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Retirement 1Retirement is usually something that is not considered by most of us till we are nearing it, so naturally we do not plan for it, until it is probably too late. This general ignorance or lack of attention to retirement planning can have far reaching consequences.

Retirement planning in the simplest sense means preparing for life after the tenure of paid work ends.  This does not only include the financial aspect, but other aspects such as what to do during retirement, the lifestyle choices that one can take and what dreams one might want to pursue during the remainder of the years.

While the concept of Retirement Planning applies to pilots just as it does to other individuals, there are certain unique points that are exclusive to retirement planning for commercial pilots. These unique points are crucial while developing a retirement plan for a pilot.

Firstly, under the current DGCA rules, the retirement age in India has been pushed up to 65. This is an entire 5 years longer than the mandated retirement age in most other industries. This translates to more income earning years, probably at the highest salary slab of the industry, since usually pilots around this age are most likely to have their designations as Captain. This extra income earning period is crucial in formulating and ironing out the retirement plan before the pilot ultimately retires. The significant income flowing could be the difference between living a compromised and a fulfilling retirement.

One of the most important things a commercial pilot has to consider is Lifestyle Inflation. Because commercial pilots have one of the best salary packages amongst all industries, they tend to have more lavish lifestyles. And they are comfortably able to match up the ever increasing expenses that come alongside their lifestyle choices. But on retirement, the salary stops. Yet expenses continue to stay, with inflation only adding to it. But more significantly no one would want to compromise on their lifestyle they have become accustomed to. As such it becomes imperative to plan much ahead so that lifestyle compromises don’t become the norm during your golden years.

Just to drive home the impact of inflation, let’s take an example. Consider a pilot Mr. A, currently 30 years of age and has a monthly expenditure of Rs 12 lakhs every year (not a very high amount, from what we hear from our pilot clientele). Assuming he will retire at age 65 and taking an average of 8% lifestyle inflation till retirement,  the same Rs. 12 lakhs expenditure will inflate to approx Rs. 1.75 crores. In other words, to maintain the lifestyle that costs Rs 12 lakhs as of today, Mr. A would require Rs 1.75 Crores annually to maintain the same expenditure choices, forget upgrading!

Furthermore, pilots are used to having extremely busy schedules. So when retirement hits, they are unprepared to handle the ample time in hand. Hence they always look for options to keep themselves engaged. This could mean, taking long leisure trips or finding, researching on and investing lump sums in “exciting investment avenues”, committing money to be part of a start up or just following their long drawn passions or enrol at the local flying clubs just so that they can regularly indulge their lifetime love of flying. All this comes at hefty financial expenditures.

All of the above means that Pilots would need to plan and develop customized retirement plans for themselves to ensure a smooth flight during retirement.

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Issue Detail:
Issue Open: Mar 8, 2017 – Mar 10, 2017
Issue Type: Book Built Issue IPO
Issue Size: 62,393,631 Equity Shares of Rs 10 aggregating up to Rs 1,865.57 Cr
Face Value: Rs 10 Per Equity Share
Issue Price: Rs. 295 – Rs. 299 Per Equity Share
Market Lot: 50 Shares
Minimum Order Quantity: 50 Shares
Listing At: BSE, NSE

D’mart (Avenues Supermarket), which is in the retail business with 118 stores, selling products such as food and groceries (55 per cent of revenues), home and personal care products (20 per cent of revenues) and general merchandise, such as crockery, furniture, garments, footwear, and home appliances (25 per cent of revenues), has clearly come at a time where the global view on equities has turned positive, and volatility in equities is at record lows. IPOs like Snapchat in the US have created significant short term gains for investors, and Indian investors are seeking a repeat.  The fact that D’mart is associated with Radhakrishan Damani, believed to be one of the sharpest long term investors in India, has only added to the frenzy. The penetration and development of retail businesses in India have been a much discussed opportunity over the last decade, and the shift from unorganised to organised, and from offline to online, continue to be much talked about.

Whilst there is no doubt that this shift has begun and is only likely to increase significantly going forward,  as individuals and families gain more and more comfort with these formats and decide which one works best for themselves, one needs to keep in mind that margins in most retail businesses tend to be very slim, and thus investors will need to be very patient with these businesses, as they scale and maintain/try to grow margins simultaneously, in spite of significant competition. Customer loyalty across these formats will also be tested , as consumers do tend to be very price sensitive in most retail segments.

Whilst revenue and earnings growth for the business have been very decent at 35 – 40% CAGR  over the last few years, and the profit margins and other numbers are better than competition, with further scope to possibly expand through the use of private labels, one will need to remember that businesses of this type will create wealth for investors if they are truly thinking very long term. At a P/E of 36 times, even though cheaper than other players in the retail space, and with a model that is very efficient with use of capital, real estate and its supply chain, this IPO is  not cheap.

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With expectations of significant listing gains pushing investors to try to get a share of the pie, and the issue size being only about Rs 1870 crores, most investors in the retail segment are not likely to get any shares at all, or even if they do, the net impact on their portfolio is likely to be minimal due to the small holding that they will get. For high net worth investors taking leveraged positions, a very high over subscription rate could essentially mean that their interest costs are also likely to be very significant.

With an uncertain global environment on the back of a possible US rate hike coming up, this issue is appropriate only for investors with a high risk appetite, or investors taking a very long term view of their portfolio in our view.

Just like Retail is all about detail, stock investing is all about earnings so keep your eyes focussed there and see how retail businesses continue to grow their earnings going forward, and deal with significant competition pressures.

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Plan Ahead has won the Outlook Money Best Investment Advisor of the year 2016

 

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Plan Ahead would like to express our heart felt gratitude to our clients for the unstinting support, basis which we continue to strive to be the best advisor in the country. 

Thank you and we look forward to your continued support and encouragement.

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Whilst there was a consensus view of RBI cutting repo rates today, with only the extent of the rate cut being questioned (would it be 0.25% or 0.5%?), Urjit Patel or rather the monetary policy committee (MPC) sprung a surprise by keeping rates unchanged. Both equity and bond markets reacted negatively to this as they were pricing in at least a 0.25% cut.

RBI was probably concerned by multiple factors – volatility in global financial markets that could be caused by a Fed rate hike, issues in the Eurozone, oil price rises, and the potential stickiness of consumer inflation around non food components.

One needs to remember that inflation targeting continues to be the core role of the RBI moving forward, and any risks to inflation are likely to result in a more conservative approach, tilted towards managing inflation in the inflation growth trade off.  In addition, the focus towards management by data is a significant positive, as markets can sometimes allow emotions to override incoming data, that may be to the contrary.

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Your investments

The demonetisation impact on the Indian economy continues to be rather speculative in our opinion, with a very wide range of possible outcomes,. and data around the same is likely to continue to throw up surprises. For example, we have seen over the last few weeks, the quantum of cash deposits that have come back to the banking system have been significantly larger than originally anticipated. In light of the need to take portfolio investment decisions basis data, it may be prudent to look for broader trends to capture through your investment strategy for example fixed income products continue to offer a real rate of return in the region of close to 2%, continuing to make fixed income investments an attractive option. With liquidity continuing to be significant, it would be prudent to look at locking into current interest rates, through a combination of accrual oriented short term and medium term funds, tax free bonds and to also cover reinvestment risk. A portion of the fixed income allocations can continue to be allocated to taking the benefits of falling interest rates, by investing into dynamic bond funds where the fund manager has the flexibility to move portfolio durations driven by incoming data. Equity investors may need to enhance exposures gradually through a combination of rupee averaging and value averaging strategies, as the potential slowdown on the back of a US rate hike and a consumption slowdown driven by demonetisation, is balanced by possible liquidity flows from Japan and the EU, as well as equity prices, especially of large cap indices, now at levels much closer to fair value after the recent correction.

Your loans

With the expectation of cost of funds for banks coming down post demonetisation, banks’ lending rates are likely to continue to slide further down. Since April 1, 2016, when the MCLR was introduced, most banks have been reducing it gradually as their cost of funds came down. The huge inflow of funds post demonetisation could make them cut MCLR  further. Thus one can expect loan rates to continue to head downwards, creating some additional consumption or investing surpluses for families with loans.

Way Ahead

The RBI is clearly aware of the danger to the GDP growth rate and possible liquidity outflows, driven by the twin impact of demonetization and higher interest rates in the US. Thus a wait and watch policy may actually be a great idea. Whilst everyone will await the next policy on Feb 8th, one needs to remember that action by the RBI can also be done prior to that if necessary, and therefore should not be ruled out. After all, surprises and the independent nature of the RBI are back in fashion.

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In its first Policy the Monetary Policy Committee (MPC) headed by newly appointed RBI Governor Urjit Patel cut policy rates by 0.25% taking repo rates down to 6.25%. The way rates are decided is different from what it was before. It is now a 6 member committee which decides rates instead of the Governor alone. The MPC was unanimous in their decision to reduce interest rates by 0.25% today.

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Focus on the real rate of return

With interest rates falling, there is a tendency to want to take more risk on the portfolio to achieve a higher absolute rate of return. We think that it is critical that investors focus on real rates of return ie the return after inflation on their portfolios. RBI continues to want to keep real rates of return between 1.25% and 1.5%, which makes fixed income attractive, even if you generate a lower return that what you generated a few years ago. Avoid higher risk strategies in chasing a higher rate of return in the current environment.

Your Investments

The rate cut came largely on the back of improved inflation numbers close to 5% in August compared to close to 6% in the month of July. Whilst food inflation, which was a big driver of inflationary pressures, seems to have come off very sharply, there continue to be risks of higher inflation due to the impact of the Goods and Services Tax (GST) post the announcement of the GST rates by the GST Council, the Seventh pay commission and the merger of the railway budget and the Union Budget which could impact the fiscal deficit by 0.15 to 0.25%. With an inflation target of of 4% +/-2%, the inflation numbers seem to be well under control at this point. The bond and equity markets had already priced in this 0.25% rate cut and thus they did not react aggressively to this announcement. Thus, whilst there continues to be a 0.25% rate cut possibility from here onwards, the timing of the same will be driven by other data, including what happens globally with interest rates. With growth rates continuing to become healthier in India, equity markets may continue to hold up in spite of their premium valuations at this point, as earnings could continue to be supported by lower interest costs. Therefore, the strategy would be to use a combination of domestic and US equity along with bond funds, with the bond fund exposure being weighted more towards accrual and short term strategies, and less towards duration and dynamic strategies. On the liquidity front RBI policy remains accommodative and nothing has changed on that front.

Your Loans

The loan rates get decided by Marginal Cost of funds based Lending Rate (MCLR). The transmission that has happened is lower than what everyone had expected. Therefore on the loan side you could continue to expect some relief, though it may be lower than what is expected.

Way Forward

The December policy will, to some extent, depend on the data flow and market expectations of the US Federal Reserve decision on hiking interest rates or not. Let us watch for the next RBI policy on 6 December 2016.

Image Credits: www.canstockphoto.com

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ICICI Prudential Life Insurance Company Limited is the largest private sector life insurer in India by total premium in fiscal 2016 and assets under management at March 31, 2016. It’s a joint venture between ICICI Bank Limited, India’s largest private sector bank in terms of total assets and Prudential Corporation Holdings Limited, a part of the Prudential Group, an international financial services group. It offers a range of Life insurance, health insurance and pension products and services.

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Source: Kotak Securities

Quick facts

  1. They were the largest private sector life insurer in India by total premium in fiscal 2016 and assets under management at March 31, 2016.
  2. In fiscal 2016, their market share on a retail weighted received premium basis was 11.3% compared to a market share of 9.7% of its nearest competitor among all private and public insurance companies.
  3. As of March 31, 2016 they had 1, 21,016 individual agents and as of July 12, 2016 their bank partners had over 4,500 branches.
  4. Their expense ratio of 14.6% for fiscal 2016 was one of the lowest among private sector life insurance companies
  5. As of March 31, 2016 their solvency ratio was 320% compared to IRDA prescribed level of 150%

Strengths

  1. Consistent and robust fund performance

Funds representing 92.9% of their market linked assets performed better than their respective benchmarks since inception.

  1. Quality service experience

In fiscal 2016 their grievance ratio was 153 per 10,000 new policies issued compared to private sector average of 345 per 10,000 new policies issued.

In fiscal 2016 their claim settlement ratio for retail death claims was 96.2% compared to private sector average of 89.4%.

  1. Their expense ratio of 14.6% for fiscal 2016 was one of the lowest among private sector life insurance companies

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  1. Diversified multi-channel distribution network

They have a growing bancassurance network. ICICI Bank and Standard chartered             Bank currently exclusively distribute their life insurance products. As of March 31, 2016 they had 1, 21,016 individual agents and as of July 12, 2016 their bank partners had over 4,500 branches. According to CRISIL Research, Life Insurance Industry Report, July 2016, they have one of the largest channels among private sector life insurance companies in India in terms of premium as on 31 March, 2016.

  1. Digitisation and transformation of sales, customer onboarding and internal processes:

They have created a device agnostic technology platform that provides their customers, employees and distributors with seamless experience from sales to claim settlement. In fiscal 2016, 92.3% of their new business applications were initiated on their digital platform either by distributors or customers. This has also helped them improve employee productivity. Their retail weighted premium received per employee grew at a CAGR of 29.1% from fiscal 2014 to fiscal 2016. They have an architecture which can integrate their systems with partners quickly which facilitates faster issuance of policies.

  1. Robust risk management and control processes

Risk is an integral part of an insurance business. They have risk management and control processes with a detailed cost benefit analysis for risk mitigation and a strong focus on credit quality of their portfolios.

  1. Experienced Senior Management Team

Their CEO, Mr. Sandeep Bakhshi has been with their company for over 5 years. He joined ICICI group in 1986 in project financing group of ICICI ltd. He has over 32 years of experience in the banking, financial services and insurance sector. 28 of top 36 members of their management team have been with ICICI group for over 10 years. Senior managerial persons in the actuary, investment, underwriting and claims department have average functional experience of 16 years.

  1. It has fairly good persistency ratio compared to peers

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Data Source: kotak Institutional Equities

Risk factors

  1. Adverse effect on equity market in India could have an impact on their business as it will have an impact on their market linked products.
  2. Change in market interest rates could have impact on their investments and business profitability.
  3. Their inability to attract or retain distributors, key sales employees could have a material impact on their finances.
  4. Any shift in consumer attitude towards financial savings could have an impact on their business.
  5. Catastrophic events, including natural disasters could increase their liabilities for claims and have an impact on their finances.
  6. Most of their new business premiums come from few products. Any constraints in selling these products due to regulatory changes could impact their business.

Valuations

The embedded value (EV) represents present value of future profits from assets after adjusting for risk. The price to embedded value multiple is approx. 3.4 times FY16 EV. Compared to multiple of HDFC and max life which is 4.2 times FY16 EV, valuations are attractive.

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Data Source: Mint, 14 September 2016

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Our opinion: Subscribe, but only if you are doing so for the long term

Whilst it is the first of its kind IPO in its space and has a large distribution network, strong brand franchise, strong solvency ratio, good settlement ratios, an attractive price to embedded value ratio relative to Max/HDFC and an experienced management, the fair value of the stock in our opinion is lower than the current offer price for the IPO. Thus, you should look to subscribe to this issue only with a long term investment horizon, as the offer price currently does not provide significant upside in the short term in our opinion.

 

 

 

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