Which is the most important topic that should be discussed during the Trump- Modi first meeting on 26-June-2017 ?

#Fincabulary 12- Aunt Millie

Meaning – A slang term for an uneducated or unsophisticated investor.

The term is considered a derogatory remark in the financial sector, often used to refer to poor investment choices. Financial professionals might recommend an “Aunt Millie” investment to clients who are unfamiliar with investing. Analysts may use the term to berate a stock or other security. For example, one may say that investing in a certain stock is so foolish, only Aunt Millie would buy it.

WEATHER DERIVATIVES – CONCEPT, CHALLENGES, AND FEASIBILITY

By  Ishan Kekre & Girish C

Introduction

A weather derivative is a tool for managing weather risk. It is a financial contract that allows a firm to hedge itself against unexpected and adverse weather. A weather derivative contract or WD derives its value from future weather conditions. Contrary to stereotypical weather insurance, the payout of this kind of derivative is based on a parametric weather index. For instance, the index could be centimeters or millimeters of rainfall. The index could also be a cumulative frequency distribution of temperatures across many locations. The underlying of WD could also be related to snowfall or hurricanes.

Origin of Weather Derivatives

The weather derivative market as compared to other financial instruments is relatively young. The first transaction in the WD market dates back to 1997. The sector developed due to the severe repercussions of El Niño. These events were forecasted correctly by the meteorological community. Firms that had their revenues linked to weather realized the importance of protecting themselves against seasonal weather risks. Many companies who were in the business of dealing with financial futures and options saw WDs as attractive tools to hedge weather risks.

The insurance sector achieved substantial financial consolidation. As a result, there was significant capital to hedge weather risks. Insurance firms started writing options with payoffs linked to weather events. This, in turn, elevated the liquidity for the development of a WD market. Thus, the WD market evolved over the years into a strong over-the-counter market.

Continue reading

Budget Impact on Metals and Minerals Sector

By Sahitya Kumar Shee

Expectations from Union Budget:

Key expectations of Industry Current rate Expected
Non Ferrous
Increase in basic custom duty on Aluminium and Aluminium products Aluminium-7.5% Aluminium products – 10% 15%
Increase in export duty on Bauxite 15% 20%
Increase in basic custom duty on copper products 5% 7.50%
Exemption of basic custom duty on copper concentrate 2.50% Nil
Ferrous
Reduction in export duty of low grade iron ore 10% Nil
Increase in import duty on Stainless steel 7.50% 15%
Reduction in duties on stainless steel scrap 2.50% Nil
Reduction of basic customs duty on metallurgical coke 5% Nil

The steel industry has been reeling under immense stress from import glut and predatory pricing for the last couple of years. Due to the excessive surge in imports of stainless steel products, the industry has been struggling and was expecting an increase in basic customs duty on finished goods from 7.5 per cent to 15 per cent. Also, measures to protect domestic aluminum players were expected which are troubled with cheap imports.

Announcement in Budget

  • The basic custom duty on nickel has come down to nil from 2.5 per cent earlier.
  • Basic customs duty on MgO coated cold rolled steel coils for use in the manufacture of CRGO steel has been reduced from 10 per cent to 5 per cent.
  • The government reduced the BCD on Hot Rolled Coils when imported for use in the manufacture of welded tubes and pipes from 12.5 per cent to 10 per cent.
  • Export duty on ‘Other aluminum ores, including laterite’ has been revised from nil to 15%.
  • Allocation of Rs 3.96 Lakh Crore to Infrastructure Sector. This will aid to growth for Steel sector in future years.

Impact on the sector: Neutral

  • Bringing down the basic customs duty (BCD) on nickel (a key steel-making raw material) to zero from 2.5 per cent comes as a great relief for the stainless steel industry which has been facing challenging times. This reduction of BCD on nickel will be mildly positive for the domestic industry.
  • The reduction of BCD on CRGO steel will help in reduction of the cost of power transformers.
  • The reduction of BCD on Hot Rolled Coils for captive use in welded tubes and pipes would create price pressure on domestic HR coil producer.
  • Focus on infrastructure is a big positive for steel companies and the industry because it is a key driver of steel consumption. 

Proposal & Impact

Budget Proposal Impact on the industry
Decline in the customs duty of HR coils used for manufacturing of welded tubes & pipes This is likely to marginally increase the imports of specific categories of HR coils. A very few select manufacturers who produce these coils may face increase competition from imports.
Decline in the custom duty on nickel As nickel (required for stainless steel production) is mainly imported, it is expected that the raw material cost is likely to get reduced. This is likely to benefit the highly cost competitive stainless steel manufacturing industry, which faces significant imports threat.
Export duty on ‘Other aluminium ores, including laterite’ has been revised from nil to 15%. Marginally Positive for the Aluminium Producers

Proposed Changes in Duties:

Duty Structure Changes
Export Duty (%)  Before After
Aluminium Ore 0% 15%
Custom Duty (%)
Nickel 3% 0%
Hot Rolled Coils 12.50% 10%
MgO coated cold rolled steel coils 10% 5%


Impact on Companies:

Company Impact Comment
Tata Steel, SAIL, Jindal Stainless Steels, JSW Steel Ltd., Usha Martin Limited Neutral While reduction in the custom duty on nickel is a positive for the stainless steel producers, overall the impact on the steel industry remains neutral.
Hindalco Industries Limited, Vedanta Limited, National Aluminum Company Limited Positive The rise in the export duty would ensure its domestic availability for higher aluminum production.


Conclusion: 
The plight of the stainless steel industry has been ignored in the Budget; despite an increase in import of stainless steel products, the basic customs Duty on finished products has been not hiked. Abolishing the duty on key raw materials and increase duty on stainless steel finished goods would have helped to revive the industry. Nonetheless, a huge investment in infrastructure will help steel sector in coming years.

IMPACT OF BUDGET ON FMCG SECTOR

By Bhargavi

After demonetization of Rs.500 and Rs.1000 currency notes, the sector which saw major hit was FMCG. So all those looking up to the budget had expectations that government will try to revive this sector.

However, instead of making any direct allocation to FMCG sector the government has made many indirect moves like focusing on youth, rural economy, agriculture, the housing and cleanliness. All these combined will lead to increase in consumption expenditure of individuals.

Expectations from Budget 2017- FMCG Sector

Giving money into the hands of consumers– With demonetization taking away the money from hands of the consumers, people expected that the post-budget the cash crunch will end and they will be able to exercise their spending power.

Ease of doing Business– If various taxes are removed and replaced by GST, the cost for FMCG companies on various products like soaps, oils will go down. Not only this, the supply side will be improved and lead time will reduce. This will also help companies in reducing the holding cost of inventory.

Outcomes and Impact of Budget on FMCG Sector

Reduction in income tax by 5% for individuals with income of 2.5 -5 lakhs will help in save 12500 annually. This will give more disposable income in the hands of people which will increase non-food expense. This tax cut will cost government somewhere around 15000 crore. We can expect that some of this will go to consumption and some for saving.

MGNREGA Allocation- Government this time made highest ever allocation to MGNREGA of 48000 crore. This will increase the income of the rural people which will again increase their spending power.

Increase in allocation to rural economy by 24%– With the aim to double the farmer’s income by next five years government allocated 1.87 lakh crore to boost the agriculture sector.

Government also made several other allocations to boost the rural economy which will increase farmers income;

  • Allocation of 5000 crore to micro irrigation fund by NABARD as part of their Per Drop per Crop Mission
  • Increase in sanitation expenditure in rural areas – Sanitation coverage has increased from 42% to 60%. This will increase the demand for personal care products and sanitary ware
  • Integration of fruits and vegetables with agro-processing units – This will help farmers get a better price for their products
  • Setting up of Dairy Processing Fund of 8000 crores– According to analysts, this fund will increase the farmer’s income by 50000 crores. Also, food segment in FMCG account for 19%, second highest after personal care products. A push to dairy products will directly lead to increase in production of food products
  • Safe drinking water to 28000 arsenic and fluoride affected habitants. This will be a welcome step for beverages company
  • Increase emphasis on Skill development in rural India– Emphasis on skill development and entrepreneurship will increase the employment in rural India which will increase the disposable income

Currently, FMCG sector derives 40% of its revenues from rural sector and rural sector spends 50% of its expenditure on consumption. Also, growth in revenues in rural markets is more higher paced than the growth of revenues in urban markets. Keeping all this is mind, the government has taken up steps in the right direction to boost the rural economy. This will increase the income of farmers which will raise their standard of living and hence the expenditure in food and personal care products.

Excise on Tabacco products– Government announced an increase in the excise duty on filter cigarettes by 6%. Duty on Pan Masala is up by 3% and on unmanufactured tobacco by 4.1%. Excise on machine made beedis have increased from 21 per thousand to 78 per thousand, that is almost 300%

This will negatively effect the revenues of companies like ITC, Godfrey Philip, VST etc.

Reduction in tax rate for MSMEs by 5%- Government reduced the tax rate for MSMEs from 30% to 25%. Close to 90% of companies belong to this category. This will increase the profits of MSMEs and will encourage them to scale up their production.

CONCLUSION– Overall Positive! the government made a good move by focusing on the rural economy as this segment has more growth in the context of FMCG sector. FMCG companies should devise strategies to market their products in the rural economy and the companies which already are leaders in the rural market will be able to take the share of growth.

Budget Impact Analysis – Auto Sector

By Dhanyakumar M H

Expectations from Industry:

  • Cut in corporate tax from 30 to 25%
  • Implementation of the vehicle scrappage scheme
  • Incentives for hybrid and electric car production to be extended
  • Removal of connection between size of car and tax
  • Push for infrastructure to offer a quality road in the long run

What Budget has to offer?

  • Personal Income tax:
    • Increase in zero income tax slab from 2.5 lakh to 3 lakh
    • Reduction in income tax from 10% to 5% for income between 2.5 to 5 lakh

Increases in household disposable income. Provides a boost to first-time auto buyer preferably two-wheeler or entry level car.

  • Infrastructure development:
    • Better the infrastructure in the country, is an incentive and encouragement for Auto Industry
    • Budget is seen as a pro-development and this would boost the sales of MHCV, HDCV and heavy equipment
  • Goods and Service Tax:
    • Implementation of GST is confirmed, but there was no message to Auto industry regarding the removal of the link between size and taxation.
  • Rural Income and Agriculture:
    • Mission of doubling farmer income would help increase the disposable income
    • Interest waiver for 60 days due to the impact of demonetization is a welcome move
    • Expected to see a 4.1% increase in Agri output

Increase in rural income would help two wheelers, tractor and entry level car manufactures. It may also help an LCV segment of commercial vehicles.

  • Market Reaction: Advance in stocks
    • Bajaj Auto, Hero Motocorp and TVS Motor
    • M&M, Maruti Suzuki, Eicher Motors, Tata Motors and Ashok Leyland
    • Escorts and VST Tillers
    • Auto Ancillaries are also shown an advancement in stock prices

Conclusion:

Overall the budget has not met the expectation of the auto industry and there was no surprise as well. But the move towards reducing personal income tax and push for rural India is welcomed. As this would increase the disposable income, industry expects an increase in sales of two wheelers, tractors, entry level cars and finally MHCV & HDCV because of push to infrastructure development. Industry is hoping to see more revival post GST implementation as there will be zig-zag in tax structure.