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Posts Tagged ‘shares’

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.

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Long Term tax gain tax

One of the biggest items that came out from the recent Budget has been the reintroduction of Long Term Capital Gain (LTCG) tax. This tax is applicable on gains arising from sale of  :

  • Equity Shares in a listed company on a recognized stock exchange
  • Units of Equity Oriented Mutual Funds; and
  • Units of a Business Trust

The proposed tax is applicable to above assets if:

  • They are held for a minimum of 12 months from date of acquisition
  • The Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of equity shares acquired after 1.10.2004, STT is required to be paid even at the time of acquisition

(As per Notice by Ministry of Finance, dated 4th February, 2018)

There are two major points in regards to the proposed regime:

  1. The LTCG tax will be at a flat 10% for any long term gains in excess of Rs 1 lakhs, starting from Financial Year 2018-19 i.e. 1stApril, 2018. In other words, all long term capital gains realized up until 31st March, 2018 will be exempt from the proposed tax.
  2. There is a “Grand Fathering” clause, which in essence ensures that all notional/realized long term capital gains up to 31stJan 2018 will remain exempted from the proposed tax. This means that effectively the closing price of 31st Jan 2018 would be the cost price for LTCG calculations.

How would the Long Term Capital Gains Tax be calculated?

If you sell after 31.3.2018 the LTCG will be taxed as follows:

The cost of acquisition of the share or unit bought before Feb 1, 2018, will be the higher of :
a) the actual cost of acquisition of the asset
b) The lower of : (i) The fair market value of this asset(highest price of share on stock exchange on 31.1.2018 or when share was last traded. NAV of unit in case of a mutual fund unit) and (ii) The sale value received

Scenarios for computation of Long Term Capital Gain

  • Scenario 1:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31st Jan 2018 was Rs 200 and it was sold on 1st April 2018 at Rs. 250.

As actual cost of acquisition is less than FMV, the FMV will be considered as cost of acquisition and therefore the LTCG will be Rs. 50 (Rs. 250 – Rs. 200)

scenario 1

  • Scenario 2:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31st Jan 2018 was Rs 200 and it was sold on 1st April 2018 at Rs. 150.

Actual cost of acquisition is less than FMV. However the sale value is also less than FMV. Therefore the sale value will be considered as cost of acquisition and therefore the LTCG will be NIL (Rs. 150 – Rs. 150)

scenario 2

  • Scenario 3:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31st Jan 2018 was Rs 50 and it was sold on 1st April 2018 at Rs. 150.

As actual cost of acquisition is more than FMV, the actual cost of acquisition will be considered as cost of acquisition and therefore the LTCG will be Rs. 50 (Rs. 150 – Rs. 100)

scenario 3

  • Scenario 4:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31st Jan 2018 was Rs 200 and it was sold on 1st April 2018 at Rs.50.

Actual cost of acquisition is less than FMV. As sale value is less than both the FMV and actual cost of acquisition, the actual cost of acquisition will be considered as cost of acquisition and therefore there will be Long Term Capital Loss of Rs. 50 (Rs.50 – Rs. 100). Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the IT Act.

scenario 4

Note, there is no clause of indexation on cost of acquisition. Setting off cost of transfer or improvement of the share/unit will also not be allowed.

 

LTCG on these instruments realized after 31.3.2018 by an individual will remain tax exempt up to Rs 1 lakh per annum i.e. the new LTCG tax of 10% would be levied only on LTCG of an individual exceeding Rs 1 lakh in one fiscal. For example, if your LTCG is Rs 1,30,000 in FY2018-19, then only Rs 30,000 will face the new LTCG tax.

What should you do now with your Equity Portfolio?

Even with the reinstatement of this tax, we believe that equities are still an efficient post tax investment avenue. We would therefore continue to recommend to remain invested in equities provided the investment horizon is long. Alternatively, if you require monies in the short term, this may be a sound window to book profits and shift to less aggressive avenues.

 

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image 1

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.

image 2

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:

image 3

 

  • 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

image 5

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)

image 6

 

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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