Indian Economy And Twitter IPO vs. Facebook IPO

November 10, 2013

By: Aakash Dang
With the exception of someone living in a cave on an undiscovered island, everyone uses money. Over the last quarter, one of the major headlines topping the Indian charts has been the depreciation of rupee against the dollar and this southward surge to unprecedented low not only shook the Indian economy but also the global markets. Getting into the nitty-gritty of this unusual behavior reveals certain facts and reasons that together rationale this anomalous trend, as chronicled below:

It is imperative to know that the rupee’s value is directly linked to the amount of US dollars available in the Indian market. India receives dollars in three ways: through exports, foreign investments, and NRI remittances. Using the simple law of economics, when the demand for dollar is more than its supply, the prices are bound to skyrocket, and hence, the rupee depreciates. India’s main imports are crude oil and gold, and the countries it imports from unfortunately accept only US dollars or other major currencies. Alas!

Anticipating the U.S central bank to loosen its monetary policy considering the economic recovery in the states, foreign investors are pulling out money already invested in the Indian market to reinvest in the U.S in hope of better returns resulting in declining foreign exchange.

Reserve Bank of India’s (RBI) monetary policies did more damage to the economy than salvaging it. Such measures as announcement to buy bonds, capital restrictions and import taxes, and then inclination towards reversal of tightening policy are sending confusing signals to the investors, making them more skeptical of their expected ROI.

One of the main reasons of this downturn is the Current Account Deficit (CAD), which was measured at 4.8% of the GDP in the 2012-13 fiscal. The inability to come up with new exporting destinations added cherry to the cake! This is thus resulting in creating more actual as well as speculative demand domestically for the dollar and other convertible currencies.

Indian stocks been rated as “Underweight” by Goldman Sachs further deteriorates the reputation and credibility of national shares in the capital markets and make investors go awry. Current low forex reserves further prevents RBI to intervene aggressively in the currency markets, aggravating the fiscal deficit and making the situation even worse.

All the above factors might be bit overwhelming but what worth noticing is that several niche yet robust factors of forex demand haven’t even been counted here yet, factors such as domestic students flying abroad to North America for higher studies or a large chunk of avid travellers airborne to Cuba for a vacation etc. Thus, things are quiet deep than they might appear and while RBI’s twist in policies might act as short term bandages giving rupee a brief respite, the angel of future is still in unchartered territory.

Having all said and done, is India the only one suffering from declining monetary worth and are its policies completely responsible for what and where the economy is today? Probably not! In fact most of the emerging markets such as Brazil, Indonesia and South Africa are seeing this trend and finding it hard to control the flow of capital and arrest its volatility. As we have figured out by far, this drift can as well be attributed to the interlinked economies and their swings just as much as to the domestic policies. Dollar getting stronger (not necessarily INR getting weaker) or reduced export rates of foreign exporters, more so, gives a negative push to any plunging economy, for that matter.

So will stopping gold imports help the Indian economy? The answer is No since lot of businesses and trades depend on gold and completely stopping its import would worsen the situation by creating a halo of slow domestic business and in turn the vicious circle of unemployment and drop in GDP. But slowing the imports on gold is seen as one of the strongest measures to help boost the economy and preserve foreign exchange. However, the recent rises in gold imports have been investment driven and that is largely due to the rise in gold prices and a lack of other investment alternatives available to Indians.
What India needs is a better investment ambience that helps not only people get other alternatives to gold for investment but also the government to pull in more foreign exchange into the country. India needs a climate where exports rise, foreign investments come into the country (FDI & FII), and all that in turn help the CAD.

In spite of all that has been logged above, it will be foolish to say that INR will/ is about to retire. RBI is taking newer efforts never seen before and better strategies never thought before but by and large, it will take a herculean effort to get the upper cap to 55 again. In one of its latest initiatives, the government proposed setting up a task force to look into currency swap agreements, a measure analysts said could bring some relief, if carried out in time, by reducing market demand for dollars or other major currencies. I guess this is where the ‘wait-n-watch’ period starts!

Now on a lighter note, the following joke is the most hilarious one I’ve read in a long time – “The only time the Indian Rupee goes up is during a Toss.”

Twitter IPO vs. Facebook IPO

By: Sameer Nargolkar

The trading world is abuzz with this news. It has got Silicon Valley and Wall Street talking about it. Microblogging website Twitter will soon come out with an Initial Public Offering (IPO). Amid a red-hot market for IPOs and soaring equity markets, Twitter raised its price range to $23 to $25 per share but kept the offering size at 70 million shares. That means it will raise up to $2 billion if an over allotment option is exercised. Twitter raised the top end of its IPO price range by 25 percent and will close its books a day early, signalling strong demand.

Twitter is seeking a far smaller valuation of up to $13.6 billion compared to Facebook’s $100 billion. Twitter’s IPO will open oversubscribed and underwriters are looking to select investors who plan to hold the stock for a longer duration rather than traders wanting to make a quick buck. The new pricing would value the company at up to 13 times forecast 2014 revenue of $1 billion. Both Facebook and LinkedIn trade at about 12 times forecast 2014 revenue.

Twitter shares are expected to rise after they begin trading, with some setting their one-year price target as high as $52. Twitter management has been touring the US over the past week, speaking with potential investors. Twitter’s bankers were conservative in not raising the size of the offering, which had caused problems for Facebook’s IPO.
Facebook raised its price range as well as the total number of shares in its IPO just before its debut in May 2012. The move maximized the amount that Facebook’s backers raised but contributed to declines in the stock in the early days of trade. Twitter, in contrast, has won plaudits for running a more modest IPO pitch process, including roadshow presentations that focused on business fundamentals.

Twitter has yet to turn a profit but it is pitching an advertising business model similar to Facebook’s. Twitter Inc’s share price could almost double in its first year as a listed company, with brokerage firms issuing a “buy” rating on the stock even before it goes public. Goldman Sachs is leading Twitter’s IPO.

Facebook had reported an annual profit of $1 billion and revenue of $3.7 billion before it went public, whereas Twitter reported a net loss of $79.4 million on revenue of just $316.9 million in 2012.

Future Prediction: As Twitter’s bankers have raised the price range to $23 to $25 a share, the company is less of a bargain than it was at the old price. It is yet to unleash its full power to advertisers. As it rolls out new advertising features and launches these features in new markets, revenue will explode higher. Twitter could easily exceed $10-billion in revenue one decade from now, which should mean at least a tripling in value, or about a 12% annual return.

Overall, Twitter’s backers seem to have got it spot on after taking into account the mistakes made during last year’s Facebook IPO fiasco. The coming few weeks will be very interesting!

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