The IFT challenge- For Finance Friends

IT companies are vulnerable to the foreign exchange risk as compared to other businesses, as the theme for them is outsourcing. Simply, it means earn in US $ and pay in INR. The last two years have been volatile for RE/$ equation. More imporatantly we framed a model pre 2007 and post 2007 to test whether those 8-10 factors impacted in the similar fashion or things have changed for IT companies in terms of covering their foreign exchange risk. From Naked call/ naked put to Collar formation .A lot of things changed for large companies.

We found a case where companies entered into swap agreements. We also found that few of the companies formed collar position to cover their exposure.

What we want you people to do is discuss and think how collar/ other strategies are formed and also think about swap agreements.

Friends this is one exercise which will ensure you know 30% of option strategies straight away. Right from Straddle to strangle and than collar to box.

Please note:We are in midst of releasing the case, just want to ensure we do not fall in legal tangle with the large Indian Corporate houses. ELse we would rename the companies. One exercise for all the Security analyst.

Airline Industry - Boom to Bust to .....???

Few years ago, India's airline industry was flying high. India, one of the fastest growing and most competitive aviation markets in the world. Six new carriers launched. In the last four years, Indian carriers ordered 400 Boeing and Airbus jetliners worth about $37 billion.

But is the fairy tale for Indian airline industry over or is it that there is only one story around the corner – mayhem? The impact of the economic recession is clearly visible, as Indian aviation industry posted a whopping loss of $2 billion in FY’09. This mayhem is not peculiar to only Indian airline industry but has hit global players viz. British Airways, Air-France KLM, Lufthansa, to name a few.

Players are forced to postpone their international expansion plans. The domestic capacity is on a decline. Do you think that resorting to steps like turning their full service domestic fleets into budget businesses, deferring aircraft deliveries, cancelling orders, rationalizing routes and trimming staff would work as balm to their sufferings?

Now what are these players shouting for? Bailout! Players like British Airways have already got the support from the governement while Indian players are still waiting for a bailout in the form of reduction in taxes and airport charges, allowing them to import jet fuels under the open general license which would save them on high sales tax, as also proposed by Naresh Chandra Committee and adding ATF under declared goods category, which the airlines say will result in an estimated annual savings of $624 million for the industry. According to an estimate, the ATF prices in India are 60-70% higher than those at the international level, and fuel costs accounts for about 40% of the total operating costs vis-à-vis 10-15% in other countries, add to their woes.

As part of measures to provide relief to the airlines, the government has already brought down customs duty from 5 to 2.5%. Is that sufficient enough?

But critics’ claim that still after 4-5 years only 2% of the population travels by air and the airline industry did very less or nothing to attract the 98% that uses road and rail travel. Even the allegation was raised that the airline operators formed cartel and fixed the price of airline tickets, which is a crime in any other country. But was this practised in any India for the lack of transparency or is it because we lack structural aviation policy? But it is projected that cargo traffic, airline traffic, number of passengers or even the number of airplans, each of these will record a growth rate between 3% and 5.5% over the next 20 years.

But how relevant do you think these future prediction holds good keeping into consideration their bleeding status? And do we need a bailout package or an aviation policy?

Share your viewpoint or send us your feedback at splconquest@gmail.com

Competition- Yama of Cartelization

Have you ever thought the reasons for cartelization? One of the basic factors that drive the sustenance of a cartel is lack of distinction. It is no wonder that most of the proven and averred cases of cartelization are in industries which have a low level of differentiation such as cement, fertilizers, tyres etc. or which are either commoditised like oil, food, grains, sugar etc. Secret cartel agreements are a direct assail on the principles of competition.
Cartelization is not peculiar to India. Even the Asian Shippers Council complained that shipping lines are conspiring to slap additional charges on Asian exports.
Do you think that the approval granted to Shree Renuka Sugars from the FMC for buying 5% in NCDEX is a signal towards cartelization? As we think that these approvals would allow the players to virtually check the prices of commodities and at the same time also profit from the price movements on the exchange.
To curb cartelization, CCI, which got the statutory powers in 2007 by an Act of Parliament, has been formed by the government, to promote and sustain competition in the market and protect interests of consumers. If it finds any company guilty of being part of a cartel or abusing their position, it can impose penalty up to 10% of the average (three-year) turnover of the firm or companies involved. That is in contrast to MRTPC’s powers, which can only ask companies to abstain from such activities.
Do you think that the pressure by the Indian Inc. on government to stall the notification of Section 3 and 4 of the Competition Act which make it mandatory for the companies to seek prior approval of CCI on matters related to mergers and acquisitions (M&A) is a sign of cartelization in future?
But the recent cartel formed by the airline companies and the concomitant withdrawal of the stike threats foreground the facts that cartel in India will increasingly find it difficult to withstand public scrutiny in the information age and retaliation by regulatory authorities for consumer protection.
Export-oriented industries such as software in India are examples of limited cartelization with active government support. With increasing scrutiny of industry data it will become difficult for cartels to justify their actions to the civil society.

Share your views!

Do theories have different interpretation in the Real World?

Porter’s 5 forces model implies Profit = Selling Price-Cost Price

Friends have you ever thought that whether its marketing or finance discipline, what makes a difference is the bottom line (Profit). Keeping this in mind, we took a holistic approach on Porter’s 5 Forces model.

Think from the perspective of business doer and evaluate how Porter 5 Forces impact the three variables i.e. Profit, Selling Price and Cost Price.

Feel free to write your feedback and learn what's the reality behind. You can even mail your analysis at splconquest@gmail.com

Decoding the New Tax Code

Media, Tax Man and General consensus feels tax savings for common man with the new tax code. Is this a fact, we doubt the same:
The new system will help in clarity, simple tax filing procedure easy to calculate tax returns and what we call a transparent system, No doubt about it.

What about tax planning? More importantly who suffers the middle class in the service sector?
The real story, Corporations happy with the slab cuts specially the FMCG pack and other Corp Houses paying 30% tax would now be paying 25%.

The common man story: A simple mathematics but making my tax burden go up? Here we write the story of the common man.

Consider the scenario 2012, 31st march under old and new system. Before that we suggest you to go through the expenditure revenue statement:
Earning s >Cash> Pre tax 7 lacs, Expenditure:Home loan repayment 1 lac( 80C) home to be occupied in 2013, ,interest 50k,(Travel Allowances 9.6k and other benefits non tax 40.4 k) totaling 50k ,15k medical, HRA benefit 1.5 lacs. House hold expenditure 2 lac.

So what makes you believe that the new tax code favors the aam aadmi. It’s an even more expensive shot of wine. Media Tax Man please help us to understand if we are wrong . Also the government is trying to emphasize on investment habit. But this reduces liquidity in the hands of the common man 2.65 lac of other expenditure will cover all the monthly household expense, in new regime if one wants to pay less of tax, invest more with a 5 year lock in. What about emergency requirement.

Note: Pardon us if we have gone wrong anywhere, would incorporate the correction immediately this is what a CA has accepted the fact to be.Note PWC argues that HRA would still be there if thats he case than many would not fall underthe purview of tax itself. There is no clarity. But hRA is defined as Benfit recd by employee from Employer. This is not the only burden you need to pay additionally, tax on your retirement and etc. Adding link for all of you to take a different view on the Hype created by media.Think about it and discuss. FOr details on the tax code hit the below link
http://lite.epaper.timesofindia.com/getpage.aspx?pageid=1&pagesize=&edid=&edlabel=ETBG&mydateHid=13-08-2009&pubname=&edname=&publabel=ET
This is only for service class wait for the SME's and COrporations who stand to lose on the new system. Suggestions/Comments please.

Political Recruitment in a Corporate Isshtyle…..!!

Did you ever had an idea how much does a company/organization spend in terms of recruitment, forget about the training part? Can the amount be as big as Rs. 2-3 crore in a single state like Gujrat, which the IYC (Indian Youth Congress) team spent for the just concluded youth congress election? If it can be, just think about India as a large!
Gone is the conventional grassroots panchayat assembly ticket itinerary to become state level office bearers. We think the days are not far when we would see Congress Inc. or BJP Inc. or be it any political part name with Inc. as a suffix.
Rahul Gandhi the master mind behind revamping the image of IYC is on a hiring spree pan India. And what would the employees in the organization/team be called as? “Aam Aadmi ke Sipahi” or “freedom fighter” or would they bear different managerial post as CEO, CFO, Business Development Executive, Analyst, consultants and other posts in an organization one can think of.
We all understand the fact that youth is considered as the backbone of an economy and don’t forget that youth are the target segment for IYC. So do you think it could be a next viable employement opportunity for you? Or do you think a new industry is opening up for the mass at large?
Candidates are grilled by a panel on their vision for the future of the youth wing, so how about the idea of schools/colleges opening up where people would be imparted training, how to get into these upcoming organization?
Do you think his concept of “ONE MAN ONE POST” as also suggested by Antony Committee is set to revolutionize the functional structure in the organization?
To what extent do you think that the policy of corporate culture adopted by IYC to identify and prepare a new generation of leaders is feasible?
Share your ideas!