It is debateable as to how much of the rupee depreciation gains on margins are likely to be retained by companies going forward, says Nomura
Nomura analysts are positive on the demand outlook for FY15F in the IT services sector in India. While top IT companies are big exporters, translation of US macro improvements into better US demand, especially in discretionary spend areas, would be keenly watched. This will reinforce Nomura’s expectations of FY15F being a better year than FY14F in terms of demand. This is the key observation by Nomura analysts in their research note on the IT services sector. The analysts believe Europe and IMS/BPO momentum should stay strong and better US growth should provide the kicker for the sector in FY15F.
According to Nomura, Tier-1 IT companies saw 250-300bps quarter-on-quarter benefit on margins in 2Q on account of rupee depreciation. Nomura analysts’ are skeptic on sustainable margins going forward due to possible reinvestment towards growth and passage of benefits to clients/employees. Nomura believes that this is an area where street upgrades can happen, as the margin gains in the last leg of rupee depreciation are likely to be stickier.
Based on well-performing IT companies, Nomura analysts are overweight the IT services sector on: 1) continuation of strong growth momentum in IMS/BPO/Europe; 2) macro improvements in US raise the possibility of higher discretionary spend and better growth in FY15F; and 3) reasonable stock valuations supported by strong EPS growth. HCL Technologies and Cognizant remain top Buys in the stock market; Nomura prefers TCS over Infosys within other Buys.
The performance analysis of TCS and Infosys with special remarks is given below:
Bitcoins are not illegal even if it is a highly volatile and risky in nature but it may be misused for illegal trading activities, says Bitcoin Alliance
The Bitcoin Alliance India (BAI), a community of Bitcoin entrepreneurs, has agreed that Bitcoins is risky and speculative but has urged the government to clarify its legality. BAI also agreed with the Reserve Bank of India (RBI)’s notification regarding risk associated with virtual currencies. In order to examine the legality of Bitcoins, the Alliance appointed Nishith Desai Associates.
Speaking with reporters in Mumbai, Nishith Desai said, “A transaction in relation to Bitcoins must be for lawful consideration and should not be opposed to the public policy. However, exporting goods from India against Bitcoins would not be permissible as the proceeds of exports must be repatriated to India in terms of foreign exchange through normal banking channels. Thus, Bitcoins per se are not regulated by any authority as it is an Internet product.”
Last month, RBI’s warning on using virtual currency, including Bitcoin raised many question about legality and safety of virtual currencies, including Bitcoins. There have been serious legal issues regarding usage of Bitcoins in commercial transactions and doubts whether Bitcoins is a currency, a security, a commodity or something else.
Desai clarified that, “Our Bitcoins Practice Group examined the issue from techno-legal perspective and have found that Bitcoins are not illegal in India. This is in consonance with international approach. United States (US) considers Bitcoins as a legitimate payment alternative. US Senate Home Land Security and Government Affairs Committee and the Senate Banking Committee consider that virtual currency has legitimate uses.”
Nishith Desai talked on Bitcoins’ legal aspects in India and said, “If the Bitcoins are sold for a price in terms of money, Sale of Goods Act would apply but accepting Bitcoins against good should not attract the provisions of Sale of Goods Act. Provisions of Foreign Exchange Management Act (FEMA) would not be triggered especially when the transactions are intra-India. Even importation of Bitcoins would be legitimate if the transactions are carried out through proper banking channels. In any event as a commercial transaction the provisions of the Indian Contract Act would have to be complied with.”
Bitcoin is also highly speculative and has seen scores of users recently. Today, a single Bitcoin in India is valued around Rs51,053 which was just equal to rupee while it started in 2008, single Bitcoin’s value in US Dollars is $818.07. According BAI there are total 30,000 Bitcoin users in India.
BAI agreed that it is highly volatile and speculative and said that, some hedge funds in US have made more than 4,000% returns from Bitcoins. One should not deal in Bitcoins unless they have proper knowledge of technology and mechanism of Bitcoins. Bitcoins can be misused to do illegal trade activities and money laundering just like cash is being misused but it is more traceable than money especially when traded through Bitcoin traders.
Recently, Bitcoin providers saw their services hacked. Replying to a Moneylife question online security risks for Bitcoins, the Alliance said “It is difficult (to hack). But Bitcoin system can be hacked while doing transactions. Owing to these risks Bitcoin users have to be careful while operating and protect password of their e-wallets.”
What is Bitcoin?
Earlier, Moneylife had covered Bitcoin in detail in a primer which can be accessed here, in which we argued that Bitcoins have taken the world by storm because of its peculiar nature in being unregulated and hence subverting rules and regulations world over, to which RBI had issued a notice. We had also written about its highly speculative nature.
While explaining Bitcoin mechanism BAI said that, after every four years production of new Bitcoins will be half of its production. During 2009, about 50 Bitcoins were generated in every 10 minutes, which came down to 25 Bitcoins per 10 minutes in 2013. They said that, Bitcoin mechanism gets more and more difficult as it creates new Bitcoins it can create maximum 21 million Bitcoins in next 126 years. After 126 years there will be no new production of Bitcoins. Hence, price discovery in Bitcoins is fair, supply is limited and demand is increasing which creates the appreciation in value of Bitcoins, BAI claimed.
BAI said that, Bitcoin is a cryptographic digital product which provides digital transaction system. The Bitcoins look like a currency or money but it is not. It sounds similar to security, derivative, negotiable instrument or pre-paid instrument but its not. However, worldwide it is known as virtual currency, even the official website of Bitcoin clearly states that it is digital money and pretty much like cash for the Internet.
BAI said trading of Bitcoins should be done through organised channels they are also willing to share all the information with regulators and government and they committed to develop further standard of openness and transparency in collaboration with the regulators.
You may like to read more stories on virtual currencies:
RBI warns against usage of Bitcoin and virtual currencies
The hard fact: those who consume 0-200 units would benefit by Rs170 per month at the most, or 25%. However, well-off household consuming 200-400 units are the real beneficiaries. They will enjoy upto 43% cut in their bill
Aam Aadmi Party (AAP) has delivered on its promise of reducing electricity rates by 50% within three days of assuming power in Delhi and made its implementation effective from 1 January 2014 for three months. Whereas in case of water, the route adopted by AAP was to cross-subsidize part of the population (read detailed analysis of impact of AAP’s water policy on different consumer classes here), in case of electricity, Delhi government has announced a budgetary subsidy to be paid to distribution companies (discoms) from Delhi exchequer as fixing power tariff comes under the purview of Delhi Electricity Regulatory Commission (DERC) and not the Delhi government. How does the subsidy affect the Aam Aadmi? It may surprise your to know that middle-class is a far bigger beneficiary of the power rate cut than the poorer sections.
Firstly, it has disappointed those who believed that reduction in electricity rates would be across-the-board and that it would be come from the discoms that are suspected to be fudging their accounts, even though AAP has also announced a move to begin audit of discom’s account books.
But the bigger question is as to how does this budgetary subsidy impact different consumer classes in Delhi? Is it a subsidy for the really poor or the middle class? Also, what impact it may have on discom’s finances and government exchequer? Is it a prudent decision or it adds more fire to a ticking time-bomb?
The metered slab-wise energy charge for domestic consumers without subsidy, with subsidy applicable before the new order and current subsidy after the new order is given below. We have not considered consumers in other categories as present subsidy is not applicable to them.
The difference between old and new subsidy is that whereas earlier the applicable subsidy in 0-200 units was not applicable if consumption went beyond 200 units, now, consumers within 400 units consumption level would get benefit of subsidy in both slabs. There is a fixed charge levied as per the sanctioned load which is given in Table 1.2 on which no subsidy is applicable
Additionally, there is an 8% surcharge (levied on metered slab-wise energy charge and fixed charge net of subsidy) and 5% Electricity Tax (levied on final amount). There is one more charge -- Power Purchase Adjustment Charge (PPAC) -- which has been discontinued from 31st July 2013.
So, how does it change the billing for consumers at different consumption points? Below is the table (Table 1.3) and graph (Graph 1.1) for comparison. Also, BSES companies claim a cost of Rs7.40 per unit for supplying power in Delhi, but more on this later.
What are the conclusions from these tables and graph?
Middle-class benefits more, not the poor
The question is: what kind of consumers consume up to 400 units of power in a month? Are they poor households or middle-class households, even assuming they are all Aam Admi? For an answer consider the table below (Table 1.4) of power consumption of different household appliances for a broadly representative household that may limit their consumption up to 400 units.
The purpose of this list is to indicate an approximate level of consumption. While care has been taken to source reliable wattage and consumption data, it should not be taken as precise depiction of consumption
Note that the list indicates that a household would be able to afford 1 AC of 1 Ton for cooling, geyser for heating water and yet limit their consumption within the 400-unit limit to gain from new subsidy regime. In our view, such consumption is possible for a middle-class household and is definitely not indicative of a poor household.
Our experience is that for four winter months in a year when air-conditioning is not required, middle-class households (who use more appliances like microwave oven, food processor, lot more lighting, washing machine, vacuum cleaners etc.) generally do not cross the 400-unit consumption threshold. It is a moot point whether such consumption pattern should be eligible for subsidy. Also, as per the ET report, this move is going to benefit ~80% of household with electricity connection. Again, it’s difficult to understand why the capital of India needs power subsidy for 80% of its population.
Due to middle-class activism, Delhi government had started providing subsidy from around April 2012 for 0-200 units slab and later announced it for 200-400 units slab as well. After the announcement of new tariff order by DERC for FY14, whereby rates were increased by 5%, such increase was made good to discoms by Delhi government by increasing quantum of subsidy (from Rs1 to Rs1.20 in Aug 2013) and therefore there was no impact in billed rates to consumers for consumption up to 400 units. Given this background and widespread support to AAP by middle-class, it is not surprising that Kejriwal has taken care of this constituency by bringing in new subsidy regime.
But what are the implications for this giveaway to the better-off middle-class at the macro level? That will be in the second part of the analysis
(Vivek Khaitan is an MBA from IIM Calcutta and is working as a management consultant for past five years in New Delhi)