Tag: Editorial

Reliance Retail is Warming Up for a Sprint

Post author By marketfeed Team
Post date September 17, 2020

India’s retail market is estimated at Rs 60 Lakh Crores in FY 2019-20 and is expected to grow at a CAGR of 10% over the next 5 years to reach Rs 90 Lakh Crores by FY 2024-25. It accounts for around 10% of the country’s GDP. Only around 8-10% of the retail market is organised retail, the remaining 92% fall under unorganised retail.

To protect the interest of agriculturists and small retailers in India, the government has a restricted FDI policy for the retail sector. You can read more about FDI in the retail sector here.

Reliance Retail Ventures Limited (RRVL) is a subsidiary of Reliance Industries Limited. It was founded in 2006. It is one of the largest retailers across India by revenue. Reliance Retail has about 11,748 stores all across India, with 70% of them being consumer electronics stores. Additionally, it owns 328 warehouses or 310 Mn Sq. Ft of warehousing space.

Talking Numbers

Reliance Retail’s generates maximum revenue from Connectivity, which essentially is the from the sale of recharge coupons of Reliance Jio (the conglomerate’s telecom arm) and Jio Store. The Consumer Electronics Segment is next accounting for almost 28% of Total Revenue in FY20 followed by Grocery at 21%, Fashion and Lifestyle at 8% and Petro Retail at 8%.

Ever seen those Reliance gas stations? They are actually owned, managed and marketed by Reliance Retail. All of the gas stations fall under the Petro Retail Segment. Reliance Retail owns around 519 of such Petro retail outlets all over the country.

Reliance Industries and its subsidiaries have been in the news a lot lately. This is because they have been on an acquisition and fundraising spree. Over the past decade, Reliance Retail has grown tremendously. The charts given below shows Reliance Retail’s growth over the past 5 years in terms of Profit After Taxes and EBITDA.

During COVID, Store functioning was severely impacted by lockdown and restrictions. Consumer Electronics and Fashion & Lifestyle business remained suspended in April and partially in May/June. Around 50% of stores were fully shut throughout the quarter, 29% were operational partially.

Grocery stores continued operations with limitations and logistical challenges. Operations across the network including supply chain were disrupted by sporadic changes in regulations. Due to the current pandemic situation Reliance Retail did face a revenue drop of 17%.

Reliance Retail saw a 21% growth across fully operational businesses of Grocery and Connectivity.

Brands and Subsidiaries of Reliance Retail

Reliance Fresh
Reliance Smart
JioMart
Reliance Market
Reliance Digital
Jio Store
Other Partner Brands

Reliance Trends
Project Eve
Trends Footwear
Reliance Mall
Reliance Jewels
AJIO

Brands and Subsidiaries of Reliance Retail.

As stated in the section above, Reliance Retail has 5 income channels or segments viz.

Consumer Electronics- Reliance Digital, Reliance ResQ, etc.
Fashion & Lifestyle- AJIO, Trends Footwear, Reliance Jewels, Marks and Spencers etc.
Grocery- Reliance Fresh, Reliance Smart, Reliance Market, JioMart
Connectivity: JioStore
Petro Retail: Reliance Petro Marketing.

With refined e-commerce especially in Grocery, JioMart, the newest member of Reliance Retail is expected to rise and it matters a lot to Reliance Retail, but why?

Why does JioMart matter?

Reliance Retail has ventured into the digital commerce space with JioMart in January, 2020. JioMart services were launched across 200 cities on a pilot basis. JioMart also uses WhatsApp ordering feature for consumers through its partnership with Facebook.

JioMart will operate on the Online to Offline business model. This means that it will connect with local retailers and deliver goods to customers by procuring them from the nearest store located in the customer’s vicinity.

This separates JioMart from its competitors like Amazon and Grofers who follow the Warehouse Model, where they stock pile inventories in warehouse spread over various locations.

JioMart will therefore save on fixed costs and other costs associated in maintaining the warehouses. Moreover, it can onboard any retailer in any part of the country into its system.

JioMart order flow is now 4 times more than what it was before the lockdown period.

Future of Reliance Retail

Reliance Industries Limited announced the acquisition of Future Group for Rs 24,713 crore, aiming to boost its presence in the offline retail market. Reliance Retail Ventures Ltd (RRVL), acquired the retail & wholesale businesses along with the logistics & warehousing businesses of the Future Group.

Reliance Retail will have access to around 1800 stores across Future Group’s Big Bazaar, FBB, Easyday, Central, Food hall formats, which are spread in over 420 cities in India.

To Read More about the Future Group Deal, Click Here.

Also, Reliance Retail acquired a majority equity stake in Vitalic Health Pvt. Ltd./ NetMeds for an amount of ~Rs. 620 crores. This marks a presence of Reliance Retail in the Pharma-Retail segment as well.

Reliance Retail acquired 100% stake in Shri Kannan Departmental Store Private Limited (SKDS) for a consideration of Rs 152.5 crores. SKDS is engaged in the business of retailing fruits & vegetables, dairy, staples, home & personal care and general merchandise to consumers. SKDS currently operates 29 stores across Coimbatore and nearby areas.

Reliance Brands Limited, another subsidiary of Reliance Retail acquired 100% equity shares of Hamleys Global Holdings Limited GBP 67.96 million. Reliance Lifestyle Holdings Limited, a subsidiary of the Company, runs and operates the Indian franchise of the Hamleys brand and has 88 stores in India. This acquisition will catapult RBL to be a major player in the global toy retail industry. (Source: Company Press Release)

Reliance Retail has also acquired men’s apparel company John Players in March,2019 for an undisclosed amount.

Investments flowing in

Silver Lake picked up a 1.75% stake in Reliance Retail Ventures for ₹7,500 crore. Earlier this year, Silver Lake invested Rs 10,202 crore in Jio Platforms, RIL’s digital services platform.

KKR & Co. is in advanced talks to invest at least $1 billion in Reliance Retail in what could be another U.S. investment following Silver Lake’s deal. Read More Here.

ADIA is in discussions to invest about $750 million at a valuation of roughly $57 billion, while PIF could funnel as much as $1.5 billion into Reliance Retail. (Source: Financial Times)

There have been reports of Reliance Retail offering 40% stake to Amazon for $20 Billion as well. This news report caused Reliance Industries Limited(RIL) shares to surge 7.2% in the markets.

What sets Reliance Retail apart?

Investment demands are pouring in so hard, that there have been reports of Mr. Mukesh Ambani, Chairman of Reliance Industries Ltd, has had to put investors like Soft Bank and Carlyle Group on a waiting list.

However, what remains common in all the investment rumours is the word “people familiar with the matter”. It is the people familiar with the matter and is anonymous to the public who are making disclosures about these deals. No confirmation has been obtained from the companies what so ever. One should keep their eyes and ears open before making any inferences.

With the Future Group in its pockets, Reliance’s Grocery segment can prove to be a tough competition for other retailers like D-Mart, Grofers, BigBasket and many more.

Additionally, Reliance Retail has its venture JioMart as its blue-eyed boy. JioMart is doing something which other retailers have failed to do so. It wants to include your next-door convenience store into its retail-ecosystem. Geographically too Reliance Retail intends expanding its trail. With the acquisition of Shri Kannan Departmental Stores, it’s set its foot in the state of Tamil Nadu’s niche retail market.

Reliance has managed to extend its wings in multiple retail segments like Toys, Pharma and Fashion & Lifestyle. Reliance has bagged investments and acquisitions for its Jio and Retail platforms, while Oil and Petroleum still continue to be a major source of income, it seems Reliance doesn’t want any sector to remain untouched by it.

Tags Editorial, jio, reliance, retail, RRVL

Editorial

Multi-Cap Funds in Danger?

Post author By marketfeed Team
Post date September 14, 2020

On Sept 11, 2020, the Securities and Exchange Board of India(SEBI) released a crucial circular regarding the asset allocation in Multi-Cap mutual funds. Summary of the circular is as follows:

All Multi-Cap funds will allocate at least 75% of the funds to Equity as compared to the earlier 65%.

Out of the amount set for Equities, a minimum of 25% each shall be allotted to Large Cap, Mid Cap and Small Cap each, respectively. The was no such limit set earlier on the allocation within equities in Multi-Cap funds.

All the existing Multi-Cap Funds shall ensure compliance with the above provisions within one month from the date of publishing the next list of stocks by AMFI, i.e January 2021.

AMFI or Association of Mutual Funds in India releases a list every 6 months on which stocks are Large Cap, Mid Cap and Small Cap.

Why did SEBI do so?

Large-cap funds required a minimum 80% in large-cap stocks, Mid-cap fund required minimum 65% in mid-cap stocks, Small-cap fund required minimum 65% in small-cap stocks. There was no such requirement for Multi Cap funds, except that they needed to invest 65% in Equity stocks.

A Multi-Cap fund is one that can invest in all segments by market capitalization i.e. Large Cap, Mid Cap and Small Cap. There was no obligation earlier as to where a Multi Cap fund could invest.

Taking advantage of this, fund manager across India would allocate most of their funds to well-performing large-cap stocks as this would reduce the risk involved and ensure steady returns. They also had the flexibility to invest in well-performing Mid Cap and Small Cap stocks.

This made the funds, lesser “Multi-Cap” in nature and more of large cap in nature causing a skewed allocation of funds.

Name	AUM(Rs. Cr)	Large Cap	Mid Cap	Small-Cap
Kotak Standard Multicap Fund	29,965.94	72%	28%	0%
HDFC Equity	19,381.37	83%	13%	4%
Motilal Oswal Multicap 35 Fund	11,427.26	87%	9%	5%
UTI Equity	11,144.25	64%	31%	5%
Aditya Birla Sun Life Equity	10,884.43	67%	26%	7%
SBI Magnum MultiCap	8,991.12	73%	20%	7%
Franklin India Equity Fund	8,375.15	76%	17%	7%
Average Investment		75%	21%	4%

The table above shows a list of Top 7 Multi-Cap mutual funds sorted by AUM(Asset Under Management). As seen in the table above it is clear that most mutual funds have allotted more than 50% of their funds in Large Cap stocks. This, if not completely, substantially makes the fund, a Large-Cap fund. This is why SEBI set a floor for the amount invested in each segment.

SEBI’s new regulation where it allots 25% per cent each to Large Cap, Mid Cap and Small Cap shall leave the other 25% at the fund manager’s discretion.

How Will This Impact The Market?

It is clear now that there will be a divestment in Large cap Stocks. There will be an investment spree in Small Cap and Mid Cap stocks as well, but will this affect market rates much? Let us find out.

According to AMFI, the total Asset Under Management for Multi-Cap Funds is Rs 145,907.04 Crores. Out of this Rs 145,907.04 Crores, there will be a divestment of almost Rs 34,000 Crores-Rs 36,000 Crores which is almost 23-25%, in Large Cap stocks.

The amount taken out from Large Cap stocks will be invested in Mid-Cap and Small-Cap stocks. However, this shall happen over a period of 3-4 months and should be a gradual process instead of a sudden one.

The investment in Mid Cap stocks by Multi-Cap funds will increase by ~4%(nearly Rs.5800 Crores). Moreover, investment in Small Cap stocks by Multi-Cap funds will increase by ~21%(nearly Rs. 29000 Crores).

What does it mean for a retail investor or a mutual fund holder?

SEBI released another circular on 13th September which clarified a lot of speculations. In fact, AMFI welcomed the step and fund managers took on to Twitter to calm investors.

All the points listed above might not happen at all. There is a high probability that mutual fund houses might decide to merge their current Multi-Cap Mutual Funds with other Large Cap Funds or Large Cum Multi-Cap. There is also an option given by SEBI to convert these multi-cap funds to large-cap funds or any of their choice.
Fund houses can also give you an option to move your funds to a fund of your choice.

The amount of outflow in Large Cap funds is about 4-5% of total AUM of Equity Mutual Funds. So impact on market might be significant but not large in magnitude.

To ensure that there is no haphazard in terms of market stability, this transition shall be a gradual process, which will avoid major fluctuations in mutual funds and stock prices. This will also give a time of 3-4 Months to mutual fund houses to figure out and plan the next course of action so there is no need for panic across the board.

Tags Editorial, large cap, Mutual Fund, SEBI

Editorial

Vodafone Idea is now VI. How Did We get here, and what lies ahead?

Post author By marketfeed Team
Post date September 11, 2020

Vodafone-Idea Group has re-branded as ‘Vi’ as it looks for a fresh start. The company announced the move after the Supreme Court gave its verdict on the AGR dues case (Read More Here). In the verdict, the apex court gave Vodafone-Idea Ltd, a period of 10 years to clear its pending dues of Rs 54,754 crore.

Many of us still don’t the amazing journey of the brand where it moved from Max Touch to Orange to Hutch to Vodafone to Vodafone Idea and finally now to Vi. So come let’s learn about this journey, both from the perpectives of Vodafone and of Idea.

What is now Vodafone-Idea Ltd is actually a result of a mixture of Mergers and Acquisitions. From Max Touch to Orange to Hutch to Vodafone Idea to Vi. The Indian economy became an easier playing ground for private sector telecom companies in the early 1990’s. Both today’s Idea and today’s Vodafone were early movers in the field.

The Journey of Vodafone

Vodafone India didn’t just start out as Vodafone. At first, it was Hutchison Max Telecom Ltd (HMTL), a joint venture between Hong Kong based Hutchison Whampoa and India’s Max Group. The company was established in 1992 and commercially called Max Touch.

In the year 2000, the company was rebranded to Orange.

In 2005-06, Max group sold its entire 41% stake to Hutchison, and exited the partnership. Meanwhile Essar Group entered as a strategic partner in the equation.

BPL, another telecom player, was merged with Hutchison Essar in 2004. Furthermore, the company rebranded itself from ‘Orange’ to ‘Hutch’ in 2005, after facing an issue with international copyrights.

Thereafter, it also targeted business users and high-end post-paid customers which helped Hutch to consistently generate a higher Average Revenue Per User (ARPU) than its competitors. By adopting this focused growth plan, it was able to establish leading positions in India’s largest markets providing the resources to expand its footprint nationwide.

Vodafone, which was a leading telecom operator in UK entered the Indian market and acquired the entire 67% stake of Hutchison in February 2007. The company was soon rebranded to Vodafone India. Vodafone later went on to buying out the entire company from other promoters Essar Group and Li Ka Shing Holdings in 2011.

The Journey of Idea

In another side of the story, Aditya Birla Group’s Idea was slowly building up their business as well. Idea Cellular began as Birla Communications Limited in 1995 after GSM licenses were won in Gujarat and Maharashtra circles.

As part of their expansion plans, American telecom giant AT&T was roped in as a strategic partner by Birla in 1996. In 1997, in order to expand into more geographical areas, a tie-up with Tata Communications led by Ratan Tata was also formed. The merged entity was known as Birla AT&T and Tata Communications Ltd, commonly known as BATATA.

The company name was changed to Idea Cellular in 2002 after a series of changes following mergers and joint ventures. In 2004, AT&T exited the partnership to concentrate on their US operations. In 2006, Tata Group exited the partnership as well as they wanted to launch their own telecom brand, which later failed anyway. So after all the partnerships ended, the Birla Group led the company alone until the eventual merger with Vodafone in 2018.

We hope you remember the popular telecom operator Escotel (fun fact : They were the first telecom operator to start operations in Kerala in 1996). Interestingly, Escotel was merged with Idea in 2004 (Another fun fact : Escotel was the disastrous telecom wing of Tractor manufacturer Escorts Ltd).

Four days later after Vodafone entered the country in 2007, Idea Cellular launched its IPO and raised ₹2,125 crores. The IPO was oversubscribed by 57 times. It is interesting to note that the paths of Vodafone and Idea have crossed many times like two soulmates, and ultimately ending up in their merger.

The Merger

The first merger between Vodafone and Idea was approved by The National Company Law Tribunal (NCLT) on 30th August 2018. As per the scheme of the arrangement, Vodafone India and Idea would merge to form a single listed entity. However, both continued to operate two separate brands until September 2020.

With Jio entering the Indian telecom sector in 2016, current players in the industry were put in a very tough spot. Mukesh Ambani’s Reliance came into the scene with deep pockets and huge offers. The sudden drop in voice and data tariffs were not tolerable to players like Vodafone and Idea, who were running a highly leveraged business (high debt). Many telecom operators were forced to shut shop, or merge to sustain in the market, including Tata Docomo’s merger with Airtel and the Vodafone-Idea merger.

Hope you all know about the recent AGR case, which has become a huge headache for telecom operators in India. Read more about it here, if you haven’t already. In the recent verdict to the case, The Supreme Court of India has given a period of 10 Years for Vodafone-Idea to pay Rs 54,754 crore, in pending AGR dues.

The Future

On 7th September, Vodafone and Idea rebranded and completely merged into a single brand ‘Vi’. The rebranding was a welcomed move as it came right after the the company’s Annual General Meeting where fundraising prospects were discussed. The share price rose 3% the day the rebranding was announced.

The merged entity is looking to raise Rs 10,000 crore via the sale of its fibre and data centre business, and another Rs 25,000 crore through debt and equity.

The rebranding of Vodafone-Idea along with its fundraising initiative has unlocked many possibilities. Vi is also exploring possibilities of the future 5G spectrum where Jio stands as a tough competition, with its homegrown 5G hardware.

Vodafone-Idea still has long term borrowings worth Rs 1,05,388 crore. It has a cash reserve of Rs 525 crores. Looking at results for Q1FY21, the company can meet its short term obligations, however, it needs to focus on enhancing its cash flow. It cannot afford to finance itself on debt. A cautious investor should watch out for Q2 results, which is likely to tell us how the company has restructured its finances.

Whether or not VI gains traction depends on how it manages to gain back its lost faith by customers and investors. They are currently forced to concentrate on both gaining lost customers and paying their AGR dues. As an investor, one needs to watch out for every single move made by the management of the company. Certainly, the company is too big to fail, with its high levels of debts from leading banks in the country. With the upcoming 5G spectrum sale, the government will want more than just Airtel and Jio to get a healthy bid value. The economy will not be able to handle the fall of this titan.

Tags Editorial, Idea, VI, Vodafone

Editorial

Reliance – Future Group deal

Post author By marketfeed Team
Post date September 10, 2020

India’s most valuable listed company with over Rs 14 trillion market capitalisation, Reliance Industries Limited announced the acquisition of Future Group for Rs 24,713 crore, aiming to boost its presence in the offline retail market. Reliance Retail Ventures Ltd (RRVL), a subsidiary of Reliance Industries Ltd, will acquire the retail & wholesale businesses and the logistics & warehousing businesses of the Future Group as going concerns on a slump sale basis which means that the Future group will transfer one or more undertakings to RIL as a result of the sale for a lump sum consideration (Rs 24,713 crore) without values being assigned to the individual assets and liabilities in such sales.

As a part of the acquisition, Future Retail, Future Lifestyle Fashions, Future Consumer, Future Supply Chains and Future Market Networks will merge into Future Enterprises Ltd (FEL). Shareholders of each companies will be allotted a fix number of shares of Future Enterprises Ltd subject to their holdings. Reliance Retail will then acquire Future Enterprises Limited businesses.

What’s in it for Reliance?

India’s retail market is expected to reach $1.3 trillion by 2025, compared to $700 billion in 2019, according to consultancy firm BCG and Retailer’s Association of India. Being the largest retailer in India, Reliance has over 11,000 stores across the country. Majority of Reliance Retail’s revenue is generated from consumer electronic segment which also accounts for nearly three-fourths of its overall store count. To compete with the global competitors like Amazon and Walmart, Reliance needed to boost its grocery and fashion & lifestyle segment in its retail arm which currently accounts for only 7% and 20% of the store count respectively.

Kishore Biyani who is known as “Father of India’s organised Retail”, understood the Indian market very well and brought the middle-class Indian consumer in his stores and retained the consumers. Big Bazaar and Easyday of Future Group made grocery shopping an event for the Indian consumers where they trusted the stores as they used to do with local kirana shops. Also, pricing was an important factor which Kishore Biyani realised was important to cater for attracting the consumers. He built the customer base over the last three decades and for Reliance it will be crucial to grow in this segment.

So, the answer to the acquisition of Future Group’s businesses is the Grocery and Fashion & Lifestyle segment. Reliance Retail will have access to around 1800 stores across Future Group’s Big Bazaar, FBB, Easyday, Central, Food hall formats, which are spread in over 420 cities in India.

Future Group after the acquisition:

Post the transaction, Future Enterprises Limited will retain the manufacturing & distribution of consumer products, fashion sourcing & manufacturing, insurance joint venture with Generalli and Textile partnership with NTC Mills. For Kishore Biyani, as a result of the agreement, he cannot enter the retail business for at least 15 years since the commencement of the deal.

Reliance Retail and Fashion Lifestyle Limited (RRFLL) also proposes to invest in Future Group post the acquisition at total sum of Rs 2800 crore in two ways,

Rs 1,200 crore in the preferential issue of equity shares of FEL to acquire 6.09 percent of post-merger equity.
Rs 400 crore in a preferential issue of equity warrants which, upon conversion and payment of balance 75 percent i.e. Rs 1200 crore, will result in RRFLL acquiring additional 7.05% stake.

Other Deals in Reliance Retail

To gain a significant market share in every segment it caters to, it has been expanding its fleet through acquisitions and new launches. In 2019, Reliance Brands acquired the British toy retailer Hamleys and Reliance Retail has the master franchise for the brand and operates across 29 cities. Also, the company launched JioMart – an online grocery service which will offer free express delivery of groceries from neighbouring local stores.

Recently, Reliance Retail announced an investment from Silver Lake worth $1.02 billion. It will grant Silver Lake a 1.75% stake in the entity and the deal values Reliance Retail at $57 billion.

Conclusion

With the recent acquisitions, Reliance Retail aims to widen the spread between the India’s largest retailer and the second largest retailer (Avenue Supermarts Limited). The Future Group’s retail and logistics will definitely give Reliance Retail an edge in grocery and fashion lifestyle segment. Amazon and Flipkart pose a threat to Retail with the online delivery of these products but in response to that, RIL has launched its JioMart. Thus, the future definitely looks promising for Reliance Retail.

Tags Editorial, Future group, reliance

Editorial

ITC. What you need to know before investing.

Post author By marketfeed Team
Post date September 8, 2020

ITC Ltd. or Indian Tobacco Company established as Imperial Tobacco Company was established in Calcutta in 1910. It began as a Tobacco Conglomerate, later on expanding to a variety of areas such as Luxury Hotels, Paperboards, Agri-Business and FMCG sectors. ITC is a blue-chip stock and for long been known as a safe investment that gives a high dividend. In case you are planning to invest in ITC, here are __ things you need to know.

Company Profile

ITC is India’s leading tobacco company. It has a near-monopoly when it comes to cigarettes. ITC manufactures more than 84% of India’s cigarettes and controls 75% of India’s entire tobacco industry.

In the late 70s, ITC ventured out into the world of luxury hotels and hospitality. It currently operates more than 100 hotel chains. ITC has been expanding on its FMCG sector having faced a massive growth in revenue from it in the past 10 years. Its Agri-business has gained a fair amount of traction last year with a 9% revenue growth (YoY) between Q1FY20 and Q1FY21 in its Agri-Business segment.

ITC’s inter-segment revenue stood at Rs. 5907 Crores facing a revenue growth of 20% as compared to the same quarter last year. This portrays the efficiency of ITC on being able to manufacture its own raw material and the fair dependability of companies on each other. Over the last 10 years, Total Shareholder Return has grown at a CAGR of 11%, significantly outperforming Sensex (CAGR: 6.9%)

Efficiency

ITC as a company is a virtually debt-free company. Cash generated by ITC is significant for it to fund its own new ventures.

ITC’s ROCE(Return on Capital Employed) stood at 72%. This means for every Rs. 100 worth of Capital Employed ITC earns Rs. 72 on it.

In the past 5 years, ITC’s Basic EPS has seen a growth of 9.1% CAGR. Basic EPS is the net-income generated by the company per outstanding share. Its Cash EPS or cash flow generated per share stood at Rs 13.59/share. Its Cash EPS grew at 9.7% CAGR over 5 years. CAGR stands for Compounded Annual Growth Rate.

Ex-Company Chairman (Late) Y C Deveshwar had set the target of making ITC the biggest player in the FMCG segment by year 2030 targeting revenue of Rs. 100,000 crore from the FMCG business.

ITC’s Profitability ratios are better than Godfrey Philips and HUL this means that ITC as compared to industry peers, is financially sounder and is in a better financial position to commit to growth and expansion.

The company’s dividend payout ratio as of March 20′ was 42% which is expected to pump up once the dividend is announced in the future. Dividend Payout Ratio of 42% means the company is giving out 42% of its net profit as dividend.

Coming to the shareholding of the company, the company has 0 promoter holding. Often times in corporates, the management makes decisions that support the interest of promoters or major stakeholder. In ITC, majority stake lies in the hands of public shareholders, the company is likely to make decisions in the public interest.

Tobacco and Diversification.

Cigarette has an inelastic demand. This means that compulsive smokers won’t stop smoking even if the price of cigarettes rise. When the government increases the duty, the cost of it get passed down to the consumer

The COVID-19 pandemic has reduced the contribution of cigarettes in the revenue of the company. It faces a temporary ban for sale and/or public smoking in few states as well. Before the pandemic as well, ITC had been reducing its focus on Cigarettes and Tobacco Products. This has many reasons behind it. According to an ITC report:

India is the 4th largest market for illegal cigarettes in the World; causing a revenue loss of over 15,000 crores every year.
42% of adult Indian males consume tobacco. Only 7% of adult Indian males smoke cigarettes as compared to 14% who smoke bidis and 30% who use smokeless tobacco.
Since 2010/11, legal cigarette industry volumes have declined by about 20% while the illicit duty-evaded cigarette segment has grown by 36%.

The above reasons have led ITC to diversify into other sectors like FMCG and Agri-Business. For ITC, Cigarette Business’ share in the revenue of ITC has reduced over the years and increased in other sectors.

ITC has started pumping into FMCG segment like never before. The graphical representation below shows the expansion of ITC into FMCG products over the past decade.

Supply and Distribution Chain.

ITC has the most unparalleled supply and distribution chain in the country. The reason why it has managed to capture 75% of the tobacco market is its supply and distribution chain. ITC has managed to access the remotest areas in the country. To know more about ITC’s supply chain. Click Here

E-Choupal is a business initiative by ITC Limited that provides Internet access to rural farmers. The purpose is to inform and empower them and, as a result, to improve the quality of agricultural goods and the quality of life for farmers. ‘e-Choupal’ services today reach out to over 4 million farmers growing a range of crops – soybean, coffee, wheat, rice, pulses, shrimp – in over 35000 villages through 6100 kiosks across 10 states (Madhya Pradesh, Haryana, Uttarakhand, Uttar Pradesh, Rajasthan, Karnataka, Kerala, Maharashtra, Andhra Pradesh and Tamil Nadu). To Read More about E-Choupal, Click Here.

The Future

ITC has started to shift its dependency from cigarettes to other areas. It suffered a huge reduction in cigarette sales by almost 33%. ITC has realised that its dependency on cigarettes won’t be viable in the long term. During COVID-19, the only two sectors showing positive growth were FMCG and Agri-Business.

ITC is diversified in FMCG and foods segment, with a wide variety of products to offer the company has recently crossed 10,000 crore revenue mark and targets 100,000 crore revenue from FMCG by 2030. A good financial history and a stable distribution setup make it a good company to invest in the long term. However, it is necessary that one performs their own research before investing.

Tags analysis, Editorial, FMCG

Editorial

Everything about Restructuring of loans

Post author By marketfeed Team
Post date September 4, 2020

Why this concerns you?

Many borrowers like you and me are facing deep economic stress due to the pandemic. Some of the people have lost their jobs and some are working with significant pay cuts. This has caused people to default on their loan repayments. RBI has to come to their aid since the start of the pandemic by issuing out a loan moratorium from March 2020.

This moratorium period ended on 31st August 2020. Till then, borrowers were allowed to defer from their repayments. Now RBI has advised the banks to restructure the loans of stressed assets so that the banks do not have to count them into NPAs. But the central bank is still very sceptical about this step.

What is Loan Moratorium?

When a borrower takes a loan, he is obligated to pay his monthly instalments to the banks. Loan Moratorium is a period during which the borrower is relieved from the obligation to pay fixed instalments. Once the loan moratorium period is over, he is again bound to pay the fixed instalments at fixed regular intervals.

Restructuring of loans

RBI has allowed banks to restructure loans of borrowers who are struggling to repay because of the pandemic. The last date for banks to restructure the loans is December 31, 2020. But what does this restructuring of loans means? The borrowers have to make a fixed payment against the loans issued to them. The restructuring of loans’ plans will help them on a few of these criteria:

Reschedule their loan payment
Lower interest rates on their existing loans
A limited loan repayment holiday
Possible loan moratorium to a maximum of 6 months

All banks and non-banks including small finance banks, Local Area Banks, NBFCs, housing finance companies and all the other Indian financial institutions can help their borrowers by restructuring their loans.

The eligibility criteria

Those borrowers who were making repayments for their loan in less than the 30 days after the repayment deadline as of 1st March 2020 are eligible for the benefit. Financial services providers and MSME borrowers who have total loans outstanding of less than Rs 25 crore are not eligible.

For corporate borrowers, banks have to come out with a restructuring plan before the start of 2021. They will have a 6-month time period, till June 30, 2021, to implement it. When it comes to personal loans, the banks have the same duration to invoke a new plan but will have only 90 days to implement it. If the banks fail to implement the resolution plan in the specified duration then no restructuring will be approved and the banks will be forced to set aside higher provisions.

Impact on Banks

Banks are the central figure of this resolution plan. The restructuring plan will help in keeping things static but what implications will it have on medium and long-term in still to be seen. With this in mind, RBI has asked banks to maintain additional 10% provisions against post-resolution debt.

As loan moratorium is not extended for the first time since March, banks will get a better picture of how much their NPAs has risen. With this new move, banks do not have to count every default as an NPA. Thus, saving themselves from a lower bottom line in their Profit and Loss statement. During the revival window, if the borrower can get his business running, he will be paying the loan accrued back. Hence, benefitting all parties.

Is everyone better off?

Restructuring of loan is a win-win situation for both banks and the borrowers but not so much for the economy as a whole. By not naming defaulters, banks do not have to keep higher provisions. When the banks are forced to keep high provisions due to NPAs, their losses mounts. This loss leads to negative emotions among the investors in the stock market which further drives down the bank’s market value. As borrowers are not termed as defaulters, their credit score is not impacted and they can avail loan from other banks. For the general public, their deposits are at risk as banks are giving out its depositor’s money to people who may not pay under the it back under the name of moratorium.

Tags Banks, Editorial, RBI

Editorial

IL&FS: Reasons behind the crisis

Post author By marketfeed Team
Post date September 3, 2020

IL&FS brief

In 1987, Infrastructure Leasing & Financial Services (IL&FS) was incorporated as an initiative to form “RBI registered Core Investment Company”. It is a non-banking finance company (NBFC) which was initially promoted by Central Bank of India, HDFC and Unit Trust of India (UTI). Over the past 30 years, IL&FS has aided in developing some major infra projects around the nation.

Few projects to name are Gujarat International Finance Tech-City (GIFT), Delhi-Noida Toll Bridge, Tripura Power Project and Chennai-Nashri tunnel (India’s longest road tunnel). Currently, Life Insurance Corporation of India, ORIX Corporation and Abu Dhabi Investment Authority (AIDA) are the largest shareholders for the company.

What is the crisis?

IL&FS ran out of cash due to a severe liquidity crunch. This resulted in the company to default on a few payments. They also failed to service its commercial papers (CP). The first hint of downfall in the public domain came in March 2018 when the company postponed a $350 million bonds issuance. During the same month, their consolidated total debt stood at whopping Rs 91,091 crore. IL&FS defaulted on inter-corporate deposits and commercial papers of about Rs 450 crore.

Later that year, IL&FS Financial Services cleared their dues related to Commercial Paper on 31st August, three days after the due date. IL&FS and it’s Financial Services subsidiary had a combined Rs 270 billion of debt rated as junk by CARE Ratings. Soon are the defaults came into the knowledge of the public, rating agency ICRA downgraded their borrowing ratings which came as a huge dent on the lendor’s business image.

The Asset-Liability Mismatch

This was one of the biggest reasons why IL&FS hit rock bottom. The company was borrowing loans in the form of commercial papers. You would be thinking, what are Commercial Papers? CPs are short-term unsecured debt-market instruments. These debt instruments have a maturity period varying from 7 days to one year.

The company was taking short-term debt and using it for financing long-term projects which would give returns only after 5-10 years. With the company’s rapidly depleting cash, they were unable to meet the demand and defaulted on several of its obligations. IL&FS’ leverage ratio jumped from 10.6x in September 2017 to 16.8x as of March 2018. That means, 6.2x jump inside a mere 6 months!

PPP Model Inefficiency and LARR

The Government of India introduced the Public-private partnership (PPP) model to aid companies for better efficiency and thus better output. With the launch of this model, the company was assured that the government will help them in financing big projects. With this assumption, they invested heavily in infrastructure projects. The company started acquiring lands on a very big scale, took numerous infrastructure projects and financed them.

But the government did not cooperate with the company to the level they expected and launched LARR (land acquisition rehabilitation and resettlement act) in 2013 instead. When LARR was passed, landowners claimed their compensation for the lands which were theirs. With the rules of LARR and no help from the government in this regard, IL&FS has to pay Rs 17 crore plus worth of compensation to the landowners. This resulted in the overshooting of the cost of the projects and future defaults. This gave birth to the huge difference between the estimated cost of the project and the executed cost.

Other Reasons

IL&FS was incorporated as a finance company. Their purview of work was to fund the infra projects. But from 2015 onwards, they started taking ownership of several risky projects. To meet this, they took short-term loans and diverted the funds for long-term applications. This was done to take loans at a cheaper rate as short-term loans incur less rate of interest when compared to long-term loans.

The company was incurring losses and having very poor cash stability from the past 5 years. Yet the remunerations to the top management was not reduced.

IL&FS operates in a very risky business. No return could be derived from the infra projects until it is successfully completed. Yet, the top risk management team did not hold any meeting for over two years.

Going Forward

More than 30 funds across all categories, such as liquid funds, short-term funds, etc. had IL&FS in their portfolio. Inside two weeks short-term scrips of IL&FS were downrated ‘D’ from ‘A4’. This severely affected the fund houses and forced to mark down the value of the schemes. This led to a steep fall in the NAV (Net Asset Value) of these funds. Recently, Franklin Templeton announced the shut down of its six Debt Mutual Funds with Rs.26000 Crore Asset Under Management. IL&FS crisis played a huge role in the liquidity crunch here as well.

IL&FS defaulting was a very big blow for the Indian economy. Even after two years, the country is still feeling the effects of its downfall. The government should aim to make strict laws to be made so that transparency is restored. The auditors also did a terrible job as they failed to detect the fraud numbers behind the company’s financial. They even failed to flag some of the blatant errors. As big the IL&FS mess is, everything cannot be explained in one article. Marketfeed will come up with more pieces on this topic so that the readers can understand the aftermaths of IL&FS blowout in detail. Until next time.

Tags Bank, Editorial, IL&FS

Editorial

India’s GDP Contracts 23.9%. All you need to know

Post author By marketfeed Team
Post date September 2, 2020

The National Statistical Office of India’s GDP(Gross Domestic Product) estimates and National Accounts for the period of April-June were published on 31st August 2020. Gross domestic product (GDP) is the money value of all finished goods and services made within a country during a specific period. Observers of the Indian economy keenly awaited the NSO GDP data because it would provide the first benchmark of the state of the Indian economy after the Covid-19 pandemic disrupted it and forced the country into widespread and repeated lockdowns. The highlights of the result were as follows:

India’s Real GDP (GDP adjusted for yearly rise in prices) contracted by 23.9% as compared to Q1 2019-20. It contracted from ₹35.35 lakh crore to ₹26.90 lakh crore. Real GVA or Value of Goods and Services Produced in the economy) contracted by 22.8%.

gdp, gdp data, gdp contraction, indian economy, indian economy covid lockdown, coronavirus lockdown, indian express news

Production of Coal reduced by 15%, and that of Crude Oil by 6.5%. The production of crude oil didn’t fall much since India imports crude oil from other countries. The production of cement reduced by 56.8%

Industrial production (IIP) took a huge hit. The Metallic Minerals industry contracted by 43.3% followed by Manufacturing Industry at (-)40.7%. This was evident looking at the slumped metal consumption this quarter. Read More about India’s metal sector Here.

The only industry in India with positive growth was Agriculture, Forestry and Fishing which was up by 3.4%. To read why the agriculture and other rural industries prospered during the lockdown, Click Here.

The Hospitality ( -50.3%) and Construction (-47%) industries were the most affected.

Components of GDP

GDP(Y)= C + I + G + NX

The formula of GDP is as given above. Where:

C = Consumption. Money spent by people or private expenses.
I = Investment. The investment made by private players into local entities and businesses.
G = Government. Government. Government expenditure or transfer payments such as education, healthcare, social protection.
NX = Net Export (Export Minus Import)

Lets understand how each of the four engines of GDP worked out this Quarter.

The private consumption expenditure (C) fell 27%. Additionally, investments into businesses(I) also slumped by 47%. Government Expenditure increased by 16%. This is due to the Aid which the government had provided in the wake of the COVID-19 Pandemic.

The net exports increased by 165%, but is this a good thing? Generally, India’s imports are always more than its exports. Now, imports have fallen because India’s total demand has fallen as well, which is not good.

Conclusion

India’s contraction of GDP was unexpected. The GDP Growth estimate by World Bank was (-)4.5%.

According to the Centre for Monitoring Indian Economy (CMIE), salaried jobs suffered the biggest hit during the lockdown, with a total loss estimated stands at 18.9 million during the first quarter. Meanwhile, recovery in the second quarter has also not picked up as expected with various states announcing lockdowns due to rise in coronavirus cases in July and August.

When private consumption(C) falls sharply, businesses stop investing. Since both of these are voluntary decisions, there is no way to absolutely force people or businesses to spend more or indulge in expansionary economic activity. Lower interests in your Fixed Deposits and saving account is one way to try and make people spend money. Also, loans given out by banks have all-time low interests now to incentivise businesses to expand.

India is increasing Government Expenditure(G) with multiple PSUs announcing huge expansion projects. The second way out is Monetary policy. RBI has been involved recently in important Open Market Operations and Long Term Repo Operations(LTRO). Read more about it over here. Hopefully, these measures taken by the government will see quick reactions from the economy.

Tags contraction, Editorial, gdp, growth, India

Editorial

GST Council Meeting – All you need to know

Post author By marketfeed Team
Post date August 29, 2020

The 41^st GST Council meet chaired by Finance Minister Nirmala Sitharaman was conducted on August 27, 2020. Finance ministers of all the states were a part of this meeting. The meeting comes at a time when there is rising tensions in states regarding revenue shortfall.

As manufacturing and services have taken a major hit during this pandemic, taxing revenue in turn was affected for the states as well as central government. Amid these crucial times, several state governments and citizens expected the meeting to discuss various issues like compensation to states and GST rates revision; revenue shortfall; need of tax rate cut in two-wheeler industry and centre providing a relief to states in FRBM (Fiscal Responsibility and Budget Management) Act.

The meeting focused on the issue related to state compensation and GST rate cut will be reviewed in later phase.

The key outcomes of the meeting are as follows,

Major concern regarding compensation cess, which is the compensation paid to the states by the centre for the possible revenue losses due to the consumption-based nature of the GST was addressed. The centre estimated the Annual GST compensation requirement to be around Rs 3 lakh crore and the cess collection is expected to be Rs 65,000 crore, which means that the total shortfall in the GST collection is at Rs 2.35 Lakh crore.

Out of the total shortfall, Rs 97000 crore is on account of GST shortfall, while the rest is due to COVID-19 pandemic. To compensate the states on account of revenue shortfall, the council proposed two options to the state –

Borrowing Rs 97000 crore which is significantly less amount and keeping the cess entitlement intact i.e. getting cess later till the decided period.
Borrowing the entire Rs 2.35 Lakh crore shortfall and pay for it using the cess collected in transition period.

Important point here to note is that the centre assured that it will facilitate the talking with RBI. It will help getting G-security linked interest rates so that each state does not have to struggle for loans. However, the loan will be taken in the names of states and the rates will be same for all the states.

For the states opting for option 1 i.e. Borrowing less and keeping their cess entitlement, they will be given an additional relaxation of 0.5% in FRBM for market borrowing. It means that they can keep their fiscal deficit up to 4% of their GDP.

Not considering any rise in interest rates to make up for shortfall will be welcomed by the state but proposing to move to a market borrowing mechanism would extend the tenure of the cess beyond five years after July 2022. This will be a concern for businesses as well as consumers as they would be required to pay compensation cess.

It was assured by the Finance Minister that two-wheeler GST rate cut has merit and surely needs to be reviewed

A brief GST council meet may be held again as States have requested to lay down both the options and provide a window of 7 working days to deliberate on it and get back with a decision.

Conclusion

In case of both the options, the interest payments will start once the transition period for compensation cess ends. It will be paid from compensation cess which the states are liable to receive. Taking a higher amount, which is opting for second option, the states, for a long period of time will lose out on the revenue which compensates for the losses. GST revenue accounts for around 42% of taxing revenue for state. So, opting for option 1 would provide enough fund to sustain the revenue shortfall. If a state requires additional fund, they can go for market borrowing up to the amount required.

As the council is planning to extend the transition period for compensation cess payment to the state, it would not be beneficial to the public. Citizens will have to pay GST cess even after a pre decided transition period. It means that the citizens and businesses will be affected on account of this move. Certain items classified by the government will remain in the higher tax bracket.

Tags Editorial, GST

Editorial

What is LTRO? Know The “Operation Twist” by the RBI

Post author By marketfeed Team
Post date August 28, 2020

The Reserve Bank of India has been in news lately for the implementation of the Operation Twist and/or LTRO(Long Term Repo Operations) in order to boost and infuse liquidity into the economy. The RBI did this so to recover from the economic downturn caused by COVID pandemic. However, they have been doing something similar since November 2019, when COVID was not even around. The liquidity crunch made RBI undertake multiple Open Market Operations(OMO) and Repo rate cuts. Let’s find out the story behind this.

Where It All Started…

The story goes back to when the IL&FS fraud and credit default which shook the country’s vigilance and credit system. The rising number of loan defaults caused the banks to restrict the supply of cash into the economy, that is, the banks became more cautious and vigilant while giving out credit. When the supply of money stopped in the economy so did economic progress. This caused RBI to undertake multiple repo rate cuts and Open Market Operations. To find out more about how repo rate works, click here.

Essentially, before implementing LTRO, the Reserve Bank implemented two liquidity tools namely LAF(Liquidity Adjustment Facility) and MSF(Marginal Standing Facility). So what do these terms mean exactly?

LAF or Liquidity Adjustment Facility is a monetary policy tool used to induce liquidity in the market wherein the RBI lends money to all banks(Private and Otherwise) at the repo rate for a short period( Overnight upto 7 days) depending on the situation in exchange for government securities or bonds.

MSF or Marginal Standing Facility is the rate at which scheduled banks can borrow funds from Reserve Bank of India (RBI) overnight at repo rate + 3%(300 basis points).

However, neither MSF nor LAF did any good. The RBI’s intention was to put money into the system, and the money did reach the banks. However, it failed to reach the market. People refused to borrow money. The rate cuts only reduced the interest received on bonds, whereas the banks couldn’t reduce their interest rates. This failed to drive up investments. The problems of LAF and MSF were:

Lack of Policy Transmission. Even though RBI had rate cuts, this didn’t reflect in the banking system which failed to deploy the funds into the market.
Credit Flow was inadequate, the market’s borrowing didn’t increase substantially.
Liquidity Issues.

Coming to LTRO or Long Term Repo Operations

After the LAF and MSF failed to boost the economy. The RBI decided to come up with LTRO or Long Term Repo Operations and the Operation Twist.

Fun Fact: Operation “Twist” was implemented for the first time in the USA by the Kennedy Administration in the mid-1960s. It was named after a dance form which was a craze back in the day.

LTRO is a tool that lets banks borrow funds for one to three years from the central bank at a fixed repo rate, by providing government securities with similar or higher tenure as collateral. Essentially, instead of a repo operation for a short term, RBI is lending money to the banks for a longer-term (greater than 1 year).

The government implemented the LTRO in three stages:

LTRO. Notified on Feb 07. Read Here.
TLTRO I (Targeted Long Term Repo Operation).
TLTRO II.

In the first LTRO, RBI had deployed ₹50,000 crores worth of funds. By 18th March, RBI had lent out ₹1.5 Lakh crores worth of funds banks for a period of one to three years. To RBI’s dismay, the COVID-19 pandemic forced the entire nation to go under a lockdown. This meant banks had no reason to deploy funds. Banks held on the funds instead of deploying them.

The RBI had to figure out a way to ensure that the banks deployed the funds in the market instead of holding on to them. Therefore, RBI came up with Targeted LTRO (TLTRO).

Under TLTROs the banks had to invest the amount received in TLTROs in primary and secondary markets. This involved corporate bonds, commercial paper, debentures, NBFCS, MFIs and other securities. Thereafter, In TLTRO 2.0 banks had to :

Invest at least 50% of the total funds in bonds issued by small NBFCs of asset size of Rs 500 crore and below
Invest in Mid-sized NBFCs of asset size between Rs 500 crore and Rs 5,000 crore
Invest in MFIs or Micro Finance Institution

However, TLRTO was a no show with very few bidders participating in it. Essentially, it wasn’t a success as well.

Operation Twist

There were certain pre-conditions set by banks to avail TLTROs by banks. It involved banks requiring to invest a certain amount of borrowed amount in the primary and secondary markets. On 25th August 2020, the RBI announced that it was going to conduct the second stage of Operation Twist to induce liquidity into the market.

Let’s understand a few terms before understanding Operation Twist.

Operation Twist– Operation Twist is an Open Market Operation(OMO) by the central bank where it sells short term bonds and buys more long term bonds. These are mostly government securities(G-Sec)

Long Term Bonds– These bonds are redeemable in the far future or are far from maturity.

Short Term Bonds– These bonds are redeemable in the near future or closer to maturity.

Liquidity– Money supply for an individual or a group of individuals or the market.

Yield – A bond yield is the return an investor realizes on a bond.

What goes on in Operation Twist

In Operation Twist, the central bank sells short term bonds. The proceeds received from selling short term bonds are used to buy more of long term bonds.

What this does is that it creates a shortage of long term bonds, which in turn increases its price. This brings down its yield or interest rate. Likewise, the opposite holds true for short term bonds.

Note: Price and Yield of a bond are inversely proportional.

When the RBI sells the short term bonds, the supply of it increases, which in turn decreases the price of the bond, which in turn increases yield, which then drives up short term interest rates.

When the short term bonds mature and its payout time, the ones who own the bonds will get a higher payout than usual. This increases the ‘supply of money‘ in the system. Which brings down overall interest rates. The lower interest rates encourage the market to borrow more and invest in market activity. This way the economy starts to prosper.

Summing it up

The Operation Twist in recent times was first adopted post the 2008 economic crisis to lift the country out of recession. The RBI had been trying its best to revive the Indian money market after the IL&FS fraud and default case. It had tried various different monetary policy tools, LAFs, MSFs, OMOs and LTROs all to its dismay. This move has been praised by many as a masterstroke. Well, many such operations were in the past. Whether or not the Operation Twist turns out to be a masterstroke, only time can tell.

Tags Editorial, LTRO, monetary, Operation Twist, Twist

Editorial

Indian Life Insurance Industry under the lens of COVID-19

Post author By marketfeed Team
Post date August 28, 2020

Life insurance is an agreement between the insuree (customer) and the insurer (insurance company). According to this contract, the insured person has to pay regular premiums to the insurance company. In return, the family of the insured person will receive a lump-sum amount in the event of the insured person’s death. New types of life insurance also provide you with periodic returns and a maturity benefit amount if the insured person remains alive until the expiry of the policy.

The Indian Life Insurance industry is dominated by the publicly-owned Life Insurance Corporation (LIC). It has a market share of 69.25%. The rest of 30.75% of the market is shared between 24 private life insurers. In the private sector, SBI Life and HDFC Standard are the two biggest players with a market share of 7.68% and 6.56% respectively. Till 1993, private players were not allowed in the industry but reforms in other sector provoked the government to bring reforms in this industry as well.

COVID-19 has impacted almost all the industries, mostly negatively. What about the life insurance industry? Let’s have a look.

The Impact on Investment mentality

COVID-19 has changed the way customers behave. Life Insurance demands that people need to invest more in the initial years. They have to wait for several years to get their benefits. The modern type of insurance helps you in gaining returns from year one. But those returns are way less than the premium which has to be paid by the customer for a first few years.

All in all, life insurance helps you to decrease your risk of income in future but for that one has to pay now. Currently, people want to reduce their risk exposure but are not ready to pay now for that. If the insured person has to invest right now, and that too, without getting any benefits, why would he do that in the middle of the pandemic when he has unstable cash inflow?

Many people have faced wage cuts, job losses and business failures. This has substantially decreased their income, though their expenses are still similar to pre-COVID times. Many of them have to use their savings to run their households. So, when you have a reduction in the inflow of money with similar outflow, one would think twice before investing his/her money at a place where he/she has to wait for years to get benefits. This is a case when we say that people are looking to fulfil their short-term needs and are avoiding to make any long-term plans for which they have to incur the cost right now.

Numbers confirming the fall

New business premiums decreased by 32.6% in April of this year. Only Rs 6,728 crore was collected in April 2020 when compared to Rs 9,928 crore in April 2019. It is reported that the sector has faced a 12% fall in first-year premiums. First-year premiums were amassed to be Rs 72,321.5 crore from April to July 2020. This was Rs 82,146.5 in the same period last year. The overall sum assured also faced a steep reduction of 9.2% between April and July this year.

The state-owned LIC witnessed its new business premium dipped to 2/3rd in April 2020 of what was in the previous year. Life Insurance Corporation recorded Rs. 3,582 crore of new business premiums in April. This number was Rs 5,639 crore one year ago.

Among private insurers, HDFC Life insurance and ICICI Prudential Life Insurance saw a big fall in their new business premiums. The former recorded a decline of 53% whereas the latter recorded a decline of 60%.

Headache for the insurers?

Unfortunately, COVID has taken a lot of lives. With no vaccine out in the market, more people will succumb to this disease. Many of them will be insured as well. Thus, whenever their family files for mortality claims, these life insurance companies are liable to pay them. As the claims have increased, insurance companies’ outflow has also increased. This has added more pressure on these companies financially.

Claim settlement ratio is one of the most important metrics to judge any insurance company. It refers to the percentage of claims the company has paid out relative to the claims which were filed inside one year. A life insurance seeker is always advised to look at this percentage before choosing the life insurance entity.

If the insurance companies do not pay the claims which have been filed recently due to COVID, this ratio will face a fall which will give a negative outlook to the potential customers. Thus, companies will lose more business next year.

Positive output in the long-term?

Not many Indian are aware of life insurance benefits. A very few numbers of people might be knowing that paying insurance premiums also helps you in making tax savings. The people who have awareness about life insurance, don’t want to invest now and wait for benefits which will be received only after a few years. All this leads to a very less number of people insured in our country. According to the data, India has a life insurance penetration of mere 3.69%.

With Covid-19 pandemic, the awareness and the need for insurance have risen sharply. People are realising that they could have been better off if they have invested their money. This global crisis will make them understand that it is very important to have a safety cover because one cannot predict what can happen in future. Thus, the industry can hope for a revival once the people starting having a stable cash position. The insurance company leaders have a dual fight in front of them. Firstly, to manage their operations in these disrupted times and secondly, making new policies which can attract people after the spread of virus decreases.

Tags Editorial, insurance, Standard Life

Editorial Uncategorized

Tea, Coffee and India Inc.

Post author By marketfeed Team
Post date August 28, 2020

Tea and Coffee are two of the most common beverages in the world. They have been regarded as a holy potion. It is has a high medicinal value. In fact, Chinese immigrants to the USA who helped build the First Transcontinental Railroad in the 19th Century survived on Black Tea, which helped stave off dysentery and other waterborne illnesses. Out-of-home consumption itself is 40% of the total consumption of tea.

The cultivation of Coffee started with the sowing of 7 Coffee beans smuggled from Yemen by an Indian Saint. Thereafter, the seeds were sown in the present-day district of Chikkamagaluru. It is estimated that India now consumes 120,000 tons of coffee per year.

Tea and Coffee Key Data.

The market consumption for Tea is expected to grow at a CAGR of 4% in the forecast period of 2020-2025. It is expected to attain 1.40 million tons of production by 2025.

As of 2019, India was the second-largest tea producer in the world with production of 1,339.70 million kgs. Furthermore, during Jan-Feb 2020, the estimated production of tea stood at 30.54 million kgs.

Revenue in the Coffee segment amounts to US$808m in 2020 in India. The market is expected to grow annually by 8.9% (CAGR 2020-2025).

According to CoffeeBi, The urban consumption dominates with about 73 per cent of total volumes. The remaining 27 per cent it is speculated to account for rural consumption, especially in South India. Moreover, Coffee is consumed more in South India than in North India.

Among the South Indian States, Tamil Nadu accounts for 60 per cent of consumption, while Karnataka, Andhra Pradesh, and Kerala account for 25%, 10%, and 5% respectively.

Nearly 30% of Coffee produced in India is Arabica and 70% produced is Robusta.

Tea, Coffee and the Tickers; and of course COVID-19.

Tea and Coffee stocks have shown excellent performance this quarter. According to Trendlyne, 10 out of the 12 Tea and Coffee stocks have shown a positive profit growth this quarter and share prices of Tea and Coffee stocks zoomed substantially. However, Production and Consumption figures speak the opposite, What is the paradox we are looking at? Let’s find out.

Tea

After the COVID-19 pandemic, there was a 40% reduction in production in Tea due to disrupted supply chain and loss of lively hood. Moreover, Assam, which is the highest producer of tea faced devastating floods. The production of the state fell from 44 Million Kilograms (M. Kgs) on April 19′ to just about 14 M.Kgs on April 20′.

The price of tea skyrocketed from a meagre Rs. 121.34 per Kg in March to Rs. 188.77 per Kg in July, according to Auction Price Data from Tea Board. The average monthly domestic consumption is 90 million kg. Of this, out-of-home consumption accounts for 36 million kg. In April and May, there was a loss of around 72 million kg of tea consumption.

As tea prices soar in India due to lower output this year, tea players and tea traders are considering importing teas from Kenya and Vietnam, where tea prices have crashed due to overproduction.

If the government approves, India may have to import tea for the first time. India has been importing teas only for re-export and that too at a small volume of 9-10 million kg annually.

Coffee

India’s coffee exporters are amidst deep financial crisis with the state and Central governments announcing a lockdown to contain the spread of Covid-19 across the country. Restriction of coffee exports from India to Europe has had an unprecedented impact on the Indian Coffee Industry.

As a result, around 21,000 metric tonnes of coffee valued at over Rs 400 crore is stuck at coffee curing centres and various ports for non-availability of permissions to export.

Likewise, India’s coffee export declined by 17.2% per cent to 168,435 tonnes for the period from January 1 to July 23, 2020, compared with the same period in the previous year. The plunge has been severe in the case of robusta variety beans at 26 per cent.

Coffee prices have been on the rise due to high demand and low supply, is a trend that is likely to continue.

The Tickers

The Top Gainers in the Tea and Coffee Industry for the month of July 20′ are as follows:

Top Gainers(July 20′) on NSE
Rossell India Ltd.	43.67%
Tata Coffee Ltd.	40.41%
Goodricke Group Ltd.	36.80%
Tata Consumer Products.	33.57%
B&A Ltd.	30.24%

Average Revenue Growth of Tea and Coffee companies was 27.74%. EBIT Growth for Tea and Coffee companies was 72.4%. Operating Profit growth for the companies was 68%. All of this over a year. The tea market just luke other companies initially slumped which was followed by a spikey/volatile recovery as the companies started posting excellent results.

How was is it that reduced production still resulted in tea and coffee companies making a profit?

India is the largest consumer of tea in the world. The production slowed down, but the demand never went down very much. After the lockdown was imposed the demand for out-of-home Tea slumped, but demand for Tea inside households covered up for it to some extent. The demand for Tea overall can never die down in a country like India.

According to data from the Indian Tea Board, there is a reserve inventory or a buffer stock for at least 145-165 Days when the lock-down was imposed. The Tea picking season had just ended in March when the lockdown was imposed. It is THIS Tea that met with the consumption demand and added to the profits of Tea companies

Why the panic in the newsroom then? The demand for three months of Tea was met, but the non-availability of labour and resources during the lockdown is what caused panic in the market. There was an uncertainty about when the production of Tea would resume. This made it difficult for companies to plan prospects or orders of Tea causing prices to skyrocket. This was a supply constraint.

June-July 2020 data from Indian Board show that India’s Tea production has started closing up to pre-COVID levels. It will be clearer through August-September data whether India will be able to supply the consumption and export demand or not.

On the other hand, Coffee conglomerates like Tata Consumer Products and Tata Coffee managed to perform well because of its international presence with the likes of Eight O’Clock Coffee and Tata Coffee Vietnam Company (TCVCL).

Medium and small farmers were already having difficulty covering operating costs. The decrease in prices in recent years has made their livelihood increasingly difficult. Therefore, the main risk is the possible shortage of manpower due to the spread of the virus and the measures of lockdown.

What drives Tea and Coffee Prices?

The concentration of production: Brazil and Vietnam happen to be the top two producers of coffee, This concentrated output means that supply disruptions in one or both of these countries can have a significant impact on the price of coffee.
Substitution to cheaper beans or leaves: In the Tea and Coffee business, there are cheap beans/leaves and expensive finer beans/leaves. If it so happens that the price spread between the cheap and expensive one’s increases then companies will start substituting the cheaper ones into their blend. This is a positive signal for India in terms of coffee This is because 70% of India’s produce is Robusta.
The price of substitute products: Tea and Coffee are substitute goods, one should analyse the trend in either side to be able to speculate which good will be more in demand and where? Other substitutes for caffeine include energy drinks and supplements.
The weather: Coffee in India mostly depends on monsoon and humidity. A poor monsoon or irrigation facility means that coffee production will be hampered. If climatic conditions are unfavourable for tea plantations owing to less or heavy rainfall that also poses severe problems affecting the production of tea and lives of tea industry labourers.
Yield: There is a fair possibility that the Tea bush or coffee plant might rot or be rendered unsuitable due to conditions like pest, disease or climatic conditions. It is necessary to check the yield provided by Tea and Coffee plantations. The data for which is available on India Tea Board or Indian Coffee Board.
Supply Chain and Logistics: The customs duties exposed on the import and export of coffee has a huge impact on the price and demand of the coffee. One should look out for trade and policy changes between countries.

What’s the Future Like?

During the period of the lockdown Tea and Coffee, production was impacted. However, June-July numbers of production show some sign of positivity in terms of production as it returns to normalcy. Tea has a huge potential export value as the international market shifts towards a more healthy lifestyle and the adoption of Tea increases as a substitute for widely preferred coffee.

On the other hand, the Chai drinking nation of India sees greater potential in rising demand for premium coffee as people’s disposable incomes rise and so does their taste for good tasting coffee. Moreover, the North Indian Market isn’t as penetrated as the South Indian market in terms of coffee consumption.

Tea and Coffee are two products that stimulate the human mind, so much so that many around the world have made it a part of their daily routine. The possible reason why the Tea and Coffee market in India suffered in COIVD is the disruption of Logistics, Supply Chain and Labor along with the uncertainty of things getting back to normal. Huge potential lies in the future ahead for the two to prosper.

Tags Coffee, Commodities, Editorial, Industry, Markets, Tea