Caselets in Macroeconomics

Caselet I- Rupee depreciation and textile industry

The recent rupee depreciation has enabled the Indian textile industry to hold yarn prices and also increase yarn exports.  Though Indian industry demonstrates stronger backward linkages, low labour costs have enabled countries like Bangladesh, Pakistan and Vietnam to overtake India in terms of capturing textile export markets.  With Chinese Yuan appreciating, Indian exports have become more competitive. Indian textile export share is marginal ( 5% as compared to China’s 30%). Many analysts advocate leveraging the current scenario to capture the global market at the expense of China.  As a CEO of leading textile manufacturer, you are planning to go in for capacity expansion. Capacity expansion necessitates funding and thus you approach a consortium of banks. Prepare the detailed projections convincing the bankers how the global economic trends portray well for Indian textile exporters.

(Note: Use financial statements showing the projected increase in exports and also how rupee depreciation results in increased profits to convince the bankers)

Caselet II- Government policy and Aluminium industry

India is fifth largest alumina producer in the world and accounts for 5% of the world’s aluminum production. Moreover, Indian bauxite reserves, account for 7.5% of total bauxite reserves. In India, the industries that require aluminum mostly include power (44%), consumer durables, transportation (10-12%), construction and packaging (17%). Yet, the per- capita consumption is low compared other major economies and usage patterns also differs from major economies. In the leading economies, aluminum is used in transportation particularly building aircrafts. Rising costs (power costs) and uncertainty in global demand has resulted in lower prices ($2300-$2400 per tone) in 2011. Domestic demand has slowed down to around 9% in the last five years and will hover around 8-9% in the next five years. Production however has increased by 11% CAGR. Though prices are likely to recover, the increasing prices of raw materials and power are likely to keep the pressures subdued. As a representative of the aluminum industry, make a representation to the government about the budgetary expectations in FY2012-13.  Build scenarios on tax proposals and their impact on domestic industry profitability.

(Note: Use financial statements to build scenarios on tax rate changes impacting profitability. Tax changes for end users can also impact your industry)

Caselet III- Inflation and retail industry

As the festive season approached, retail industry CFOs and CEO’s were keeping their fingers crossed. High inflation combined with high interest rates seemed to have dampened the enthusiasm of the consumers to spend. Traditionally the period starting from Dusherra to Diwali was considered auspicious in India and consumer spending usually grew at 20-25% during this period. However, in 2011, the spending was projected to be less than 10%. As a CFO of leading retail chain, analyse the impact of inflationary pressures in the economy on the retail industry in terms of its sales and profitability.

(Note: Need to build a financial statement for the industry showing the projected figures in the normal and the projected figures in the current period. Reasons for variations have to be clearly explained)

Caselet IV- Interest rates and automobile industry

Automobile industry usually moves along with a business cycle. In the US for examples, the average period for holding a car is 6.5 years. An increase in the average period by one year leads to a drop of 15%  in terms of car sales. In India, automobile purchases are financed by interest rates. Interest rates increase the cost of borrowing and households postpone the purchase of cars. Sales growth in 2011 slowed to just 4.3%, compared with a stellar 31% in the previous 12 months. Further the overall growth through to March 2012 is projected to be 2-4% only.  However, in positive feelers, with RBI likely to cut rates or at least unlikely to increase, car sales may show up. As a automobile analyst, prepare the projections for the auto industry in 2012-13 based on the likely interest rate scenarios.

(Note: Need to build a financial statement for the industry showing the projected figures using interest rate changes and consequent impact on the industry. Reasons for variations have to be clearly explained)

Caselet V- US fiscal policy and Indian ITES industry

Recently, President Obama proposed the withdrawal of tax breaks for industries that ship jobs abroad. Implied in the proposal was a coaxed warning to US industry not to outsource to countries like India. This has the potential for upsetting over $60 billion IT export industry in India. However, leading research firms like Gartner and key analysts have ruled out any impact on the Indian IT industry. You have approached a venture capitalist for financing an opening of KPO. He is reluctant given the Obama proposals. Convince him your financials would see minimal impact of the US fiscal proposals.

(Note: Use financial statements to back up your claim. Show the impact scenarios both when tax breaks do not get withdrawn and when tax breaks get withdrawn)

Caselet VI- Consumer durable industry and IIP trends

Index of Industrial Production (IIP) has seen negative growth (-5.1%) in October 2011. Capital goods and manufacturing sector were the worst affected. But home appliances industry is made of many small-ticket items (kitchen appliances, low-end models in washing machines, air-coolers, and so on) too, where financing doesn't play a major role in a consumer's purchase decision. To analysts, less than 10 per cent of the home appliance industry's sales happen via the financing route. The Board of Directors of a lead home appliances manufacturer, however, were concerned about the downtrend  impacting the firm. Add to it is high interest rate regime. As a Chief Economist of the firm you have to make a presentation before the BoD about the implications of this fall in IIP. Convince them about how consumer durable industry starts recovering before the other sectors do and how the worst is over. Use financial statements to prove your point that their fears are unfounded.

(Note: Financial statements to reflect to projected sales and profits and the reasons for this upturn to happen before other industries start to recover)

Caselet VII- Subsidies and fertilizer industry

An analysis of the recent budget 2011-2012 suggests that the India's subsidy bill will jump by more than 100 per cent during the four-year period ending 2011-12 to Rs 1.43 lakh crore. This is being attributed to the  rising outgo towards petroleum and food items. Interestingly the non-plan expenditure on subsidies for the fiscal 2011-12  is  at Rs 1,43,570 crore, which is over 102 per cent more than the actual expenditure of Rs 70,926 crore during 2007-08. There is a proposal to shift to a direct transfer of cash subsidy to people living below the poverty line in a phased manner. This is likely to ensure greater efficiency, cost effectiveness and better delivery for both kerosene and fertilizers. The greatest share of subsidy allocation is for the three segments -- food, fertiliser and petroleum.  The projected subsidy for food in 2011-12 is Rs 60,573 crore, for fertiliser and petroleum it is Rs 49,998 crore and Rs 23,640 crore, respectively.  As an economic analyst using financial statements, prove the relative effectiveness of direct subsidies vs cash transfers in terms of sales and profitability of fertilizer industry

(Note: Financial statements to reflect profitability projections under both scenarios: direct subsidies or cash transfers.  Cash transfers represent redistribution of money from the government to the farmers to enable to buy fertilizers from the markets. Direct Subsidies on the hand represent the selling of fertilizers at lower than market prices to the farmers, with the government paying the balance to the firm)

Caselet  VIII- Repo and reverse repo rates and housing industry

RBI’s ambitious policy of inflation targeting through interest rate hikes has seen rate hikes in the last year and a half. With the increase in repo and reverse repo rates, the cost of funds for banks has increased. Implied is a shifting of this burden to the consumers particularly in the housing sector. The loan amounts available has reduced by 25% besides the EMI’s have increased by one and half times for an average buyers. All these factors spell a negative sentiment in the housing market and thus adds to troubled bottom lines of the housing sector firms. As a CFO of the leading housing sector company, present your projections to your shareholders on the impact of repo and reverse repo rate hikes by RBI in terms of profitability of the firm. Also present your future anticipation of interest rates and its impact on your company

(Note: Build the financial statements incorporating the sensitivity of the housing sector industry to the changes in repo and reverse repo rates )

Caselet IX- Government expenditure and Infrastructure industry

India's spending on infrastructure has been in the region of about 3% to 4% of the GDP, which the government now plans to take to 9% by the year 2012. Yet compared to other countries it is quite small. Investment opportunities abound in roads, bridges, ports, power, railways, airports, urban infrastructure, water, irrigation or gas transport.  Since most of these are public goods, it is felt the government has to take the initiative for the increased expenditure. The beneficiaries of the increased government expenditure are the infrastructure and ancillary infrastructure companies.  A leading domestic infrastructure company wants to take advantage of the proposed expenditure but is short of funds. Hence it is looking at a collaborator from abroad. Apart from the FDI inflows, the overseas collaborator will bring in its technical expertise. As the financial consultant for the domestic firm, prepare financial projections to convince overseas collaborator the benefits of investing in India.

(Note: Financial statements will have to be prepared showing the projected and sales and profit trends and how sensitive the industry is to increase in government expenditure. For every Rupee increase in expenditure, there is a multiplier effect in firm’s profitability)

Caselet X- GDP growth rates and Hotel industry

Indian GDP growth rates have been by CRISIL to grow at around 7% for FY 2011-12. The downtrend in growth projections is being attributed to uncertainty in global demand accentuated by European crisis,  oil price rise owing to developments in the Arab world, slackening investment climate in India and lack of fiscal space in Indian economy. Industries which are closely linked to GDP growth rates are affected. Hotel industry grows at a multiple of about 2.5 of the GDP growth rate. Linked to rising incomes, hotel industry sees uptrend when GDP shows an increase. In current revised scenario, the hotel industry is likely to face downward projections. As an stock market analyst, show the financial projections for the profitability of the hotel industry in the revised scenario.

(Note: Prepare financial projections for the hotel industry profit rates based on the current trends in GDP and also how it is going to change following increase or decrease of GDP growth rate)