Financials

The PEG Ratio or Price Earnings to Growth Ratio determines a stock’s value while considering future earnings growth. Like the P/E Ratio, the PEG Ratio is used to get a better understanding of whether a company’s stock is overpriced, underpriced or right (priced). The PEG Ratio uses the P/E Ratio of a company and compares it with that company’s annual growth rate. If a company’s stock is priced, then its P/E Ratio should equal its annual growth rate. PEG Ratio is calculated as   = PE Ratio / Expected Earnings Growth (%) The P/E Ratio is the ‘Price to Earnings’ Ratio’ The expected earnings growth will be in percentage form and is available from the company’s annual report. A PEG ratio of 1 suggests equilibrium between market value of stock and anticipated earnings. It means that the stock is priced, and current market price (numerator) justifies the anticipated growth rate (denominator). For Example: A company stock has a P/E of twenty. Analysts feel that the stock has anticipated earnings growth of 12% over the next five years. PEG Ratio =  20 / 12 =  1.66                               Here, stock prices are higher than its earnings growth. This means that market price is higher compared to anticipated earnings growth. This can be attributed to ‘hype’ or undue enthusiasm in the market for that stock. To keep up with the market hype, the company will now have to grow faster. This means that if the company does not grow at a faster rate, the stock price will decrease (stock price correction will occur as hype will die down). Another example… Another company’s stock has a P/E of thirty. Analysts feel that the stock has an anticipated earnings growth of 40% over the next five years. PEG Ratio =  30 / 40 =  0.75 Here, stock prices are lower than its earnings growth. This means that market price is lower compared to anticipated earnings growth. This tells us that the company’s stock is undervalued. Stocks are trading in line with the growth rate and the stock price has potential to increase in future. Some thumb rules… PEG Ratio greater than 1 means:- The market’s expectation of growth is higher than analysts’ estimates. The stock is currently overvalued due to heightened demand for shares (investor hype). PEG Ratio less than 1 means:- Markets are underestimating the projected growth, and the stock is thus undervalued (a contra pick). Analysts’ estimates of future earnings growth are currently set too high. Advantages of PEG Ratio… Investors prefer PEG because it puts a definite value in relation to the expected growth in earnings of a company. PEG ratio can offer a suggestion of whether a company’s high P/E ratio reflects an excessively high stock price or reflects promising growth prospects for the company. Disadvantages of PEG Ratio… Less appropriate for measuring companies without high growth. Large well-established companies, for instance, may offer dependable dividend income but little opportunity for growth. A company’s growth rate is an estimate and is subject to limitations of projecting future events i.e., in this case estimated growth rate is only an estimate based on past trends.  

Let’s assume you suddenly have a guest at home and you are running short of milk to prepare tea. In such a scenario you will have no option but to borrow some from your neighbors, which you can replace later. Likewise, external means non-Indian / foreign source, commercial would mean engaged in commerce and borrowing means acquire temporarily with a promise to return along with interest. The concept of this strange sounding term is just as simple. ECB has become a major source  for raising money by large Indian companies in recent years. In comparison with India, interest rates are a lot lower abroad. Therefore, this is the single biggest incentive for companies raising money from overseas. For example, even if a company borrows in the international market at 4% for one year; the cost of borrowing for a similar tenor may be close to 10% in the domestic market. Companies in India are allowed to borrow from overseas, under certain conditions, through different instruments, with a minimum average maturity of 3 years. The main objective is to provide companies with an option of low-cost capital. However, it is not that ECB is always beneficial to a company and the country and does not carry any risk. There is a definite risk involved. The depreciation of the rupee is the biggest hurdle to this kind of borrowing. Let’s assume, I have borrowed $100 at 4% and converted it into rupees at Rs.85/- per dollar. Now effectively I have borrowed Rs.8,500/- at 4%. Under normal circumstances, I will have to pay $104 after a year. So, if the currency were to remain stable, I would have added the interest amount (4% of Rs.8,500/- which is Rs.340/-) to the principal to make it Rs. 8,840 and buy US dollars at the rate of Rs.85/- per dollar.  This would fetch me Rs. 8,840/-/Rs.85/- = $104. So far this makes complete business sense. Isn’t it? But what if the rupee depreciates to Rs.100/-? As far as the overseas party is concerned the liability of the Indian company is clearly $104. At $1 = Rs.100/-, Rs.8,840/- would only fetch me Rs.8,840/-/ Rs.100/- = $88.40. There is thus a shortfall of $15.60 ($104 – $88.40). Now, the cost of buying additional $15.60 at Rs.100 per dollar turns out to ($15.60 x Rs.100) = Rs.1,560/-. Thus, the interest which was planned as Rs.340 turns out to be (Rs.340/- + Rs.1,560/-) Rs.1,900/-. Now if you were to calculate the rate of interest the business enterprise in India lands up paying turns out to be (Rs. 1,560 / Rs.8,500) x 100% which works out as 18.35% which is much more than the 10% interest rates prevailing in the local market. Thus, in this case the borrower would surely feel short changed. The opposite will be the scenario incase rupee appreciates against the dollar.

Most of us work for a living. But what do we do to the income that we earn? Many of us simply keep the money in the form of cash. Did you know that just by keeping money as cash at home we are not helping our economy? Sounds confusing? Let us say there is a community of people living in a particular area. Let us also assume that these people have their houses around a huge piece of barren land. So, in a sense their houses run around the periphery of the barren land. Now Most of these people love their homes. They all have flowerpots in their homes which they water without fail. They also love to keep their floors clean and wash them daily. But They never bother to walk out of their homes and water the barren land nearby. So, the field continues to be barren and of no use to anyone. Then one day a wise man comes to town. The people of the town look to him for solutions to their day-to-day problems. He tells them “Just water the barren land daily.” Most people are amused by this strange recommendation. How would watering the barren land help them. Nevertheless, from the very next day the people make it a point to water the barren land. They do this daily. Slowly as time goes by, the people see plants grow on the barren land. Over time these plants grow and become trees. They bear fruits and vegetables in exceptionally large quantities. The people not only consume the fruits and vegetables but also sell the produce in the market and earn from it. The wise man revisits them. He finds out that all the residents are extremely happy. They tell him that not only are they enjoying the fruits from the garden but are also earning from the same. The wise man tells them that the field at the center of their houses was like the economy of the country and the water that was provided was like the money in our pockets. Just as the regular watering of the barren land converted it into a garden full of fruits and vegetables in the same manner regular investments in the economy provides the money needed by the economy for creating wealth. Thus, the wise man successfully convinces the residents that they should not save money as cash or near cash but instead invest the same in stocks, mutual funds, bonds etc. for the sake of creating wealth for themselves as well as the nation.

We have often heard our parents or grandparents saying that they used to manage the entire house for one hundred rupees a month in “those days.” We usually smirk and say “Gone are those days. Today we cannot even have one full meal in one hundred rupees.” Blame it on inflation. Inflation erodes the purchasing power of money such that Rs.100/- today is no longer Rs.100/- tomorrow. We understand inflation, but what does imported inflation mean? When the general price level rises in a country because of the rise in prices of imported commodities, inflation is termed as imported. No country in the world is self-sufficient by itself. Each country depends on other countries for goods and services which are not produced domestically. For Instance, India imports about three quarters of its total crude oil consumption. Therefore, if oil prices go up in the international market, inflation in India will also go up due to higher prices of the petroleum products. However, it is not necessary that only rise in the price of a traded commodity in the international market fuels imported inflation. Inflation may also rise because of depreciation of the domestic currency. For example, if the rupee depreciates by 15% against the US dollar in a particular period, the landed rupee cost of oil will also go up by a similar proportion and will affect the price and inflation numbers. Let us consider an example. Suppose we import Petrol at $100 a unit. And the exchange rate is Rs.85/- per dollar. This means we need Rs.8,500/- to first buy $100, and then pay for the Petrol purchase of one unit. Therefore, the price of Petrol depends on two factors: Price of Petrol (in dollar terms) Price of the dollar As explained above, price of petrol in India is directly proportional to the price of petrol in dollars, but also is impacted by the price of the dollar. Let us understand how. Suppose the price of the dollar goes up to Rs.100/- per dollar. This means that we will have to cough up Rs.10,000/- to buy $100 for the purchase of one unit of Petrol. So, even though the price of Petrol continues to be stable in the international market at $100, the price of Petrol in India goes up from Rs.8,500/- per unit to Rs.10,000/- per unit. So, while there is 0% increase in the price of petrol in the international market, the price of petrol in India increases by approx. 11.76%. Therefore, one often reads that the devaluation of the rupee will bring in imported inflation.

These days, the world over, governments are borrowing more and more money from the market. You may have wondered how governments always manage to create a mountain of debt for themselves. But ever wondered how governments ultimately repay their debts? There are several ways by which a government actually repays its debts. Well, borrowing money is obviously not a problem for any government. After all, a government’s promise to repay does not require any collateral. But we need to understand a little bit about how governments manage their finances first before moving on to the repayment of their debts. To start with… Just like individuals, a government has to constantly balance income and expenditure. Governments have only limited sources of income, which look like peanuts when we look at the mountain of expenditure. So, before planning anything, the government does need to find some extra money. But where is this extra money going to come from? Now… Although default by a government is not common, we can’t say that it is completely improbable. Sometimes governments too default in the repayment of their debts. But you would hear about a government defaulting only in extreme situations. By & large, the track record of governments repaying debts appears as clean as a whistle. There are several ways by which a government actually repays its debts… First and foremost… For actually repaying its debt, a government needs to develop a fiscal surplus that can be used to buy back existing government securities. A fiscal surplus can arise only if the government’s income exceeds its expenditure. To make that happen, a government would need to improve its income and reduce its expenses. Unfortunately, there is no fixed formula of how to reduce expenses, but when it comes to improving income, all governments have to use their famous weapon: taxes. Here’s how… But taxes in themselves may not be enough to repay all debts. Taxes are very helpful in meeting the yearly payments of interest, but to actually retire the mountain of debts, the government may need to think of other strategies. What other strategies can the government follow? The government can use public sector companies to its advantage. This can be done in two ways. First option: The government can choose to keep the public sector companies with itself and use their yearly dividends to repay debts. This will produce slow but steady results. Every year, a part of the debt would get repaid, provided the government is not planning to use dividends for any other purpose. Otherwise… Second option: The government can choose to divest its holding in public sector companies at the best available opportunity and use the proceeds for repayment of debts. Disinvestment produces immediate results. A mountain of money received from disinvestment can be used to retire a mountain of debt in one shot. Most governments around the world that are now putting their money to bail out private enterprises expect to repay their debt by profitably divesting their holdings when the right time comes. But what if nothing works? When nothing works, governments can resort to their least popular choice: Borrow money to repay existing debt. But that’s not all. When borrowing becomes difficult, governments may even resort to printing notes. Such a course of action may lead to hyperinflation, which indicates that the government has gone bankrupt. So even if you get your money back, it is a worthless piece of paper. Luckily, we have many sensible central banks to prevent things from coming to such a pass. To Sum Up What: Governments repay their debts in several ways. When: To actually repay its debt, a government needs to develop a fiscal surplus, but sometimes that may not be possible. How: Taxes, Public Sector Companies & borrowing programmes may be used. In the worst case, a government may resort to printing more notes to repay existing debt.

UDGAM – Unclaimed Deposits Gateway to Access Information This portal has been developed by RBI for use by members of the public to facilitate and make it easier for them to search their unclaimed deposits across multiple banks in one place. The establishment of the web portal would make it easier for consumers to locate their unclaimed deposits and accounts, giving them the option to either make their deposit accounts active or collect the deposit amount. Users will have access to information about their unclaimed deposits for the seven banks already included on the portal thanks to UDGAM. Any deposits in a savings, current, or fixed deposit are categorized as “Unclaimed Deposits” if they haven’t been used for 10 years. Unclaimed deposits are defined as “balances in savings/current accounts that are not operated for 10 years. term deposits that are not claimed within 10 years of the maturity date. Bank’s transfer these funds to the Reserve Bank of India’s Depositor Education and Awareness (DEA) Fund. Bank depositors have the right to reclaim unclaimed funds from the bank where they were held, including any accrued interest, even after the funds are transferred to the DEA. The RBI observed that despite efforts to increase public awareness in a statement from July 2022 that the number of unclaimed deposits was rising. However, despite periodic public awareness initiatives by banks and the RBI, the number of Unclaimed deposits is showing a growing trend. List of banks available on centralised web portal for unclaimed deposits 1. State Bank of India 2. Punjab National Bank 3. Central Bank of India 4. Dhanlaxmi Bank Ltd. 5. South Indian Bank Ltd. 6. DBS Bank India Ltd. 7. Citibank The search feature for the remaining banks on the portal would be rolled in by October 15, 2023.

Understanding the Relationship between Devaluation, Beggar Thy Neighbor and Currency War. Let’s say an American wants to buy Indian products. Indian products can only be bought by paying in Indian rupees. This means that the American cannot buy the Indian product unless and until he buys Indian rupees. Therefore, if the Indian government reduces the value of the rupee, the American can get more Indian rupees for every US dollar. Let’s say earlier he would get Rs. 70 for every US dollar but after devaluation he gets Rs. 80 for every US dollar. This means that after devaluation the American for 1$ can now buy a product for Rs. 70 and another for Rs. 10 whereas before the devaluation he was in a position to only buy one product of Rs. 70. So clearly the buying capacity of a US dollar increases because of rupee devaluation. Thus, for the American the product which was costing $1 previously would now be available to him at less than $1. To understand how many dollars it would now cost him, let’s look at the following: If Rs. 80 = $1 Then Rs. 70 = $? The above equation means that Rs. 1 is 1/80th part of a dollar in value. Hence Rs. 50 would be $(70 x 1/80) And this works to $ 7/8 = $.87 From the previous explanation one thing that gets clear is the fact that whenever a country devalues its currency, its exports get cheaper and attractive. And when this happens, there is a possibility that America (as in this case where our example talks about America and India) would prefer buying products from India than let’s say its neighbors (who have not devalued their currency). This policy of devaluing currency is also known as “Beggar Thy Neighbor” because it has the potential of harming the economy of neighboring countries by making their exports less attractive and causing a reduction in their exports. This in a sense sets up a sort of war between two countries for a higher export market share. This war is known as “Currency War”.

Let me tell you a story of 2 brothers Karan and Arjun both of whom were educated and did well in their jobs respectively. However, two years back Karan lost his job. Suddenly, his world changed. He had to start making compromises in his day-to-day life. He was also considering discontinuing the education of his children. But fortunately, Arjun came to his rescue. He agreed to share his salary so that Karan’s life did not get disrupted. Therefore, Arjun had to postpone many of his plans such as purchasing a car for his family. For the next 6 months Karan got financial support from Arjun and managed to keep his problems at bay. However, after 6 difficult months Karan finally got a job and his cash flow situation improved significantly. Hence, his need for assistance also reduced. Hence, Arjun decided to discontinue the financial support to Karan. Having discontinued this financial support Arjun was in a good position to fulfill his plans of purchasing the car for this family. The financial support that Arjun provided Karan was like the fiscal stimulus that governments /central banks provided to industry during the financial crisis whereas his decision to discontinue the support once Karan’s position improved is nothing but the financial consolidation of Karan’s account. So, when we talk of financial consolidation what is meant is that because the Indian economy is back on track, a time has come to withdraw the fiscal support that was provided during the Covid-19 meltdown in 2020 so that the money could be put to better use from the economy.

The RBI has defined Capital Account Convertibility (CAC) as the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange without any sort of intermediation and regulation. So, what is its use? It is intended for local merchants to easily conduct trans-national business freely without any regulation or control. In case a currency is fully capital account convertible, then anybody from anywhere in the world can invest in any asset in that currency. Thus, a US citizen could buy a flat in India, allow it to appreciate and sell the same and take his contribution as well as the profits out of India to the US freely. Since this is not allowed in India and the government has its own rules and policies to regulate foreign investments, we say that India does not have full CAC. However, a word of warning… CAC also allows the people and companies not only to convert one currency to another, but also free cross-border movement of those currencies, without the interventions of the law of the country concerned. Thus, Indians could convert their rupees into dollars and park it in the US if there was capital account convertibility here. Imagine if a large number of Indians were to do this out of an irrational fear that India might go to war with Pakistan! What would happen then? This would lead to an irrational demand for dollar and would cause a free fall in the value of the Indian Rupee, thereby detrimentally affecting the economy. Something like this happened in the Asian crisis in Thailand where the citizens lost confidence in the Thai Baht leading to a mass sale of the currency and subsequent collapse of the same. This happened because their currency was fully capital account convertible. So, when can India expect to have full Capital Account Convertibility? For full CAC, the economy should be extremely stable so that its citizens are never made to feel insecure about their economy and drive them into irrationally converting their currencies and investing them abroad. Under the Tarapore Committee recommendations, this was possible only when the following conditions were satisfied: The average rate of inflation should vary between 3% to 5% during the debt-servicing time. Decreasing the gross fiscal deficit to the GDP ratio by 3.5% in 1999-2000. Convertible Account Convertibility in India is regulated as follows… All types of liquid capital assets must be able to be feely exchanged, between any two nations, with standardized exchange rates. The amounts must be a significant amount (in excess of $500,000). Capital inflows should be invested in semi-liquid assets, to prevent churning and excessive outflow. Institutional investors should not use CAC to manipulate fiscal policy or exchange rates. Excessive inflows and outflows should be buffered by national banks to provide collateral. In India… According to the RBI, as the Indian rupee is not fully convertible, it is not possible to go in for dual listing of shares which allows people to buy shares in the stock exchanges of one country and sell in the bourses of another country. Why? Because under dual listing, an African citizen could buy the stock in Africa and sell it in India, collect the rupees, convert it into ‘Rand’ and take them into the African economy – all this without any controls, permissions and regulations. This unhindered capital flow is not currently favored by the Indian Govt. To Sum Up What: Capital Account Convertibility is concerned about the ownership changes in domestic or foreign financial assets and liabilities. Why: This is so that local merchants can easily conduct trans-national business without falling short of foreign currency exchanges to handle small transactions. How: It allows people and companies not only to convert one currency to the other, but also free cross-border movement of those currencies, without the interventions of the law of the country concerned.

The government of India has launched a new app known as Mera Bin Mera Adhikaar, an app which can be used on both Android as well as iOS-based devices. This scheme is to get towards creating awareness about the importance of receiving invoices for B to C transactions Fostering a more transparent economy. Under this scheme, consumers are offered incentive to demand bills for their purchases. This price varies from 10,000 Rs to one crore rupees. These prices will be awarded through monthly and quarterly draws, encouraging the individuals to win substantial cash rewards by simply requesting legitimate invoices during the transactions. The minimum purchase value for an invoice to be considered for lucky draw is rupees 200 and a person can upload maximum 25 invoices in a month. The invoice uploaded on the app should have GSTIN of the seller, invoice number, amount paid and tax amount. Only B to C invoices is acceptable, which are issued or received by an end user B2B bills are not acceptable. This game is open to all the invoices issued by the suppliers registered under the goods and service tax. Consumers from the initial batch of six states and Union territories like Assam, Gujarat, Haryana Puducherry Daman & Diu and Dadra and Nagar Haveli are the first beneficiaries for this innovative program.