Satyam scandal

Text of Mr Ramalinga Raju’s statement
To the Board of Directors Satyam Computer Services Ltd. From B. Ramalinga Raju Chairman, Satyam Computer Services Ltd. January 7, 2009

Dear Board Members, It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The balance sheet carries of September 30, 2008

a. Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books)

b. An accrued interest of Rs 376 crore which is non-existent

c. An understated liability of Rs 1,230 crore on account of funds arranged by me.

d. An overstated debtors position of Rs 490 crore (as against Rs 2,651 reflected in the books)

2. For the September quarter (Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24 per cent of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of reve nues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.

The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual opera ting profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the September q uarter, 2008 and official reserves of Rs 8,392 crore).

The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations - thereby significantly increasing the costs.
Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off withou t being eaten.
The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and strategic fit. Once Satyam's problem was solved, it was hoped that Ma ytas' payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.
I would like the Board to know:

1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years - excepting for a small proportion declared and sold for philanthropic purposes.

2. That in the last two years a net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all ki nds of assurances (statement enclosed, only to the members of the board), Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt pa yment of salaries to the associates. The last straw was the selling of most of the pledged share by the lenders on account of margin triggers.

3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results.

4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murli V, Sriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts.
None of my or Managing Director's immediate or extended family members has any idea about these issues. Having put these facts before you, I leave it to the wisdom of the board to take the matters forward.

However, I am also taking the liberty to recommend the following steps:

1. A task force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam: Subu D, T.R. Anand, Keshab Pandaand Virender Agarwal, r epresenting business functions, and A.S. Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampati be made the Chairman of this task force to immediately address some of the operational matters on hand. Ram can also act a s an interim CEO reporting to the board.

2. Merrill Lynch can be entrusted with the task of quickly exploring some merger opportunities.

3. You may have a ‘restatement of accounts' prepared by the auditors in light of the facts that I have placed before you. I have promoted and have been associated with Satyam for well over twenty years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologise to all Satyamites and stakeholders, who have made Satyam a specia l organisation, for the current situation.
I am confident they will stand by the company in this hour of crisis. In light of the above, I fervently appeal to the board to hold together to take some important steps. Mr. T.R. Prasad is well placed to mobilise support form the government at this cru cial time. With the hope that members of the task force and the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well.
Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible. I am now prepared to subject myself to the laws of the land and face consequences thereof.

Dubai Crisis

Just three days before Eid, the Dubai government's announcement seeking a six-month reprieve on debt repayments sent shockwaves through the world markets, as it raised doubts over the Gulf emirate's ability to meet its financial obligations.

Global markets, which have yet to come out of the financial crisis that savaged many an economy, reacted sharply and sank like a rock. Analysts now wonder whether they are witnessing the beginning of the biggest sovereign default since Argentina in 2001.

Questions are also being raised on Dubai's status as a major destination for international investment.

What happened was that the Dubai government requested the creditors of Dubai World (one of three conglomerates that are backed by the emirate), to agree to a 'standstill' on repayments until May 30 2010.

The standstill also applies to the $4.05 billion sukuk, or Islamic bond, issued by Nakheel, the state-owned builder famous for the spectacular Palm Jumeirah scheme and other such mind boggling projects that involve large-scale land reclamation. Nakheel's parent company is Dubai World.

The truth is that Dubai is being crushed under a mountain of debt. The emirate has chalked up debt in excess of $80 billion by expanding in banking, real estate and transportation. Dubai World with $60 billion liabilities has sought a six-month standstill on its debt repayment to all its lenders.

So how will this affect India and why did the crisis happen

The emirate borrowed $80 billion in a four-year construction boom that transformed Dubai into a glittering jewel in the middle of the Gulf region and also into a tourism and financial hotspot.

The debt itself might not seem too high, but the uncertainty surrounding the entire issue has spooked financier. Investor confidence the world over has been shaken up badly, as many wonder if the world would slip into another recessionary phase, given that there are some other nations in a similar situation as Dubai: Greece, Iceland, Hungary being just a few of them. Many nations that are following Dubai's development pattern are inviting trouble, said analysts. Economists fear that they might have been too hasty in predicting that the global financial crisis had ended.

'The Sun Never Sets on Dubai World' is the corporate slogan of Dubai World (a state controlled enterprise). However, that may no longer hold true.

gossip spread through the world like wildfire hitting the emirate's property prices, credit rating agencies downgraded all Dubai government-related debt, billions of dollars were lost by investors as the value of their investments in the Gulf emirate plummeted, oil prices began to fall, some currencies saw a steep slide, and the stock markets the world over were revisited by that all-too-familiar sinking feeling. Billions of dollars of investor wealth was wiped out before anyone could blink.
Dubai saw property prices falling by almost 50 per cent from their 2008 peak. The property bubble had already begun to burst, but with this latest shock real estate will be devalued even more.

However, many say that it might be too early to write Dubai off. Its oil-rich neighbour Abu Dhabi will bail it out to some extent.

However, Indian bankers and economists say that the Dubai debacle would not have much of an impact on India as Indian banks do not have much exposure to the Dubai real estate markets.

Notwithstanding the UAE being India's top destination for exports, the government put up a brave face stating financial concerns in Dubai would not impact the Indian economy and the country's real estate sector.
"I don't think," said Commerce and Industry Minister Anand Sharma when asked whether the confidence erosion in Dubai would have ripple effect in India.
Sharma said the Indian economy is large and "I don't think developments in real estate sector in Dubai are going to impact it. Besides, the Indian real estate is doing well," he said.
The UAE, which has a large Indian population, is the country's largest export destination with shipments of about $24 billion in fiscal 2008-09.
Asked whether exports to the Middle East could be impacted, Sharma told reporters, "I hope not."

ICICI Bank says no material exposure to Dubai corporates
Delhi-based Oriental Bank of Commerce also said the bank does not have any exposure in Dubai.
"We have no exposure there," OBC Executive Director S C Sinha said.
The Indian finance ministry meanwhile said the financial crisis in Dubai, triggered by a slump in real estate, may not impact remittances sent by Indian expatriates in the Gulf.
"Remittances from expats didn't suffer during the period when the larger crisis was on. So whether this should have an impact in terms of employment, in terms of salaries and therefore in terms of remittances is somewhat unlikely," Finance Secretary Ashok Chawla said.
India gets nearly a quarter of its total remittances from the United Arab Emirates.
Former RBI Governor Y V Reddy said, "On the basis of past evidence, the recent development in the Middle East should not have any serious impact on the Indian remittances."
Finance Secretary Ashok Chawla, however, said it will take some time for the Finance Ministry to examine the exact impact of the crisis on the Indian economy.
"We have seen the press reports. We will have to study what the issue is, what the problem is and what will be the possible implications, if any for the Indian economy, on the people, on the corporates. It will take some time for us to examine this," Chawla said.
The Reserve Bank India said it is examining the impact of the Dubai government's decision to suspend debt payments by Dubai World, which led global stock markets to tumble amid fears of widespread default.
Governor Duvvuri Subbarao said he has asked his officials to study the impact and "if necessary make recommendations."
"We shouldn't react to instant news like this. One lesson that we learnt from the (global financial) crisis is that we must study the developments and measure the extent of the problem and hence study the impact on India," said Subbarao, who attended an interactive session with the students of Indian School of Business in Hyderabad.

My View - It looks like it is surely going to be an important trigger because the reality is that the numbers are relatively large. These are not small numbers that we are talking of. We have to keep in mind that whenever any kind of a crisis begins to unfold, it starts off on a very modest note and it doesn’t look very damaging to begin with.
But what we find is that by the time we are through with the middle of the crisis or towards the end of the crisis, a lot more other issues and triggers kind of crop up during the journey of the crisis. I think that is going to be very critical that – is this going to just start off with Dubai and end there, or is this kind of going to spread itself and reach other pockets of the globe?
Also we have to keep in mind that the last time the crisis unfolded in 2008, it also kind of ended off in a pretty good manner and outside the US, except for something like Iceland or something like that which went under, we didn’t see the collateral damage extending to other pockets of the globe though despite the fact that at that point of time geographies like Middle East and Eastern Europe were talked about but nothing came out in the end.
What we are probably beginning to see now is that some of those other areas are now beginning to crop up and I think Dubai is one example of that. It’s quite possible that over the next few months or few quarters you would actually see some of the other pockets also emerge. That can basically you could say, be the round two of the crisis. Whether that round two is going to be as big and as devastating as round one? I do not think so and that is something which we need to look at.

Talking about indian market - I do not think there will be a knee jerk reaction. I think the general feedback or what we are hearing from funds even today is this is not something to react to in India. There could be Indian specific factors going forward, which might affect the markets.

About Nifty - we have to keep in mind that going forward unless we see any major global trigger, I think this is a kind of a market which will continue to play between 4,500 to about 5,200 for the next several months till we kind of start factoring-in things like the budget or reforms or the next earnings season. I think till that point of time we will have to kind of look at this kind of a trading range.

Impornat area of consern is credit growth is not picking up at all this year, it is running in single digits, clearly tells us that corporate capex is not picking up despite so much of improvement in the market, sentiments, talks about pickup in economy etc. Whenever corporate capex doesn’t pickup, it shows up with a lag on the broad economy a couple of quarters down.
So I think the downside can be deeper than 4,500.

India outlook

To sum up we can say that the global financial recession which started off as a sub-prime crisis of USA has brought all nations including India into its fold. The GDP growth rate which was around nine per cent over the last four years has slowed since the last quarter of 2008 owing to deceleration in employment, export-import, tax-GDP ratio, reduction in capital inflows and significant outflows due to economic slowdown. The demand for bank credit is also slackening despite comfortable liquidity in the system. Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence leading to the crash

Nevertheless, a sound and resilient banking sector, well-functioning financial markets, robust liquidity management and payment and settlement infrastructure, buoyancy of foreign exchange reserves have helped Indian economy to remain largely immune from the contagious effect of global meltdown. Indian financial markets are capable of withstanding the global shock, perhaps somewhat bruised but definitely not battered. India, with its strong internal drivers for growth, may escape the worst consequences of the global financial crisis. In other words, the fundamentals of our economy continue to be strong and robust. The global economic environment continues to remain uncertain, although the rate of contraction in economic activities and the extent of pressures on financial systems eased in the first quarter of 2009-10. Yet, it is not possible to clearly see the path of the crisis and its resolution over the coming months. In this sense, India is not unique as almost every country, whether or not directly affected, has to manage the current economic crisis under uncertainty.

I would like to conclude as the monetary and fiscal stimuli work their way through, and if calm and confidence are restored in the global markets, we can see economic turnaround later this year. Once calm and confidence are restored in the global markets, economic activity in India will recover sharply.

Risks in Indian economy

I. FII Movement
Due to the impact of global economic recession, Indian stock market crashed from the high of 20000 to a low of around 8000 points. Indian stock market has tumbled down mainly because of reversal of foreign institutional investment in September-October 2008 with overseas investors pulling out a record USD 13.3 billion and fall in the nominal value of the rupee from Rs. 40.36 per USD in March 2008 to Rs. 51.23 per USD in March 2009,

II. US Dollar
Despite slowing from highs of 8% to 9% growth, India’s economy will grow close to 6% in 2009. However, in my opinion there are severe short-term risks from the US dollar. At the end of the day – the service sector is the largest component for Indian GDP and Indian software firms get up to 60% of their revenue from the United States. If Indian firms are not able to counteract meaningful decline in the US dollar with efficiency gains internally, that could have a material impact on the whole growth story.
III. Liquidity crunch
To large extend Indian market sentiment are run through FII movement whether positive or negative. Hence if FII trend negative we will experience negative movement in domestic player as well

IV. Reduction In Export
Large number of Indian export includes export to developed economy, and due to credit crunch in developed economy Indian export badly affected. Same we have experience, during 2008-09, the growth in exports was robust till August 2008. However, in September 2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative till the end of the financial year.

V. Reduction In Employment
Employment is worst affected during any financial crisis. So is true with the current global meltdown. This recession has adversely affected the service industry of India mainly the BPO, KPO, IT companies etc.

Some Other Important Risk
1) Lower domestic participation in stock market – Only 1% of people invests in stocks. Rest put in banks or gold. Stock market dependent on foreign capital: Give FII as a % of total market cap of the SENSEX. I guess roughly 26%. This makes total market prone to movement of FIIs
2) Inadequate infrastructure: Compare with China. Transportation cost highest among all emerging economies. leading to in competitiveness
3) High fiscal deficit compared to all emerging economies.
4) Time taken to enforce legal contracts (courts)
5) Labor problem – Frequent strikes, no clear policy
6) Land acquisition problem – POSCO, TATAS – sending global signals
7) Power
8) High dependency on imports for fuel

India Position after 2008-09

India Position
In India, the impact of the crisis has been deeper than what was estimated by our policy makers although it is less severe than in other emerging market economies. The extent of impact has been restricted due to several reasons such as-

1) Indian financial particularly our banks have no direct exposure to tainted assets
2) The credit derivatives market is in an embryonic stage and there are restrictions on investments by residents in such products
3) India’s growth process has been largely domestic demand driven and its reliance on foreign savings has remained around 1.5 per cent in recent period.
4) India’s comfortable foreign exchange reserves provide confidence in our ability to manage our balance of payments notwithstanding lower export demand and dampened capital flows.
5) Headline inflation, as measured by the wholesale price index (WPI), has declined sharply. Consumer price inflation too has begun to moderate.

Step taken by Indian finance & Commerce ministry to boost the economy

The future trajectory of the economic meltdown is not yet clear. However, the Government and the Reserve Bank responded to the challenge strongly and promptly to infuse liquidity and restore confidence in Indian financial markets. The fiscal and monetary response to the crisis has been discussed in the following points-

I. Fiscal Response

The Government launched three fiscal stimulus packages between December 2008 and February 2009.

1) Expanded safety-net program for the rural poor,
2) The farm loan waiver package and
3) Payout following the Sixth Pay Commission report

II. Monetary Response

The RBI has taken several measures aimed at infusing rupee as well as foreign exchange liquidity and to maintain credit flow to productive sectors of the economy such as infusing liquidity through management, risk management and credit management

Interest Rate management
In order to deal with the liquidity crunch and the virtual freezing of international credit, RBI took steps for monetary expansion which gave a cue to the banks to reduce their deposit and lending rates. The major changes in the interest rate policy of RBI are given below-

Reduction in the cash reserve ratio (CRR) by 400 basis points from 9.0 per cent in August 2008 to 5 per cent in January 2009

Reduction in the repo rate (rate at which RBI lends to the banks) by 425 basis points from 9.0 per cent as on October 19 to 4.75 per cent by July 2009 (the lowest in past 9 years) in order to improve the flow of credit to productive sectors at viable costs so as to sustain the growth momentum.

Risk management
RBI has already made several changes to the current prudential norms for robust risk disclosures, transparency in restructured products and standard assets such as-

1) Implementation of Basel II w.e.f. March 2009 by all Scheduled Commercial Banks except RRBs
2) Further guidance to strengthen disclosure requirements under Pillar 3 of Basel II
3) Counter-cyclical adjustment of provisioning norms for all types of standard assets
4) Reduction in the provisioning requirement for all standard assets to 0.40 per cent;
5) Market participant’s securities regulators will expand the information provided about security.

Credit management
There was a noticeable decline in the credit demand during 2008-09 which is indicative of slowing economic activity- a major challenge for the banks to ensure healthy flow of credit to the productive sectors of the economy. In order to facilitate demand for credit in the economy the Reserve Bank has taken certain steps such as-

1) Opening a special repo window under the liquidity adjustment facility for banks for on-lending to the non-banking financial companies, housing finance companies and mutual funds
2) Extending a special refinance facility, which banks can access without any collateral
3) Accelerating Government’s borrowing program
4) Relaxing the external commercial borrowings (ECB) regime
5) Allowing the NBFCs and HFCs access to foreign borrowing
6) Expanding the refinance facility for exports
7) Extending flow of credit to sectors which are coming under pressure
8) Instituting a rupee-dollar swap facility for banks with overseas branches
9) Allowing corporate to buy back foreign currency convertible bonds (FCCBs) to take advantage of the discount in the prevailing depressed global markets

key drivers of any country’s economy?

With consistent high growth rate of any economy, the key question that poses before everybody’s mind is that whether the growth story is secular and sustainable? Most effective way to answer this question is to see Key Economic Drivers for the Economy. The most important key driver of any economy is
1) Rising per-capita income,
2) GDP growth rate
3) Population
4) wholesale price index or Inflation Index
5) Government policy & stability
6) Openness to trade
7) Channelization of investment and deregulation will be the key driver’s economic growth
8) Whether growth is driven by domestic factors or global factors
9) Education and healthcare system
10) Infrastructure development

Typical economic drivers applied through local economic development initiatives include:

1) New enterprise development
2) Local business growth development
3) Inward investment promotion
4) Sector and business cluster development
5) Investment in Soft Infrastructure
6) Investment in hard infrastructure
7) Investment in sites or premises for business
8) Local business investment climate enhancement
These interventions and initiatives may be undertaken by a number of organizations including both central and local government, business and community organizations

Impact of Crisis in Emerging economies (India)

2008 has been an extremely challenging year for street across the globe. The economic slowdown of the advanced countries which started around mid-2007, as a result of sub-prime crisis in USA, led to the spread of economic crisis across the globe. Many financial institutions like Lehman Brothers or Washington Mutual or General Motors collapsed and several became bankrupt in this crisis. According to the current available assessment of the IMF, the global economy is projected to contract by 1.4 per cent in 2009. Even as recently as six months ago, there was a view that the fallout of the crisis will remain confined only to the financial sector of advanced economies and at the most there would be a shallow effect on emerging economies. These expectations, as it now turns out, have been belied. The contagion has traversed from the financial to the real sector; and it now looks like the recession will be deeper and the recovery longer than earlier anticipated. Many economists are now predicting that this ‘Great Recession’ of 2008-09 will be the worst global recession since the 1930s.

Despite of some mitigating factors, Emerging economy like “India” too has to weather the negative impact of the crisis due to rising two-way trade in goods and services and financial integration with the rest of the world. Today, Emerging economy is certainly more integrated into the world economy than fifteen years ago. Although emerging economy banks have very limited exposure to the US mortgage market, directly or through derivatives, emerging economy is experiencing the knock-on effects of the global crisis, through the monetary, financial and real channels – all of which are coming on top of the already expected cyclical moderation in growth.

I. Stock Market (BSE)

The economy and the stock market are closely related as the buoyancy of the economy gets reflected in the stock market. Due to the impact of global economic recession, Indian stock market crashed from the high of 20000 to a low of around 8000 points. Corporate performance of most of the companies remained subdued, and the impact of moderation in demand was visible in the substantial deceleration during the current fiscal year. Corporate profitability also exhibited negative growth in the last three successive quarters of the year. Indian stock market has tumbled down mainly because of 'the substitution effect' of:

1) Drying up of overseas financing for Indian banks and Indian corporate;
2) Constraints in raising funds in a bearish domestic capital market; and
3) Decline in the internal accruals of the corporate.

II. Forex Market (example India)

In Emerging Economy like India, the current economic crisis was largely insulated by the reversal of
1) Foreign institutional investment (FII),
2) External commercial borrowings (ECB) and
3) Trade credit
Its spillovers became visible in September-October 2008 with overseas investors pulling out a record USD 13.3 billion and fall in the nominal value of the rupee from Rs. 40.36 per USD in March 2008 to Rs. 51.23 per USD in March 2009, reflecting at 21.2 per cent depreciation during the fiscal 2008-09. The annual average exchange rate during 2008-09 worked out to Rs. 45.99 per US dollar compared to Rs. 40.26 per USD in 2007-08 which is the biggest annual loss for the rupee since 1991 crisis.

Moreover, there is reduction in the capital account receipts in 2008-09 with total net capital flows falling from USD 17.3 billion in April-June 2007 to USD 13.2 billion in April-June 2008. Hence, sharp fluctuation in the overnight forex rates and the depreciation of the rupee reflects the combined impact of the global credit crunch and the de-leveraging process underway in Indian forex market.

III. Money Market

The money market consists of credit market, debt market and government securities market. All these markets are in some or other way related to the soundness of banking system as they are regulated by Central Bank. Emerging economy financial system is essentially sound and resilient, and that systemic stability is by and large robust and there are no significant vulnerabilities in the banking system. Yet, NPAs of banks may indeed rise due to slowdown but that rise is not likely to pose any systemic risks, as it might in many advanced countries.

IV. Slowing GDP Growth rate

In the past 5 years, the emerging economy has grown at an average rate of 7-8 per cent. Services which contribute more than half of GDP have grown fastest along with manufacturing which has also done well. But this impressive run of GDP ended in the first quarter of 2008 and is gradually reduced.

The slowdown in growth of GDP is more clearly visible from the growth rates over successive quarters of 2008-09. In the first two quarters of 2008-09, the growth in GDP was 7.8 and 7.7 respectively which fell to 5.8 per cent in the third and fourth quarters of 2008-09. The third quarter witnessed a sharp fall in the growth of manufacturing, construction, restaurants. The last quarter was an added deterioration in manufacturing due to the deepening impact of the global crisis and a slowdown in domestic demand.

V. Reduction In Import-Export

During 2008-09, the growth in exports was robust till August 2008. However, in September 2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative till the end of the financial year.

VI. Reduction In Employment

Employment is worst affected during any financial crisis. So is true with the current global meltdown. This recession has adversely affected the service industry of India mainly the BPO, KPO, IT companies etc.

Financial Research Report

My This post will answer your question "How to writing research report"

Nordstrom, Inc.

YL eServices Pvt. Ltd.
Bangalore, India
Price: $ 33.64
Price Target $ 28.93

Company description
Nordstrom, Inc. is a fashion specialty retailer that offers a selection of apparel, shoes, cosmetics and accessories for women, men and children

Business Details

As of March 20, 2009, the Company operated 171 stores located in 28 states in the United States. It includes 109 Nordstrom full line stores, 58 Nordstrom Rack stores, two clearance stores, and two Jeffrey boutiques. Nordstrom, Inc. offers a selection of brand name and private-label merchandise. The Company offers its products through multiple retail channels, its Faconnable boutiques, its catalogs and on the Internet at http://www.nordstrom.com/. Company offers its customers a variety of payment products and services, including its loyalty program. Nordstrom, Inc. operates in four business segments: Retail Stores, Direct, Credit, and Other.

The projected revenue & net profit of the company are $9.277 & $0.446 billion in FY 2009 respectively. Revenue breaks up by segment & products are presented below.

The business environment during 2008 was both challenging and volatile. The first half of the year was relatively stable with quarterly same-store sales decreasing between 6.0% and 6.5%. The second half of 2008 was more volatile as consumers reduced their discretionary spending due to economic concerns and uncertainty, and retailers struggled to align their businesses with significantly lower levels of demand. Consequently company has experience negative growth rate in revenue, gross profit, operating and net profit margin.

Reason of negative growth is systematic risk due to global economic slowdown & US job cut, which have direct impact on retail demand. Hence we will see positive growth rate as and when Global financial market start improving. Good part is US government and Federal Reserve has taken serious step; we can now experience positive movement in market.

We can read in below price movement chart, stock has started decline from $ 34 on 1st April 2008 in similar line with economic slowdown. Price has gone down to $8 per share compared to $34 only because of economic slowdown. Hence we are hoping, as we can see in recent month, price will be stable one global market stabilized.

Competition
Nordstrom faces competition from privately held company, normally Bloomingdale’s Inc, The Neiman Marcus Group Inc, and Saks Fifth Avenue Enterprises. Bloomingdale’s is engaged in sale of apparels, cosmetics and other accessories through 40 stores in 12 states primarily in California, Florida and New York. The Neiman Marcus department store offer high fashion, high quality women and men apparels through 40 stores in 20 states and the District of Columbia. Saks Fifth Avenue stores and some 50 off 5th "luxury off-price" stores in 25 states and abroad, their product line includes apparels cosmetics jewellery and shoes.

Prospects:
Nordstrom is implementing the “Robust” Project which is expected to complete by 2013. This project involves 28 new stores in US. New store openings also involve certain risks, including constructing, furnishing and supplying a store in a timely and cost effective manner and accurately assessing the demographic or retail environment for a particular location. However, after the completion of the project company will have strong market poison in the US.

With the help of key financial ratio and last one year price movement, Investor can see this as a good script since its PE Ratio, EBITDA, and profitability ratio are above industry average.

However Nordstrom Bita is high “1.86” (Source Google finance) due to which price calculated with the help of discounted cash flow method is 29.99, which is less than current market price of 33.64.

Sensitivity:
The company is operating in highly dynamic fashion industries. Any failure in company’s part to recognize any fashion changed may impact its operation.

Future sales at new, relocated or remodeled stores may not meet projections, which could affect return on investment. Performance of new stores could also be negatively impacted if company is unable to hire employees who are able to deliver the level of service for which customers have come to expect when shopping in stores.

I believe know you will have some idea about writing Research report

Securitization

In securitisation portfolio of assets is transferred from the balance sheet of the originator to a special purpose vehicle (SPV), which refinances itself by issuing securities on this reference portfolio to capital markets at a margin

Steps in Securitization

Before going for process, let’s first understand who normally go for securitization.
Answer is Banks and financial institutions those have huge pool of advances or loans either by way of credit card, loan or by any similar assets class.

Let’s take example of ICICI “India largest Private sector bank”.

Now suppose ICICI total advances is INR 500000 crors by way of different assets pool, which will liquidate in on an average period of 10 years, however ICICI need that money within a year to support its business expansion plan.

Now here securitization start - in order to do so ICICI first contacts rating agencies to get rating of their assets like CRISIL in India or S&P in World.

Before going to rating agency ICICI will classify its entire assets pool of INR 500000 Crors in different assets class. Then ask from rating agencies to give their rating to different assets class.

Now depending on Risk & rewards factor credit agencies will give their rating to those assets from AAA to CCC.

Those rating have their different risk and rewards, assets with “AAA” rating have less risk hence easily salable in market at less cost; vice versa, assets class with rating “CCC” is most risky and bank have to bear huge cost to sell these assets class.

Once rating is done it means these assets pool are ready for sale in market

Hence ICICI bank will go for underwriting for issuing securities to sell these assets pool in market

After selling of these assets in market ICICI will get it money in first year itself with certain loss due to securitization

And purchaser of these securities (assets) will get money as and when borrower will make those payments to ICICI by way of special purposes vehicle (SPV). In case of default investor (purchaser) will bear the loss

This entire process is called securitization.

Credit Default Swaps

What is a Swap?
A swap is a contractual agreement between two parties, called counterparties, where the counterparties agree to make periodic payments to each other.
Example
• Currencies Swap
• Interest rate swap

Risks in Swaps
• Interest rate risk
• Currency/exchange rate risk
• Credit default risk
• Liquidity risk
• Mismatch risk
• Basis risk

Credit default risk - Credit risk is defined as the probability of the counterparty in the swap agreement ceasing to exist, incorporating all the possible financial effects of the elimination. The reason for a counterparty becoming insolvent might be consequences of everything from bankruptcy to changes in the macroeconomic environment.

Credit Default Swaps - A CDS is a contract that provides protection against the risk of a credit event by a particular company or country.
Important terms in CDS
• Buyer
• Seller
• Reference entity
• Credit event
• Reference obligation
• Notional principal

Type of settlement
• Physical settlement
• Cash settlement

In layman’s terms the CDS is essentially an unregulated insurance policy, This obviously makes the sale of the Credit Default Swaps extremely profitable and default loss payments very expensive.