies from Hong Kong and China have gone public on organized stock exchanges in the United States but were maligned by a number of accounting frauds. Looking into the past, the previous Chinese IPOs have not performed well decades due to low return on equity and weak profit margins of Chinese companies, in spite of the enormous growth of the Chinese economy during the last three. Another reason for skepticism about Chinese IPOs is due to risks arising from the legal structure of Alibaba and other Chinese companies as they have employed corporate governance structures typically used to get around restrictions by the Chinese government on foreign ownership of businesses. Alibaba needs to grow significant profits in order to give investors good returns and sustain the prices as its going public at a high P/E ratio of around 50 at present. Although recent growth in profits justifies high P/E ratio but there is one more risk .It can be the case of concern that Alibaba has potential to grow its profits without investors receiving their fair share as the management control voting rights and there is a possibility that rather than paying out profits to the investors, they can directed to their Alipay subsidiary, and this subsidiary could be sold at dear prices to the managers. And, since Alibaba operates in China, and not the U.S., there is little that U.S. investors could do about this potential theft of assets if it were to happen. Come next month, it would be interesting to watch how this much anticipated billion dollar IPO deal fares

on US stock market amongst all the skepticism and prove to be a boon paving the way for other Chinese companies.

FinNiche

The Biggest IPO still a mystery to many: Alibaba.com

—- Nupur Gupta

JULY 2014

Page 3

Opinion

After the world’s largest democracy made a

decision for the change it needed and the

overwhelming vote for political stability and

economic change it had been longing for, it

has infused the country with a new

optimism that is spreading beyond borders.

India may be on the cusp of a new wave of

growth and promising to deliver

employment to millions of fellow

countrymen and women, but the truth is

the that the country and the government

may be able to grasp the opportunity if

India has a way to unleash the potential of

the manufacturing sector.

If the right environment and the right

opportunities are provided, India has a list

of international clients who have interest in

investing and have the funds and the risk

appetite to be a part of India’s economic

future. The government needs to focus this

positive interest of the investors where it

will do the most good to the country and its

people.

The country’s primary sectors, principally

agriculture and likes can provide jobs but

not growth. Also, our tertiary sector

services like information technology can

provide growth but not enough jobs: if the

nation wants to provide jobs and growth,

the drivers of the nation must encourage

foreign direct investment into the

secondary sector i.e. manufacturing. A

renaissance in the Indian manufacturing

would accelerate employment generation,

boosts exports, strengthen the financial

sector and attract substantial foreign

capital inflows into the country.

It is estimated that at optimal levels,

manufacturing would account for about

quarter of the GDP, rising from its current

input which is lesser than 15%. It will take

substantial investment to generate the

necessary level of manufacturing growth:

over the past four years, the manufacturing

sector has been losing its share of GDP,

expanding just 4%.

If we expect the above mentioned investors

to come to the country, invest, take risk

and provide us both cash and expertise, we

must clean up our home, make it inviting

and prepare the ground. Our focus should

be on making India more business friendly.

We must try to improve our world ranking

in the World Banks’ ease of doing business

index, where the country languishes at

number 134 out of 189 nations ranked in

the list. The country is ranked slightly

better than Ecuador, but behind Yemen or

Bangladesh, and 24 places behind

Pakistan.

The change needs to start with the

bureaucracy, where we must streamline

the lengthy and complicated procedures for

various approvals and environmental

clearances. For example projects worth

some 15 lakh crore are stuck waiting for a

green light since months in the books of

bureaucratic officers. Companies in India

are subject to some 33% taxes as

compared to 5-7% in developed countries.

A relatively large proportion of India is of

working age, but if we are to benefit from

so called ‘demographic dividend’, we need

to reform our obsolete labour laws to make

the workforce more cost efficient and

flexible.

We need to address a looming and

potentially critical shortfall through

improved education and vocational

training, get the hardware of development

right, the national skills development

corporation estimated the skill gap will

widen to 90 million people over the next 10

years.

FinNiche

India: Pushing Jobs and Growth

July 2014

------ By Anureen Bhatti

Page 4

FINANCIAL KNOWLEDGE

A derivative is something which derives its

price from the underlying asset. For

example a Infosys stock derivative derives

its price from the share price of Infosys on

the stock exchange. We can broadly classify

the types of derivative contracts into

forwards, futures and options.

A farmer who grows wheat is concerned

with the price of wheat in the harvesting

season. Let us say the harvesting season is

2 months away. What is the way out? Does

the farmer wait for two months expecting

that the price will be to his advantage i.e

move upwards? Is that the only way out?

Certainly not!

Alternatively, the farmer can enter into a

contract to sell wheat at a predetermined

price today. Such a contract is called a

forward contract which fixes the

transaction price of an asset at a specified

date in the future. By entering into such a

contract, the farmer effectively reduces the

risk of any price decline in the next two

months. However, there is also a downside.

What if the current price rises above the

contract price? In such a case, the farmer

would effectively make a loss as he is

obligated to transact with the other party at

the price decided in the forward contract.

For example, if the farmer enters into a

contract to sell wheat for Rs. 15 per kilo

and the price rises to Rs. 17 per kilo, the

farmer is obligated to sell at Rs. 15 which is

Rs. 2 less than the current market price

also called the spot price.

The above example explains a very

unstandardized contract which any two

parties can enter into. With time as more

and more people started entering into these

contracts, a need was felt for

standardisation and making sure that the

default risk is minimised. This led to such

contracts being traded on exchanges where

the counterparty was the exchange to both

the buyer and seller. This potentially

eliminated the default risk. Each party to a

futures contract is expected to deposit a

certain percentage of the total contract

value called initial margin with the

exchange. This deposit acts as a security

against default. Another important feature

of futures contracts is that they are marked

-to-market. For example, if the contract

price is Rs. 200,000 (assuming the wheat

farmer is selling 1000 kilos of wheat at Rs.

20 per kilo) and the parties are required to

deposit 10% as initial margin, both the

buyer and seller will pay Rs 20,000 to the

exchange. Now, if the next day the price of

wheat falls to Rs. 19 per kilo, the seller of

wheat makes an expected loss of Re. 1 per

kilo and his margin of Rs. 20,000 is

reduced to Rs. 19,000 (1000 kilos x Re. 1

loss).

Another type of derivative contract is

Option. As the name suggests, it gives the

holder the right but not the obligation to

transact on the date of maturity. This limits

the downside risk as a person would

transact if and only if it will result in a gain.

Unlike futures and forwards however,

entering into an option contract requires

payment of a non-refundable option

premium to the seller of the option. So, the

buyer of the option is in a way transferring

the risk of price volatility of the asset by

making payment to the seller.

FinNiche

Derivatives

July 2014

Page 5

FINANCIAL KNOWLEDGE FinNiche

Market This Week

After three-weeks of consolidation, equity benchmarks gathered momentum with

the Sensex and Nifty ending at record closing high ahead of Budget and April-

March quarter earnings started off with Infosys next week. Hopes of better mon-

soon after a dry spell in June and fall in crude oil prices on easing Iraq conflict too

supported the market. The Nifty gained 3.2% this week to close at 7,751.60 while

Sensex gained 3.4% to close at 25,962.06 points. The rupee has depreciated

against the US dollar from last week to close at Rs 59.79 per $1.

SENSEX Simple Moving Averages

BSE SENSEX

CNX Nifty

Thirty Days 25,172.68

Fifty Days 24.435.48

Hundred Fifty Days 22,328.74

Two Hundred Days 21,850.97

July 2014

Page 6

FINANCIAL KNOWLEDGE FinNiche

Bank Rate 9.00%

Repo Rate 8.00%

Reverse Repo Rate 7.00%

Cash Reserve Ratio 4%

Statutory Liquidity Ratio 22.5%

INR / 1 USD 59.79

INR / 1 Euro 81.32

INR / 100 Jap. YEN 58.60

INR / 1 Pound Sterling 102.66

Commodity Unit Rs / Unit % Change

Gold 10 grams 27,584 0.44

Silver 1 Kg 45,056 0.47

Crude Oil 1 bbl 6,227 0.27

Base Rate 10.00%-10.25%

Savings Deposit Rate 4.0%

Term Deposit Rate 8.00%-9.05%

Nifty Simple Moving Averages

Commodities

Lending / Deposit Rates

Thirty Days 7,523.28

Fifty Days 7,298.56

Hundred Fifty Days 6,657.91

Two Hundred Days 6,507.88

Key Policy Rates and Reserve Ratios

Exchange Rates

July 2014

Page 7

FINANCIAL KNOWLEDGE

Lufthansa to sign join venture deal

with Air China this weekend

Lufthansa and Air China are planning

to set up a joint venture which would

allow them to share revenue on certain

Asian routes by selling tickets for each

other's flights but the routes have still

not been specified.

The news is a strategic move for

Lufthansa as it has struggled to keep

up with competition from low-cost and

the gulf rivals which are performing

extremely well . It has been in talks

with Air China for months as it seeks to

strengthen its position in Asia, where

Dubai-based Emirates and Turkish

Air l ines have been expanding

continuously.

Rupee sees biggest weekly gain in 1-

1/2 months

The rupee rose 0.6 percent for the week,

posting its strongest gain since the

week of May 16 that saw the election of

Modi as prime minister, although the

unit has ceded ground since hitting a

three-week intraday high of 59.52 on

Thursday.

The Reserve Bank of India was also

spotted buying dollars, continuing its

pattern of intervention to prevent the

rupee from gaining sharply. The rupee

is likely to trade in a range of 59.60 to

60.40 until the budget. The budget due

to be presented on July 10 will be a key

test of investors' faith in Modi and his.

Tata Power May Sell $250 Million

Stake in Indonesian Coal Mine

Tata Power Co. Ltd. (TPWR), suffering

losses at its largest power plant in

Mundra, western India may sell a 5

percent stake in Indonesia’s Prima Coal

for about $250 million to reduce group

debt.

Tata Power, part of India’s largest

business conglomerate, signed option

agreements with a Bakrie Group entity

for the stake. The agreement would

include the sale of Tata Power’s entire

30 percent stake in Kaltim’s associated

power infrastructure companies

reducing TATA Power share to just 25

percent in coal mining companies.

The company has been reporting

losses in the past three fiscal years,

largely driven by below-cost power sales

at its 4,000-megawatt power plant in

Mundra in the western Indian state of

Gujarat. The contracted tariff for the

plant, which runs on coal imported from

Indonesia, became unviable after a

change in law led to a jump in prices of

the fuel in Indonesia, the world’s biggest

exporter.

But this sale would not affect coal

supplies to Tata Power’s power plants,

as there would be no dilution in its

rights as a shareholder of the company.

Emerging Stocks Rise to 15-Month

High on U.S. Jobs Report

Emerging-market stocks rose for a

fourth day after the U.S. jobless rate slid

to an almost six-year low, boosting the

outlook for global growth. U.S.

employers added more workers than

forecast in June and the unemployment

rate dropped to 6.1 percent, Labor

Department figures showed today. The

report adds to global optimism after

data on July 1 showed China’s

manufacturing expanded in June at the

fastest pace this year, while a private

gauge signaled gains in India. The

Shanghai Composite Index added 0.2

percent to a two-week high on its fourth

FinNiche

NEWS OF THE WEEK

July 2014

Page 8

FINANCIAL KNOWLEDGE

gauge signalled gains in India.

The Shanghai Composite Index added

0.2 percent to a two-week high on its

fourth day of gains. The Philippine

Stock Exchange Index gained 0.7

percent, while Taiwan’s Taiex Index

(TWSE) rose 0.4 percent.

Indian Bonds Complete First Weekly

Gain in a Month Before Budget

India’s 10-year bonds completed their

first weekly gain in a month on signs

Prime Minister Narendra Modi’s new

government will boost efforts to curb

the fiscal deficit in next week’s budget.

The yield on the 8.83 percent bonds due

November 2023 fell nine basis points, or

0.09 percentage point, this week to 8.66

percent in Mumbai, according to the

central bank’s trading system. That’s

the first decline since the period ended

June 6. The rate was little changed

today.

Markets are hinging a lot of hopes on

the budget and we expect the

government’s focus to be on fiscal

consolidation, which is positive for

bonds. Some small progress in the

monsoon has also aided sentiment.

Dollar Has Biggest Weekly Gain in Six

on Faster Job Growth

The dollar posted its biggest weekly gain

in six as signs of an accelerating U.S.

r e co ve ry s pu r re d s pe cu l a t i o n

the Federal Reserve will bring forward

the timing of interest-rate increases.

The Bloomberg Dollar Spot Index,

which tracks the greenback against 10

major peers, posted 0.24 percent weekly

increase after data showed that U.S.

nonfarm payrolls rose more than the

e c o n o m i s t s e s t i m a t e d a n d

the unemployment rate fell to an almost

six-year low thus spurting hopes of an

economic recovery soon .

Asian Currencies in Weekly Advance

as Export Outlook Brightens

Asian currencies advanced the most last

week in almost two months, led by

Indonesia’s rupiah, as signs of

improvement in the world’s two largest

economies spurred optimism that

regional exports will pick up.

U.S. companies added more jobs in

June than economists estimated

while China’s manufacturing grew at

the fastest pace of the year, reports

published last week.

The Bloomberg-JPMorgan Asia Dollar

Index (ADXY), which tracks the region’s

10 most-active currencies excluding the

yen, rose 0.3 percent last week, the

biggest advance since the period ended

May 9. The rupiah strengthened 1

percent to 11,880 per dollar in Jakarta,

while the Malaysian ringgit gained 0.9

percent to 3.1860 and India’s rupee

added 0.6 percent to 59.7350.

FinNiche

NEWS OF THE WEEK

July 2014

FinNiche

Fun Corner

FinQuiz 1. Name the bond whose interest rate is tied to rate of inflation?

2. Who was independent India’s first Defense minister?

3. Which is the Tata group’s oldest surviving brand?

4. Which airline had the tagline ‘Flying for everyone’?

5. Which is India’s first fully indigenous passenger car?

CARTOONS

FUN CORNER

Page 9

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Publisher: Aditya Agrawal

July 2014

Last week’s answers 1. Plain Vanilla interest rate swap 2. Term sheet 3. Less than 1 4. White squire defence 5. Exchange Clearing House

Last Week’s Quiz Winner

Aditya Bhavanasi