Implication of GST on the broader economy and Stock Markets: Stakeholders’ perspective

Contributed by:

Mandar Chapekar,CFA

CFA Society, Pune Chapter hosted a session on “Implication of GST on the broader economy and Stock Markets: stakeholders’ perspective” by Mr. Kuntal Shah on 18th August 2017.

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Kuntal is one of the founding partners of SageOne and has an opportunistic inclination towards the value-oriented and risk-controlled approach to investments.
The Crux of the Topic was implications of reforms on government finance, corporate profitability, long-term trends, factors to watch out for, impact on broader economy and possibilities ahead.

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In his presentation, Kuntal stressed on the computerized economy, digitization that has taken place which will act like scanning machine of every transaction of each individual. It would be possible to keep a trail of all economic activities, and there would be very few loopholes to evade the computerized system. It would improve tax collection for the Government, curb the parallel economy transactions and will have a huge overall positive impact on the broader economy and stock market.

Kuntal mentioned following few points about the impact of the introduction of GST :

• Margins may not improve as dramatically as widely thought that they would. Most of gains/losses in slab changes would be passed on under anti-profiteering clause, market share expansion preference, etc

• Transition is chaotic, however, the launch has been decently managed so far

• Wise to ignore the first six months of GST – the most important detail to follow will be the Indirect tax numbers, and direct taxes should shoot up as same entities violates both

• SME business has been forced to enroll because the customers and vendors have started demanding it

• It has led to a tremendous working capital demand in the system at the MSME level

• GST – its misunderstood that tax efficiency is the biggest impact of GST, however, it will be the digitization of records which will be far more valuable

• Four benefits of GST will be Digitization , Enforcement, Analytics and Higher tax base

• Privatization of PSU with a higher cost of capital and lower ROCE

• GST will attract Global pension money, Private Equity money

• IT backed digitisation and reconciliation will increase the efficiency

• There is also automation and analytics being employed in taxes

• Demonetization. GST and RERA has ensured that the bad competition in the real estate will go away

To conclude, it was very well informative and educative session. It was full of realistic illustrations which would help attendees to understand Implication of GST on the broader economy and Stock Markets better.

-MC

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IAIP – 12th AGM…

IAIP had its 12th AGM on September 23rd 2017 at MCA, BKC, Mumbai. The board made a formal presentation and discussed various questions raised by the members. The resolutions, which were voted by members through remote e-voting and on the spot tablet voting facility, were passed by majority. These included the adoption of the audit financial statements, re-appointment of directors by rotation, resignation of two directors on completion of their terms, change in the auditors, and induction of two new directors viz. Sampath Reddy Baddam and Jitendra Chawla respectively. The annual report covering audit financial report, directors’ report, and AGM notice as well as the scrutinizer’s report are available on the India page on the CFA Society page under Communications->Documents

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ACCOUNTING FOR OFF BALANCE SHEET ACTIVITIES

By: Gaurang S Trivedi, CFA

In order to better assess the true economics of the business and ascertain its value it is imperative that the off the balance sheet items are recorded in the books.  This could be done by recording all contractual, guaranteed, contingent or at-risk amounts, that are either expected to be received or to be paid, into the books as an asset or liability with a corresponding contra-liability or asset account.

Consider accounting for operating lease transaction for example. Recording of a contractual Operating Lease arrangement could be done by creating Contra Accounts as
   Operating Lease Asset on the asset side and
Operating Lease Obligation on the liability side

Periodic lease rental payments could be credited into
   Lease Rental Payment
Cash/Bank
Periodic Amortization of Lease Asset and Obligation over contractual life of lease:
   Operating Lease Obligation
Operating Lease Asset

The net impact is:
A progressive approach that explicitly recognizes assets available or liabilities assumed by the corporation.
Provides an objective basis to evaluate the effectiveness of transactions entered into by
managements by linking profits and charges associated with the underlying assets and liabilities respectively.
The contra accounts created have no bearing on profits or cashflow.
The contra asset and liability accounts created do not affect the book value.
Efficiency ratios such as Return on Assets and Asset Turnover will be depressed due to a higher asset base until the corresponding asset is fully amortized.
Debt ratios may be negatively affected if the contra liability is deemed a financing activity.
If the contra asset account is created as a reserve, the following differing effects may materialize:
Book Value will increase.
Debt Service ratios will not be affected.
Debt to Equity and Debt to Total Capital will be positively affected due to higher Equity Capital.
Return on Equity will be depressed due to a higher equity base until the corresponding reserve account is fully amortized.

GST

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Corporate Bond Market

 

 

 

 

 

 

 

 

 

By Sitaraman Iyer

Three seasoned professionals in the fixed income arena viz. Rahul Goswami, Head, Fixed Income, ICICI Prudential AMC, Jayen Shah, Head, Debt Capital Markets, IDFC Bank, and Bhushan Kedar, Associate Director, CRISIL, got together to uniquely share their corporate bond market experiences with an inquisitive audience of CFA Charterholders in Mumbai.

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Wide ranging aspects of the Indian corporate bond markets were presented and discussed. These included evolution of bond market, statistics, recent trends, market ecosystem, role of key institutions, market infrastructure, pivotal role of credit rating agencies, various investor classes and their respective investment patterns, regulatory framework and the areas which need immediate attention, issuer needs & choices both onshore & offshore, innovative structures, deal or credit failures, valuation methodologies deployed by different investor groups and so on.

The market was closely watching the the fate of the cases taken up under the insolvency and bankruptcy code. Successful resolution of cases  will send out a positive signal to bond market participants that issues can be resolved if corporates don’t behave properly. The depth of the market will improve with further encouragement from regulators and stricter norms on bank lending to big corporates. Steps like limiting ISIN numbers issued to a company was also expected to improve liquidity. Around 90% of the corporate bonds bought by Mutual Funds or Financial Institutions were in the AA  or AAA category indicating low depth of the market. Over time the panel also expected dedicated credit funds to set up shop in India which would further increase penetration in the bond market.

-SI

 

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Mobilizing for equality- What Can You Do?

Contributed by- Shivani Chopra, CFA

Women in Investment Management (WIM) is an action-oriented initiative of CFA Institute. It is focused on improving investor outcomes by encouraging diversity in the investment management profession. The data presented in the latest annual report of CFA Society India clearly highlights the business case for gender inclusion in our country. For the FY 2016-17, the gender ratio was 90.3% Males to 9.7% Females. Many factors like society landscape, lack of knowledge and opportunities, etc. contribute towards this underrepresentation. It seems that an average Indian mind is not wired to see women leaders in male dominated professions. The news of Nirmala Sitharaman taking over as India’s first full-time woman Defence Minister completely overshadowing other male appointments is a recent case.

While the CFA Institute and CFA Society India fully support this initiative and have taken several steps to raise awareness, all the members must work together to drive the necessary change in a country like India. After all, we are all responsible for meeting investor needs. Below are a few recommendations for our members and employers –

Members and Employers

• Determine a baseline of gender diversity- Analyze your firm’s gender representation at all levels. Are women well-represented at all levels of your firm? Do they serve on your board? Do you have a women’s initiative in place?

• Recruit beyond traditional networks- Women clients often look for advisers who are women, and when a firm doesn’t have satisfactory women advisers, they select other firms that do. It requires search firms to produce credible women candidates for top positions.

• Sponsor, mentor, and ensure the visibility of women- Studies show that women are undersponsored. Mentor and sponsor young female managers, provide opportunities that help them develop their skills, and offer the visibility they need to advance—not only internally but also externally with clients.

• Promote and retain more women. As individuals progress to more senior levels in financial organizations, their assessments are more qualitative, which leads to a bias: Those in leadership tend to hire/promote individuals who are more like themselves. You can develop strategies and tools to overcome these unconscious biases that will significantly impact your firm’s ability to promote women. We know that people are naturally inclined to hire and promote individuals who are like them, so it is a difficult bias to overcome. Keep the women you have by building a culture that is inclusive. Establish metrics that reward the creation of diverse teams. Determine whether your firm has gender pay gaps and address them.

• Create an inclusive culture: Organization culture that makes all employees feel included across its functions is the backbone to all diversity solutions. Decision making should consciously involve employees irrespective of gender and consider their opinion. Have scheduled meetings, within office hours, for all key discussions rather than encouraging informal coteries meeting outside the office. It will encourage women to participate in decision-making

• Promote the CFA Program as a cost-effective, flexible option for career success. Specifically, encourage women to learn more about the Women’s Scholarship Program offered by CFA Institute

We are not expecting members to become torchbearers of feminism but to understand the gravity of the situation. It is natural for females being more comfortable spreading this message, males too have a crucial role to play as they represent ~90% of all CFA Society India members. An Aug’17 news article in Economic Times reported that leading corporates like Deloitte, Genpact, Godrej, Ericsson, and Welspun group are looking at male employees as key stakeholders in the entire process of hiring & retaining more women, taking initiatives to eliminate gender bias, etc. Men as allies can create greater impact and strengthen the programme.

Taken individually, these steps might look like a small insignificant contribution and you may wonder how they will make a difference. Much like the boiling frog syndrome where the mythical frog is able to recognize only sudden changes, human minds too may not notice slow changes. But slow changes get magnified over time. Taking a long-term perspective for our coming generation is important here.

-SC

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“A to Z for First Time Investor” – Book Review

Title: A to Z for First Time Investor
Author: Ankur Kapur, CFA
Publisher: Plutus Capital (2017)
M.R.P: Rs. 199
Pages: 120
Reviewed By: Shivani Chopra, CFA

Book

“A to Z for First Time Investor” is a personal finance book written in a simple yet effective manner. The title of the book is very apt as it attempts to exclusively focus on people just starting their investment journey. It compiles the most important questions such investors would have and offers advice for this long term financial journey to be a smooth one.

The author of the book, Mr. Ankur Kapur, CFA is the founder and managing partner of Plutus Capital, an investment advisory firm and has over 15 years of experience in the financial services space. He has dedicated the book to improving financial literacy and ending mis-selling of financial products. Using his rich personal experience and expertise, the advice has been written in easy to understand bite-size pieces.

The book is divided in seven sections including the basics, planning, options for investing, designing the investment portfolio, taking action, etc. As it assumes little to no prior knowledge of finance, an explanation has been provided for basic terms like inflation, shares, bonds, SIP, etc. The knowledge presented will empower the readers to plan their expenses and savings and make them understand the importance of investing the savings instead of letting them sit idle. It will also help them to achieve their key milestones in life and finally to be able to ask relevant questions before purchasing any financial product.

Ankur’s undivided attention goes to a disciplined approach towards Saving to Invest- “As one starts their careers, one should try and save at least 20% of their monthly income and increase it as their income rises over the years”. This disciplined approach will help the money to grow in order to accumulate a large amount of wealth. Planning for both short term and long term financial requirements is the key. Steps have been outlined to determine how much money will be needed for different goals like purchasing the first home, children’s education, retirement, etc. For example, an ’10 x 10’ formula has been illustrated for retiring rich. An investment of 10% of monthly income in a retirement fund and subsequent increase of 10% every year, can lead to a comfortable retirement. The book then goes on to discuss the various vehicles available to park money and spells out details for all the financial products available under growth asset classes and income asset classes. The growth asset class includes investments such as equity, real estate, alternative investments, etc. Income asset classes include FDs, bonds, PF/PPF, etc. While mutual funds are highlighted to be one of the most viable products, it has been recommended not to mix insurance products like ULIPs as an investment option. New products like ETFs, REITs, etc. are slowly gaining popularity in India, so these are the ones to watch out for.

To meet one’s desired goals, it is important to understand the portfolio construction process which combines the growth and income asset classes depending upon the relevance and suitability. The essence of designing your investment portfolio is compared to a balanced diet for a human being – “Just as your food diet plans contain a diversified mix of different types of foods, so should your financial portfolio contains a diversified mix of different types of asset classes for overall growth of your money in a safe manner”. While structuring a portfolio, one should have a long and short term focus, consider the impact of inflation and determine risk tolerance. Monitoring and rebalancing are equally important activities to stay on track. Ankur also discusses the absolutely essential stuff which everyone should be aware of – emergency fund, different types of insurance, saving taxes, etc. as well as other stuff one should know. Readers will learn more about SIP, STP, SWP, how to select the right mutual funds, things to do before retirement and utilizing bonus amount in the right way. The last section covers age based investment guidance. How should investors in their 20s,30s…50s should invest.

Overall, the book will definitely act as a guide for first-time investors and help them in securing their financial health. Although the investors jobs’ will just start as being apprised about the various investment products is not enough, they should be in a comfortable position to perform due diligence on new financial advisors or other agents.

Ankur Kapur deserves a special mention as he is amongst a very few Indian CFA charter holders to have written a book. When asked about the motivation behind authoring a book, he mentioned , “I believe in growing by sharing knowledge than by charging for information asymmetry”. Indeed a noble thought put firmly into action! CFA Society India would like to congratulate Ankur and wish him the very best for future endeavours.

-SC

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Advanced Modelling and Valuation Workshop in Delhi

Contributed By- Shivani Chopra, CFA

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CFA Society India and EY LLP jointly organised a two day workshop in Delhi on Aug 4th and 5th on the topic – “Advanced Modelling and Valuation”. Similar workshops were conducted in Mumbai (2016) and Bengaluru (Feb 2017). The event in Delhi was equally successful with around 50 attendees learning one of the crucial skills to strive for excellence in valuation related roles. Designed by industry experts, the program combined core concepts with applied tools for participants. Star speakers included Mr. Navin Vohra (Partner, Ernst & Young) & his team, from CFA Institute- Mr. Robert Gowen, CFA (Head, Product Solutions, CFA Institute) and Mr. Shreenivas Kunte (Director, Continuing Education and Advocacy, India, CFA Institute), Sampath Reddy(CIO, Bajaj Allianz Life Insurance), Anil Joshi (Founder and Managing Partner, Unicorn India Ventures and S G Badrinath (Visiting Faculty at IIM Bangalore).

Investment banking analysts and associates are expected to be able to build three-statement operating models as part of their day-to-day responsibilities. The three statements referred to are income statement, balance sheet and cash flow statement. The program contents were designed to help participants develop complete and comprehensive three-statement models using various supporting schedules.

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During the first day, the trainers shared the fundamentals of spreadsheet modelling. The golden rules of modelling are- readability, transparency, consistency, integrity and simplicity. Various examples were presented on excel sheets. The trainees were given a bad spreadsheet to review, identify errors and discuss in teams. Next, it was discussed how to analyse financial statements for valuation. One should look at the contents of the annual report and pay attention to key focus areas like segment reporting, revenue drivers, profitability, capex, working capital, operating vs non-operating, minority interest, etc. It is important to read MD&A and auditor’s report as well. A refresher was provided on various valuation methodologies like market approach, income approach and asset approach. These have been discussed in great details in CFA Level 1 and Level 2 learning objective statements. But as the aim of the course was to go beyond textbooks and present an opportunity for participants to practice best in-class valuation practitioner concepts, real life case studies were given. Trainees practiced on actual and most current financial data of leading Indian FMCG company to learn from.

On Day 2 , the discussion around various valuation approaches was continued. Topics discussed included key drivers of valuation, sensitivity of ratios to the valuation, PE ratings, business cyclicality and management quality. A brief was given on Sum of Parts (SOTP) valuation. A presentation was shared on the valuation of start-ups/VC funding which included topics like pre/post money definitions, different valuation methodologies application to young companies, scorecard valuation method and venture capital method. Behavioural Finance, an area rapidly gaining acceptance got its fair share in the agenda too. Practice on real life case studies from Pharma and mining industries kept the program more constructive.

The two day workshop was indeed very rigorous with 8-10 hours of training each day. The participants now have to put their shoulders to the wheel and continue practice on the stuff learnt. Going forward, the course will be offered for other chapters and would encourage members/candidates to keep an eye on this wonderful opportunity.

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