Showing posts sorted by relevance for query US DOLLAR. Sort by date Show all posts

Thursday, November 24, 2011

THE DOLLAR RUPEE STORY !!!

On 22nd November 2011 Rupee touched its year high of Rs. 52.73/1$, making RBI governor to give public statements. If US dollar weakens importers are benefited and exporters are at loss. Whenever Dollar weakens against Indian Re exporters blasts their feelings & so RBI have to step forward for their help. But have you ever imagine that once our 1 INR was equal to 1$ but eventually $ become strong against INR, how read on to know this -

When India got independence in the year 1947, there were no loans or external Debts on Indian government. The exchange rate as on 15 August 1947 was 1US$ equal to 1.00 INR. With the introduction of 5 year plans Indian government needed foreign borrowing and started devaluing INR. Which was further influenced by Indo- China war in 1962 and Indo- Pak war in 1965 which devalued INR more as India needed large funds for buying weapons.

In the year 1966, 6 June at the time of Mrs. Indira Gandhi as the prime minister, inflation was increasing at a tremendous rate and also to keep on the aids given by US to India, USA government demanded and pressurised Mrs. Gandhi to devalue INR against US$. And kept the rate of 1US$= 7.50 INR. The then ministers Mr.Krismachari & Mr.Kamraj opposed these policy but it was of no use as Mrs. Gandhi was interested in getting help from US and kept INR weak against US$.

US$ grew stronger after 1971 –

After the year 1970, US$ grew stronger against INR due to incompetence of Indian politicians and bully of US. The exchange rate in 1970 was 1US$= 7.47 INR, which rise to 1US$= 8.40 INR in 1975, after the assassination of Mrs. Gandhi in the year 1984, and due to Boffors scandal tumbling Rajiv Gandhi’s government made the INR weaker and the rate was 1US$= 12.36 INR in the year 1985. In the year 1990 1US$ was equal to 17.50 INR.

Drastic drop in 1991 –

Whenever India faced economic or political problem, US made India to devalue INR against US$ by offering funds or trade benefits. In the year 1991 under the Narshima Roa government, India faced a drastic drop in INR against US$. At that time the Indian Forex reserve dropped to its bottom and there was a time where the balance of Forex reserve was such that India would be able to pay just 3months of Import bills. To fill in this gap India borrowed huge amounts from International Monetary Fund’s (IMF) with the condition that INR will be devalued against US$ and due to this 1US$ became 24.58 INR from Rs.16.31/1$. During this period exporters flourished as their exported products gained them more value in Rupee term.

History of Rates slowdowns -

In the year 1992 1US$ was equal to 28.97 INR; in 1995 1US$ was equal to 34.96 INR; in 2000 1US$ was equal to 46.78 INR; In the year 2002 June 1US$ was equal to 48.98 INR; After June 2002 INR became stronger against US$. In the year 2002 of December 1US$ was equal to 48.14 INR; in 2003 1US$ was equal to 45.57 INR; in 2004 1US$ was equal to 43.84 INR.

During the year 2004-06 RBI started buying $ and Indian Forex reserve raised to $200 cr, RBI stopped buying $ from January 2007 when 1US$ was equal to 44.25 INR; On 16^th May 2007 1US$ was equal to 40.79; on 27^th October 07 1US$ was equal to 39.21 INR it’s all time high when FII’s were flowing in tones of money in Indian capital markets; on 3^rd march 2009 1US$ was equal to 52.16 INR which was all time low of Indian Rupee. Which is now broken.

What can be the real value of US$?

Today $ is high against Re. But to determine the real value of any currency we have to see its Purchasing Power. This is known as Purchasing Power Parity (PPP).

The purchase rate of any product in US is compared with the rate to be given in Indian currency to buy that same good. For example to buy 1 dozen of fruit will costs 1$ in US, that same fruit would cost Rs.15 in India per dozen(of course inflation & other factors are not considered). This was just an example but to know real effective rate of any currency REER or Real Effective Exchange Rate index is referred to.

What Real Effective Exchange Rate (REER) index?

REER index measures a domestic currency’s competitiveness against other major currencies and is an indicator of currencies relative value versus foreign currencies. REER index is the 6 currency basket which uses 3 year moving averages for calculating weights of the index taking 2004 -05 as base year. The 6 currency REER index in India is calculated using Euro, US Dollar, Yen, Pound Sterling, Hong Kong Dollar & Renminbi. REER relates to purchasing power parity hypothesis. It's the invoicing currency that has more weightage and since 80 % of our trade is done in US$ it is assigned more weightage in REER INDEX.

The Real Effective Exchange Rate (REER) Index for India measures the rupee's true strength against major trading partners, adjusting for inflation. A value above 100 suggests rupee Overvaluation making Exports costlier also High REER makes Imports cheaper impacting the trade balance, while REER below 100 indicates undervaluation boosting competitiveness.

It is believed that RBI intervenes currency market to suppress Rupee if REER index approaches 105 & props Rupee up if REER gets close to 95. REER above 100 indicates relative strength of the currency. REER levels as on 25 Aug 2011 was at 117.01 implies that rupee is weaker compared with the base year of 2004-05.

There is also a 36-currency REER index, which is also used to measure competiveness of currency. However, this index is not used too frequently since CPI data for many nations comes with a 3-month lag. On an average basis, the 6-currency real effective exchange rate (REER) appreciated by 12.7 per cent in 2010-11, the 30-currency REER by 4.5 per cent and the 36-currency REER by 7.7 per cent.

REER Trends:

The 6-currency REER index rose to 112.76 in the period leading up to the economic crisis in 2007-08. During the crisis, REER weakened as rupee depreciated due to fall in capital flows. In one of the sharpest fall during the period, it fell to 93 levels in March 2008. REER stood near 100 for almost two years in 2008 and 2009. As the economy gathered pace, REER started appreciating and scaled to 116 by April 2010. From April 2010, REER has stayed around 115 for 17 months. REER strength and weakness before and after the crisis have been due to demand and supply factors led by capital flows. However, recent slide in rupee has been triggered by euro-zone problems.

READ HERE FOR MORE ON US DOLLARS - CLICK HERE

Wednesday, April 27, 2011

Is it Time to worry about the Dollar??

The Fed’s so-called “QE2″ (Quantitative Easing/second round) which is purchasing of U.S. Treasury bonds by printing more and more currency notes to fulfill its purchases are supposed to come to an end on June 30, 2011, which would make July a crucial month – for the US economy, for the performance of the dollar and most of all for the Emerging Markets like INDIA.

For the last two years, the U.S. economy has been supported by the twin catalysts of fiscal and monetary stimuli. Fiscal stimulus seems to continue for some time as US have year’s $1.6 trillion deficit. But monetary stimulus is another matter.

Since QE2 began in November 2010, the Fed has been buying about two-thirds of the Treasury bonds issued – or about $600 billion ($60,000 Cr) of the $900 billion ($90,000 Cr) in total bonds to be issued between November and June. Simply extending QE2 won’t solve this problem. The Fed would then be buying both too much of debt and not enough of debt at a same time.

Treasury bond purchases of $75 billion ($7,500 Cr) a month would be enough to push inflation sharply upwards. This is, after all, the very same policy that gave the German Weimar Republic its trillion-percent inflation. On the other hand, even if the Fed buys $75 billion ($7,500 Cr) of Treasuries a month, this will bring with them the need to place an additional $75 billion ($7,500 Cr) worth of bonds every month. And with inflation rapidly accelerating, the chances of a bond market and dollar crisis would still be great, which will affect the flows of foreign money (FII’s money) to the emerging markets like India. This is a concern!!!!

The one way to avoid the Death of the Dollar

With the U.S. market struggling under the burden of rising inflation and some ill-advised monetary and fiscal moves, the death of the dollar is looming as a worst-case – but still possible – scenario.

The Fed has one chance to avoid this outcome. Just to have a chance of staying level with inflation. U.S. central bank policymakers must boost short-term interest rates at least to the 3% level. That would burst the global commodities bubble like one in Sliver, and reduce inflationary pressures. With that, the Fed could then –continue with a “modified QE3.” For instance, it could buy $50 billion ($5,000 Cr) of bonds in the third quarter and $25 billion ($2,500 Cr) in the fourth quarter, thus breaking the Treasury bond market. With inflationary pressure reduced by the interest-rate increase, the chances of a Treasury-bond-market meltdown would thus be reduced to almost zero. Interest rates would rise and bond prices would decline, but it will be in an orderly manner. And inflation, if it continued, would do so at a more-moderate pace.

In fact, even inflation – should it remain stronger-than-desired – could be moderated, simply by raising rates a bit more, perhaps in several increments. And the U.S. dollar would be saved. There’s only one problem with this scenario and that won’t happen unless Bernanke won’t boost rates.

Visit my previous post on click here- US PRINTING NOTES

Friday, July 2, 2010

THE YUAN DE - PEGGING STORY........

Almost for 2 year’s Chinese government with the help of People’s Republic Bank Of China – the Chinese central bank had managed to keep the value of their currency Yuan pegged to the value of US dollar. One $ was worth around 6.82 Yuan.

China is an export driven economy. Their main export market is the US. So when an Chinese company exports goods to US it gets paid in US$. These $ are converted to Yuan, it means $ are sold and Yuan is bought. Over a period of times, as exports keeps going up, more $ are sold and more Yuan are bought. This of course increases demand for Yuan & it starts to appreciate or increase in value against $. And an appreciation in currency is detrimental to exporter.

This means, suppose say a Chinese exporter exports goods worth $100000. When he converts them at 1$=6.82 Yuan he gets 682000 Yuan ($100000x6.82) in return. Now say the Yuan appreciates and 1$=6.6 Yuan, then the exporter will get 660000 ($100000x6.6). Thus he will not make the same amount of 682000. If he wants to make the same money he will have to raise prices. It’s well known that Chinese compete on price & not quality, the exporter may not be in position to raise prices. This is were the government comes in by ensuring that the value of the Yuan stays constant around 6.82 to $, so that the exporter does not have to deal with any fluctuation in currency.

Government of china in order to maintain Yuan at 6.82 to $ starts selling Yuan & buys $. Because when lots of $ come into china to buy Yuan, pushes up the demand of Yuan & Central Bank of China starts selling Yuan & buys $. This ensures that there are enough Yuan in market & its value dos not appreciate.

Now China has suddenly decided to de-peg its currency as US feels that China is a currency manipulator, US feels that china has held the value of Yuan against the $ constant & this is what has kept their export machinery chugging along. They feel this has led to situation where Americans citizens continue to buy cheap Chinese goods instead of home grown ones.If Chinese government had not involved itself with the foreign exchange market & let it work independently then the flow of $ into china would have ensured that the Yuan would have appreciated against $.

Suppose if 1 $ = 6 Yuan, means exporter exporting goods worth $100000 would make 600000 Yuan. Under the pegged regime he would have earned 682000 Yuan. Now, to earn that much, he has to sell goods for $113666.7 (682000/6). This means he has to increase its price to 13.67%. This in turn would make Americans buy American goods instead of low priced Chinese goods. Nobel Prize winning economist Pual Krugman had earlier proposed to impose a 25 % surcharge on Chinese imports to US. He felt that this will make Chinese goods expensive & will result into Americans buying more US goods. Basically the allegation against china on being currency manipulator have been growing in US, and US the biggest market for china do not want US to take any strict steps that would hurt its exports. So it wants to de-peg it currency against US$.

Currently if something worth $1000 it will be worth 6820 Yuan in china if it is imported, if 1$ = 6 Yuan, then it would be worth 6000 Yuan which is lower. So some experts believe that this will make Chinese buy more imported goods & that in turn will help the exports across the globe. China will take time to change its spending habits. Currently china’s saving rate is 54 %.

And off course in order to maintain the peg, the Chinese Central Bank bought $ & sold Yuan that explains Foreign Exchange Reserve of $ 2.4 trillion. And all this money found its way back primarily into US & other western economies, helping them to finance their fiscal deficits. Now if these Chinese really let the Yuan float even partially, its rate of accumulation of Forex reserve might slow down. This means lesser $ to help finance the fiscal deficit in the US.

Friday, June 10, 2011

QE2 coming to an end and QE3 could follow!!!

As told on blog on QE earlier, by JUNE 30^th2011, the Fed will be winding down its second round of quantitative easing. I.e.QE2. By announcing quantitative easing Fed made an impression to the world that they’re willing to do whatever is necessary to maintain growth, which promoted higher stock prices, made people and companies feel a little more financially stable and wealthy, which will then translate into consumer spending & subsequently unemployment will go down. The employment situation do showed some increase in hiring & a drop in the unemployment rate below 9.0 %, all due to QE program. Now when the unemployment rate ticked back up again above that high benchmark of 9.0%, and weekly initial jobless claims have been firmly above 4,00,000 for several weeks, people have started talking about QE3 i.e. third round of quantitative easing !!!

Well, the perception of “easy money” was enough to encourage speculators and traders to make a leveraged bets on both stocks & commodities. As said, stocks and commodities went higher. And the jobs data improved a little bit all due to blessing of QE2.

Now, when the QE2 is coming to an end, the perception of 2011 recovery has evaporated as the economic data from mid-summer signaled another round of recession coming back. At the opening of the year, many economists were projecting U.S. to grow as high as 5 %; the Fed was thinking 3.4 % to 3.9 % of growth which was above average year of economic expansion.

The U.S. has grown at a historical average of 3 % per year. Even with unprecedented stimulus it’s been growing below the trend since 2006. Recent data suggests that another round of recession is coming …A recent study showed that since 1948 whenever the US GDP fell below 2 %, it normally predicted recession for the U.S. economy.

In April 2011, the Bureau of Economic Analysis (BEA) gave their advanced estimate for Q1 2011 which said that growth will be at 1.8 %, Unemployment will hover around 5 % higher than pre-crisis levels.

Even after the two rounds of quantitative easing by the Fed and two rounds of fiscal stimulus by the U.S. government, employment will still sits about 5 % over the long run “natural rate” of unemployment, housing prices will remain anywhere from 20 % to 50 % below its peak levels. The government has recapitalized the banks, the Fed has kept mortgage rates historically low, and various failed mortgage revival programs have been floated, housing is still at 32 % down from 2006 highs.

As all can see that consumer credit peaked in 2008 when Lehman Brothers failed, it likely means that the world is in for another seven years of economic uneasiness.

In Asia, traders have been anticipating QE3, sending the Indian rupee, Singapore dollar, Malaysian ringgit, Indonesian rupiah & even Thai bhat went higher, QE3 could turn into massive capital inflows in Emerging markets like India boosting growth, creating an illusion of false recovery, but in reality they would be just bubbles. If QE3 is not announced then in that case US markets can collapse by 10 % or so making treasury yields to rise, USD would strengthen and commodities like Gold, Silver & Oil would see a minor dip in their prices. And if QE3 happens it will make US $ to crash. US $ will loose its value among all major currencies across the world , crude oil prices will jump up, prices of commodities like Gold will shot up, Equity markets around the world especially Emerging markets will rise and India will be benefited by it if India’s own internal problems are solved by that time.

With all of this in mind, even though the easy money policies of the Fed have been highly scrutinized, in my view Fed may delay the announcement of QE3 which can cause markets to take a down turn for a while and on announcement of QE3 markets will raise again. There are lots of issues around the Indian equity markets such as high inflation, 2G scam, Government facing public agitation on corruption, such issues were keeping investors away form our markets for a while, but on announcement of QE3 our markets will raise again, I believe that stocks specific investments during the down turn would bring good returns, in the mean time I would be going for 45 % in stocks & 25 % in Gold & rest to hold cash, this would be my strategy for the time being.

But one thing of sure QE3 would bring another violent downturn for the global economy!!!!!

CLICK HERE FOR PREVIOUS POSTS ON QE

Friday, September 14, 2012

QE3 ANNOUNCED BY FED TO PRINT $480 BILLION!!!

Fed to Print $480 BILLION AGAIN!!!

Yesterday, Fed chief Ben Bernanke proved that what many have suspected all along is indeed true: The U.S. Federal Reserve will not patently stop printing money!

Mr. Ben Bernanke announced that the Fed is going to do the same old thing, it’s going to hold interest rates near zero as far as the eye can see... And it’s going to print a whopping $40 Billion (Rs.2,21,680 Cr $/Rs.55.42) new dollars per month in an attempt to stimulate the economy — a whopping $480 billion (Rs.26,60,160 Cr $/Rs.55.42) per year! In short, it’s doing the same things it has done since 2008, but expecting better results, In any way you look at this, that’s The Very Definition Of INSANITY!! The Fed has Already held interest rates near zero percent for four long years, now. Plus, it has already created $1.8 trillion out of thin air through QE I and QE II... And it has already bought hundreds of billions of dollars more worth of long-term Treasuries as part of Operation Twist 1 and 2.

So what’s the result?

NO IMPACT WHATSOEVER ON THE REAL ECONOMY!

Sure — all that free, easy money will temporarily excite the stock markets around the world but despite everything the Fed has done ... the

** Unemployment has stayed over 8 % for 42 straight months ...

** The average family home is Still falling in value ...

** Profits of many major corporations in US are Still sinking ...

** The U.S. economic growth is Still grinding to a near standstill ...

** And now, as America approaches the precipice of its great fiscal cliff, the stock market looks for the entire world as if it’s a massive bubble about to burst!

** Worse is that, the middle class — the very backbone of the U.S. economy — is getting eaten alive:

HOUSEHOLD INCOME IS PLUNGING: The U.S. Census Bureau just reported that real median household income has now fallen for the fourth straight year. Income has fallen so low, in fact, that when you adjust for inflation, the median family has the same income today as it did in 1967 , now that was the 45 long years ago!

THE INCOME GAP IS WIDENING ALARMINGLY: The Census Bureau is also reporting that the movement of income away from the middle class has just hit a record high. That’s terrible as typically this kind of increasing disparity in income occurs just before economic calamities — and today, it’s more extreme even than before the 1929 stock-market crash and the Great Depression!

U.S. POVERTY IS AT ALL-TIME RECORD HIGH LEVELS: Finally, as if to add insult to injury, the Census Bureau also reports that a staggering 46.2 million Americans now live in poverty! And not only isn’t the Fed Helping ... its failed efforts to revive the economy is creating a second crisis: Thanks to the Fed’s past money-printing gambits, the Producer Price Index just jumped 1.7% in August — hands-down the biggest surge in producer price inflation going back to June of 2009!

**********************************

Make no mistake:

The U.S. economy is broken.

Nothing the Fed can do will fix it.

**********************************

To the contrary: The Fed’s easy money policies Created this crisis by inflating the housing bubble. Now, they’re only making matters worse — doing absolutely Nothing for the job market, while driving inflation higher! And as America’s great Fiscal Cliff approaches — the catastrophe that JPMorgan says will push America “head-first into the fiscal meat grinder” — the storm clouds are darker than ever.

The Gold has raised 111.58 % from QE1 to QE3 : Gold jumped after this QE3 by FED the third round of monetary stimulus called Quantitative Easing. QE has been a massive boon for gold, when FED flooded markets with nearly Zero money or free money, gold’s allure as a store of wealth & an inflation hedge is burnished. Loose monetary policy weakens the dollar boosting the GOLD. Fed’s nearly ZERO interest rate policy and bond purchasing under QE1 kicked off on 16^th December 20008 and Gold was $837.50 an ounce, & today Gold is at $1772 an ounce this means Gold raised to 111.58 % on back of QE1 & QE2 which followed in Nov 2010. So QE & Gold has always been supporting each other..SO ALWAYS BUY GOLD

Impact of QE3 on India: As for India, off course in near term the pattern of QE has always been strong for emerging market like India and for their currencies and even stronger for commodities. The QE programme is good for India for a day or two as it will help the rupee a little bit and at a same time QE surges commodity prices, which is bad for India as it imports most of the commodities to meet its growing needs of the economy, Brent crude is at $115 and any raise in its prices will make inflation to climb again making life difficult for RBI, remember QE2 which was announced on Nov 04 2010 in which Indian Market made a high of 6338 on NOV 05 2010 and had a one way decline post that & so QE2 turned out to be disastrous for India as it stoked inflation. India is not a obvious QE play now, as Indian markets has its own set of problems like high inflation, policy paralysis and of course the scams and political unrest. The diesel price hike of Rs.5/liter is the positive step and so the FDI policy in aviation but these have a short term sentiments..

In short, US FED with the announcement of QE3 gives the clear message to the market that rates will remain this low till 2015 with a hope that this low rates will revive economic growth, but on India one should remain cautiously Bullish, one must look at classic defensive's like pharma, consumer stocks with a risk of breakdown between the investment cycle & the consumer cycle weighs heavily on them.

CLICK HERE FOR PREVIOUS POSTS ON QE

Monday, July 19, 2010

NIFTY TRADES IN US FROM TODAY : S&P DOW JONES WILL JOIN INDIAN MARKETS SOON

Scheduled to Launch Monday, July 19, 2010

CME Group has partnered with The National Stock Exchange of India (NSE) and Standard & Poor’s to offer trading institutions two smart new ways to take part in the dynamic opportunities of the Indian stock market. E-mini and E-micro S&P CNX Nifty futures (Nifty 50 futures) are scheduled to begin trading on Monday, July 19, 2010.

The contracts will be listed and traded on the CME Globex platform, providing nearly round-the-clock trading access. Trading hours will be Monday-Friday, 3:30 p.m. – 3:15 p.m. the next day (except Friday, which closes at 3:15 p.m.) with a trading halt Sundays-Thursdays from 9:30-10:30 p.m. CDT (8:30 p.m.-9:30 p.m. CST) coinciding with the hour prior to the NSE open.

Cross-Listing Arrangement on March 10, 2010, CME Group and NSE announced cross-listing arrangements that Include license agreements covering benchmark indexes for U.S. and Indian equities. The agreement provides CME Group with rights to create and list U.S. dollar-denominated futures contracts for trading on CME, while providing NSE with rights to create and (subject to the regulatory approval) list Rupee-denominated futures contracts on the S&P 500 and Dow Jones Industrial Average (DJIA) for trading on NSE. Combine with other benchmark index contracts to express views on the direction of India’s market vs. the U.S. stock market (E-mini S&P 500 futures), vs. a broader view of world’s emerging markets (E-mini MSCI Emerging Markets futures) or to capitalize on arbitrage opportunities from short-term price differences vs. the SGX futures contract on the S&P CNX Nifty Index. You also can trade the contracts outright to hedge your risk from existing exposure to the Indian stock market.

Monday, January 5, 2009

GOLD RESERVES AS ON DEC 2007

Gold reserves (or gold holdings) are held by central banks as a store of value. In 2001, it was estimated that all the gold ever mined totaled 145,000 tonnes.

1. One tonne of gold equated to a value of US$25.75 million as of October 2008 ($730/troy ounces)

2. The total value of all gold ever mined would be $3.39 trillion at October 2008 prices.

At the end of 2004, central banks and official organizations held 19% of all above-ground gold as a reserve asset.

3. About one percent of all above-ground gold (370 metric tonnes) was mined in the first five years of the California Gold Rush (worth approximately $11 billion at July 2008 prices).

4. IMF gold reserves refers to 3,217 tonnes of gold held by the International Monetary Fund. It is currently priced at $42 a troy ounce ($1,370/kg) for accounting purposes, a price that was fixed in 1971 just before the Nixon administration officially delinked the U.S.dollar from gold and instead allowed market forces to set the dollar's worth. An attempt to revalue the gold reserve to today's value has met resistance for different reasons. For example,Canada is against the idea of revaluing the reserve, as it would flood the market with gold and therefore depress its price.

5. It is also not clear whether the gold reserve is the property of the IMF or of member countries. As of September 2008, gold exchange-traded funds held 1,039 tonnes of gold in total for private and institutional investors.

6. The United States' holding of gold is worth approximately $241 billion (July 2008). Although the United States has the largest reserves of individual countries, in total the Eurozone gold holdings are greater (11,065 tonnes as of December 2007).

Monday, May 17, 2010

What does IDRs means to an Indian sharesholders in terms of Taxations.....

Like Global Depository Receipts (GDR’s) & American Depository Shares (ADS’s), IDR are the derivative instrument with parent companies shares as the underlying asset, they allow foreign companies to raise money in India. An IDR holder acquires the same rights as a shareholder, except that he/she can neither attend the AGM nor vote on resolutions. NRI’s can trade in the IDR’s.

The biggest question doing the rounds is – what could be the tax implications for the Indian IDR holder? The good news is that IDR does not come under the purview of Securities Transaction Tax. But the IDR holder will have to pay tax on the dividend income earned. It is not yet clear whether the tax payable would be equal to the Dividend Distribution Tax which for the current fiscal stands at 16.61%. So tax seems sure but the rate is yet unsure.

Then there is the question of short and long term capital gains tax?

Currently, Long term gains made from Indian Stock Exchanges (stock held for more than 12 months) is completely exempted from tax while Short term capital gains tax (held less than 12 months) stands at 15%. But the IDR does not fall under the STT, so maybe it will not enjoy the same benefits as the shares listed on the Indian Exchanges enjoys. So this means that IDR’s will be taxed like any other asset –long term tax- held for over 36 months would be around 20%. Short term tax, when asset is held for less than a year, will be like regular income earned, at 30.9%.

There is no real clarity yet on this treatment of tax but surely, the Govt will have to bring a notification soon. A quick resolution on the tax angle is urgent and imperative or else it could undermine the very lure of this IDR.

According to the red-herring prospectus, the legal regime for IDR’s is still to be tested; investors in IDR’s may not get the benefits of a bonus issue or a rights issue; Even dividend income on IDR’s will be taxed in the hands of the investors and long-term capital gains tax will be another additional burden. Standard Chartered Bank has said whenever the company and/or the depository is unable to make bonus issues or rights issues available to the IDR holders, the depository will try and sell the deposited property that is the subject of the distribution on behalf of the IDR holders and distribute the net proceeds thereof as a cash distribution to the IDR holders.

Standard Chartered said it has agreed that for all corporate actions including voting, rights issues, the payment of dividends and other distributions, it will treat IDR holders on an equitable basis vis-à-vis other holders of shares in the home country (the UK). However, it pointed out that in circumstances where certain corporate actions, which are available to the holders of shares in the home country of the company and other jurisdictions where its shares are listed, are not permitted by Indian laws to be offered to IDR holders.

There is also a term called "Fungibility", now what does this means & how it relates to IDR/ADRS ?

The actual meaning of the word fungible is the ability to substitute one unit of a financial instrument for another unit of the same financial instrument. However, in trading, fungibility usually implies the ability to buy or sell the same financial instrument on a different market with the same end result.

Its a financial instrument (i.e. individual stock, futures contract, options contract, etc.) is considered fungible if it can be bought or sold on one market or exchange, and then sold or bought on another market or exchange.

For example, if one hundred shares of an individual stock can be bought on the NASDAQ in the US, and the same one hundred shares of the same individual stock can be sold on the London Stock Exchange in the UK, with the result being zero shares, the individual stock would be considered fungible. There are many fungible financial instruments, with most popular being individual stocks, some commodities (e.g. gold, silver, etc.), and currencies.

Fungible financial instruments are often used in arbitrage trades, because the difference in the price (the arbitrage part) often comes from a difference in location (the fungible part). For example, if the Euro to US Dollar exchange rate was 1.2500 in the US and 1.2505 in the UK, an arbitrage trader could buy Euros in the US, and then immediately sell Euros in the UK, making a profit of 0.0005 per Euro (or $5 per €10,000), because Euros are a fungible financial instrument. Similarly it implies to Stocks IDRs etc.

Monday, June 13, 2016

VEDANTA LTD : RISING FROM THE ASHES !!

Scrip Code: 500295 / VEDL

CMP: Rs. 116.80; Market Cap: Rs. 31,910.55 Cr; 52 Week High/Low: Rs. 190.95 / Rs. 58.15.

Total Shares: 273,20,67,720 shares; Promoters : 176,46,76,160 shares –63.34 %; Total Public holding : 96,73,91,560 shares – 35.40 %; Book Value: Rs. 129.90; Face Value: Rs. 1.00; EPS: Rs. 18.46; Div: 350 % ; P/E: 6.32 times; Ind. P/E: 10.78; EV/EBITDA: 16.45 times.

Total Debt: Rs. 77,952.03 Cr; Enterprise Value: Rs. 1,07,66,293 Cr.

VEDANTA LIMITED: VEDANTA Ltd was incorporated in 1954 and is based in Panji, Goa, India. It got converted into public limited company on March 25, 1981. It was formerly known as SESAGOA LTD and then changed its name on merger with Sterlite Industries as SESASTERLITE Ltd in 2013, again in 2015 the company changed its name to Vedanta Ltd. VEDANTA is an India-based global diversified natural resources company with operations in metals across zinc, lead, silver, oil and gas, iron ore, copper, aluminum and commercial power. It is also engaged in exploration, mining and processing of iron-ore. The Company operates in three business segments namely iron ore, metallurgical coke and pig iron. The pig iron business focuses on the domestic Indian market, especially to foundries and steel mills in western and southern India. It also exports to the Middle-East and South East Asia. The Company came with an IPO on November 1981, with 22,05,000 equity shares of Rs. 10 each at a premium of Rs. 2.50 per share. Vedanta gave its first bonus in the year 1978 in proportion of 2:3, then in 1986 in proportion of 2:5, in 1993 in ratio of 1:1, in 2004 in ratio of 1:1 and lastly in August 2008 in ratio of 1:1. Vedanta had last split the face value of its shares from Rs. 10 to Rs. 1 in August 8, 2008. VEDANTA is India's largest producer & exporter of iron ore in the private sector which currently accounts for 1.5 % of world trade in iron ore & is amongst lowest cost iron ore mining company in the world. Its mining operations in India include Codli, Sonshi/Surla & Bicholim mines located in Goa & Narrain mine located in Karnataka. Sesagoa exported approx. 5 mn tons of iron ore, fines and lumps to Japan, China, Europe. It also has mining interests in Western Cluster Iron Ore project, Liberia. In addition, the company produces basic, foundry and spheroidal grades of pig iron to steel mills and foundries as well as slag as a by-product to the cement industry and metallurgical coke, primarily low ash coke for foundries, blast furnaces & ferrous alloy industries. It operates Tuticorin smelter and India Copper Mines of Tasmania. Its custom smelting assets include a copper smelter, a refinery, a phosphoric acid plant, a sulfuric acid plant, a copper rod plant and two captive power plants at Tuticorin in Southern India, and a refinery and two copper rod plants at Silvassa in Western India. Its Iron Ore business consists of exploration, mining and processing of iron ore, pig iron and metallurgical coke and power generation. Its Aluminium operations include a refinery, a smelter and power plants at Lanjigarh and Jharsuguda. Its other activities include operation of its Vizag General Cargo Berth Private Limited in which it owns a 100 % interest. Further it engages in generation & distribution of power to Goa Electricity department & owns 30 MW power plants in Goa that utilizes the waste heat gases from its coke making & pig iron facilities as well as 30 MW waste heat recovery power plant. The company sells its iron ore primarily in China, Japan, Korea, India, and Europe. In April 2007, Anil Agarwal – Vedanta Resources acquired a controlling stake of 51 % in SESA GOA from Mitsui & Co, Japan, for US$ 981 million. In April 2011, the Company acquired 10.4% stake in Cairn India Ltd (CIL) from Petronas International Corporation Ltd (Petronas). In March 2011, Sesa Goa acquired the assets of steel plant unit of Bellary Steel and Alloys Limited (BSAL). VEDANTA LTD is compared with OMDC, MOIL LTD, Hindustan Zinc Ltd, Sandur Manganese Ltd, Greenearth Resources Ltd, NMDC Limited, Godawari Power & Ispat Limited in India and globally with Rio Tino Plc of Australia, Vale of Brazil, BHP Billiton Plc of UK, Anglo American Plc of South Africa, Glencore Plc of Austrila, Anshan Iron and steel Group of China, Metalloinvest of Russia, Severstal's Karelsky Okatysh of Russia, Metinvest of Ukrain, Ferrexpo of Ukraine, Cliffs Natural Resources of USA, Sokolov-Sarbai Mining Production Association of Kazakhstan, APAC Resources Limited of Hong Kong.

Investment Rationale:

VEDANTA LTD has iron ore reserves and resources of 374m tons in Goa and Karnataka. Goa's ore is medium grade and easy to extract without blasting and crushing. The iron ore from Karnataka is of high grade but found in rocky form, which necessitates blasting and crushing. VEDL is India's largest private sector iron ore exporter and is an important Indian arm of Global natural resource player VEDANTA Resources PLC; in February 2012 Vedanta restructured its subsidiaries by announcing merger of Sterlite Industries into Sesa Goa in a 5:3 swap ratio, and later changed its name from SESAGOA to VEDANTA LTD. VEDANTA LTD contributes 27 % of India’s domestic crude oil production. India has 78 % of market share in Zinc, 48% in Aluminium and 34 % in domestic market in copper. VEDL managed to register strong performance in the aluminium division led by a decline in coal costs and higher realisation. However, aluminium production volumes were lower on a QoQ due to lower contribution from Korba‐II smelter and Jharsuguda‐I smelter. The ramp up at Jharsuguda‐II smelter too was slower than expected. It is estimated that the volumes to increase at Jharsuguda‐II smelter on the back of higher availability of power from 2,400MW power plant and lower coal costs. Aluminium production volumes were lower by 3.4 % QoQ and 1.3 % YoY. The impact of lower production on revenue was offset by some inventory liquidation. Aluminium sales volume was marginally higher on a QoQ basis. Realisations too were higher on a QoQ basis with an increase in import duty on aluminium from 5 % to 7.5 %. The impact of lower product premiums was offset by increase in share of value added products. Value added products accounted for 56 % of overall volumes. Outperformance in operating profit was largely led by a decline in cost of production. Lower coal costs coupled with a decline in alumina costs led to 6.3 % qoq decline in blended CoP. On a per ton basis, alumina costs declined by 8.7 % qoq and power costs were lower by 6.3 % qoq. The decline in alumina costs was largely due to lower production of high cost alumina and consumption of external cheaper alumina. The company was benefited from the sharp fall in alumina prices globally. Power costs declined due to increase in availability of linkage coal and a decline in e‐auction coal prices. Aluminium CoP at Jharsuguda declined 3.7 % qoq in Rupee terms and 5.9 % in Dollar terms on account of the above two reasons. CoP at BALCO too decline by 4.6 % QoQ in Rupee terms and 6.9 % in Dollar terms. Post the commissioning of the 300MW CPP at BALCO II, the company has put the high cost 270MW CPP on standby. Alumina production during the quarter was lower by 3.2 % QoQ and 23 % YoY due to the closure of one stream at its refinery. Aluminium business registered an operating profit of Rs. 355cr in Q4 FY16 against a loss of Rs. 11 Cr in Q3 FY16. Costs are expected to be lower in Q1 FY17 due to carry over of cheap alumina. However, this impact would be offset by an increase in global alumina costs. As a result, the company has restarted its 2nd stream of alumina refinery. It is targeting higher alumina production in FY17 as the company has received environmental clearance to raise its alumina production capacity from 1mtpa to 4mtpa. It plans to increase its capacity from 1.5mtpa to 2mtpa via de‐bottlenecking. The company has guided for volumes of 1.2mtpa in FY17, 30% higher on a yoy basis post the approval to use IPP as CPP and rampup at Korba‐II. Of the 1.25mtpa Jharsuguda smelter (4 x 313kt), 1st pot line started‐up on 1st April 2016 (to be ramped‐up in 3‐6 months). 2nd line is expected to commence ramp up from end‐Q2 FY16 and subsequently ramp up of 3rd line from Q4 FY16. Ramp up of 4th line would be Evaluated later. The 325ktpa Korba–II smelter has commenced ramp‐up in April 2016 and is expected to boost volumes on the back of commissioning of power plants. 2nd unit of 300MW of 1,200MW BALCO power plant commissioned in March 2016. The conversion of IPP to CPP would allow the company to utilize the low cost power produced at SEL for aluminium manufacturing without paying a fee to the government. The ramping up process at Jharsugudai II is under way and the company would rampup Capacities in FY17. The Chotia coal block has received all the necessary approvals and has started operations by end‐FY16. Laterite mine is also expected to start contributing from FY17. It also expects CoP to reduce from the current range due to lower coal costs, shutdown of high cost facilities, lower alumina costs and various cost saving measures taken by the company. VEDENTA’s copper business will have some improvement led by strong Tc/Rc margins and higher volumes. Its copper business continued to report strong performance in operating profit. Tc/Rc margins have been on the upswing over the last one year due to higher supply of concentrate. Tc/Rc margins increased on a QoQ basis to 24.8c/lb during the quarter. Last quarter performance during the quarter was impacted by flood in the region. Copper production was higher by 5.2 % yoy and 14.6 % qoq. CoP too decreased on a qoq basis on account of higher production. The sequential decline in operating profit was largely due to one‐time benefit of export incentives in Q3 FY16. The management expects Tc/Rc margins to be marginally lower on a yoy basis in FY17, in line with the change in global trends. The management expects maintenance shutdown of 10 days in FY17. HZL registered a sharp decline in topline due to both, lower volumes and lower realisation. The miss in topline was largely due to a sharp decline in zinc metal output. Mined metal output for the quarter was lower by 30.1% yoy and 17.5% qoq to 188,000tons. The decrease was on account of lower production primarily from Rampura Agucha open pit as per the mine plan, which was partially offset by record production from all the underground mines especially Sindesar Khurd. The sharp decline in output from Rampura Agucha led to a 29% yoy decline in refined metal zinc volume. However, higher contribution from Sindesar Khurd led to a sharp jump in integrated silver and lead output. Product premium was marginally lower for Zinc metal and higher for lead metal. The company has guided for subdued metal production in H1 FY17 as per mine plan, while maintaining its full year guidance of marginal growth in mined metal production. The mine expansion plan is on track and the company expects to raise its mined metal output by 1.2mtpa over the next three years. HZL reported 33.9% yoy decline in operating profit on account of lower realisations and lower volumes. This was quite lower than our estimate due to a sharp fall in zinc volumes. Costs were also higher due to a decline in average grade of ores. Power and fuel costs too decreased due to lower prices of e‐auction coal. CoP in Rupee terms was higher by 10.8% qoq and 14.2% yoy to Rs. 58,044/ton. The management expects costs to be lower going forward due to operating leverage. The Company has re‐negotiated several contracts to optimize costs and expect this to translate into significant savings in FY17, taking benefit from the recent commodity price downturn. In the international zinc division, production was lower by 17 % qoq due to lower production from Skorpion (maintenance shutdown) and closure of Lisheen mine. Costs declined by 21.3 % qoq in Q4 FY16 due to higher volumes at Skorpion and various cost initiatives. However, the decline in costs was lower than expected. FY16 production volumes stood at 226kt, out of which Black Mountain accounted for 63kt and Skorpion accounted for 82kt. The company expects FY17 volumes at 170‐190kt. It is focused on cost reduction initiatives by including labour and equipment productivity improvements. It expects FY17 costs to be US$1,200‐1300/ton from US$1,431/ton in FY16. The first ore production is expected 2018 and mines will reach rated capacity of 250ktpa in a year post ramp‐up. The capex will be US$400mn of which US$200mn will be spent in FY17. Vedanta managed to ramp up its iron ore operations in Q4 FY16. The company managed to sell 2.6mn tons of iron ore against 1.5mn tons in Q3 FY16. Production too was strong at 2.8mn tons against 1.4mn tons in Q3 FY16. The company exited Q4 FY16 at a run rate of 0.8mn tons per month. The jump in sales was supported by a rebound in global iron ore prices and removal of export duty on ore less than 58 % from 1st March ’16. The company has managed to reduce its costs on the back of operational efficiencies, contract re‐negotiations and resolution of transportation issue. The company is now in the 1st quartile for global cost curve for its Goa operations. It has guided for FY17 production of 5.5mn tons from Goa and 2.3mn tons from Karnataka. The company is pursuing to increase its environmental clearance in Karnataka from 2.3mn tons. Over the last two months commodity prices have bounced back from their lows on the back of inventory restocking, Dollar weakness and lower concerns over Chinese demand. It is believed that the base metal prices have formed a bottom and are likely to stay around current levels. Vendanta has managed to bind its loose ends over the last six months. Increase in availability if cheap coal has aided the company to reduce its costs sharply. This coupled with volume ramp up of low cost capacities would boost the company’s earnings over the next two years. Conversion of IPP to CPP would push aluminium volumes higher. It is expected that going forward VEDL’s debt to decline as capex outflow would be low and cash generation would be quite high at HZL and Cairn. Cost rationalization would further help the company in delivering strong numbers. In 2011, Vedanta Group acquired 58.5 per cent controlling interest in Cairn India from its UK parent, Cairn Energy plc, 20 per cent of this was acquired by Vedanta Ltd and 38.5 per cent by Twinstar Mauritius Holdings Ltd (TMHL) - a special purpose vehicle wholly owned by Vedanta Resources plc (VED). In July 2015, VEDL announced a merger with its subsidiary Cairn India, in which minority shareholders of Cairn India will receive 1 equity share of Vedanta for each Cairn India held and which is expected to be completed in this month of JUNE 2016. The effective merger ratio is of 1:1.04 after adjusting the preference shares allotted to Cairn’s shareholders, so Cairn India shareholders will get 104 Shares of Vedanta for every 100 shares of Cairn India held. This deal will make VEDL to have access to Cairn India’s Rs. 21,000 CR Cash. The merger with Cairn India did face some hurdles due to the widening spread but now it is expected to be completed by end of JUNE 2016. Post the change, the valuation of Vedanta would be at 4.9x FY18 EV/EBIDTA, which is attractive.

Outlook and Valuation:

Vedanta is formed with the merger of Sesa Goa and sterlite Industries. Vedanta is one of the largest natural resource companies globally with exposure to all the major commodities. It has refined zinc and lead capacities of 1.5mtpa in HZL and Zinc International, Crude oil production capacity of 225-240 kboepd, Iron ore production capacity of 17mtpa, Aluminium capacity of 2.3mtpa and 8.8GW (including current expansion) of power capacity. VEDANTA LTD contributes 27 % of India’s domestic crude oil production. India has 78 % of market share in Zinc, 48% in Aluminium and 34 % in domestic market in copper. VEDANTA has been focusing on operational improvement in various segments. In aluminium segment, it has been trying to improve its efficiency by reducing the cost of production. Lower alumina prices supported initially, however, with price rise, the company has started focusing more on ramping up its refinery. As 2400 MW power plant got CPP status, power cost also is likely to come down gradually. Both of these will result into lower cost of production. The management is expecting the CoP to come down to US$1250/ tonne in FY17 itself. In iron ore segment too, rise in global prices is likely to complement the company’s efforts to reduce the cash cost to US$14/ tonne. Both these segments have been under stress for a long time and operational improvement there would be positive. The capacity ramp up will help in better performance. The falling oil prices led to Rs. 12,304 crore of impairment charges on the balance sheet. However, the commencement of production capacity of 1.2 mt Aluminium (Jharsuguda Smelter), 9,000 MW Power plant along with ramping up of Iron Ore operations in Goa and Karnataka will provide necessary boost to the top line. The company has been able to reduce its debt level from Rs. 52,000 Cr in FY15 to Rs. 50,400 Cr in FY16. Overall on debt front, company has increased portfolio duration thereby reducing its interest cost from 8.2 % to 7.9 %. However, savings from interest will be partially offset by depreciation which is expected to increase by 20 %. The value of goodwill may also change post completion of the merger with Cairn India depending on the market conditions. Company is undertaking several costs saving initiative wherein it has been able to save $250 mn in FY16 and is targeting to save another $250-30 mn in FY17. On account of revaluation of assets and capitalization in Aluminum & Power Business Company has recorded higher depreciation in Q4 and is expected to increase by 20 % in FY17 also. Taxes have been lower in Q4FY16 on account investment income in HZL set off against carried forward tax losses. Going forward management expects tax to be close to MAT rate. Management has highlighted that reduction in oil cess from Rs. 4,500 per tonne to 20 % ad-valorem and increase in aluminium import duty from 5 % to 7.5 % will positively impact its business segments respectively. The company has Gross debt of Rs. 77,952 and net debt of Rs. 25,286 crore as on March 31, 2016, which are lower than Rs. 80,952 crore at December 31, 2015. Gross debt and net debt were lower over the quarter primarily on account of refinancing. Out of the total debt of Rs. 77,952 crore, the Rs/US$ split is 52 % and 48% each. During FY16, the company capex amounted to $600 million. FY17 capex is expected to be around $1.0 billion. FY17 maturities of $2.3 billion are a combination of $1.3 billion of short-term debt and $1 billion of term debt $1.3 billion of short-term debt is expected to be met through a combination of rollover and replacement with term debt $1 billion of external term debt and $1 billion of intercompany loan to Vedanta plc to be met through a combination of refinancing, working capital initiatives and internal accruals $200 million cash and liquid investments at Vedanta standalone $200 million refinanced in April $1 billion of undrawn committed facilities. The company expects to repay the remaining inter-company loan of US$ 1.8 billion at Cairn SPV over the next three to four quarters, having already repaid US$ 400 million in January 2016. Given the company is focused on deleveraging, the board has opted to not declare any dividend out of $3.3 billion debt obligation, management highlighted that $1.2 billion is to be funded through rolled over short term debt, $1 billion will be funded through Internal operation and other sources and for the balance $1 billion the company is negotiating with various banks. Company has increased duration of its debt portfolio which is expected to reduce interest burden going forward. On the coal requirement front w.r.t 9,000 MW power facilities, the company is expecting to source 25 % from imports, 20 % from Linkage, 40 % through IPP Linkages and balance through auction. Vedanta's reported a loss at the PAT level due to exceptional item (non-cash impairment charge). Going forward, with a positive view on the company’s domestic zinc business (HZL) and on account of strong underlying fundamentals VEDANTA will do better and its profitability will be mainly driven by higher zinc prices and improved iron ore profitability and also due to improvement in aluminium and power operations. Higher depreciation and tax will limit the net profit jump. Based on the expected improvement in aluminium and iron ore business and also higher estimates for Hindustan Zinc, the valuation of VEDL on SOTP basis comes at Rs. 125. At the CMP of Rs. 116.80, the stock is trading at P/E of 10.52 x FY17E and, 6.99 x FY18E. The company can post EPS of Rs. 11.10 for FY17E and Rs. 16.70 for FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	73,710.00	64,434.00	76,274.00	85,737.00
NET PROFIT (₹ Cr)	(15,646.00)	(9,323.00)	3,304.00	4,965.00
EPS (₹)	21.90	7.30	11.10	16.70
PE (x)	4.80	14.30	9.30	6.20
P/BV (x)	0.60	0.70	0.70	0.60
EV/EBITDA (x)	4.70	7.10	6.20	4.90
ROE (%)	10.20	4.40	7.20	10.10
ROCE (%)	9.90	7.00	8.10	9.30

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*As the author of this blog I disclose that I do not hold VEDANTA LTD in my any of the portfolios.

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.