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InterGlobe Aviation Ltd, which runs India’s largest airline by market share IndiGo, and its existing investors plan to sell around 10% of its equity.

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Source : Economic Times

Quick facts

  • First big listing after Jet: IndiGo’s IPO will be the first big listing afterJet Airways’ 2005 IPO. Jet Airways (India) Ltd, then India’s largest private airline, raised 1,900 crore in its 2005 IPO. The carrier, which is part- owned by Etihad Airways PJSC, now has a market capitalization of $494 million while SpiceJet Ltd is valued at $172 million
  • Existing Shareholders:

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  • Use of Funds: According to its share sale prospectus, IndiGo will use 1,165.66 crore to retire liabilities and acquire aircraft. It will spendRs.33.36 crore for equipment acquisition and rest for general corporate purposes.

What works for Indigo

  • Only profitable Indian carrier: IndiGo is India’s largest no-frills airline and has been the only profitable Indian carrier for the past seven years out of its nine years of existence. Indigo has won a reputation for its service quality and on-time performance in an industry characterized by debt and accumulated losses. The airline turned profitable in fiscal 2009 and has remained profitable in each subsequent fiscal through FY14. No other Indian airline has consistently remained profitable over the same period, according to consulting firm CAPA India.
  • Order Book: IndoGo maintains largest order book of any Indian carrier. The significant volumes that they generate mean that they have much better bargaining power vis a vis other players, allowing them to keep their costs down.
  • ASK (Average seat kilometers): ASK measures an airlines passenger carrying capacity. IndiGo’s carrying capacity has increase from 2004 to 2014 while in the same period for other carriers it has gone down.
  • Falling jet fuel prices: Falling jet fuel prices in the last one year Fom Rs.165.6 in September 2014 to Rs. 92.24 in September 2015 will reduce the input cost for airline industry dramatically.

Risk factors

  • Continuing to apply the low cost carrier model: The airline industry is characterized by low profit margins and high fixed costs, including lease and other aircraft acquisition charges, engineering and maintenance charges, financing commitments, staff costs and IT costs.

Significant operating expenses, such as airport charges, do not vary according to passenger load factors. In order for them to profitably operate their business, they must continue to achieve, on a regular basis, high utilization of their aircraft, low levels of operating and other costs, careful management of passenger load factors and revenue yields, acceptable service levels and a high degree of safety.  Some of these factors are not under their control. Therefore, profits may vary. Any change in fuel costs could significantly impact profitability.

  • Production delays for Airbus A320neo aircraft: Production delays in the order placed for Airbus A320neo in 2011 could impact their expansion plans.
  • Foreign Exchange Risk of depreciating Rupee against Dollar: With substantially all their revenues denominated in Rupees, they are exposed to foreign exchange rate risk as a substantial portion of their expenses are denominated in U.S. Dollars, including their aircraft orders with Airbus.

Quantitative Factors:

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Comparison with industry peers

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Note: The above shares have a face value of Rs.10

IndiGo is the only profitable airline currently, though Spicejet has just started to turn profitable post the change in its management.

Other Ratios (Source: Mint)

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Recommendation

The company’s track record and focus on the basics provide comfort to investors, whilst its dividend payout strategy prior to the IPO has raised quite a few eyebrows and negative questions around governance. With India being one of the fastest growing markets for air travel, a well managed fleet expansion plan could pay off well for long term investors, especially as low cost airlines have tended to be the only category of the airline business that have made monies for investors.

Investors could look at investing in the Indigo IPO.

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Recent census data seems to indicate that the median household size is now less than four for the first time in urban India. This means that family sizes are shrinking, and over 70% of households are not multigenerational any more. As India as a society becomes more nuclear, planning for retirement becomes even more critical, with children not being a dependable retirement plan any more.

We find that most investors tend to start working seriously on their retirement plans between the age of 35 and 40. Considering that life expectancy in India is increasing rapidly and medical advancements make it very likely that we will live much longer than we currently envisage, creating a corpus that can outlive us can be quite a challenge. To put it into perspective, someone starting his retirement planning at 40 will save and invest for 15 to 20 years till he turns 60, and expect these savings to support him and his family for a 25 to 30 year period.

Most investors have certain investments in their portfolio that are earmarked for retirement. The moot question is – Will those be enough? Since a monthly expense of Rs 40000 per month today would be close to Rs 2.75 lakhs per month after 25 years assuming an inflation rate at 8%, these may just not be enough. So how does one plan to retire rich. Here’s our six step guide:

Step 1: List – Make a list of your current monthly and annual expenses

Step 2: Analyse – Critically evaluate each expense head to see whether these expenses are likely to increase or decrease post retirement.

Step 3: Inflate – Apply an appropriate inflation rate to these expenses to arrive at the likely expenses at retirement age.

Step 4: Estimate – Estimate the corpus required for the inflated expenses to support you during the period of retirement till death.

Step 5: Invest – Evaluate the amount you need to save each month/year to achieve the desired corpus. Invest the amounts in a diversified portfolio that can help you achieve the desired corpus.

Step 6: Monitor – Revisit the plan annually to ensure that it is on track.

Since the rate of return on their investment portfolio is a variable that investors can target to change if they wish to achieve their targeted retirement corpus, we strongly advise that investors look at investment strategies that, although riskier over shorter time frames, have the potential to outperform over longer periods. Investments in asset classes like equities for a retirement portfolio should be looked at very closely for their potential to deliver superior returns over longer time frames.

In addition to the quantitative aspects of retirement, we also urge investors to answer two questions when they plan for retirement

  1. What would your ideal day be like when you retire?
  2.  And will this continue to be your ideal day if you do this day after day?

We find that these answers are also very difficult for most investors to find, as a calculator cannot answer this for them. We urge investors to think deeply about these answers today so that they are prepared for retirement not only financially but holistically.

This article was written by Vishal Dhawan, CFPCM 

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The suspense over the Fidelity review of its India mutual fund business is finally over, with Fidelity announcing that its India mutual fund business is being taken over by L&T Mutual Fund. The good news is that the speculation around who is going to take over the fund is now over, a matter that has been the matter of great speculation and discussion over the last few weeks. The other good news is that with multiple suitors for the Fidelity India  business willing to pay a decent sum for the Fidelity India business ( 5% to 6.2% of Assets under Management), other mutual funds obviously continue to view India very favourably  for their mutual funds business. Thus, the exit of Fidelity should definitely not be viewed as a negative.

The bad news is that the equity team of Fidelity, which boasts of one of the best track records in the country as far as domestic equity fund management is concerned, is not going to move to L&T Mutual Fund and is only going to assist with the integration. Whilst this takeover is subject to an approval from SEBI and Competition Commission of India ,  and the integration post that is likely to take a few months, a large number of investors would be contemplating on what should be done next.

Here’s how we think investors need to approach this:

Broadly, Fidelity funds in India can be classified as under:

1.  Domestic equity funds – Fidelity India Equity Fund, Fidelity India Growth Fund, Fidelity Tax Advantage, Fidelity India Special Situations Fund and the Fidelity India Value Fund are the funds that are prominently in this category.

2.  Debt funds – Fidelity India Short Term Plan, Fidelity Flexibond and Fidelity Flexigilt are the funds that are prominently in this category

3.  International Funds – Fidelity International Opportunities Fund and Fidelity Global Real Assets Fund are the funds that are prominently in this category

4.  Hybrid funds – Fidelity Childrens Gift Fund and Fidelity Wealth Builder are the funds that are prominently in this category

Whilst L&T as a brand does give a great deal of comfort to a large number of Indian investors, and a large number of domestic Indian managers have done very well vis a vis foreign fund managers ( HDFCs mutual fund schemes are a very good example),the performance of equity funds of L&T so far have not been very inspiring. L&T has been working towards strengthening its fund management team, with M Venugopal( ex co head equities – Tata MF) having joint as head of equities at L&T recently. Whilst it is very early days to measure his performance at L&T, L&T equity funds have so far underperformed Fidelity funds and their peer group fairly significantly. Thus, both domestic equity funds and hybrid funds that have varying amounts of equity exposure in them will need to be tracked carefully and if there is a drop in performance of any of the erstwhile Fidelity funds due to the new changes at the helm over the next 3-6 months, we would recommend that investors move to other funds. It is critical that this measurement is done against the relevant peer group and an appropriate index so you may need to take the help of your advisor for this purpose.

As far as the debt funds are concerned, L&T has been a reasonably good track record. In most debt fund categories there is little to choose between performances of Fidelity and L&T schemes. Therefore we do not see the need for an immediate change. However, we do recommend that investors track these performances closely as well to ensure that there are no slippages on this front.

As far as international funds are concerned, there is no clarity yet on how these will be managed as the fund management processes and access to global resources that Fidelity has, due to their large international presence, will be hard to replicate for L&T. We will need to await clarity on how this part of the business will be managed, as managing these portfolios without the support of an international business will be very challenging. As soon as clarity  on the fund management process for international funds is clearer, the decision on whether or not these investments need to be retained can be taken.

Whilst taking the final decision on staying invested or deciding to exit, tax implications, lockins and exit costs will also need to be considered. Therefore, do not react immediately to this news but evaluate this in the context of multiple parameters before you finally decide.

This article was written by Vishal Dhawan, CFPCM 

 

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India seems to be getting more and more integrated with global financial markets. Thus, even though most Indian investors probably have only a small portion of their investments overseas, events that take place globally seem to impact financial markets in India significantly and as a result domestic Indian portfolios as well. Whilst there is no shortage of news and information on what’s happening in Europe and the US, we believe that its critical to focus on the key variables in these economies and the likely resultant risks for Indian investors.

Lets start with the US, where the news flow has largely been positive over the last few months, at least as far as employment data, retail sales and GDP growth is concerned. Whilst this is obviously heartening, a significant amount of the growth seems to be emerging from increased inventory levels and businesses restocking in anticipation of increased consumer spending.

Thus the key question is, will the consumer actually buy?

The US consumer has to deal with higher oil prices, continuing falls in home prices, a low savings rates and above all, a tax structure that may end up changing depending on who is elected as the President of the United States later this year. Therefore, the consumer may not necessarily buy as anticipated, and the result will be a GDP growth rate that could well slip significantly below the currently projected 2.5% to 3%. Therefore, the outlook for both the US and the US dollar may not be as bright as it currently seems.

Moving to Europe, where there is a sense of relief post the Greek settlement last week, the incremental liquidity of 1.1 trillion euros through LTROs has obviously been a huge help in deferring the problems of Southern Europe.  However, there seems to be a high likelihood that Portugal, Greece or even some of the other countries could walk out of the Eurozone. Thus, Europe will continue to suffer from short term solutions for long term challenges. A third round of LTRO could well be the next solution.

Thus, as an Indian investor, whilst increased global liquidity may well take asset prices up significantly, just like they have in the last couple of months, it is critical that investors focus deeply on valuations before making their investment decisions, be it equities, real estate or gold. A diversified investment strategy continues to be the best solution in these times in our opinion. It will probably continue to come second to the best asset class return over the next 12 months but the question is “ Can you really predict which will be the best asset class over the next 12 months?”

This article was written by Vishal Dhawan, CFPCM 

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We are now in the final quarter of addressing one of the biggest myths about managing money that is, managing money is all about returns on your investment. Whilst returns are no doubt an important component of managing money, we believe it is critical to take a more holistic view on finances. A quick recap on what we have already covered as to do items for quarter 1, 2 and 3

January – Put it all together

February – Question what you really want your money to do for you

March –  Keep what matters, let the rest go

April – Plan for emergencies and contingencies

May – Put your risk control mechanisms in place

June – File your taxes correctly and diligently

July – Use technology to improve the management of your finances

AugustBuild a team of trusted advisors

September – Build your succession plan

October –   Invest in yourself – There is a tendency to go into a comfort zone with respect to our professions and careers, especially as we become masters at doing the same thing over and over again. Macolm Gladwell in “ The Outliers” has shared a 10000 hour rule which I’m sure a lot of you already know about. For those who don’t, the 10000 hour rule indicates that mastery in a field is driven by spending 10000 hours in it. So what happens after you have spent 20 hours a week doing the same thing for 10 years? Maybe its time to move your cheese before someone else does that for you. Just like companies spend a significant portion of their revenue on research, how many of us have a financial plan that includes spending a portion of our income( or our wealth) on improving ourselves. As Warren Buffett says “ Investing in yourself is the best thing you can do.”

NovemberAccept that you are an investor – Whilst most of us start off as investors, there is a high risk of becoming a speculator along the way. The difference between an investor and a speculator is two fold in our opinion – firstly, an investor thinks more with his brain and less with his eyes,  and secondly, an investor knows what he owns, why he owns it and can explain that clearly. Avoid buying an investment just because it has done well in the recent past or because it excites you. As George Soros says” If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” In case you cannot avoid speculating, restrict it to a very small portion of your portfolio and understand that you are speculating, not investing with that portion of your wealth.

December  – Review your plan and rebalance your portfolio – Whilst its great to have a plan and even better to implement it, its important to ensure that it is on track to deliver what was expected from it. Whilst different types of investments deliver results over different time frames, it is critical to evaluate that the overall plan is moving in the direction that you wanted it to. Whilst it is good to spend some time on the specific products that you have invested in, the overall allocation across different asset classes is ideally where the focus should be, so that assets that have become cheaper can be added to in the portfolio, and more expensive assets can be reduced. This simple strategy of rebalancing , at least once a year, can make a significant difference to your overall portfolio returns.

Whilst we are already at the end of February now, it is never too late to start in case you have not started implementing this calendar already.

This article was written by Vishal Dhawan, CFPCM 

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We are now at that critical time of the year, where new year resolutions could be in different stages of action or inaction. Whilst I’m sure that not all of you make new year resolutions ( why should making a resolution in the new year be any different from making a resolution on your birthday, or your wife’s birthday, or in fact any other day), there are probably a large number of you who do. Since losing weight and quitting smoking/drinking are probably the top two resolutions for the year globally, we are simply attempting to create a monthly calendar to simplify the process of managing your money. One of the biggest myths about managing money is that it is all about returns on your investment. Whilst returns are no doubt a critical component of managing money, we believe it is critical to take a more holistic view on finances.

January – Put it all together – There is no point in having made a large number of investments because of the potential for above average returns or tax savings or putting away excess savings and not knowing where the documents for these are or how they are doing. Create an inventory of all your savings and investments – bank accounts, insurance policies, mutual funds, shares, demat statements, real estate agreements, credit card statements, loan documents, amongst others. Whilst this may sound simple, it can be much more challenging than it seems. Whether you wish to maintain a set of files with all these or use software for tracking, it is critical that all the records are well documented and stored so that you or your dependents have easy access to it. Treat it like an ISO certification for yourself whereby you or your dependents can retrieve any document within a maximum of 15 minutes after you realize you need it.

February –  Question what you really want your money to do for you – This could vary from person to person, for some it is retiring at 45, for another sending a child to study overseas, or for someone else, visiting 100 places before he or she dies. As you think deeply about these life goals, you will find monies would have an important role to play in a large number of these. Try to put numbers to each of these goals and estimate how your finances are currently designed to get you to these goals. In case you find this process difficult,you may need to seek the help of a certified financial planner.

March Keep what matters, let the rest go – This is one of the most challenging parts of managing money, since you may have to admit to mistakes that you made in the past. Past performance should not be the only factor driving this decision. For example, if you have a large number of small value insurance policies that do not give you substantial life cover, it may be better to surrender these policies and buy a term insurance cover that will allow you to cover the risk to your life meaningfully for your dependents. Or equity investments made in the past that have not delivered for more than 7 years, may need to be substituted with better equity investments. Remember to separate underperformance of equity markets from underperformance of specific stocks or equity mutual funds in your portfolio.

I will endeavour to continue with this calendar over the next few columns as well. I look forward to hearing from you on what you believe is an ideal calendar for the second quarter of 2012. You can write to me with your wishlist on vishal@planaheadindia.com or by leaving your comments.

This article was written by Vishal Dhawan, CFPCM 

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With the India-England series having ended with a 4-0 whitewash for India, a significant amount of time is now being spent by experts and commentators to understand what went wrong with the same Indian team that won the World Cup just a few months ago and was the number 1 rated test team before the series started.

In just a few weeks, a captain who could do no wrong has been criticised for not talking enough to his bowlers, reputations of senior players with significant experience have been severely hit and India has been relegated to third place in the world rankings.

We believe that there are significant lessons for investors with regard to their investment portfolio from this test series loss that India faced.

1. The past should not be looked at as a prediction of the future

Investors would recollect that there were significant inflows into equity mutual funds, stocks, IPOs and NFOs (New Fund Offerings) on the basis of approximately 40 per cent annualised return over the previous 5 years till 2007.

Investors expected this to repeat over the next 5 years as well. Those who invested during that period are still seeing returns that are either negative or sub-optimal today. Similarly, investors are looking at equity returns over the last 5 years today and shunning equities as the last 5 years returns on the Sensex are below 8 per cent per annum. They should avoid looking into the rear view mirror to predict the future. In the same way, just because this same Indian team won the World Cup earlier this year and had performed well in the past in test series both in India and overseas, it does not make it an automatic qualification to continue to do well in the future.

2. Build a strong foundation

The Indian cricket team made some fundamental mistakes in England like dropping catches and carrying injured players who were unable to even play full matches, forget playing to their potential. In the same way, investors tend to make some fundamental mistakes like not planning for a contingency fund of 4-6 months that may be required in case of a job loss or medical emergency or not having adequate life insurance cover to provide for their family in case of an unfortunate event. There is a tendency to focus on investments excessively, without taking care of the basics.

3. Experience matters

Rahul Dravid was the only batsman who redeemed himself in the star-studded Indian batting line-up that failed so miserably. His rich experience of playing in English conditions surely helped him. In the same way, money managers with experience of handling money during both positive and negative economic environments can be critical, as they can tailor their responses accordingly and use their experience to their advantage.

4. Build a well-balanced portfolio

There were times where it looked like the Indian team did not have the right blend of experience and youth to cope with the conditions. In the same way, your investment portfolio needs to have a good balance of different asset classes like equities, fixed income, commodities and real estate rather than having only one of them that is significantly overweight like real estate or gold.

5. Don’t focus only on the stars, track the universe of portfolio managers

The England team that beat India so comprehensively had also done extremely well over the last few years and was already the world no. 2 before the series began. In the same way, you need to look at your portfolio managers carefully and you will find that there is not just one manager who delivers all the time. There will be portfolio managers who are probably doing nearly as well as the ones who are ranked at the highest level and you need to track them as well. In case you find that difficult, you may need to use the services of a professional advisor who tracks portfolio managers more closely.

6. Worry about the silent killers

A large number of players, though apparently fit, were obviously not so and were silent about it. They thus failed to deliver when required. In much the same way, inflation is a silent killer on your portfolio. Whilst fixed income may give you a lot of comfort and help you avoid any fluctuations on your portfolio, it is unable to match inflation most of the time and is thus unable to deliver when required for your goal.

Whilst I am sure there are multiple other lessons that can be learnt from this series loss, we believe investors should look closely at some of the above lessons in case they have not done so already.

This article was written by Vishal Dhawan, CFPCM and appeared in the EXIM INDIA newsletter on 26th September 2011 .

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