Oil and Gas price crisis is not a new phenomenon; previous instances in 1970s and 1980s had resulted in skyrocketing of oil prices. But the issue is making headlines because of the scarcity of the resource, this means that such emergency will manifest later on too. The statistics does not support the preposition altogether though with better technology and expertise in the field of oil extraction and other conventional oil resources, the oil reserves have increased by 60% of what they were about two decades ago and the production of oil has gone up by 25% too. The current crisis can be attributed to the sudden emergence of the US, as its production to a half a century high. This has put pressure on the OPEC countries which house maximum of the world’s oil reserves. Since these questions their supremacy in the oil industry OPEC has not budged and reduced its production. This has created a competitive environment in the industry by achieving record low prices per barrels. Future Estimates put china as one of the biggest consumers of oil with an increase in demand by 9.4 million barrels per day by 2030. The regions with spurting refinery capacities are OPEC nations, India. US and China. This spells out an excellent opportunity for capacity augmentation as the consumption trends will increase in these regions especially Asia. Estimates also say that several fields in China are yet to reach their peak output.

The Company in focus here is not a part of the Major two geographies discussed above i.e. the US and the OPEC, Sinopec is a Chinese oil and gas company based in Beijing, it is a state owned company and in terms of the revenue generated, it is one of the largest oil companies in the world. Apart from oil and gas refining and exploration Sinopec is also into production and sales of petrochemicals, chemical fibres, chemical fertilizers, and other chemical products; storage and pipeline transportation of crude oil and natural gas; import, export and import/export agency business of crude oil, natural gas, refined oil products, petrochemicals, and other chemicals. Sinopec has made some good acquisition in Europe and Africa, specifically Africa (Angola, Nigeria, Cameroon, Egypt, Ethiopia, Sudan and Gabon).

The Chinese oil and Gas industry can be disrupted by some factors both internal and external.

Internal Factors:

• Brittle Politics: the Chinese Political Scenario is such that it has not opened it markets freely. The Government was slow to approve new IPO’s for promising start-ups. The financial system also inflated the bubble during the recent crisis as large sums of money were pumped into the market. The problem also arises with the inability to find investments with good returns which has started investment frenzies in various sectors, also the fact that when the markets do well the Medias project it as though it is the result of the financial measures taken by the government. Now that it‘s falling the regulators want to shore up the leaderships reputation.
• The Structure of the Markets: the communist government has never minced its words while describing the feeling of distrust for the market forces. Therefore, the markets have played a smaller role in China. The amount available for trading in Chinese markets is a third of the GDP, compared to 100% in developed countries. Hence a panicked response to the July crisis will only cast a doubt on the minds of the investors about the government’s stance over such crisis situations.

External Factors: Competition:

Even though the growth in capacity and refining capabilities is immense in China, OPEC countries still have the maximum reserves and have strength to control prices. The balance between returns on capital and host countries’ interests is a delicate matter. A number of countries, for political reasons, have limited the access of international companies, if China has to have a view of the bigger picture, it has to relax a lot of regulations. Also the emergence of US as a strong produces will also hamper China’s market. The current weakness in the oil market, which stems in large part from strong growth in tight oil production in the US, is likely to take several years to work through.

Conclusion:

The current scenario pegs china in a favourable position in the oil and gas industry against its contemporaries in Asia. The main competition will arise only from US and the OPEC. I feel, Sinopec with its current position is a favoured investment, as it has decent offshore projects as well the capability to build on the existing local demand.

Click here for government certification in Accounting, Banking & Finance

The post Oil and gas Crisis and what it means for today’s world appeared first on Vskills Blog.

“Death Valley Curve” is a jargon used in start-up financing referring to the period during the initial investment in a start-up when the firm is not generating sufficient revenues to meet the expenses, and could be paralyzed unless they raise more capital. In short, it is the financial risk faced by start-ups to survive the initial years of their business, and become profitable in the future.

The dip of the curve shows the negative values of the balance sheet. A new firm should always maintain focus on formulating strategies, so as to cross the valley of death, and to survive, in the future. One of the major reasons behind the sudden death of start-up firms, in the initial stages of the business, is the shortage of funds. The start-ups lose their sheen within a period of 3 years, mainly due to a flawed business model.

For e.g. Taggle was a ‘group buying’ e-commerce site launched in 2010 in India, with an initial funding of Rs 5 crores from international equity funds Greylock Partners and Battery Ventures. It couldn’t survive and was shut down after a period of 1 year. The reason attributed to the closure was the increasing cost of operation and an unsustainable business model. The concept of Death Valley is synonymous with a firm breaking even, where the firm is neither making a profit, nor a loss.

So, how can a company survive the phase of Valley of Death?

• Adequate Planning of Funds (Self-funding)

The entrepreneur should have clarity in his mind regarding the various expenses which would be incurred during the formative stages of the business. An entrepreneur should accumulate some funds from his side, which can act as a safety fund during emergencies. He should invest this safety fund in an appropriate risk less instrument outside the business, and earn returns on it.  This will help to mitigate the risk to a small extent.

• Alternative Source of Cash Flow

If a start-up entrepreneur is already having a job, it is advisable to hold on to the job, given that he can manage both at once, this would provide him with an alternative source of cash flow.

• Funds from Family and Friends

After Self-funding, the next viable option is family and friends. Venture Capitalists may be hesitant in investing further funds into the business. Family and Friends could be of major help during such turbulent times

• Crowd Funding

Crowd funding is an emerging area which is getting considerable attention. In India, sites such as catapooolt.com, kickstarter.com, etc. provide an opportunity, to solicit funds online. The most successful story of Crowd funding was the Kannada movie “Lucia”. The movie was funded by 100 investors and the director was able to raise Rs 51 lakhs in 10 days. Once the film starts earning profit, the investors will be getting returns on their investment.

• Bank finance

If a start-up firm has sufficient collateral to back the loan, this source could be used for a short time. While deciding to lend, banks will look at the feasibility of the business in terms of the business plan and the assets held by the business.

• Join a start-up incubator

A start-up incubator is a company, university, or other organization which provides equity funding to set up and nurture start-up firms, helping them to survive and grow during the start-up period when they are most vulnerable to risks of pre-mature closure.

• Joint venture with distributor or beneficiary

The start-up firm can join hands with an interested company such as a distributor or a supplier who would be willing to enter into long term contracts, and which would provide great opportunity to the supplier or distributor negotiate favorable price and terms. This provides stable funding to the business but also potentially provides foothold to parties who may attempt a buy out in the future. Such funding could lower the cost of goods sold or cost of providing services thereby improve profitability, pivotal in the early years of a start-up.

• Commit to a large customer

During the initial stages of the business, the company can enter into deals with a single large customer, depending upon the type of product, and could generate sufficient revenues. If the customer is impressed with the performance, could place more orders and a payment of advances. This could create dependence on small number of customers which also could threaten the business. The start-up would need to rapidly broad base the customer base soon after it breaks even.

Overcoming the valley of death shows the viability of the core business model and the ability to act to generate profits. It shows the true grit of the entrepreneur, who has the courage to take risks with a clear vision of his business. Overall, crossing the valley of death requires timely and robust planning around a fundamentally sound business model coupled with the ability to take and manage risks.

Click here for government certification in Accounting, Banking & Finance

The post Death Valley Curve – What it means for Start ups and how to avoid appeared first on Vskills Blog.

The recent stock market crash in China has reduced the value of Shanghai composite by 1/3rd of the value within a span of three weeks. Can this be considered as the bursting of a tech bubble? Also, what caused this bubble? Can this be compared with the tech bubble burst in 2000? The essence of this article is to elucidate the answers to these questions.
Was there a Stock Market bubble in China? Let us first examine whether the situations prevailing in the Chinese market exhibit the characteristics of a tech bubble. A tech bubble is characterized by very high levels of speculation in the stocks of a particular industry, where prices of these stocks rise beyond a threshold limit without any fundamental backing. When the bubble reaches its pinnacle, a sea of tech companies try to raise capital by way of IPOs in an attempt to ride on the speculative market interest. In this case, the Shanghai composite index rose in value by approximately 50 in the preceding year. On an average, stocks traded at an implausible 220 times their reported profits, making the dot com bubble look meek in comparison. During
the year 2000, technology companies showed a mean price earnings ratio of 156. In the past year, China witnessed a total of 147 tech IPOs; companies fetched as much as 1,871 times their offer price. With these facts, it can be concluded that there was indeed a technology bubble in China.
Comparison between Dow Jones and Shanghai composite: The Shanghai Composite is not completely representative of the Chinese economy, unlike Dow Jones, that aims to provide a fair representation of the US Economy. The portrayal of manufacturing companies in the Shanghai composite is minimal. Manufacturing firms in the country, are state owned and are not listed in stock market, as China is a communist economy. Hence the Shanghai composite’s value does not give a true depiction of the economy. Another key difference is that companies from all over the world can be listed in Dow Jones whereas even the stocks of companies from Hong Kong are not included in the Shanghai composite. The other difference was that the composition of the technology sector in Chinese equity market was less than the composition of U.S technology sector in Dow Jones during 2000s.Adding to these, is the fact that retail investors are the key contributors to the Shanghai markets whereas Institutional investors are the key contributors in other dominant markets.
Efforts by the Chinese government to boost the economy and the consequences: The slowdown of the Chinese economy is evident, seeing the fact that an economy which has posted double digit growths for years together is now growing at 7.5%. The Chinese Government sought to diversify so as to decrease the over dependence of the economy on manufacturing. The Chinese government being the biggest net importer of oil, made huge savings in the past year due to the oil glut. Chinese savings had increased but the domestic demand and other economic indicators had slowed down implying that the economy was entering a deflationary phase. In order to trigger growth in the real economy, the government owned banks reduced the interest rates to create a boom in realty sector. As a result, the common man in China, taking advantage of the lower interest rates, borrowed heavily and subsequently invested in the markets, predominantly in technology stocks. ‘A-Shares’ were initially available for trade only by citizens of China and were listed in stock exchanges in the main land of China. ‘H -shares’ were shares of Chinese companies listed in Hong Kong Exchange, which were denominated in Hong Kong Dollars and could be traded by anyone but had to abide by conditions put forth by Chinese regulators. Certain companies (86) were listed as both ‘A Shares’ and ‘H Shares’. There always existed a price differential between the two; however, arbitrage was not possible due to the restrictions. The rally in A-shares started in the third quarter of 2014 not only due to local investors’ expectations for policy easing but also a shift in investment appetite away from the slowing Chinese property market into equities. This had spill over effects in Hong Kong markets. In November 2014,the Shanghai-Hong Kong Stock Connect was launched which proved to be a great boost to market sentiment as an inflow of foreign funds into A-Shares were expected. However, it is noteworthy that this linkage only promised a daily quota based trade and not a free link. Theoretically, an arbitrage was expected until the price differential became zero hence creating expectation for fair valuations of all the stocks. But this did not happen due to structural limitations. On the contrary, the premium of A Shares over H shares went up to as much as 130. In 2006-07, when a similar bubble was building in the main land stock markets, economic tightening was enforced, but in the recent case, due to the fear of recession, further monetary easing ensued leading to added inflation of the bubble.

Profile of the investors: In the past five years nearly 80% of the market turnover could be attributed to retail investors. This rocketed to 90% this year after 4-million new accounts were opened in March, bringing the total to 182-million.A recent survey showed that a shocking 67% of the investors were not even high school graduates. Unlike the Wall Street, most of the investors who inflated the Chinese bubble were novice investors- house wives, farmers and workmen who actually borrowed to invest in markets. Clearly they were speculators who had minimal understanding and only just ensured that it was a technology stock before investing. Marginal Financing: The stock market bubble was mainly fueled by easy availability of credit. In the past year, USD 339 million worth marginal financing was done (Marginal financing as a percentage of market capitalization in the main land China Stock Exchanges and NYSE is approximately same). However, the worrisome factor is that the amount of marginal financing taken had almost doubled in a year. However, it is important to note that there is a minimum threshold on the amount that can be borrowed from these brokerages and this also offered some scope for regulation. The most precarious trend was set when peer to peer online lending portals started blooming-these portals did not have a minimum threshold limit on borrowing and hence invited retail investors from the economically weaker strata to speculate. However, the annualized interest rates these online lending portals were charging were a whopping 22%. This offered extremely high leverage but what the retail investors failed to see was that it was a double edged sword and could result in extremely high losses if the returns on the stocks they invested fell. Magnitude of devastation caused by the bubble burst: It is estimated that when the markets fell, the investors lost money equivalent to 1.2% of China’s GDP. This is greater than the ‘combined’ value of losses that investors incurred during the 2000 dot com bubble burst and the 2008 financial crisis.

Click here for government certification in Accounting, Banking & Finance

The post Why did the Chinese Stock Market Crash.. appeared first on Vskills Blog.

A lot of talk has been going on about US interest rates. Let’s begin by understanding the crux of the situation that is what has happened and why is it is happening. Interests rates are charged on any borrowings made and are generally represented as a percentage of the loan. In order to ensure price stability in an economy a country’s central bank performs the duty of setting base interest rates and other lenders peg their interest rates to those set by the central government.

The United States follows Federal system of government in which power is shared between central (referred to as Federal) and State Governments. The Feds are contemplating on increasing their interest rate for the first time in 9 years where the last interest rate was raised in the year 2006. The US Fed’s interest rate has been almost zero for years and now an increase is expected. One of the reasons as to why the Feds are intended towards raising the interest rates is that there has been an increase in unemployment in US and the total unemployment percentage has fallen to 5.1% in the month of August 2015. The second reason being the dip in the inflation rate by 0.1% can prove to be fatal in future. So in order to keep a check on both the unemployment prevailing in the country as well as declining inflation rates the US feds have to monitor them with the help of interest rates. However, the recent scenarios which is happening in China that is the stock market plunge as well as devaluation of currency added to the overall health of the economy has made US to wait a little longer to change the rates.

Now let’s look at the impact of the increase in Interest rate in India. There are possibilities that in a few days India would be cutting its rate by 0.25% and US raising theirs by .25%. As mentioned before the current interest rate at USA is almost zero and a rise from .1% to .25% implies the new rate is more than double the old rate. Invariably after three months it would further increase by 0.25% after three months and led to further doubling. The price of bonds is inversely related to interest rates. It means that bond prices can crash up to 50% every time the interest rate is going to double. This implies a 0.25% hike in the US can critically matter. Apart from nearly zero rates in the US, those investors who save in Switzerland, Germany and Japan would be forced to leave their home markets and plunge into riskier countries like China and India.

In case the Fed decides to raise interest and reach up to 2%, then there are possibilities that trillions of dollars could flow back to the US from all developing markets which would lead to Indian Stock market to crash down. It is observed that in the previous month when rumours spread about the interest rate hike has caused turmoil in the emerging markets. So, an increase in interest in US rates of 0.25 % can set off a series of events.

Analyzing the change in interest rate in India in depth we can see that many US companies borrow at 2 % today, so an raise of 0.25% implies a substantial rise of 1/8^th overall. However the leading Indian companies borrow either between the ranges 8-9% or 12-14%, so this increase doesn’t make much difference to these borrowers. On the other hand smaller companies have very little or no formal banks backing them and it’s the RBI which finalizes decisions on the interest rates. From the total costs on average costs for companies, interest costs account to merely 3% and the fact is the domestic business are affected more by global conditions and fiscal conditions rather than interest rates.

So the question in mind is that does this change in interest rate make much of a difference to India? There has been so much hype about the interest rate by the media which is made to highlight the annual budget coverage. Also the media pertaining to financial media only cater to those in the bond markets like banks and traders. This small change in the interest rate would matter to EMI’s of interest loans charged for cars and houses of middle class section of the society.

Click here for government certification in Accounting, Banking & Finance

The post US Financial Crisis appeared first on Vskills Blog.

After a long day’s hard work under the scorching heat of Dubai, the least expectation by an Indian construction worker would be to donate a part of his pay to a bank. This is the ugly truth today, where migrant workers namely from India and Philippines are losing their money remitted to their countries because they are reduced by foreign exchange margins and fees. An estimate by World Bank is that total flows to developing countries would be worth around $400 billion which is double as that of foreign.

Remitting money has proved to be a costly affair. A report in 2009 the G8, a club dealing with rich governments has promised to cut the global average cost of sending funds from 10% to 5% over the years. Sadly we haven’t reached there yet as the average stands still at 7.7% currently. The value hasn’t improved in spite of rivals to giant money-transfer outfits such as MoneyGram and West cash. Meanwhile Africa has adopted a smart method by using “mobile money” to transfer money from one person to another through mobile phones. The advantage of using mobile money is that domestic transactions are virtually free.

An expert view has been taken in from Mr. Dilip Ratha who is from the World Bank. According to Mr. Ratha, the entire fault lies within banks who sign exclusive agreements and with other companies who are involved in handling these remittances. These companies in order to reduce competition tend to keep charges high and India has made sure it bans such tie-ups; however they are still present in Africa. In 2014 the Overseas Development Institute, a think-tank, has forecasted that the average money to Africa could be reduced by 5%, it would mean $1.8 billion more for them every year. In spite of this Mr. Ratha is highly optimistic. There is competition rising against banks and other money transfers firms are coming up, especially in London. With raise in Venture capital, they claim they can use technology to cut costs. Transfer Wise one of the transfer companies began as peert-to-peer foreign exchange service for the rich is now the quickest growing firms in India and soon would be transferring to Mexico.

To circulate money abroad is easy but the hard part is ensuring this money reaches spouses and parents in poor countries, who may not have access to bank accounts. Money transfers such as MoneyGram and Western Union have hundreds and thousands of agents and so enjoy a colossal advantage in the cash market. Mobile money also seems to coming up with World Remit an online transfer service. Though technology has given a boost to competition it is the regulation that is causing all the issues. Cross border transactions are considered highly risky as they are prone to money laundering and terrorism. The price of following rules is high, and punishment for breaching them is very stringent. Taking Western as an example, where they agreed to not less than 73 changes to its procedures and settlement in 2010 of claims in America where it had been charged for money laundering. Precautions have been taken where they even do background checking on their agents as well as have adapted new software to scan for any suspicious transactions.

To avoid red tape and exorbitant fines, banks have now withdrawn from certain markets. This has resulted in lesser competition and prices higher than they would otherwise be. Countries like Somalia is the worst effected as they are most dependent on Remittances. When it becomes difficult and costly to send money through legal sources, money starts to flow illegitimately. Money is dumped into suitcases or sent through informal middlemen. This completely vanishes the paper trails and makes it difficult to track this money.

For caution on these costly remittances and to ease the frictions related to remittances two actions would have to be taken. One would be that rich countries will have to tighten their regulations on money laundering with assistance from organisations such as Financial Action Task Force which is an inter-government body. Banks have to be warned that they comply to proper procedures during transfers such as checking wire-transfer information against lists of suspected terrorists and criminals. The second approach is intended towards those countries receiving the remittances. These countries would have to ensure safe transfer of the money with the help of national identity systems and tracking mobile accounts.

Click here for government certification in Accounting, Banking & Finance

The post Remittance – The high transaction costs appeared first on Vskills Blog.

Countries which are connected globally have a contagion effect, so if one market falls on the trap, the other market has the odds of falling on same track. Does Greece crisis show evidence for this? Greece has just got its third bailout and it is one of the trading partners of India, will that have any implications on the Indian economy?

Though India’s exports to Greece form a meagre $381mn (0.14% of total exports), India’s trade with EU is significantly high, where the leading countries are UK, Germany and Switzerland. Current scenario in FX market shows that, the Euro stands at a risk of high volatility and likelihood of Euro to depreciate against dollar are high. As India’s major trading partner is EU, it will hit India’s exports (esp., software and engineering exports) negatively, since India ought to receive fewer Euros in exchange to rupee for its exports which stand at $56.9 bn to European countries.

The world financial markets operate on the basis of certain conservatism, where; if one market falls, institutional investors tend to withdraw their investments from developing markets to safe guard their money. Greece is a part of EU, to whom the exports from India is around 40% of its total exports and this association with troubling European economy makes India look more vulnerable. But the aforementioned scenario will occur only when the Greece crisis trigger other struggling European nations like Spain and Italy to follow the queue of Greece and worsen the situation in EU. The resulting EU crisis will increase the volatility of Indian capital market due to flight of foreign investment which in turn affects the rupee.

Situations like these push the prices of bond market higher and it will lead to higher borrowing costs. Higher borrowing costs would lead to higher amount paid for imports, which will in turn lead to inflation. Apart from Greece crisis, country’s domestic factors will determine the market outlook in long term though market shock prevails.  India cannot afford external factors contributing towards worsening the business outlook. It is indeed heartening that the government had sensed the challenges as early as in 2012 and had decided to cut down its exports to EU and channelled the same towards developing economies. Though the earnings will not be as high as those in developed economies, there is at least greater amount of guarantee in terms of investment being safe.

The best reference to this situation can be when the Indian rupee came to a 13 month low of Rs.63.59 against USD when Russian central bank hiked their interest rate from 10.5% to 17% to attract foreign funds  and Sensex slumped 583 points (Dec’17,2014) and it was not entirely driven by domestic factors. Though falling oil prices caused it, India had to bear the brunt. The above mentioned situation might trigger currency risk pulling all the economies to suffer. After struggling for a long time to put India on track by containing Inflation target, stabilising rupee, servicing the CAD through favourable oil prices, any impact from Greece crisis will give tough time for India to bounce back.

The situation though is unfavourable; India can still capitalize on the opportunity.  The value and demand for dollar will probably increase against euro and USD appreciation could make Janet Yellen, Chair of the Federal Reserve to rethink about interest rate hike. It will lead to favourable market scenario for India and other developing economies. Indian markets tumbled intraday but closed in green signal which shows that it was just a knee-jerk reaction and the Indian economy will not be impacted for a long period of time, since it has been safeguarded by diverting the exports to UAE, Asian and African economies. Hence, short term volatility is only due to panic prevailed due to Greece bailout and Indian economy is determined mainly by domestic factors like interest rates, inflation, trade etc.  It can be concluded that, though the Greece crisis does pose an indirect threat to export earnings and currency depreciation, India is well prepared with adequate foreign exchange reserves of $353.648bn. Greece crisis shall persist. But shall not be a major threat to the growth of India.

Click here for government certification in Accounting, Banking & Finance

The post GREECE CRISIS- What does it mean for India ? appeared first on Vskills Blog.