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Monday, April 28, 2014

IMF warns about the increasing debt of corporate India.

Is there any scientifically proven optimal debt to equity ratio? Well, not really but the number that can come pretty close to it is perhaps 100%. In other words, if past history is anything to go by, the moment debt starts getting higher than the equity base of a firm, investors should start turning cautious. And this is precisely why a news item in a leading daily has us worried. It highlights how about one third of the corporate debt in India is having a debt to equity ratio of more than 3 times! And the agency to flag off this warning signal is none other than the global financing agency, the IMF.

It has further pointed out how about half the corporate debt in India is on the books of companies with return on assets less than 5%. Basically, this does not even cover the interest expenses. Similarly, more than 20% debt is owed by firms with profit to interest expenses ratio being less than one. Clearly, should the economic scenario worsen further, we could well be staring at a fresh round of troubles for the Indian banking sector. For this reason alone, the sector may not be a haven for value investors as it is being made out to be.

Pfizer offered to purchase AstraZeneca

In January for £46.61 ($76.62) a share in cash and stock, with the proposal representing a 30% premium on AstraZeneca's (AZN) shares at the time. The U.K. company turned the offer down, explaining that it "significantly undervalued AstraZeneca and its prospects." Pfizer (PFE) again approached AstraZeneca on Saturday and was rebuffed a second time, and is now "considering its options." AstraZeneca's shares were +15% premarket at $78.54.

Japanese retail sales jumped at the fastest level

In 17 years in March, climbing an expected 11% on year after growing 3.6% in February. The reason for the large gain is that consumers rushed to purchase goods before a rise in sales tax to 8% from 5% went into effect on April 1. The upshot is that sales are expected to fall this month but then recover in May.

President Obama has announced new targeted sanctions

Against Russia that will hit more individuals and companies after the G7 concluded that the country hasn't met its pledge to "de-escalate" the conflict with Ukraine. However, any moves won't target broad sections of Russia's economy. While the U.S. and EU have made noises about wider-ranging action, individual EU countries fear the consequences for their economies.

Not keeping separate books together with frequent transactions means that gains from shares has to be assessed as business profits instead of as STCG

CIT vs. M/s D&M Components Ltd (Delhi High Court)

The AO and CIT(A) held that separate books were not used. Amounts were freely transferred from the profits gained to business and vice-versa. However, perhaps the single-most telling circumstance is the volume, frequency, duration (of holding) of the transactions. Apart from the above significant aspect, the AO and the CIT (A) observed that the assessee had been purchasing and selling a large number of shares of a few companies. It was also held that the transactions involved large or substantial sums of money. Whenever any share is purchased with the intention of investment, it cannot be sold off within a very short span of time, since the share market is always fluctuating. Since in the present case, very frequent purchase and sale of shares have been done it indicates that the main intention of the assessee was to earn income out of these shares which have been claimed to be under the head of short term capital gains. Having regard to the short duration of holding of the shares, and the lack of clarity in the account books, this Tribunal was wrong in assessing the gains as STCG instead of as business profits

Sunday, April 27, 2014

RBI to become the only regulator to frame which loan is NPA

The rise in non-performing assets of PSU banks in the past fiscal has given rise to many doubts. The most pertinent one is whether bank's inability to recover bad loans is as real and projected by them. And if so, whether the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI Act), 2002 has completely failed. For the uninitiated the said act was meant to be a pariah for banks burdened with NPAs. The act allows banks and financial institutions to auction borrowers' properties if they fail to repay their loans. It thus enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery.

However, that has certainly not helped over the past year. The reason being an amendment to the SARFAESI Act in 2005 allowed different regulators to have different loan classification for NPAs. And that resulted in delayed acknowledgement that the loans are indeed bad. However a recent Gujarat High court judgment has repealed the amendment. It has in fact allowed RBI to become the only regulator to frame policies on NPAs. We believe that although belated, this judgment will certainly allow the central bank to control the NPA malady in the sector.

Japanese core inflation remains steady at 1.3% on year in march.

Japanese core inflation, which excludes fresh food prices, held steady at 1.3% on year in March but came in below consensus of 1.4%. Core core CPI, which excludes fresh food and energy, slipped to +0.7% from +0.8% in February. The data helped the Nikkei buck a negative global tape and close +0.2%, due to hopes that the Bank of Japan will increase its bond-buying program in order to make sure that inflation rises to the BOJ's target of 2%.

S&P has reduced Russia's rating by a notch to BBB-

S&P has reduced Russia's rating by a notch to BBB-, or one grade above junk level, and kept the country's outlook at negative as the tensions with Ukraine continue to ratchet up. Russia began military exercises on its border with Ukraine yesterday in response to the latter killing five pro-Moscow rebels during attempts to reassert control over the eastern part of the country. The developments have helped send world shares lower.

Thursday, April 24, 2014

German corporate optimism has increased in April.

With the Ifo institute's business climate index rising to 111.2 from 110.7 in March and beating consensus of 110.5. The current-situation reading and the expectations print also climbed. Meanwhile, Spain's recovery continued to firm up in Q1: the Bank of Spain expects GDP growth to have accelerated to 0.4% on quarter in Q1 from 0.2% in Q4.

ECB may go for broad based asset purchases.

The European Central Bank would consider broad-based asset purchases if the outlook for eurozone inflation continues to weaken, ECB President Mario Draghi has said, adding that further strengthening of the euro could also prompt action.

Important CBDT Circular On Depreciation/ Amortisation Of Intangible Assets

The CBDT has issued Circular No. 09/2014 dated 23.04.2014 in which it has dealt with the important issue of treatment of expenditure incurred for development of roads & highways in Build-Own-Transfer (BOT) agreements.
The CBDT has expressed the view that as the assessee does not hold any rights in the project except recovery of toll fee to recoup the expenditure incurred, the assessee cannot be treated as the “owner” of the property and cannot be allowed depreciation u/s 32(1)(ii) of the Act.
However, the CBDT has also held, following the law laid down in Madras Industrial Investment Corp 225 ITR 802 (SC), that the entire cost of construction and development of the infrastructure facility has to be amortized evenly over the period of the concessionaire agreement and allowed as business expenditure u/s 37(1) of the Act.
The CBDT’s view with regard to the assessee not being the “owner” runs counter to the law laid down in Noida Toll Bridge 213 Taxman 333 and several other judgements. In Swarna Tollway, the ITAT has conducted a thorough analysis of the entire law on the subject and concluded that the assessee has to be treated as the “owner” even though it has limited rights on the structure. The Tribunal relied on several judgements of the Supreme Court including Mysore Minerals 239 ITR 775 (SC) where the concept of “owner” has been considered in great detail.
Unfortunately, the CBDT has not applied its mind these aspects and come to a conclusion in a summary manner.It is well settled that a Circular which is contrary to the law has no binding effect.
However, the CBDT’s directive that the expenditure should be amortized and allowed as business expenditure is welcome.

Wednesday, April 23, 2014

Portugal has sold €750M in 10-year bonds

 At a yield of 3.5752%, representing the return of the bailed-out country to international markets not long after Greece sold €3B in five-year bonds earlier this month. "The story is the same as the rest of Europe," as The market believes that governments have an implied backstop from the ECB, preventing default."

Eurozone business growth has accelerated in April.

With composite flash PMI climbing to a 35-month high of 54 from 53.1 in March. Manufacturing PMI has increased to 53.3 from 53 and services to 53.1 from 52.2. The growth was led by Germany, although French activity slowed. The bloc experienced a return to job creation,suggesting that companies believe "that the recovery has legs and is looking increasingly sustainable." However, "deflationary pressures," still cannot be ignored.

China's manufacturing sector has contracted

The sector has contracted for a fourth consecutive month in April, although the HSBC PMI gauge has edged up to 48.3 from 48 in March. "Domestic demand showed mild improvement and deflationary pressures eased," says HSBC, "but downside risks to growth are still evident as both new export orders and employment contracted." Given China's slowing economy, HSBC believes that the government will add to its recent stimulus.

Tuesday, April 22, 2014

Novartis has agreed to acquire GlaxoSmithKline's (GSK) oncology products for an initial $14.5B and up to $1.5B in development milestones. In return, GSK will buy the Swiss company's vaccines business for $5.25B upfront and as much as $1.8B in milestones, as well as royalties. The latter deal doesn't include Novartis' flu business. Novartis (NVS) will also combine its over-the-counter operations with GSK Consumer Healthcare in a joint venture. GSK's shares were +5% premarket, while those of Novartis were +1.1%. It has also agreed to sell its animal-health division to Eli Lilly (LLY) for around $5.4B. The latter will fold the Novartis (NVS) unit into its Elanco business to create the second-largest company in the sector in terms of global revenue.

Japan has overhauled the investment committee

Japan has overhauled the investment committee of its $1.26T Government Pension Investment Fund (GPIF), the world's largest pension fund. Prime Minister Shinzo Abe wants the GPIF to improve returns by making higher-risk investments and reducing its reliance on low-yielding government bonds. The revamp is part of Abe's "third arrow" of his strategy to reform the economy and lift Japan out of deflation.

Monday, April 21, 2014

The unemployment problem in the US may have been underplayed by the US Fed. However, the statistics hardly fail to reveal the magnitude of the crisis. As per Washington Post, for those who have been unemployed in the US for long, finding jobs has become nearly impossible! In fact as per economists, the long term unemployed may stay out of jobs forever. They argue that such workers have become part of a vicious cycle. Their skill sets have deteriorated during the long spell of joblessness. Hence they are unlikely to fetch jobs versus those who are newly skilled. Again, in their desperation to fetch jobs such workers are willing to accept lower and lower pay. Data revealed by White House shows that of the unemployed from 2008 to 2013, only 36% were in a job 15 months later. Hence a major portion of the population has remained unemployed for good. These unemployed workers have in most cases even ceased to become job seekers. While the US Fed may choose to call this 'less unemployment', the crisis in the economy is for real.

Sunday, April 20, 2014

Low inflation is a larger threat to the U.S.economy.

Janet Yellen in her second public speech since taking the reins at the Fed. Being careful not to talk timing after her "six months" remark in her initial post-FOMC press conference, Yellen said the decision on tightening would hinge on the strength of the labor market and how quickly inflation is headed towards the Fed's 2% goal. She noted wage gains to this point have remained muted, suggesting plenty of slack in the labor market.

Tuesday, April 15, 2014

Diageo made a $1.9B bid

To purchase an additional 26% stake in United Spirits. The transaction will increase Diageo's (DEO) stake in the Indian company to 54.78%. Shares of United Spirits are up over 10%.

Asian stocks moved lower

Following a strong opening after the People's Bank of China disclosed it withdrew 172B yuan ($28B) through repurchase agreements. China's money supply grew at its weakest pace in over a decade during March. Shares of banks and brokerage firms in China stumbled on concerns of capital outflow. The Shanghai Composite Index closed down 1.4%, while the Hang Seng fell 1.6%. The Nikkei showed a 0.6% gain as a strong report on retail sales in the U.S. earlier in the day spilled over. European stocks are slipping with the escalation in Ukraine creating geopolitical worries again. U.S. stock futures are little changed on the early mixed bag of economic news.

Monday, April 14, 2014

The continued strengthening of the euro "would require further monetary policy accommodation," ECB President Mario Draghi said over the weekend. Draghi's comments came after the euro increased 6% over the past year. He said that the euro's strength has been an important factor in causing eurozone inflation to drop to 0.5% on year, which has prompted fears of deflation. The euro was -0.45% at $1.3823 at the time of writing.

Sunday, April 13, 2014

RBI's proposed benchmark base rate versus repo rate.

The RBI has over the past few days put forth several proposals to streamline banking sector's lending norms. One of the most important proposals is with regard to the lending rate. Now each bank in India has its own lending rate called base rate. And most of the lending is at rates above the base rate. However, the RBI has proposed that like in the West, Indian banks too should have a uniform lending rate called Indian Banks Base Rate (IBBR) . This will not only improve transparency in lending but also ensure parity in margins for banks across the sector. Taking the average base rates of leading PSU and private sector banks, the RBI has shown that the benchmark rate can consistently fetch 2-3% margin over the repo rate.

Indian corporate sector's Debt to Equity ratio remains high.

Excessive leverage poses balance sheet risk. It also makes interest servicing a difficult task. If one were to go by the IMF's latest financial stability report, leverage ratios in India's corporate sector appear to be a potent source of risk. As can be seen in today's chart, the debt to equity ratio of India's corporate sector stands at 83%. This is highest amongst emerging market peers. When compared to advanced economies, only Greece and Italy have higher debt to equity ratio than that of India.

Higher leverage signifies that India's corporate sector is quite sensitive to interest rate changes. If interest rates increase, the borrowing cost of corporates will rise further. With debt already being at un-proportionate levels servicing the same could be a challenge. This may result in defaults. Higher debt also reflects the inherent non-performing asset (NPA) risk prevailing in the banking system. If corporates fail to repay their loans and default Indian banks may turn vulnerable. This can have serious repercussions on the economy.

German inflation has slipped to its lowest level

Since August 2010, declining to 1% on year in March from 1.2% in February. Spanish CPI slipped 0.1% after dropping 0.2% a month earlier. The falling levels of CPI come amid fears about deflation in the eurozone, which has prompted the ECB to discuss unconventional policy measures such as quantitative easing.

Thursday, April 10, 2014

Vodafone has agreed to acquire an 11% stake

In its Indian unit held by partner Piramal Enterprises for 89B rupees ($1.48B). The transaction is part of Vodafone's (VOD) plan to obtain 100% control of the subsidiary for a total of 101.41B rupees. The U.K. company owns 84.5% of Vodafone India directly and indirectly. Vodafone also intends to purchase the holding of another minority investor, businessman Analjit Singh.

Greece is reportedly raising €3B ($4.15B).

In five-year bonds in the country's first auction of long-term paper since it was initially bailed out in 2010. Demand was for €20B ($27.7B) of notes, helping to push the yield down to just 4.95% from an initial pricing of 5-5.25%. The bond sale comes two years after Greece defaulted and suffered the biggest sovereign-debt restructuring in history.
The country remains mired in deflation. CPI fell 1.3% on year in March after dropping 1.1% in February, with consensus -1.1%. Unemployment declined to 26.7% in January from 27.2% in December.

Wednesday, April 9, 2014

Profits that major U.S. corporations have parked overseas.

In order to avoid taxes at home jumped 93% to $2.1T in 2008-2013, research firm Audit Analytics has calculated. GE (GE) held the most amount of money abroad with $110B and Microsoft (MSFT) was second with $76.4B, after which comes Pfizer (PFE) with $69B, Merck (MRK) with $57.1B and Apple (AAPL) with $54.4B. The numbers have prompted fresh calls for an overhaul of the tax code. 

It is important to note here that tax rate in US is 35%. However, as per the US law, US based corporations need not pay tax on overseas profits unless they repatriate such profits. In order to avoid high rates of tax in US, the profits stashed abroad have almost doubled from 2008 to 2013. However, one can hardly blame the corporations for tax avoidance in this case. All they are doing is working within the policy framework and putting the money where they feel can it can be most efficiently used. If something deserves blame, it is the flawed policies in the first place.

In an attempt to bring back the money, there is a proposal to scrap the law that allows income tax deferral. There are even talks of offering onetime tax holiday to incentivize companies to bring back foreign profits. But will these proposals be taken ahead? If one goes by history, chances of a significant change in tax code seem slim. The time and effort it takes to clear the mess should be a lesson for all policymakers to come up with efficient policies in the first place, without leaving loopholes.

Germany's exports fell 1.3% on month.

Exports fell in February after rising 2.2% in January and missed consensus. Import growth slowed to 0.4% from 4.1% but was greater than expected, while the trade surplus surprisingly dropped to €15.7B from €17.3B and came in below forecasts. Germany has received criticism that its economy relies too much on exports at the expense of its European partners.

US regulators voted to raise the leverage ratio of banks to 5-6% of their total assets.

The eight largest U.S. banks will have to hold another $68B in loss-absorbing capital after U.S. regulators voted to raise the "leverage ratio" to 5-6% of their total assets, well above the Basel III standard of 3%. The banks affected include JPMorgan (JPM), Citigroup (C), Bank of America (BAC) and Goldman Sachs. The eight firms have until January 1, 2018 to comply with the new rule.

Tuesday, April 8, 2014

S. 80-IB(10): If developer does not (without just cause) develop to full extent of FSI, a part of the sale proceeds has to treated as being for sale of FSI and denied s. 80-IB(10) deduction

CIT vs. Moon Star Developers (Gujarat High Court)

For any commercial activity of construction, be it residential or commercial complex maximum utilization of FSI is of great importance to the developer. Ordinarily, therefore, it would be imprudent for a developer to underutilize available FSI. Sale price of constructed properties is decided on the built up area. It can thus be seen that given the rate of constructed area remaining same, non-utilization of available FSI would reduce the profit margin of the developer. When a developer therefore utilizes only say 25% of FSI and sells the unit leaving 75% FSI still available for construction, he obviously works out the sale price bearing in mind this special feature. Thus, therefore, when a developer constructs residential unit occupying a fourth or half of usable FSI and sells it, his profits from the activity of development and construction of residential units and from sale of unused FSI are distinct and separate and rightly segregated by the AO.

The Bank of Japan has left its key interest rate at 0.1%.

BOJ kept its program of expanding the monetary base by ¥60-70T ($580-680B) a year. The BOJ refrained from further easing and maintained its optimism about the economy despite concerns about the impact of a rise in sales tax that took effect last week.
As per a leading daily, the world's two largest cement manufacturers, Lafarge SA and Holcim SA, are set for the biggest merger in the cement industry. If the merger goes through, the merged entity would have a market capitalisation of about US$ 55 billion. Does this merger make sense? Let us explain. There are broadly two ways in which a firm can enjoy an economic moat or competitive advantage. One is through pricing power and the other is through cost competitiveness. For commodity companies, there isn't much product differentiation to be able to give them much pricing power. So for such companies, the economic moat arises mainly on the cost front. In other words, to be a successful commodity player you have to be a low cost producer. And one way to be a low cost producer is to have huge economies of scale. In this context, the merger of Lafarge and Holcim would certainly help the two companies rationalize costs. The combined entity would be in a better position to deal with rising energy costs and poor demand that has severely impacted the sector since the 2008 financial crisis.

Monday, April 7, 2014

Sun Pharmaceutical Industries has agreed to acquire Ranbaxy Laboratories.

Fellow Indian company Ranbaxy Laboratories for $3.2B in an all-stock deal that will create the world's fifth-largest generic-drug maker. The merger combines two firms that have had problems with quality issues. Ranbaxy, which is owned by Japan's Daiichi Sankyo (OTCPK:DSKYF), is banned from selling ingredients to the U.S., while Sun's Karkhadi facility is also not allowed to export products to the U.S.

Indians have begun to vote in the world's largest election,.

It involves an electorate of 815M people. The ballot comprises nine rounds and will take five weeks, and results are due on May 16. The favorite to win is the Bharatiya Janata Party led by Narendra Modi, who has business support. Hopes that he can form a stable coalition and revive India's moribund economy have boosted the country's markets recently.

Thursday, April 3, 2014

NHB is considering a proposal to allow lenders to provide up to 90% of the property value as home loan.

As per a leading financial daily, the National Housing Bank is considering a proposal to allow lenders to provide up to 90% of the property value as home loan. The proposal is meant for loans above Rs 20 lakh with a mortgage guarantee cover. A mortgage guarantee cover is nothing but an insurance policy which compensates lenders or investors for losses in the event of a mortgage loan default. Under such an arrangement, a housing finance company enters into a contract with a mortgage guarantee company at the time of loan origination.

Higher loan to value ratios backed with such guarantees are expected to boost the growth in the housing finance space. More importantly it's a win-win situation for the parties involved. That's because it's a margin driver for the housing finance company. And such a mortgage guarantee-backed securitization deal favours the lender who bags the deal. For bankers seeking to meet the priority sector targets, such mortgage guaranteed deals come to their rescue. Above all, it's the borrower who stands to benefit significantly as he would be able to avail a loan of Rs 90 lakh against a property value of Rs 1 cr, for instance. But on the flipside, the risk would be any compromises in due diligence, checks of creditworthiness of borrowers, fluctuation in interest rates, meltdown in real estate prices, amongst others.

The eurozone's business sector continued to enjoy broad, albeit softening, growth in March.

With the composite PMI edging down to 53.1 from 53.3 in February. Services PMI slipped to 52.2 from 52.6. Irish composite PMI hit a seven-year high and France a 31-month peak, but German growth softened. Still, the eurozone business sector enjoyed its best quarter for three years in Q1, and the surveys indicate GDP growth of 0.5%.European shares were mixed at the time of writing ahead of an ECB policy announcement later today, when the central bank is expected to keep interest rates at 0.25%. There are some hopes that the bank could take easing measures to ensure that the eurozone doesn't slip into deflation. Asian shares were also mixed, while U.S. stock futures were higher.

China has unveiled another mini-stimulus package.

As part of an attempt to stabilize slowing growth and maintain confidence. The announcement comes even as the government looks to reform the economy so that it relies less on the state sector. The program includes selling 150B yuan ($24.6B) in bonds for railway construction, improved housing for the low paid, and tax relief for struggling small companies.

Wednesday, April 2, 2014

Janet Yellen has been seen as the central banker who will toe in line with the predecessor Ben Bernanke. From day one, she has supported the Federal Reserve attempts to make the liquidity scenario easier to support employment. It now seems that she is still not satisfied with the billions the US Fed has already pumped into the economy. As per Bloomberg, Yellen believes that the Fed has not done enough to combat unemployment. This certainly sounds ridiculous after having held interest rates near zero for more than five years. And at the same time pumping up its balance sheet to US$ 4.23 trillion with bond purchases. Fed chief Yellen is now inclined to keep interest rates low for a prolonged period to boost employment. Unemployment in the US was 6.7% in February, up from the 6.6% level in January 2014 that was the lowest since October 2008. While we do not think the Fed chief's decision holds much water it could certainly mean more cheap money coming into emerging markets.

Eurozone manufacturing PMI slipped.

 PMI slipped to 53 in March from 53.2 in February as French PMI returned to expansion territory and hit a 33-month high. Spain and Ireland continued to roar ahead, but German growth eased and Greece dipped back into contraction. The survey indicates that production rose 1% in Q1 and GDP 0.5%. Meanwhile, eurozone unemployment held steady at 11.9% in February, coming in below consensus of 12%.

PMI data from China has painted a mixed picture.

The country's manufacturing sector, with the official gauge, which focuses on larger state-owned enterprises, edging up to 50.3 in March from 50.2 in February. The HSBC index, which gives more weight to smaller private companies, slipped to 48 from 48.5. HSBC says that its reading confirms the weakness of domestic demand and that it implies 1Q GDP growth of below the annual goal of 7.5%.