Better Volumes, Rupee Depreciation Improve Garment Makers’ Prospects

Jul 14 2013

The sharp fall of the rupee over the past few months should improve the revenue of many textile companies since most of them accrue from exports. Cotton textile exporters would get more value for every dollar-denominated sale unit made in the global markets. Readymade garment exporters will benefit, given that the export volumes are also on the rise since the beginning of 2013 after nearly two years.

A report by Crisil Research reiterates that garment exports to the US and Europe, which fell by 7% and 15%, respectively, in 2012, compared with the previous year, have shown signs of improving in the current year. Interestingly, India has also gained marketshare in these two regions, although on a low base against China.

Going by media reports, India’s Apparel Export Promotion Council says that leading global brands have increased their sourcing from India following greater stability in output and factory compliance compared with other Asian regions. Further, most garment makers have also increased prices this year to pass on higher yarn prices.

Analysts reckon that some integrated units such as Vardhman Textiles Ltd, Alok Industries Ltd and other firms such as Page Industries Ltd and Kewal Kiran Clothing Ltd are likely to register higher revenue after nearly three to four quarters. Therefore, favourable market conditions like higher volumes and better pricing power could translate into improved profitability for garment makers amid rising yarn and cotton prices.

According to Crisil, garment makers had seen an operating margin erosion of around 70-80 basis points to 9.3% from fiscal 2012 to the year ended March. One basis point is one-hundredth of a percentage point. Fortunately, garment manufacturers, barring some integrated companies, are not saddled with huge debt like the spinning mills.

That said, the Indian marketshare in the US and Europe is only in the low single digits. And, though Chinese readymade garments marketshare fell in the US and Europe in 2013 so far, it enjoys a little over one-third of the marketshare in these regions. But it remains to be seen whether the uptrend in volumes will sustain over the longer term, given the fierce competition from other countries.

Source:-www.livemint.com

Gold Imports Slip In June But Still Up 36% Yoy

Gold imports have slipped to 31 metric tonnes in June as per government data. It is 81 per cent less than the figures for May.



The numbers from the department of central excise and customs show they are, however, still 36 per cent more than the imports for the same month last year which means the upward thrust in the import demand for gold persists.



The numbers were shared with the chief economic advisor to the finance ministry Raghuram Rajan by the indirect tax department over the weekend.



Rajan also met foreign and domestic banks on Friday and would be meeting finance minister P Chidambaram on Monday to decide if the government needs to go ahead with a foreign bond issue to shore up the forex reserves. The minister returns from the US for a trip where he went to raise more forex for the economy.



An upsurge in the demand for gold along with oil has created the biggest macro economic management crisis for the centre for a long time. It has pushed the current account deficit to 4.8 per cent for the year 2012-13. Since this also creates a pressure on the foreign exchange by draining it the government has been looking for means to plug the leak and raise additional forex from international markets to finance it.



After meeting the bankers on Friday, Rajan had said all options (including raising of foreign bonds) were on the table.



Analysts are fretting that the government has run short of options to check in the falling rupee. While economists have said the fall is in sync with the economic fundamentals, treasurers of banks are fretting this is making it harder for them to meet the income targets of their banks.



The indirect tax data also shows that just in the first quarter of this financial year, gold imports at 335 tonnes is more than double the imports for last year at 137 metric tonnes. In value terms it is $15 billion against $7 billion in the same period last year.

Source:-www.indianexpress.com

Refined Palm Imports By India Seen At Record High On Lower Taxes

14-Jul-2013

India, the world’s biggest palm oil buyer, is set to import record amounts of the refined variety, taking advantage Palm of lower export taxes in Indonesia and Malaysia as the producers seek to encourage domestic refining.



The share of refined oil will climb to 60 percent to 70 percent of total palm purchases by Oct. 31, said Dorab Mistry, a director at Godrej International Ltd. That may increase to 80 percent by December if India fails to raise the import duty, he said. Such products were 20 percent of shipments a year earlier, according to the Solvent Extractors’ Association of India.



Malaysia and Indonesia, suppliers of about 87 percent of the world’s palm oil, cut taxes on shipments to clear stockpiles and boost prices. Futures for the oil used in everything from noodles to biofuel entered a bear market in June 2012 as output expanded and demand slowed. Stockpiles are poised to jump 21 percent to a record 9.5 million metric tons in 2013-2014, U.S. Department of Agriculture data show.



“The problem is created by the differential export taxes levied in Indonesia and Malaysia, and the Indian government has refused to rectify this situation,” Mistry said in an e-mailed response to questions from Bloomberg. “The economics of refining are so bad.”



Indonesia set the export tax on refined, bleached and deodorized palm olein at 4 percent for July, compared with a 10.5 percent tariff on crude oil. RBD palm olein exports from Malaysia attract no taxes, while crude oil shipments are taxed at 4.5 percent since March. India imposed a duty of 2.5 percent on crude edible oil imports in January, while keeping the levy on refined varieties unchanged at 7.5 percent.

Low Capacity



The gap between RBD olein and crude on a cost, insurance and freight basis delivered to Indian ports is at times as low as $10 and on odd days prices are the same, said Mistry.



The industry is in a serious crisis and most plants are operating at very low capacity, said B.V. Mehta, executive director of the extractors’ association. The government should increase taxes to maintain a gap of at least 10 percent between RBD palm olein and crude oil, he said.



“Our refining capacities are low because of the higher refined imports,” said Dinesh Shahra, managing director of Ruchi Soya Industries Ltd. (RSI), the biggest importer of cooking oils. “This is true for other refiners as well,” he said by text message. Imports are definitely cheaper and that’s why so much olein is coming in, said Atul Chaturvedi, chief executive officer of Adani Wilmar Ltd.

Source:-www.bloomberg.com

Professional fees excluded in applying employee cost filter; entity losses ‘uncontrolled’ status if

IT/ILT : Application of turnover filter of Rs. 1 crore to Rs. 200 crore for selecting comparables is justified

What decides suitability of a financial product?

The traditional argument in the market for financial products is to ask the investor to use the information that is disclosed and make a correct and cautious decision. This places on the producer the onus of disclosing correct and relevant information as prescribed by the regulator.

The problem with this approach is that both regulators and producers hope the investor will select the right product using the information that is disclosed. This has not been the case for three main reasons. First, producers bring too many products with poorly differentiated variants and are not too bothered as long as they comply with disclosure rules. Second, distributors and advisers push these products to investors for a commission, leading to misselling. Third, disclosures are too technical and complex for investors to make an investment decision based on them.

The focus in financial markets is slowly shifting to 'suitability' of financial products, where investors are helped by advisers and distributors to select the right product based on its appropriateness for their specific situation. This means the selection of the right investment product is done by the adviser based on his understanding of the investor's needs. Several assume that collecting financial data from the investor and running a risk profiling questionnaire would solve this problem. Many investor advisory processes tend to build around these two documents. However, more needs to be done.

Let us consider the case of a retired investor. The first question is about his needs, or what he would expect the investment to do for him. He would like to receive a regular income that adjusts for inflation and protects his capital from erosion. The second question is about the extent to which he depends on this investment for these objectives. Or how critical is the performance of this investment for the given objective, and whether there is a buffer or alternate sources to meet the given objective. The third question is about how willing the investor is to accept any variation in the investment performance, say, the minimum monthly income that he expects at all times. The fourth question is about the willingness and ability to accept any changes to the invested value and the maximum downside that can be accepted without stress.

In the above framework of suitability, the adviser should be able to compare the alternatives that are available. For example, a bank deposit or a government saving scheme may serve the objective of safety of principal and regular income, but may not protect against inflation. An investment in equity may offer long-term protection from inflation, but will offer neither capital protection nor regular income. A suitable solution is a combination of equity and debt, which generates an income within the range that the investor is comfortable with.

How should a mutual fund's monthly income plan (MIP) be positioned in the context of the suitability framework? The investor should know that the product does not offer a guaranteed dividend of a fixed amount every month. Therefore, unless he has an alternate source of income, such as rent, interest from deposits, income from an alternate profession, an MIP would be unsuitable. It is at best an add-on product that can supplement existing income from another source. Recommending that the entire retirement corpus be invested in an MIP would make it unsuitable for an investor seeking a fixed amount of monthly income.

It would, however, be suitable for an investor who is willing to take some downside risks to income and capital, in return for a growth in the value invested over a period of time. This needs investor agreement on risks to capital value and income, to some extent. However, unfortunately, MIPs are typically positioned as a 'yield plus' product, which is only half the story. Advisers tend to tell retired investors that the MIP will offer a return better than that of a bank deposit or saving scheme, since the equity return will top up the interest income earned by the debt portfolio. This is not always true. What the investor needs to know is that the presence of equity incorporates risk into the product in return for appreciation in the value of the investment over the long term.

Assume that the debt component earns a return of 9%, and 80% of the portfolio is invested in debt securities. This translates to a return of 7.2%. The equity component of 20% is risky. It can earn a return of say -15% to +15%. This means that it contributes -3% to +3% to the return. After allowing for costs of, say, 2%, the return to the investor ranges from 2.2% to 8.2%. If suitability is the criterion, the investor who chooses this product should be willing to accept both variation in income and in the value of the amount invested, given the equity component in the portfolio. Only those retired investors who accept this proposition pass the suitability test. Others will reject it.

What happens in this context? The adviser positions the MIP as 'better' without highlighting the risk brought in by equity, and positions the return for one of the many scenarios where it is higher. The fund manager is expected to meet the demands of the sales team that has made the promise, and juggles the equity and debt components to deliver a stable return, or announce a regular dividend. The funds that manage to pay a regular dividend are heavily invested in debt, not meeting the need of equity for the investor; funds that deliver a high return do so in a bullish equity market, unable to replicate it in a falling one.

We have a sad situation where MIPs are offered with various equity levels (5-30%) and their performance swings wildly. In a rare phase of good equity and debt returns, they are stars with double-digit returns. During good equity markets, they are the deposit-plus product advisers love. The rest of the time, they are products whose performance and returns are tough to explain and investors remain unconvinced.

Suitability requires comparison of alternatives. The retired investor may be better off adding equity to his post office deposits or an index fund to his bank deposit. Such solutions require advisers and investors to examine both risks and returns, and agree on what they are willing to give up in terms of security and comfort, in exchange for inflation protection and return. That is the process we need.

(The author is Managing Director, Centre for Investment Education and Learning.)

Family Finances: Rohit Joshi's skewed portfolio may hurt important goals

By Amit Kumar, ET Bureau | 15 Jul, 2013, 08.35AM IST

Prioritising goals is as important as working towards them. If you don't follow this tenet of financial planning, the achievement of one important goal is likely to come at the cost of sacrificing the others.

When Rohit Joshi, a senior manager in an education company, contacted us to help him with his finances, his portfolio was massively skewed towards real estate. The usual suspects— expensive insurance, low equity investment and no contingency fund—were there too.

We concluded that given his income, a house would result in a struggle to build corpuses for his future child's education and marriage. His daughter was born a few months after the plan, and in light of this development, the financial review will help them rectify their mistakes.

The original plan

Rohit, 29, lives with his wife Neha, 24, and 10-month-old Niral in their own house in Vadodara. When the Joshis approached ET Wealth for advice a year ago, it was easy to see why.

Rohit had a monthly income of Rs 52,725, and after accounting for all their expenses, the Joshis were left with a handsome surplus of Rs 24,306. At that time, they were supposed to pay Rs 6.45 lakh for a piece of land bought in Ujjain a few months ago.

The couple had been lazy about life insurance too. They had a total cover of Rs 76 lakh— from two traditional insurance plans, three Ulips and one online term plan—and shelled out about Rs 43,000 per year for this. They did better at health insurance with a cover of Rs 3 lakh each from ICICI Lombard.

Their goals included making a down payment for the land in three years, saving Rs 37 lakh and Rs 55 lakh for their child's education and marriage, respectively, and amassing Rs 6.57 crore in 30 years for their retirement.