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Today marked the second and much awaited Bi-Monthly policy statement by the RBI for the new FY 2018-19.

In line with what bond markets expected, the Monetary Policy Committee (MPC) delivered a 6-0 verdict on an interest rate hike by 0.25%. The was largely in line with market expectations post the release of the minutes of the last meeting and thus the bond market had only a marginal impact of this change.

However, the MPC also continued to maintain a neutral stance, indicating that it is trying to play a delicate balance between inflation and growth, and decisions are being taken basis news flow and fresh data coming in.

The MPC noted that domestic economic activity has exhibited a sustained revival in recent quarters and the output gap has almost closed. Investment activity, in particular, is recovering well and could receive a further boost from swift resolution of distressed sectors of the economy under the Insolvency and Bankruptcy Code. This is in general good news for the economy.

Retail inflation i.e. CPI grew to 4.6% in April. The decision to raise rates is therefore in line with the objective of keeping the medium term inflation at 4% i.e. well within the 2-6% range.

Since the MPC’s meeting in early April, the price of Indian basket of crude surged from US$ 66 a barrel to US$ 74. This, along with an increase in other global commodity prices and recent global financial market developments, has resulted in a firming up of input cost pressure thus persisting in a high CPI inflation projection for 2018-19. On the other hand the summer momentum in vegetable prices was weaker than the usual pattern softening the food inflation in the short term, though this has been more than negated by the changes in oil prices. Household inflation expectations have also moved up sharply and  pricing power seems to be on its way up as well.

Taking these effects into account, the projected CPI inflation for 2018-19 is revised to 4.8-4.9 per cent in H1 and 4.7 per cent in H2, including the HRA impact. Excluding the impact of HRA revisions, CPI inflation is projected at 4.6 per cent in H1 and 4.7 per cent in H2.

Crude oil prices have been volatile recently and since consumption, both rural and urban, remains healthy and is expected to strengthen further, all this imparts considerable uncertainty to the inflation outlook, possibly on the upside. With an election year upon us and possible fiscal risks emanating, along with global outflows on the back of higher US interest rates and a falling rupee, this may not be the last of the rate hikes in our view.

Your Investments

Geo-political risks, global financial market volatility and the threat of trade protectionism pose headwinds to the domestic recovery. However, it also important that public finances do not crowd out private sector investment activity at this crucial juncture.

In most Emerging Market Economies (EMEs), bond yields have risen on reduced foreign appetite for their debt due to growing dollar shortage in the global market and on prospects of higher interest rates in Advanced Economies.

Equities continue to remain overpriced from a price to earnings perspective in spite of recent corrections and a better growth outlook. However, signs of improved demand and pricing power for companies, along with good growth expectations and better capacity utilisation,  bode well for earnings growth going forward. Corrections into equities could therefore be bought into.

Real rates continue to remain positive.The rising G-sec yield makes dynamic bonds and long term bond funds unattractive and the exposure to the same should be minimized. Bonds with a shorter duration of 3 months to 2 years are ideal in the given scenario. We therefore, continue to believe that investors should continue to have fixed income exposure through a combination of lower duration and short term strategies.

Your Loans

Even before the RBI meet, the banks had begun hiking both their lending and borrowing rates. This rise in lending rates was brought about by the rapid increase in bond yields and increased loan demand, especially in private banks.

With an increase of 25 basis points by the RBI, the deposit rate of the banks could further increase which would be followed by lending rate hikes. Thus look at prepaying your loans with excess liquidity.

A 6-0 verdict is therefore a clear indicator that inflation targeting continues to be the MPCs primary role, and a conservative stance will probably give foreign investors a more positive view on India.

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Like it or not, your Mutual Fund holdings, at least some if not all, are already undergoing significant changes. While the changes in some were predictable, there are instances where the proposed changes were never imagined. Now, everyone from advisors and distributors to AMCs and mostly importantly the investors are starting to scramble to make sense out of the commotion!

Since the mutual fund AMCs have started to list out the changes in their schemes, there have been plenty of eyebrows raised with some of their decisions.

For example, one particular AMC had a Liquid Fund and a Money Market Fund prior to re- categorization. As per the new re-categorization rules, there is a Liquid Fund and a separate Money Market Fund Category. The AMC has gone ahead and moved their existing Liquid Fund into the Money Market Fund category and vice versa!

Another major example is that of another AMC, where they have changed the mandate of an existing MultiCap Fund to that of an Aggressive Hybrid Fund (where only up to 80% can be invested into equities ) as per the new rules. In addition, they have decided to merge one of their existing Balanced Fund with this newly formed scheme. The N.A.V. of this newly merged entity would be that of the earlier existing MultiCap Fund.

The same AMC has dealt another googly by changing an existing pure Equity scheme to a Balanced Advantage Category Fund (a fund that manages debt and equity allocation on a dynamic basis). Note that there is no cap on either asset class as per new rules. Furthermore, they have merged another existing Balanced Fund into this new scheme, while keeping the N.A.V. of the prior equity fund. The fund could now theoretically go 100% into debt or the other way as per the discretion of the fund manager.

Another example is that of an AMC that had an Ultra Short Term Fund and separately also ran a debt fund that primarily invested into bonds of Banks and PSUs. Post the introduction of the re- categorization rules, the AMC has merged the above Banking and PSU fund into the Ultra Short Term Debt Fund. It has further gone on to change the mandate of an existing Short Term Debt Fund into a Banking PSU Fund as per new rules. Now imagine the plight of an investor who was anyways confused with the huge universe of schemes. If he/she is not careful, he/she might end up investing into the current Banking and PSU fund expecting to remain in that category when it actually will get merged into an Ultra Short Term Fund. Or he/she may invest into the current Short Term Debt Fund not realizing it will become a Banking and PSU fund shortly. These unintentional errors could have big implications later on the mutual fund portfolio.

There are thousands of mutual funds schemes out there. And if not selected right, which can often be the case, investors end up with a plethora of funds in their portfolio over time. Now imagine looking at your fund list and realizing that a lot of them are going changes and may come out as something new and unintended. In such a context, it is easy to make unintended errors or make ill informed decisions in deciding what to do next with your mutual fund portfolio.

It is with this concern in mind that Plan Ahead Wealth Advisors is conducting a seminar tomorrow at The Regus, Andheri West to enlighten both our clients and their friends and families, on the impact this massive reorganization of mutual fund schemes will have on their portfolios and how they can navigate these changes in an efficient way.

While it may seem a little inconvenient to come out on a Saturday 19th May 2018 to attend this event, the take away from this event could lead to much better decision making on your current mutual fund holdings in the immediate future!

 

 

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Today marked the first Bi-Monthly policy statement by the RBI for the new FY 2018-19.

The MPC notes that there has been a recovery in growth on a domestic level and various structural reforms introduced will support further long term growth. The MPC recognizes the downside risk to private financing and investments as well as growth on both a global and domestic level is brought out by deteriorating public finances and rising trade protectionism.

The MPC stated that the GDP growth is projected to strengthen from 6.6% in 2017-18 to 7.4% in 2018-19 with H1 2018-19 reflecting growth in the range of 7.3-7.4% and 7.3-7.6% in H2 2018-19 supported by revival in investment activity and global demand.

The MPC revised down the CPI for FY 2018-19 to 4.7-5.1% in H1 and 4.4% in H2 (inclusive of the HRA impact) keeping in mind that factors such as the revised formula for MSP (minimum support price), impact of HRA, further fiscal slippages, a weak monsoon and volatile crude prices could all pose upward risks to the near term inflation outlook.

Amongst the midst of global and local market volatility in both the equity and bond markets, the monetary policy committee maintained their neutral stance and kept the policy repo rate and the reverse repo rate unchanged at 6 percent and 5.75 percent respectively.

5 out of 6 members voted in favor of the policy while one member voted for raise in rates by 25 basis points.

The 10 year G-Sec fell sharply from 7.3% levels to 7.12-7.13% indicating that the market is putting to rest any near term rate hikes.

Your Investments

While the RBI does talk about economic recovery as well as a possible sustained long term recovery one can not ignore the volatility brought about by the juxtaposition between global recovery and the possible trade war between the United states of America and China.

Equities continue to remain overpriced from a price to earnings perspective in spite of recent corrections. Real rates continue to remain positive and interest rates (benchmarked by the 10 year G-sec) have cooled down from their high ranges of 7.7-7.8%.

We continue to believe that investors should continue to have fixed income exposure through a combination of accrual, short to medium and hold strategies. Considering a large state loan calendar interest rates could revert back to an upward movement scenario and thus we recommend maintaining only a 10% exposure to dynamic bond fund that have the flexibility to move across bond maturities.

Your Loans

For the first time in 2 years banks started increasing interest rates indicating a change in rate cycle. This rise in lending rates was brought about by the rapid increase in bond yields.

The RBI has maintained status quo on rates and has allowed banks to spread their bond losses over 4 quarters. This action by the RBI could cause lending rates to stabilize.

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In a landmark judgement, the Supreme Court on Friday recognized that a terminally-ill patient or a person in persistent vegetative state can execute an “advance medical directive” or a “living will” to refuse medical treatment, saying the right to live with dignity also includes “smoothening” the process of dying.

What is a Living Will?

It is essentially a document that sets out a patient’s wishes regarding how they want to be treated if they are seriously ill or in a permanently vegetative state. With this judgment, the right to die with dignity has been recognized as a fundamental right.

As regards personal finances, perhaps a big critical function that a living will performs is that it allows the maker of the will to prevent their family from financially overburdening themselves, sometimes to the extent of bankruptcy. Usually family members are spurred on out of love, guilt or a sense of duty to keep the patient alive, often at any cost. This results in the family’s financials going into disarray and jeopardizing their financial future and important life goals.

Who qualifies to write down a Living Will?

  • An adult who is of a sound and healthy mind and in a position to communicate, relate and comprehend the purpose and consequences of executing the document.
  • An adult must make such a will voluntarily 

What are the important items to cover in the document?

The judiciary has laid down guidelines on how such a document can be formed. They are as follows:

  • It should clearly indicate the decision relating to the circumstances in which medical treatment can be withdrawn.
  • Instructions must be absolutely clear and unambiguous.
  • It should mention whether the patient would like torevoke the instructions/authority at any time.
  • It should specifythat the patient has understood the consequences of executing such a document.
  • It should specify the name of a guardian or close relative who, in the event of the patient becoming incapable of taking decision at the relevant time, will be authorized to give consent to refuse or withdraw medical treatment
  • It should be in writing and should clearly state as to when medical treatment may be withdrawn or if specific medical treatment that will have the effect of delaying the process of death should be given.
  • If there is more than one valid Advance Directive, the most recently signed Advance Directive will be considered as the last expression of the patient‘s wishes and will be implemented.

How should this document be stored? 

The Supreme court has further laid down a road map on how the Living Will needs to be stored safely:

  • The living will should be signed by the maker in the presence of two witnesses. It should be countersigned by the judicial magistrate of first class (JMFC), confirming that the will has been drawn up voluntarily.
  • The JMFC will maintain a copy of the will and forward a copy to the registry of the district court of that jurisdiction.

Implementation of a Living Will 

The Supreme Court has described various checks on how a living will may be implemented:

  • Execution of the will can only be done if the medical board approves it. The medical board will consist of the head of the treating department and at least three experts from various specialized medical fields with at least 20 years of experience. The board can only give their certification (or not) in presence of the closest relatives. Furthermore, the board’s certification is only preliminary.
  • Once the board approves, the hospital has to inform the jurisdictional collector of the same. The collector will then appoint a separate board consisting of the Chief District Medical Office and three other experts from specialized medical fields. If this board approves the same, the chief medical officer will relay the decision to the jurisdictional magistrate who will then have to visit the patient at the earliest and authorize the implementation.

Any advantages of a Living Will?

  • Providesrespect towards a human being’s fundamental right to live and die smoothly
  • Doctors are likely to suggest appropriate procedures and medication knowing what the patient wantsas per his living will
  • A living willspares both the doctor and immediate relatives from taking difficult decisions
  • A living will could also spare the immediate family from the financial burden that comes up in cases of unnecessarilyprolonged medical procedures for a terminally ill family member

While Living Wills are common in the west, it is a very new concept in India. Although the general verdict, by and large is that this is a positive step in the right direction the complexity is still something that needs to be addressed.

 

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According to Investopedia, “Geographical Diversification” is the practice of diversifying an investment portfolio across different geographic regions so as to reduce the overall risk and improve returns on the portfolio.

As with diversification in general, geographical diversification is based on the premise that financial markets in different parts of the world may not be highly correlated with one another. For example, if the US and European stock markets are declining because their economies are in a recession, an investor may choose to allocate part of his portfolio to emerging economies with higher growth rates such as China, Brazil and India.

There are two major advantages in diversifying one’s investment portfolio based on geography:

  • Taking Advantage of Opportunities in other Strong Economies:

A significant benefit to a geographic diversification of assets has to do with the way it allows you to mitigate risk by taking advantage of stable economies elsewhere in the world. It’s no secret that some economies are struggling to recover from the trying economic times of the last few years. Other countries, however, have seen higher growth rates due to a variety of factors. International portfolios have been shown, in general, to outperform domestic ones, this is because when there are so many markets to choose from, it is unlikely that the same country will ever repeatedly achieve the highest level of growth. With improved access to international markets and investment instruments such as mutual funds bringing down the costs, an additional option to further diversify has been to buy in international markets.

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(Source: Bloomberg, Kotak MF. As of 31st Jan, 2018)

The above returns data chart clearly shows that while the Indian Equity Markets have performed significantly in the last year, there were opportunities elsewhere which proved even better. Diversification into such economies can therefore result in better yielding portfolios.

  • Balancing out the risks:

While chasing better returns might definitely be one aspect of any investment portfolio, it is also crucial to understand how any strategy helps in mitigating the associated risks that are part of every investment decision. Geographic diversification provides a much needed balance that all investors strive for. If one of your assets is located in a part of the world that is or could be vulnerable, the investments in other geographies could compensate or buffer any unexpected losses. This is because despite the impact of globalisation, geographies and economies can still have limited correlation between them, and over time international markets could perform very differently to domestic markets. Following is a chart that shows how various sectors form part of some regions around the world, in % of total market capitalization:

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(Source: credit suisse global investment returns yearbook 2015)

As you may notice, different regions give different weightages to every sector. Thus by accessing these regions, you can in essence, reduce investment risks in individual sectors and therefore your entire portfolio as a whole.

Since the cycles that drive business and investment are experienced at different times in different countries, foreign markets seldom move in perfect tandem with each other. Losses in one market may be offset by gains in another. Geographical diversification significantly reduces the overall level of volatility and exposure to external factors. For an investor, theoretically this would mean that the more diversified your assets, the safer is your money. However it is true that a significant black swan event, such as the financial crisis of 2008, will likely deplete any such benefits, especially in the short term immediately after such an event. What is rather important to keep in perspective is (a) your investment horizon and (b) your risk taking capability to diversify into foreign markets.

 

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save on tax

The Tax Season is here! More appropriately, the time for providing those investment/expenses proofs that will give you the tax deduction benefits. Most individuals are therefore looking for smart tips on to how best avail benefits available to individuals so as to minimize their tax outflow.

While there are commonly known avenues that are utilized by one and all, following are some of the lesser known options that you could look into to optimize your tax planning:

  1. Section 80EE: In Budget 2016-2017, a new proposal has been made in which, first time home buyers are eligible for an additional tax deduction of up to Rs 50,000 on home loan interest payments under section 80EE. For claiming tax deductions under this new section 80EE, the following criteria have to be met:
    • The home loan should have been availed or sanctioned in FY 2016-2017.
    • The Loan amount should be less than Rs 35 Lakhs.
    • The value of the home should not be more than Rs 50 Lakhs
    • The buyer should not possess any other residential house under his/her name
  2. Section 80E: The entire interest paid (without any upper limit) on education loan in a financial year is eligible for deduction u/s 80E. However there is no deduction on principal paid for the Education Loan. The loan should be for education of self, spouse or children only and should be taken for pursuing full time courses only. The loan has to be taken necessarily from approved charitable trust or a financial institution only.
  3. New Pension Scheme(NPS): Employer’s contribution up to 10% of Basic salary plus DA (dearness aloowance) is eligible for deduction under this section above the Rs 1.5 lakh limit in Sec 80CCD(1). This is also beneficial for employer as it can claim tax benefit for its contribution by showing it as business expense in the profit and loss account. This comes under Section 80CCD(2).
  4. Leave Travel Allowance: LTA tax break can be claimed for travel of self and family members for journeys undertaken only within India.The non-taxable reimbursement of travel costs is limited to the actual expenses incurred on air, rail and bus fares only. The block applicable for the current period is calendar year 2014-17. The previous block was calendar year 2010-2013. Going forward, the new block will be 2018 to 2022. So make the most of this as any unclaimed allowance will not be carried forward into the new block!
  5. NRE Account: While Non Resident Indians face alot of complications with tax structure, especially Tax Deducted at Source (TDS), they also have some things going in their favor. For example, The interest earned on NRE account is tax-free and continues to be exempt for two years after the individual returns to India. In case a NRI returns to India,, It is suggested to retain deposits held in the FD NRE so as to earn tax-free interest for two more years. After two years, when the tax status changes, these deposits can be moved to the regular savings account or investments.
  6. 80RRB: Income received through Patent royalty (registered on/after 01.04.2003), under the Patents Act 1970 can be claimed up to Rs. 3 lakhs or the income actually received, whichever is less. The taxpayer must be a resident of India who holds the patent.

While it is important to reduce to tax outflow, it is even more critical that it is done in the right way and also by using all appropriate options. Furthermore, making ad hoc investments for last minute tax savings may mean compromising on the larger financial picture. Therefore take professional guidance from a financial advisor and a tax advisor, to ascertain a perfect blend of financial and tax planning and to maintain your financial plans on the right track.

 

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Inflation concerns mean rates stay as is…

As was broadly expected, The Monetary Policy Committee (MPC) on Wednesday left the policy repo rate and reverse repo rate unchanged at 6 percent and 5.75 percent, respectively. Out of six members, five members voted for no rate cut and one member voted for 25 bps rate cut. RBI continued to maintain its view that the 4% target on inflation remains its focus. Retail inflation measured by year-on-year change in the consumer price index (CPI) had recorded a seven-month high in October, and with an indicated range of 4.3% to 4.7% for the next two quarters, along with higher inflationary expectations getting built in through the possibility of higher oil prices and some possible fiscal pressure, this was very much in line with expectations. Surplus liquidity in the system has also continued to decline, reducing chances of rate cuts going forward.

Focus on the real rate of return

With the RBI referring to possible green shoots on growth starting to appear in the economy, it does seem that whilst they will continue to track data closely, strategies that are focussed on interest rates getting reduced are likely to face pressure. However, considering that real rates of return (returns from fixed income investments less inflation) continue to be significantly positive, we continue to believe that investing in fixed income is attractive.

Your Investments

Considering positive real interest rates, and equities continuing to trade at significant premiums to long term price to earnings ratios,  it may be a good idea to continue to have fixed income exposure through a combination of largely accrual, short to medium term, and hold to maturity strategies. For investors willing to continue to look at interest rates heading downwards, dynamic bond funds that have flexibility to move across bond maturities, can be explored for a small portion of the fixed income portfolio.

Your Loans

The RBI’s decision to hold rate cuts could indicate that there is unlikely to be any impact on existing lending rates, especially home and car loans by banks. Whilst the transmission of the rate cuts for bank loans over the last couple of years has only been partial, we believe that interest rates may not head down much more going forward.

Way Forward

Considering that the next policy meeting on Feb 6 and 7 is likely to be post the Union Budget, one will need to track how the government manages its fiscal policy and its focus on growth going forward. Global interest rates headed upwards, will also continue to drive RBI’s decisions on interest rates.

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Sixth bi monthly RBI Monetary Policy FY17

The RBI monetary policy committee ( MPC ) reiterated what it has indicated in its last meeting in December – concerns around core inflation continue to remain with seasonal impacts on currently low inflation on items like vegetables likely to go away over a period of time, a strong global recovery that could create inflationary risks though higher prices of commodities including oil, volatility in global currencies on the back of rate hikes in some developed economies and some pass through of the HRA component of the 7th pay commission implementation.

Whilst none of this was really new, there continues to be a view that what the MPC says and what they will do are different from each other. With two consecutive policies that have reiterated the same thing, we believe that markets will finally believe that the MPC means what they say, and their actions will be consistent with the same.

It is therefore critical to continue to remember that managing inflation in the 4-5% pa range continues to be the number one priority of the RBI , and therefore decisions are likely to be taken keeping this in mind, more than other data points.

Your investments

The RBI also moved its policy stance to ‘ neutral ‘ from ‘accommodative ‘ which possibly means that the interest rate cuts from its side are probably coming to an end. This may mean that investment strategies that were driven around interest rate cuts need to be pared down. However, we need to remember that a neutral policy does not mean that interest rates are going to go up on bonds and fixed income instruments, so there is no need for a complete change in investment strategy on fixed income side. A strong global recovery as indicated in the policy statement ,is actually excellent news for the Indian economy, as a global growth environment has traditionally been positive for Indian companies, and therefore one should expect corporate earnings to get better going forward. The MPC has also indicated that they expect the economy to start showing a recovery going forward, so investments in equities could be enhanced for longer term investors. One also needs to remember that even thought RBI has probably stopped cutting interest rates, banks would possibly continue to cut loan rates as the transmission of the 1.75% rate cuts have only been about 0.85% to 0.9%, meaning that corporate India could continue to see lower loan rates going forward, helping their bottomline.

Your loans

With the banking sector flush with funds, and transmission only partially done, you can expect to see loan rates continue to drop for individual borrowers as well. It is a good time to refinance your loans, especially your home loan, in case you have not done so already. Be choosy about the loan provider that you use, as different variants of loans available could mean that you need to pick what works best for you.

April 6 is the next date to watch for the MPC meeting – expect some volatility in bond and currency markets till then, as they react to this shift to a neutral stance as well as other global events.

 

 

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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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L&T Infotech is a large global IT services and solutions company, NASSCOM (National Association of Software and Services Companies) ranked them the 6th largest India IT Services Company in terms of export revenues in 2014.

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L&T Infotech has come up with an IPO of Rs. 1228 Cr. The details are as under

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Data Source: JM Financial

Purpose of the issue

The purpose is to provide liquidity to the existing shareholders.

Quick facts

  • They offer IT services in diverse industries such as Banking & Financial services, insurance, energy and processes, consumer packaged goods, retail and pharma, media and entertainment, hi-tech and consumer electronics and automotive and aerospace.
  • Their range of services includes application development, maintenance and out sourcing, enterprise solutions, infrastructure management services, testing, digital solutions and platform based solutions.
  • Larsen & Toubro Ltd. was incorporated in 1996. The L&T group provides them with access to professionals with deep industry knowledge and its corporate and business culture

Besides India, they have global presence

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  • Their revenues from continuing operations increased from Rs. 34278million in FY 13 to Rs. 49680 million in FY 15.

Strengths

  • Their business to IT connect model

They are one of the very few IT service providers who are part of such a diversified business conglomerate. The experience and institutional knowledge of the L&T group helps them to capitalise on strategic opportunities at a faster pace.

  • The strong brand support

L&T provides them with a competitive advantage and helps them in attracting talent, clients, capital, benefit of parent’s global network, best corporate governance practices, etc. They can continue to capitalise on the ability to engage with strategic global clients, vendors and partners of the L&T group.

  • Established long term client relationships

Their client base includes world’s largest and well known organisations including 41 out of fortune 500 companies. They have a history of high client retention and derive significant amount o revenue from repeat business.

revenues from continuing operations

They carry out regular surveys which helps them ensure high level of client satisfaction. They provide customised client solutions flexible to their client needs through their “Thought Partnership program “ which is designed such that they work with business leaders from their clients on business specific needs like reducing run costs, realigning IT with business changes and helping tem envision their future technological needs.

 

  • Track record of established process

 

They have expanded their onshore, offshore and near shore presence thus developing their global delivery model. They have a reputation for delivering high quality IT solutions and timely completion of projects. They have a track record of executing a number of large, end to end critical projects in diverse business areas.

Risk Factors

  • Their business will suffer if they fail to innovate, anticipate and develop new services and enhance existing services to keep pace with change in technology.
  • Due to their global presence their revenues and profitability will be impacted by exchange rate fluctuations.
  • They derive a significant portion of their revenue from a limited number of corporate clients and their revenues could decline if they lose a major client.
  • They may be liable to client’s loss caused due to system failure, disclosure of confidential information or data security breaches.

Valuations

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Extracts from P&L

It has experienced earnings growth in all periods except 2013-14.

Earnings per Share

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PE Ratio based on 31 March 2015 EPS

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Comparison with peers

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PRE based on 31 March 2016 EPS

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Data source: JM Financial services, DRHP

Our opinion

You can consider subscribing to this IPO and exiting post listing.It has a reasonable valuation compared to peers at this stage, but it does not have a very differentiated business model.

Data Source: DRHP

Image credit: economydecoded.com

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