Indian Cement Industry: Set to grow

The one Indian industry which is set for growth over the coming years is the Cement Industry. The world’s second largest cement producer (after China) reached its total installed capacity to 231 million tones after adding 11 million tones of capacity during the first half of 2009.

The main characteristics of this industry is that it is highly fragmented, cyclical and highly capital intensive. There are around 125 large and 300 small cement plants. Some of the leading cement manufacturers are UltraTech/Grasim combine, Dalmia Cements, India Cements and Holcim. Returns depend on the vibrancy of the economy as a whole as it directly affects the sales realization and capacity utilization.

The industry is heavily dependent on 3 sectors; coal, power and transport. Energy and freight are the two major cost components. Over the last few years, while the proportion of energy cost has increased marginally, freight costs have declined.

Increasing government expenditure on infrastructure sector and rising demand for commercial and residential real estate development has resulted in higher demand for cement in the country. According to a report by the ICRA Industry Monitor, the installed cement capacity is expected to increase to 241 million tones per annum by the end of 2010. It also expects that driven by higher domestic demand and increasing utilization, India's cement industry may record an annual growth of 10% over the coming years.

Taking cue of the global economic slowdown which was affecting cement companies in India last year, Government’s initiative to re-impose counter-veiling duty and special counter-veiling duty this year will help provide a level playing field for domestic players. Moreover, it also appointed a coal regulator to facilitate timely and proper allocation of coal blocks to the important sectors like cement. As coal is one of the prime raw material used in cement production, this seems to be a positive move.

Growth potential of cement industry can be judged by the fact that the per capita cement consumption (156 kg) in India is still well below the global average consumption (396 kg). This gap can be expected to be covered in the coming years. Besides, housing sector accounts for almost 50% of the total cement consumption in the country and the large young population will ensure that the demand for infrastructure stays put.

The rising cost of energy, transportation raw material continues to pressure the industry as a whole. To sustain profitability, companies will have to explore alternate source of energy while at the same time enhance their operational efficiency.

Industry experts opine that the cement industries should now increase their focus on investing adequately in developing human resources that will be capable enough to address the professional needs of construction industry including advanced technologies and construction practices, project management construction and litigation.

Some of the concerns facing the Indian Cement Industry

REITs: Real Estate Investment Trusts

A Real Estate Investment Trust (REIT) is like a mutual fund that invests only in real estate. It can buy, manage, sell and develop real estates. It breaks down the ownership of real estate properties into units that are sold to investors. As per Draft Securities and Exchange Board of India (SEBI) (Real Estate Investment Trusts) Regulations 2008, REITs should carry a minimum net worth of rupees three crore at the time of registration, increasing to rupees five crore within three years from the date of grant of registration. As per the draft regulation, REITs should distribute 90% of its income (generally rental income) to its investors as regular dividends. By investing in REITs investors can reap the benefits of investing in real estate without going through the long and tedious procedure, besides REIT units can be easily liquidated unlike traditional properties.


REITs are typically established by sponsors that then enter into management agreement with Real Estate Asset Management Companies for managing their REIT schemes. Public is then invited to subscribe to the units of their schemes. Units under REIT schemes must be mandatorily listed on any recognized stock exchange within a period of six weeks from the closure of the scheme.


Broadly, REITs are classified as equity, mortgage or hybrid REITs. Equity REITs are the most common form of REIT especially in the US, the world’s largest REIT market. While Equity REITs earn revenue in the form of rents and leases by buying, developing or owning properties, Mortgage REITs earn interest from financing property deals.


Some REITs can also be sector specific that invest only in commercial buildings (malls, office buildings, warehouses, community centers or entertainment centers) or residential buildings. Investors can choose schemes based on their risk appetites. Some of the key ratios to judge an REIT’s performance are NAV (Net Asset Value), AFFO (Adjusted Funds from Operations) and CAD (Cash Available for Distribution)


An advantage of investing through REIT is that they hire professionals and legal experts that make sure that the property they are investing in has a free title and is free from any legal mess. Moreover, as REITs invest in many sectors like retail, commercial and residential properties, investors can reap the benefits of diversification which they may be unable to do within their available resources.


In 2007, SEBI had introduced a draft regulation for REITs. Legislations governing the establishment of REITs were expected to be introduced by the end of 2009. However, the current bearish mood and lack of investor confidence in real estate markets seems to have forced the Indian Government to push away introducing any legislation as of now.


Given the lack of transparency and standardization in pricing of real estate properties, raising funds from capital markets is a major challenge for REITs that continue to deploy high level of debts to improve their returns. RBI too continues to maintain a cautious approach while lending to real estate sectors. Besides this, higher transaction costs and delays in obtaining approvals are creating bottlenecks.


Following are some of the reasons to believe that REITs will be a success in India.

1. Demand for residential and commercial spaces have picked up after a lull in 2008.
2. In India, Average rental yields are much higher (8.5% to 10%) compared to other countries (Japan: 3.5%, Singapore: 5.2%, Hong Kong: 5.7%).
3. Development yields are comparatively much higher in India compared to other developed countries.
4. Increasing urbanization and growing income will make sure that the demand for real estate attracts investment.


Experts suggest that awareness, expanded credit availability and increased adoption of REITs in India will increase the flow of information regarding rent and valuations resulting in improved transparency in pricing of properties. By gaining access to capital markets and exit routes REITs can improve margins and can reduce their overall cost of capital.

Investment Process

Any investor who sincerely works towards making the most of the current market trend will never underestimate the importance of having an investment strategy predefined before he starts investing. Investment environment is increasingly becoming complex and encompass various kinds of marketable securities. Nevertheless, importance of a well-defined and suitable investment strategy cannot be underestimated.

An investment strategy defines how an investor should go about choosing securities to invest in. It is a basic guide for where to invest, when to invest and how much to invest. There are five important steps in an investment process which should not be neglected. They are:

1. Defining an Investment strategy/policy
2. Analyzing securities
3. Constructing a portfolio to minimize risk
4. Evaluating the performance of the portfolio, and
5. Revising the portfolio

An investor cannot define his investment strategy unless he defines his investment objective and investment surplus to his disposal. Objective of making more money is very vague. Of course everyone wants to make more money! Objectives have to be clearly defined in terms of risk and return. Understanding the relationship between risk and return will go a long way while building a portfolio that can provide optimum returns for the amount of risk an investor can take.

A commonly neglected aspect while choosing a venue of investment is the individual tax status. It does not make sense for a tax-exempt investor to invest in government securities or other tax-exempt investment options.

The second step of analyzing securities enables the investor to distinguish between underpriced and overpriced stock. Return can be maximized by investing in stocks which are currently underpriced but have the potential to increase (remember buy low sell high). There are two approaches used for analyzing securities; Technical analysis and Fundamental analysis.

Technical analysis involves studying the trends of stock prices movements. Technical analysts claim that by studying recurring trends and patterns in price movements it is possible to predict near term price movements. This is based on the assumption that price trends and pattern repeat themselves.

On the other hand, fundamental analysts believe that intrinsic value is equal to the present value of all the cash flows that a firm expects to gain in the future. Present value is therefore computed by forecasting the timing and amount of future cash flows and discounting these by applying an appropriate discount rate. A stock is considered undervalued and worth investing in only if this intrinsic value is reasonably less than the stock’s current market price. This is based on the belief that mispriced stocks will be corrected by the market at some point of time in the future, and that underpriced stocks will appreciate and overpriced stocks will depreciate.

Get credit news to remain apace with changes in credit card policies

To stay current on what is happening in the financial markets and in the different sectors of the economy around you, its very important to be aware of recent credit news and information. This is more important in case of new developments that take place in the credit card industry. Changes in the financial markets do not affect all because you may not be having an investment portfolio consisting of stocks, bonds etc. But credit card is one thing that is common among all Americans.


It is unfortunate to learn that ignorance is one of the reasons why credit cardholders fell behind on payments. Due to the credit crunch there were many credit card issuers that changed their payment policies and reduced credit limits. However, many consumers were not aware of the same and continued using their credit cards as per older terms of their cards. This led to the increase in the number of delinquencies associated with credit cards.


In order to do away with the anomalies, the government introduced the new credit card regulations that were supposed to come into effect in February 2010. However, it is anticipated that these changes in the credit card policies will come into effect by 2009 end. These changes have been made keeping in mind the needs of the consumers. Consumers have been complaining about the changes in the policies and the irregularities that prevail in the mortgage market.


So, it is important to stay abreast with the latest developments that are taking place around you. If you get credit news about the mortgage market, you can prevent your property from being taken away by fraudsters. How is this possible?
There are many scammers in the mortgage market that take you for a ride. Instances of mortgage fraud are not uncommon and in the majority if the cases, it is found that borrowers that are ignorant are the victims of mortgage fraud like property flipping, appraisal fraud, etc.

Organized Indian Retail: Challenges ahead for Organized Retail

Booming economy, favorable demographic patterns, increasing per capita income and urbanization gave rise to a new sector in India: Organized Retail. Opening up of retail sector for FDI can be considered as the prime reason behind the blooming organized retail sector. Sensing this opportunity several companies ventured into this sector, including Reliance, Bharti and Pantaloons.

Despite the Government allowing only 51% of FDI in single format retail segment, global retail giants like Tesco, Wal-Mart and Metro AG are making inroads indirectly through franchise agreements and cash and carry wholesale trading, thus giving some serious competition to domestic retailers. Nevertheless, growth opportunity in this sector can be judged by the fact that only 3% of the total retail sector is organized and 97% of the sector still consists of local mom and pop stores.

Unfortunately, the growth strategy used by all organized retail players of increasing their number of stores backfired when rentals dramatically shot up following the global economic melt down. Profitability is seriously hampered and almost all major retailers are now struggling to maintain their bottom line. Average operating profit margin declined from 9.5% in 2007 to 7.9% in 2008. The worst part is that such a drastic growth in the number of stores was backed by significant leverage which is expected to further hurt these organized retailers’ liquidity and profitability levels.

Retailers are correcting their over enthusiastic strategies of the past and focusing on improving their business model. This section will review some of the challenges these organized retailers are facing on both macro as well as local levels.

Aggressive Expansion

Over the last few years Indian retailers most preferred mode of expansion was to increase their number of outlets across metros. Outlets were built wherever real estate was available and not where they were actually required, which led to ‘Clustering’. Following credit crunch in 2008, several outlets were cast strapped and had to be closed down simply because they were operating in unviable locations.

Poor Supply Chain Management

One of the major challenges for retailers is to reduce shrinkage which includes short-weighing, pilferage and poor product handling. While the average shrinking percentage of inventory in developed countries is 1% to 2% of Cost of Goods Sold, it is estimated to be much higher for Indian retailers, primarily due to the lack of focus on supply chain management. The existing supply chain is not devoid of inherent weakness of India’s infrastructure, besides being corrupted along the entire chain. Tracing shrinkage is a Hercules task as almost all the transactions still continue to be based on paper system. This gives rise to the need of third party logistics organizations that can provide services at competitive prices. Third party logistics is a concept still absent from the Indian retailers’ value chain.

A large part of shrinkage takes place within the retailer by its employees. Moreover, tracking an employee’s track record and background checks is difficult. Retailers are now joining hands to fight this battle by creating a database of employees and share it amongst themselves to avoid shrinkage from within.

Employee training and retention

The most common strategy applied by retailers to keep labor cost at minimum was to employ fresh graduates with no experience in retail sector. They have now realized that in difficult market situations, experienced and talented employees that have sound understanding of ground realities could give retailers a competitive advantage. Despite a downturn, need for skilled manpower still continues to be a major concern across the sector.

Managing working capital

One of the most important factors affecting a retailer’s profitability is the way it handles its working capital. Lower footfalls, resulting into lower sales has directly impacted Indian retailers’ working capital position. Discounting is now the most common technique used to turn slow moving inventory.

Besides lower footfalls another factor which is hurting retailers’ liquidity position is the significant amount of leverage they are carrying which was used earlier for aggressive expansion. Banks are now reluctant to finance retailers given the falling demand and plummeting profitability. Retailers are therefore finding it difficult to finance their working capital requirements.

Diversifying into untapped rural areas

Experts believe that the next phase of growth for organized retail sector will come from rural areas that account for half of the $300 billion domestic retail market. Retailers will have to focus on the previously untapped lower income strata by providing them access to credit facilities. On the back of souring commodity prices and improving productivity, rural economy is set to boom in the next decade.

Backward Integration

One way to improve efficiency and profitability is to remove unwanted intermediaries which eat into the already stressed margins. To improve rural economy, Indian Government approved Contract farming and Leasing. According to KPMG, this will bring about technology transfer, increase capital inflow and assure market for crop production, besides eliminating intermediaries. Pepsico and ITC’s e-chaupal are already benefitting from contract farming in Northern India.

Despite the above mentioned challenges, long term prospects of organized retailers are still very attractive. Important consolidations and partnerships can be expected soon for improving operating and cost efficiency. Focusing on supply chain management and partnering seem to be the need for an hour for organized retailers so as to leverage their expertise and financial muscle.

Indian Telecom Industry: Sharing Telecom Infrastructure

De-licensing, implementation of open-market policy and other liberal economic policies has helped the Indian Telecom sector register a remarkable growth during the last 5 years. Indian Telecom sector today is the second largest and the fastest growing telecom market in the world only after China. Competition is intense with 4 out of the top 10 telecom players accounting for two third of the entire mobile market.

While all major telecom companies like BSNL, Bharti, MTNL, Reliance and Tata Infocomm have experienced a drastic increase in their subscriber base over the last few years, Average Revenue per Unit (ARPU) continues to be a major concern as price competition shows no sign of boiling down. According to TRAI, as of December 2008, the total subscriber base stood at 346.9 million, growing from 0.9 million as on March 1998. Despite growing subscriber based, mobile penetration still continues to remain at a low 27% compared to 94% in the US. Moreover, growth has been primarily from metros and Class A circles.

Due to growing competition and declining ARPU, large telecom players including Bharti, BSNL and Reliance are now increasingly focusing on rural and Class B and C circles to capture the untapped subscriber base. Since growth will be coming from lower income strata, it can safely be assumed that APRU will continue to slide further.

ARPU and MoUs (Minutes of Usage) are two critical factors for a telecom company as it directly impacts its EBITDA (earnings before interest tax depreciation and amortization) margins and IRR (internal rate of return). In the past, telecom companies were able to improve their EBITDA figures by amortizing cost over large and growing subscriber base. However, cut-throat competition and declining ARPU is increasing the pressure on these companies’ EBITDA an IRR.

Sharing of telecom infrastructure seemed to be the most logical step towards improving capital efficiency and reducing the cost of maintaining passive telecom infrastructure, besides enabling them to focus on their core operations. Return on Capital Employed (RoCE) and Profits are also positively impacted when telecom operators prefer to lease towers instead of owning them.

A tower infrastructure company provides passive telecom infrastructure on a sharing basis to telecom operators by entering into Master Service Agreements (MSAs) with them. While sharing of telecom infrastructure is now the order of the day across the world, the extent to which they are shared depends on the competition and regulatory climate in each country.

In order to improve operational and capital efficiencies, large telecom companies including Bharti Airtel, Reliance Communications and Tata Teleservices, hived off their tower divisions as separate companies. This benefitted them not only in the form of reduced operating cost and capital requirement, but also unlocking of significant value. Tower infrastructure subsidiaries always have the advantage of an assured occupant. As per ICRA, telecom infrastructure can generate good returns after achieving an average occupancy ratio of 1.7.

Besides hived off telecom infrastructure subsidiaries, there are several Independent Telecom Infrastructure Companies (ITIC) that build passive and active telecom infrastructure on anticipatory basis and rent it out to operators. For example, Essar Telecom Infrastructure Limited, Xcel Telecom Private Limited, GTL Infrastructure Limited, Quippo Telecom Infrastructure Limited, Vision India Private Limited, Aster Infrastructure Private Limited and TVS Interconnect Systems Limited.

ITICs are at a disadvantage against other telecom infrastructure subsidiaries as they have no assured occupants. Moreover, large telecom operators have their own infrastructure subsidiaries. As such, ITICs focus on regional and new operators. Unitech, Swan Telecom and S Tel Limited are some of the new entrants that will bank on such ITICs to optimize their investment.

Mobile tariffs are currently so low that any further reduction in tariffs will be impossible. The only distinguishing factor will be the quality of service provided by telecom operators. Given the scarce spectrum coupled with ever increasing number of subscriber base, providing good quality of service will demand additional passive and active telecom infrastructure thus increasing the demand for ITICs. Introduction of mobile number portability with limited switching costs is seen to be another important factor that will drive the ITIC sector.

Driven by intensifying price competition, mobile tariffs are now the lowest in the world. Consolidation is now expected to be the strategic and most logical step in the future, which will be supported by the rapidly increasing number of ITICs.

IPO: Risks involved for Retail Investors

Markets seem to be improving. With some minor corrections happening on the way, medium and long term prospects of capital markets look bright. Taking a clue of this, several companies are planning to launch their much awaited, rather postponed IPOs soon. Around 20 companies will be raising about Rs.20,000 crores from the market in the next 6 months.


QIPs and High Networth Individuals are carrying huge surplus liquidity which will be diverted into such IPOs. However, if retail subscription numbers of recent IPOs is anything to go by, it has proven that retail investor seem to lack confidence. The 10 IPOs launched this year where undersubscribed by retail investors. For example, QIP subscription of the largest public IPO this year, NHPC was oversubscribed 29 times, but its retail portion was subscribed only 3.1 times.


While underwriters to the issue claim that the IPO is significantly underpriced, retails investors need to bear in mind that there are certain risks involved in investing at the time of an IPO which cannot be easily measured. Measuring risk profile of an IPO is difficult compared to the risk of a seasoned issue. Various models of IPO pricing behaviour also fail to explain the behaviour of IPO returns. They have their own risk profile which is different from the risk in investing in trading stocks.


Those times are long gone when small investors could blindly throw in money at IPOs and expect to gain big return in no time. While IPOs still are a good investment option, the focus has shifted to long term return potential. Here we will brief on some of the points which retail investors should know before they plan to invest their hard earned money into IPOs.


The most important point to be kept in mind is that several companies that launch their IPOs are new ventures and do not have a track record of profitability. This in itself is a big risk as there is no parameter against which an investor can compare the valuation. The prospectus issued by such companies at time of filling for an IPO may be overblown and overoptimistic about their future prospects. Nevertheless, it is advisable to read through the prospectus as it does indicate risk and opportunities related to the company. It is a healthy sign, if the Company plans to use the amount raised towards expansion or research and development. Contrary to this, if the amount will be used to pay off existing debts and liabilities, it is a bad sign as it indicates that the company is unable to generate cash to pay off its debt.


The other important point worth mentioning here is that these are the companies which are not extensively covered by other analyst to uncover hidden risks. Moreover, investment banks and brokerage firms that do provide information have their own interest in pushing their clients’ IPOs to ensure their own future business with them. Similarly, opinion of magazines and newspapers may be biased because of their vested interests.


It has always been observed that retail investors are last to enter when signs of economic direction becomes clear. With the picture of economic recovery getting clearer, confidence and appetite of retail investors will improve and they will be inclined to invest in IPOs.

Sovereign Wealth Funds: India's Stand on SWFs

India has realized that SWFs can play an important role in financing its growing economy and has started drawing attention of Oman, Kuwait and Qatar, countries holding largest SWF assets. India and Oman recently entered into MoU with $100 million of seed capital increasing to approximately $1.5 billion over the next two years. Core sectors like infrastructure, telecom, health, tourism and utility are expected to benefit from this funding. At present, large pool of foreign exchange reserves have been invested in low yielding OECD government securities bonds and other low yield deposits.

Indian Government had announced in its recent meeting with Gulf nations that it needs around $500 billion investment over the next decade to fund their growing infrastructure requirements. This also presents an opportunity for rich and wealthy Gulf nations that are hunting for better investment avenues beyond developed countries which are still under recession post Subprime mortgage crisis.

A section of industry experts however opine that since India’s reserves are not derived by commodity exports, unlike cash rich Gulf nations, establishing its own SWF is not a good idea. With its current account deficit still running around 2% of its GDP, it makes more sense to hold as much reserve as possible as against long term investing through SWFs. While reserves of Middle East countries come from oil and commodity exports, India’s reserves are derived from FDIs, External Commercial Borrowings and other term credits.

Opening up to Islamic banking will enable India in attracting huge amount of SWFs which are being diverted to China and other emerging Asian economies. Singapore is cultivating Islamic Banking so as to leverage its position as a leading financial centre.

Sovereign Wealth Funds: Concerns attached with SWFs

Several countries are keeping their economies away from SWFs due to the concern that some investments are being diverted for political objective to acquire control of strategically important assets. It has been observed that OPECs have been diverting large pool of funds in acquiring strategic assets and investing in important sectors like infrastructure, telecom, energy and media across developed countries. After much opposition from US Congress, Abu Dhabi's Investment Authority had to withdraw from its ADIA Dubai Port after 9/11 terror attacks.

China Investment Corporation’s $5 billion stake in Morgan Stanley and acquisition of Citigroup by Abu Dhabi Investment Authority for $7.5 billion was severely criticized after the recent subprime crisis.

Lack of transparency continues to be a major concern for nations that are experiencing increasing SWF funding in their economies. SWFs are being criticized for inadequate disclosures regarding size and source of funds, investment objectives and their holding in private equity funds. While in the U.S., these concerns are addressed by the Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988, European Union preferred to avoid SWF funding. Some experts opine that such a fear is unwarranted if we compare the size of SWFs assets ($2 trillion) with the size of global investment funds assets ($20 trillion) and securities traded in dollars ($50 trillion).

IMG tried to address this concern of transparency and governance by issuing the Santiago Principles in 2007, a set of 24 voluntary principles to ensure transparency and sound governance by sovereign wealth funds (SWFs). However, very few SWFs have been following these principles seriously.

Sovereign Wealth Funds (SWFs)

Sovereign Wealth Funds (SWF) are owned and managed by governments or central banks of various countries around the world to invest their trade surplus globally, usually on a long term basis. They are funded by trade surplus of international trade, foreign currency deposit, International Monetary Fund reserves and other national funds like pension funds and oil funds. With subprime crisis haunting the global financial sectors, several SWFs are being criticized for investing heavily in Citigroup, Morgan Stanley and Merill Lynch which left them gasping for cash infusion. Nevertheless, from $500 million in 1990 to $3.8 trillion in assets today, SWFs have their presence now spread across 27 countries.

Around two-third of SWFs are held by the commodity and oil exporting and gulf countries like Qatar Investment Authority, primarily with the objective of diversifying their revenue streams and reduce oil-related risk and their dependence on oil export revenue.

Over the last decade, large current account surplus enabled Russia and China to build up their sovereign funds. They seemed to have realized (after Asian financial crisis of 1997-98) that it is better to build up their own reserves instead of depending on IMF to bail them out at the time of crisis. Russia and China now manage around $450 million and $1.44 trillion in SWF assets respectively.

Industry experts predict that assets under SWFs’ control could reach $12 trillion by the end of 2015.

The two main purposes of SWFs are short term foreign currency stabilization and liquidity management. The Global Financial Stability Report (2007) classified SMFs into five groups depending on investment objectives of their respective governments. They are:

(i) Stabilization Funds

(ii) Saving Funds for Future Generation

(iii) Reserve Investment Corporate

(iv) Development Funds; and

(v) Contingent Pension Reserve Fund.

During the period of rising oil prices, SWFs of oil exporting nations drastically due to increase in their foreign exchange reserves which are then used to make strategic acquisitions across the world. On the other hand, SWFs of emerging economies like China, Singapore, Malaysia and South Korea tend to grow steadily.

Another point of difference is the SWF to Foreign Reserve Exchange ratio which is used to determine the proportion of reserves which are invested using SWFs. It has been observed that OPEC have higher ratio compared to emerging economies. Last year, ratio for Qatar Investment Authority was 5.9 times compared to China Investment Corporation’s 0.12 times.

Cement Industry: Problem of Excess Capacity

According to CMIE (Centre for Monitoring Indian Economy), Cement industry is expected to increase its capacity by 30 million tones, reaching total capacity of around 276 million tones by March 2010. This will be the highest capacity addition in any single year. Given the current consumption levels of 178 million tones, expansion in capacity will put the pressure on the already plummeting cement prices.

Manufacturers have been cutting cement prices since September to ensure proper capacity utilization. The industry has been consolidating and the top five manufacturers now control around 60% of the entire production. The remaining capacity continues to be largely fragmented, primarily because cement is highly freight intensive and costly to be transported over large distance.

While the industry experienced a 10% growth in 2009, excess supply due to large capacity addition coupled with curtailed exports to Middle East and South East Asian Nations, the rate of growth can be expected to boil down.

Despite these challenges, industry experts opine that cement industry can be conservatively expected to grow 8% to 9% next year on the back of Government initiatives towards boosting the infrastructure and housing sector. Housing and Infrastructure sectors consume around 55% and 35$ of India’s cement output respectively and will now act as a major driver of growth for cement industry.

Islamic Banking in India

State Bank of India, India’s largest lending bank and Life Insurance Corporation (LIC), the country’s largest insurance company are planning to launch Islamic products, despite a study by RBI concluding that Islamic banking is not feasible in the current regulatory environment. Amendment to the Banking Regulation Act of India, 1949 is the prerequisite to allow Islamic banking system to operate in India. Such changes however cannot be made without strong political will.

According to RBI, except offering basic current account facility, almost no other banking product in India can be modified to meet the conditions of Islamic banking. Shariah law prohibits making money out of money, therefore shunning the idea of paying interests to depositors.

While SBI is still working on the feasibility of launching Shariah-compliant products and changes in system that will be required, LIC is looking forward to launch Takaful products catering to Saudi nations. Takaful is the insurance equivalent of Shariah-compliant Islamic Banking.

Some experts suggest that given the fact that 15% of India population comprises of Muslims, Islamic banking will open up a significant resource for funds during this period of credit crunch. Most importantly, it will attract large number of cash rich Middle Eastern economies that are looking for new investment avenues.

Current Scenario of NBFCs

Global credit crisis followed by increase in interest rates in October and November 2008 resulted in widespread crisis of confidence. Chain of events after the collapse of Lehman Brothers is still fresh in the minds of investors. Non-Banking Finance Companies (NBFCs) in India were severely impacted due to economic slowdown coupled with fall in demand for financing as several businesses deferred their expansion plan. Stock prices of NBFCs’ crashed on the back of rising non-performing assets and several companies closed their operations. International NBFCs’ still continue to close down or sell their back end operations in India.

The positive news however is that, this crisis has forced NBFCs to improve their operations and strategies. Industry experts opine that they are much more mature today than they where during the last decade. Timely intervention of RBI helped reduce the negative effect of credit crunch on banks and NBFCs. In fact, aggressive strategies helped LIC Housing Finance to grab new customers (including customers of other banks) and increase its market share in national mortgage market. Surprisingly it was able to maintain its profitability in 2009 (around 37%). HDFC, the largest NBFC in India, however experienced a slowdown in customer growth due to stiff competition, especially from LIC Housing Finance and tight

monetary conditions.

Other NBFCs that were stable during this period of credit crunch are Infrastructure Development Finance Company (IDFC) Power Finance Corporation (PFC) and Rural Electrification Corporation (REC). Growth prospects are strong for these companies given the acute shortage of power in the country and expected increase in demand for infrastructure projects.

The segment which was hit hardest was Vehicle Financing. Companies financing new vehicle purchases experienced a drastic reduction in new customer numbers. Fortunately, since vehicle finance is asset-based business, their asset quality did not suffer as against other consumer financing businesses. Contrary to this, Shriram Transport Finance, the only NBFC which deals in second-hand vehicle financing was able to maintain its growth primarily due to its business model which does not entirely depends on health of the auto industry.

Indian Newspaper Industry

With 42% market share, newspaper continues to be a dominant advertising medium across the world. As most of the cost is fixed, profitability of a newspaper company is primarily driven by the circulation volume. Large newspaper companies around the world are becoming multi-dimensional and are increasing their stakes in television, radio, magazines and other businesses. They are also operating online news websites to take advantage of economics of scale achieved by sharing resources while providing a range of outlets to advertisers.

The most important characteristic of Newspaper industry is the significant start-up cost that is required for buildings, presses, establishing distribution channels and large editorial staff to develop original content on a daily basis. Building brand value and maintaining a large circulation volume therefore is crucial to recover these high fixed costs. While the rate of renewed subscription is usually high, gaining new subscribers gets difficult in tough competition scenarios.

Advertising is a major source of revenue which directly depends on the health of the economy. Advertising also depends on Circulation, which is the second most important source of revenue and is based on the number of copies sold and subscription rate charged. As circulation drops, advertising revenue also falls. Thus a small fall in circulation can have a much higher impact on a newspaper company’s total revenues.

Newsprint cost comprises of a large proportion of newspaper publishing cost. While it is procured by weight, its production is measured in number of copies produced, commonly referred to as GSM (grams per square meter). Normal wastage of newsprint during this process of conversion is around 3% to 5%.

Historically, newspaper has always been a profitable industry. Despite significant start-up and fixed costs, once a newspaper is able to establish its brand, its dominance is indisputable. However, the last decade witnessed melt-down of several large newspaper companies across US and Europe only because they ignored the threat coming from growing Internet penetration. Several newspapers have filed for bankruptcy or are already looking for a buyer.

Ironically, while analyst across the globe are debating whether any valuation proposition still exists in the outdated newspaper model, one industry continues to hold promises for future growth; the Indian Newspaper Industry. While American newspapers have been struggling to survive the competition from growing internet advertising, Indian newspaper experienced dramatic growth during 2000 and 2005.

Circulation of Dailies in India increased from 5,91,29,000 in 2001 to 7,29,39,000 in 2003 to 7,86,89,000 in 2005. The key drivers for the growth of newspaper penetration in India are the expanding middle class and improving literacy rates. Marginal (though increasing) internet penetration is also one of the important reasons why Indian newspaper industry has not yet come across stiff competition from this medium.

According to a KPMG-FICCI report, Indian print media can be expected to grow conservatively at around 9% over the next 4 to 5 years. However, the industry has been experiencing growing margin pressures due to increasing newsprint costs which are not yet being passed on to readers due to intense competition. Newsprint costs soared almost 50% last year. While Indian newspapers are the cheapest in the world, industry experts opine that it may not be long that newspaper companies will increase their circulation charges and advertising rates to counter the increasing newsprint costs.

Last year, several publishers postponed their plans to expand their capacity in the wake of drastically increasing newsprint costs. On the other hand, they were unable to increase advertising rates as advertisers are slowly moving to other cheap medium like the internet. Publishers are not concerned about the slowly shifting advertising revenue to mediums such as radio and internet.

Despite such concern one important growth area for Indian newspaper publishers is that several rural areas are still untapped. Improving literacy rates, increasing income and benefits from development schemes of the Government will definitely open up penetration opportunities for Indian publishers.

In House Developed Vs. Ready to Use Solution

A Liquidity Aggregator acts as a centralized trading portal by accepting and normalizing several data feeds, feeding that data into algorithmic engines and receiving orders and routing them into the market. By presenting available liquidity in a single and consolidated order book, Aggregator act as a ‘Virtual Forex Exchange’ for buy-side traders. Traders can get a complete picture of available liquidity in a single trading environment, which enables them to have maximum control over their order flow by easily sorting, analyzing and making profitable decisions. Aggregation solutions are developed using Complex Event Processing technology, which are real-time in nature. Leading banks have now recognized opportunities in providing market aggregation services to their customers, creating sophisticated order types and implementing smart-order routing technology.

Trading institutions and market making banks can build their own trading platform that provides an aggregated view of the market. On getting an aggregated view of the market, algorithms can be created to apply orders based on their trading strategies. Trading firms can also purchase a third party aggregating and trading platform with prebuilt screens, algorithms and connectivity (referred to as ‘Black-box solutions’). Alternatively, they can also apply systems which also come with pre-built features but can be configured to meet the trading firm’s specific trading needs, commonly known as ‘ White-box solutions’. White box solutions are particularly applied by top-tier hedge funds and large dealers.

Competitive Advantage

The biggest challenge faced by all market participants (including sell-side and buy-side traders and market makers) in Forex market place today is managing complexity driven by drastically growing trading volumes and growing dispersion in liquidity sources. Significant investment is essential for updating old technologies or risk losing money on trades. A well developed and maintained liquidity discovery and aggregation solution can provide a trading firm competitive advantage, especially for market making banks which have traditionally relied on EBS and Reuters for accessing liquidity. Banks are increasingly using aggregation tools not only to track the available liquidity in the market but also in their own orders books. For example, HSBC has internally built its own liquidity discovery solution by applying aggregation and algorithms. Large hedge funds and banks view algorithms as a competitive advantage and do not rely on third-party vendors for algorithm development.

Costly and Time-Consuming

According to TABB Group, by the end of this year, 68% of all forex trades will be executed online. Historically, only the largest corporate customers dealt electronically, however infrequently trading customers are also looking for trading electronically with their banks. To satisfy this growing clientele, banks are therefore focusing on building robust and scalable trading platform. They use Complex event processing technology to build a series of rules that enable them to locate the best available price. They can also build algorithms to reflect their trading habits and preferences instead of applying a standardized third party trading platform. However, developing such a platform in-house is costly and time-consuming which can be afforded by only a handful of tier one banks that have enough resources. By outsourcing technology to best suppliers, banks can reduce their time to market and IT costs.

Current market conditions have further aggravated the problem of lack of resources. Both tier 2 and tier 1 banks are therefore entering into partnerships with vendors and other banks for developing white-labeled solutions to capture forex business. Some banks prefer third party providers which provide the same tools but without the burden of in-house development cost and cost of maintaining and updating algorithms. Ready to use aggregated platforms act as a telecom grid wherein market participants can easily dial anyone and engage in a conversation without investing in infrastructure. Moreover, vendors are increasingly adopting FIX standards for trading and FIX FAST for providing market data, thus improving connectivity to execution venues and overall performance.

Changing Motives to Trade

Foreign exchange is now treated as an asset and the trading volume has increased drastically over the last few years. New market participants have different approaches and trading motives and demand different trading venues and trading styles. Traders may be active or passive, patient or impatient and may be informed or uninformed. Besides they may also have different risk-return expectations, investment time horizons and may react differently to market conditions. To satisfy varying needs of their customers and distribution channels, banks are now in the race to aggregate the fragmented forex market and provide their customers a single view of the market. Market making banks that lack resource to develop their own aggregated trading platforms can either outsource developing task or opt for white-labeling solutions. The choice generally depends on the proportion of their high frequency and low frequency customers. However, the biggest challenge they face is that the existing electronic infrastructure and aggregation system available provide limited flexibility and customization.

Control in Dealings

Some trading firms and market making banks prefer developing their own trading platforms based on their business strategies and risk appetite. In-house developed platforms provide them better control over their dealings. However, it is important to analyze the cost and return benefits of building an in-house platform. To keep up with the arms race, third party providers have started investing and building faster technologies and products that enable banks to provide different executable pricing streams to different customers based on their needs and trading motives.

Speed and Capacity

Speed of execution becomes a critical factor due to the ever increasing use of algorithmic trading. Increasing ticket volumes challenges banks and liquidity providers to get their prices out in the market fast enough and confirm trades at the rate at which they are being traded. While several banks continue spending heavily on their websites to keep it updated, internet lack capacity, cannot be scaled easily and can have security issues. Introduction of Black box trading has resulted in an increase in small ticket trading thus increasing trading frequency. As the number of tickets traded increases, it creates a real capacity constraint and cost pressures for banks and brokers. Not having enough capacity can further create latency issues. Developing solutions that takes care of both pre-trade and post-trade execution issues may not be cost-effective for banks and trading institutions.

Flexible and Customizable
Innovations in technologies enable system providers to unbundle and re-package their core services to provide optimal set of network and trading services to their customers. Given the dynamic nature of trading relationships and increasing number of available liquidity venues, flexibility is now considered to be the most important feature in a trading system by all market participants including liquidity providers, market making banks, buy-side and sell-side firms. White-label solution providers are now providing new and improved aggregation platforms that allow banks to not only provide prices in chosen currencies but also get liquidity from a partner banks when required. Market participants prefer solutions that are intuitive and stream best prices to their screens in customized ways besides allowing them to trade in large order sizes. New aggregators are also expected to have the ability to enable traders to trade unique order types, including sweeps, triggers, and time varying orders.

Integral’s FX Grid is one such trading platform which allow market participants to connect to its FX Grid through a single Integral API from which they can negotiate, execute and settle trades with counterparties. Besides providing system integration and eliminating the need to manage multiple systems and services, FX Grid also insulates its participants from changes in technology made by other participants in the network, such as modifications to their systems' APIs. It is an end-to-end automated system which allows for provisioning of liquidity, thus enabling banks to provide flexible and customized liquidity solutions to customers.

Implementation of Aggregation Platform

Market making banks today have access to a wide range of white-label solutions available in the market; however implementation of these services is equally important. While some of the older solutions available are considered to be very good at scanning the market, they lack in adaptability and dynamic decision making ability. Building a technology is only half the battle won, the other half lies in proper implementation and integration of this technology into strategic decision making.

Cost of Maintaining and Updating

Changing dynamics and increasing velocity of forex market demand constant monitoring of aggregating solutions and keeping them updated and in tune with the market developments. Liquidity venues and the way liquidity is posted are constantly changing. The importance of successfully choosing, upgrading and maintaining a system cannot be overlooked. Banks have realized that it does not make any business sense for them to build aggregation solutions themselves and spend heavily in maintaining them. They rather focus on creating value-added services and use the best available technology to launch these services quickly into the market. Purchasing white-label solutions is therefore a more efficient way to offer new services to their customers.