Feeds:
Posts
Comments

Posts Tagged ‘#Exchange’

IPO 1

The year so far has not been going well for the equity market yet India has seen a flurry of IPOs getting launched. Between January to June 2018, India has recorded as many as 90 IPO launches, the highest globally so far. The latest to join the band wagon was HDFC AMC and coming up next is Lodha.

Does it make sense to invest in the IPOs? And if yes how do you pick one? Read to find out more.

What is an IPO?

For a company to grow and expand it requires huge amounts of capital; an IPO helps them raise much more money than what they can raise through borrowing or private equity investors. An IPO stands for Initial Public Offering; it is the very first time a company offers its stocks to the public. Prior to an IPO the company is considered private with a relatively small number of shareholders. With the IPO the company becomes public and thereafter, it’s shares can be traded through an Exchange.

Why is there a frenzy around IPOs?

Every investor is looking for a diamond in the rough. Through an IPO the investors tries to purchase the shares at an IPO price which may be significantly lower than it’s future market price when it eventually starts trading on an exchange. This is where huge capital gains can be made.

As per data, the HDFC AMC offer was over subscribed 83 times by the end of the 1st day. What this means is that there was a demand of over 83 times for the shares offered by the company. The investors saw huge growth potential in the company and every one wanted to get a piece of it. Unfortunately, getting an allotment of a hot IPO can be very difficult, if not impossible.

Understanding the IPO process

A company that wishes to launch an IPO has to first register itself with Securities and Exchange Board of INDIA (SEBI) and submit its prospectus for approval. Once the SEBI gives a go ahead, the company fixes the price and the number of shares it plans to issue through the IPO.

 There are two types of IPO issues: fixed price and book building. In the former, the price of the share is decided in advance. In the latter the company offers a prices range and the investor needs to bid for the share within that range. The upper limit is known as the cap price while the lower is called floor price.

While applying for shares the investor needs to bid as per the lot size mentioned in the prospectus. Lot size is the minimum number of shares you have to apply for during an IPO.

For eg: If the you wished to buy 50 shares of XYZ company and the lot size is 10 shares/lot then you would have to bid for 5 lots. As per the SEBI rules, one can’t bid in decimals.

It is important to note that even if you have successfully subscribed to an IPO there is no guarantee that you will receive your lot. If the issue is popular and gets oversubscribed then it becomes difficult to issue even 1 lot to each successful applicant. In such cases the lots are allotted based on a computerized lucky draw.


Things you should consider before applying for an IPO

  • Read the Red Herring prospectus. It can be difficult to analyze the performance of a private company since there is no historical data to draw on. So the red herring becomes an important document to gauge the business prospect and operations of the company.
  • Look closely at the management team; they should be capable of steering the company towards growth after it goes public. Look for how they plan to utilize the funds received from the IPO.
  • Compare it’s bid price to that of the competitors in the market. That will give you a fair idea as to if the IPO is over priced or a value purchase.
  • You will need to have a Demat account since the shares can not be received in the physical mode.
  • Some investors like to subscribe to an IPO because some lucky people had bought shares in the IPOs of companies that went on to pay huge dividends or soar in value. But just because investing in IPOs has worked for some in the past doesn’t mean you’ll get the same returns.
  • The target investor for an IPO are the institutional investors and a big part of the shares are reserved for them. This leaves a small percentage of shares available to the retail investor. Your best chance to get an allotment would be to check the “cut-off price” option in your application form. This way if the IPO is oversubscribed, then you have a better chance of getting a subscription.
  • Since you will need to block the money required while bidding, you can use an ASBA (Application Sorted by Blocked Amount)account while applying for shares. The blocked amount stays in the ASBA account and earns interest till the allotment can happen. And only an amount equivalent to the allotment is deducted.

Going back to the main question, should you invest in an IPO? The answer depends on your investment outlook. IPOs are definitely a good investment option if you are looking for value investing or under the radar deals but then so is everyone else.

If the company has been in the business for long, has good performance history and management team then it definitely is worth the shot but then again there is no guarantee that you would be able to get your hands on a lot or two.

If you’re not sure whether investing in an IPO will be a good move for your portfolio, consider talking to a financial advisor. A financial advisor can evaluate your investment decisions in the context of your overall financial situation and goals.

Advertisements

Read Full Post »

indian-stock-market-news-update-as-on-april-02-2014

India is currently among the most watched Emerging Market nations. To top that, the Indian Equity Markets have witnessed unprecedented growth in the recent months. The YTD returns for Sensex alone has been 26% (data from BSE India). The euphoria and high confidence on the Indian Equities has continued to remain, especially from the institutional investors both foreign and domestic.

This is also leading to make many individual investors question whether they should invest in equities or sit on the sidelines. While individual risk appetite and time horizon would be some of the basic factors to understand before investing, there are many other fundamental factors to track. While the debate has been raging on as to which indicators should be looked at or ignored to make sense of the valuations of the Indian equity markets, the following factors can help bring some sense of clarity to the overall picture. Factors such as:

Current Price to Earnings Ratio (P/E Numbers): One of the most traditional tools used globally at gauging the valuations of an equity market of a country. In the last one year alone (based on data from Oct 16 to Oct 17), the P/E Ratio for S&P BSE Sensex has averaged close to 22 times in comparison to its historical average of approximately 17 on a trailing basis. For the BSE Mid Cap and Small Cap of the same period, the P/E valuations are at an average of 33.8 and 81.13 times.

Corporate Earnings: P/E Ratios are directly linked to the corporate earnings of the country. As per Kotak Institutional Equities Estimates, the Expected Earnings for companies representing the Nifty 50 Index are approximately 2% in FY 2018. A variety of reasons are attributed to these low earnings expectations, most famously discussed are the implementations and effects of Demonetization and Goods and Service Tax (GST).

Crude Oil Prices: Nearly 80% of India’s energy needs are import dependent. A direct consequence of this is the risk to the country’s inflation rate if the prices of crude oil are to rise. A rise in oil prices results in lower cashflows/profits for companies and higher prices for consumers. Brent crude oil prices are currently firming up at prices upwards of 60$ per barrel. This is a definite concern from an Indian economy perspective.

Exchange Rates: The Rupee is currently considered overvalued basis its 10 year average (Source: Kotak Research). This has a dual impact on the economy i.e. (A) it increases attractiveness of imported products, resulting in increased competition for domestic companies and lower profits; (B) it decreases the value of exported products and therefore hurts the margins of export based industries such as the IT sector. Both have resulted in muted growth prospects for these respective industries.

Bond Yields: In an growing economy like India, both equities and bonds compete for capital. In a equity bull rally, money is taken out from bond markets and pumped into equities, forgoing risk to capital for riskier investments. Currently bond yields are inching up to the mid 2017 high of 6.987% yield for the 10yr G-Sec. However there has only been net inflows into fixed income. Foreign Portfolio Investments into Government Securities have already reached 83.94% of their allotted limit (data dated as per 6th Nov NSDL)

Inflation Rate: Inflation brings about it own risks to the stock markets. In the last Monetary Policy Committee meeting, the RBI revised the inflation projections for the rest of FY 2018 upwards to 4% – 4.5%. This may indicate a stop to future rate cuts, freezing any possibilities of reduction in lending rates. Medium term consequences for companies could possibly mean dearer than expected debt to  service, resulting in subdued profits and revenue.

Role of FIIs: The way that Foreign Institutional Investors park monies in the market can give an indication to the current picture of that market. While FIIs were very bullish on Indian Equities for most part of the calendar year, starting June they slowly but surely tapered inflows in equity, finally resulting in net outflows in the month of September and October. (Source: moneycontrol)

Global Scenario: On a global scale, economies are starting to look up, with further growth expected. According to IMF Economic Outlook, average expected GDP growth for FY 2017 is 2.5%. Globally, equity markets have participated in this growth including India. What probably may need to be put in perspective is that the rally in Indian Equities may be partly due to the global rallies taking place. Therefore the Indian equities are associated with risks in terms of foreign external factors like outbreak of war in the Korean Peninsula. Such events are likely to have negative impacts on the domestic markets.

Keeping in mind the above mentioned factors, Plan Ahead Wealth Advisors has a definite view that current equity markets are over valued and investors should exercise caution. The not so positive indicators from these mentioned factors should mean a significant correction cannot be discounted, keeping us wary of diving too much into equities without first educating investors of the potential risks in the short to medium term horizon.

 

 

Read Full Post »

1 (1) (1)In a world where access to internet is becoming more and more widespread, information on almost anything is subsequently becoming easier to find, simply by “Googling” it. Furthermore, free information quite often results in self proclaimed experts of the field, sometimes resulting in unfavorable outcomes for anyone who follows their views/advice without understanding how such individuals arrived at those outlooks.

As such it is important to separate a few facts from myths in terms of what data an individual should consider when faced with some common financial planning aspects rather than what is most commonly/easily available of the internet.

Sending children abroad for higher education is no more a matter of consideration for the upper class families. Nowadays, more and more middle class families aspire to send their children outside India for their education. As such, planning for such an major event requires careful attention. The common misconception is to take simple average rise of Indian education costs and apply the same data for education in a foreign country. However, two critical data points get missed out in such an exercise, (A) the rise in education costs in that particular country to which you plan to send your child. It is inappropriate to consider the inflation numbers would be identical or even similar to that of India. (B) the rise/fall in the currency exchange rate for the two countries in consideration. The following illustration should help clear this concept:

Particulars % Change
Rise in average education cost of  universities in the U.S. in last 10 years 5%
Rise in Currency Exchange rate in last 5 years 4%
Total Inflation to Consider 9%

Now In comparison the inflation rate for the Indian colleges is approximately 10%-11% p.a.

Talking about inflation, another topic of debate is if the Consumer Price Index (CPI) data is an adequate inflation benchmark, especially for higher middle class/ HNI families. To put things in perspective, following is a snapshot of items considered in the CPI basket and their respective weight-age:

Sr. No Particulars Weightage
1 Food and Beverages 45.86%
2 Pan, Tobacco and Intoxicants 2.38%
3 Clothing and Footwear 6.53%
4 Housing 10.07%
5 Fuel and Light 6.84%
6 Miscellaneous 28.32%

(Source: Ministry of Statistics Programme Implementation Circular Dated 14th March,2017)

As you can see, the weight age of expenses, while more suitable for the lower strata of income generating families, might not be appropriate for the higher end. Something like expenses on food/groceries would certainly not be half the expenses. As such, while current CPI numbers are around 3.5%, indicating that going forward inflation is to be expected around that range, it would be right to assume that a middle class family living in Mumbai would face the same inflation rates. A more appropriate method would be to calculate the individual inflation of major expense heads i.e. food, rent, education, lifestyle expenses and find the average of the same. You would more likely discover a very different inflation rate compared to the CPI.

Past returns is a favorite filter for most investors when choosing products of an asset class, especially stocks and mutual funds. However almost all online data provided by various service providers show Trailing Returns.. Trailing returns show how a fund has performed from date A to date B, by simply seeing the difference in NAV of those dates. But it does not show how consistently it performed in that period. A recent upswing in its performance can skew the average of say a 3 or 5 year performance. To adjust for this, Rolling Returns is considered. It does not take only one block of a 3year period but several blocks of such periods. Thus it allows you to see a range of performances across blocks of time. They therefore capture performance of funds over different market periods, giving a more reliable view of the fund’s performance

Similarly, another topic of debate is usage of Total Return Index v/s Simple Price Index as a benchmark when selecting a mutual fund. A Simple Price Index only captures the capital gains due to stock movements in the fund. But the Total Return Index considers the capital gains and dividend paid by the companies to the investors. Hence it shows a truer picture of the returns. Almost all mutual funds today benchmark their returns against the Simple Price Index. This can result in showing higher alpha generation by the fund which may not give the right picture to the investor. For example, Nifty 50 Price Index over past one year (as on 27th October 2017) was 18.63 percent and Nifty Total Return Index for the same period showed 19.75 percent. Hence a mutual fund will show different alpha based on the benchmark used.

Plan Ahead Wealth Advisors believes that Rolling Returns and the Total Price Index are the correct data points to consider.

Finally, the widespread use of the general rule of thumb when it comes purchasing a Term Insurance Plan i.e. the sum assured is to be 15-20 times the annual income. Procuring a term plan should be about covering financial risks that may befall on the dependants in case of an unfortunate event. Financial risk does not only include loss of income but also other factors such as pending liabilities, future financial goals, current assets that can be redeemed shortly to meet any obligations. Such factors also play a significant role in determining how much cover needs to be taken.

Using the right data is critical during the financial planning process. As you can see, wrong data can lead to significant errors/assumptions which can have detrimental impacts.

Read Full Post »

%d bloggers like this: