The subscription for the eleventh tranche of the Sovereign Gold Bonds (SGBs) scheme, the 2020-21 Series XI, opened from February 1 and is slated for closure on February 5. The SGBs will be allotted on Feb 9. Here’s all you wanted to know about this ‘golden’ investment opportunity.
2020-21 Series XI SGB issue details
Offer period – Feb 1 to 5 (bonds to be issued on Feb 9)
Issue price – Rs 4,912 (per gram of gold). There is a discount of Rs 50 per gram to investors applying online and the payment against the application is made through digital mode. For such investors, the issue price of gold bond will be Rs 4,862 per gram of gold.
Maturity – Eight years with exit option from the fifth year to be exercised on interest payment dates; these bonds will be eligible for trading from the date as notified by the RBI
Subscription limits for individuals – A minimum 1 gram of gold and a maximum 4 kilogram of gold per person in a fiscal (the April-March period); available in units of 1 gram of gold and multiples thereof What are gold bonds
Sovereign Gold Bonds are government securities denominated in grams of gold. These are one of the best substitutes for holding physical gold. SGBs are issued by the central bank on behalf of the Government of India. Investors have to pay the issue price in cash and the bonds are redeemed in cash on maturity.
SGBs have a tenure of eight years. Early encashment/redemption of the bonds is allowed after the fifth year.
Interest on SGBs is taxable but the capital gains tax arising on redemption of the bonds is exempted for individuals. The indexation benefits will be provided to the long-term capital gains arising to any person on transfer of the bonds.
You can even use gold bonds as collateral for loans.
Most importantly, Sovereign Gold Bonds carry the sovereign guarantee as these are issued by the Reserve Bank of India on behalf of the Government of India.
Why buy gold
There are many reasons to consider buying gold. The yellow metal acts as a hedge against inflation. Gold is said to be a relatively stable investment compared to equities, adding diversification to a portfolio. Gold bonds can also be purchased easily.
Why invest in gold bonds
Sovereign gold bonds carry a fixed interest rate of 2.50% per annum on the amount of the initial investment. The interest is credited semi-annually to the bank account of the investor.
One can hold gold bonds in demat form.
Gold bond prices are linked to the price of gold of 999 purity published by India Bullion & Jewellers Association (IBJA).
By investing in SGBs, you can eliminate the risk of theft and the cost of storage. Also, SGBs are free from issues like making charges and purity associated with purchase of gold in jewellery form. Investors are assured of the market value of gold at the time of maturity and periodical interest. If you are interested in investing in SGBs, connect with the Wealthzi team on service@wealthzi.com or visit wealthzi.com.
A global crisis notwithstanding, cometh the hour, cometh the woman. Union Finance Minister Nirmala Sitharaman has delivered a power-packed budget that makes all the ‘right’ moves. In doing so, the annual event, which over the years has lost much of its sheen, was celebrated by the markets with massive buying. Monday and Tuesday so far has seen equities climb to near all-time highs, a swift change in sentiment from a week back when there was trepidation all around on the fear of higher taxes and lack of fiscal space to go big on spending.
Market focus
From an equity market perspective, the budget, on balance, has turned out well, with no negatives on the taxation front and several long-term structural initiatives that augur well for medium-term growth.
The push for capex and investments could trigger the revival of an investment cycle. This could spread to multiple sectors such as Cement, Auto, BFSI, Metals, and Capital Goods.
But do remember that with Sensex again close to 50K and Nifty near 14600, when the fine-print is absorbed, the market focus would return to the fundamentals, viz. corporate earnings growth.
What stood out
The Union Budget 2021-22 was not afraid to go expansionary, and become aggressive on upfront infrastructure spends. Importantly, it boosted transparency & credibility in terms of accounting, spends, estimates.
Comparable to P Chidambaram’s 1997-98 Dream Budget, Sitharaman’s budget that will be remembered for a long time given its distinct investment vis-a-vis consumption bias and no rejig or tweaking with taxes, both of which provide relief as well as continuity. The focus on urban over rural was also a differentiating factor.
The absence of nasty surprises on the tax front was partially responsible for the relief rally in markets, which had almost baked in a Covid cess on all tax-payers and a levy on high-income earners. Those fears didn’t come true.
As a result, the budget is feel-good for the economy, and is more than what the market hoped for. Of course, execution will decide the future.
What has wowed experts, economists and commentators is perhaps the distinct shift from a cautious contractionary approach to a distinctly expansionary one by Sitharaman in the budget. Fiscal deficit at 9.5%/6.8% in FY21/22 is quite higher than estimates but it’s complemented by a focused push on infra-spending (up 25%) and fiscal accounting/estimating that have stepped up on credibility. The off-budget tricks used by previous FMs has been kept at a bare minimum this time.
There’s an honest effort at fixing the financial system like asset resolutions, bank privatisation, a DFI and tax resolutions. Reforms like 74% FDI in insurance are being seen as a sign of things to come in more sectors.
What was missed
But not everything is perfect. Budget 2021-22 also has chinks in its armoury.
Firstly, net market borrowings continue to remain elevated at Rs 9.25 trillion, which maintains pressure on bond yields. The gross borrowing at Rs12.05 trillion is bigger than what most expected. This implies RBI support in the form of OMOs will be required to maintain demand-supply balance.
The budget makes the job of RBI difficult as there will be a need for on-the-money coordination in the monetary stance. The risk of inflation flaring up in next 9-10 months remains quite high, which may kill the nascent growth recovery.
Secondly, the FY22 Union Budget extends the expenditure pattern adopted in the FY21 budget, by allocating higher/more resources to public health, Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), affordable housing segment, micro small and medium enterprises, rural development etc. However, the FY22 numbers are an increase over the FY21 budget estimate (BE) and not the RE (Revised estimate). For a number of heads/ ministries, the FY22 BE is significantly lower than the RE for FY21. The government finances face expenditure rigidity and this may have caused it.
Also, more than 95% of the capex in FY21 (RE) and FY22 (BE) is concentrated in 12 ministries/departments. This is a top-heavy budget, which may not be as inclusive as previous budgets in terms of capex.
Tax related announcements
(Source: Philip Capital)
The following three acts are proposed to be consolidated into a rationalized single Securities Markets Code:
ï‚· SEBI Act, 1992, Depositories Act, 1996
ï‚· Securities Contracts (Regulation) Act, 1956
ï‚· Government Securities Act, 2007.
One of the proposals is also to decriminalize the Limited Liability Partnership (LLP) Act, 2008, in line with last year’s decriminalization of Companies Act, 2013. The rationalization of acts is aimed at reducing the compliance cost by simplifying the amendment process to one act instead of four separate acts. Along with decriminalization of the LLP Act, government has reiterated its commitment towards ease of doing business by providing a simpler legal framework.
Tax-related announcements:
1. Relief to senior citizens: older pensioners (age 75 or more) with only interest and pension income are exempted from filing taxes.
2. Reduction in time limits for re-opening of assessment: Being reduced to three years from the current six years.
3. Relief for dividend: Dividend paid to Real Estate Infrastructure Trusts or Infrastructure Investment Trusts (REIT/InvIT) will be exempt from TDS.
4. Setting up of a Dispute Resolution Committee (DRC): Dispute resolution for small taxpayers.
5. Faceless Income Tax Appellate Tribunal (ITAT): To provide a transparent tax appellate mechanism, the government has proposed to the make the Income Tax Appellate Tribunal faceless and jurisdiction-less.
6. Tax incentives for affordable housing and affordable rental housing projects: Extended the eligibility period (for claiming additional deduction for interest of Rs 150,000 paid for loan taken for purchasing an affordable house) to 31st March 2022.
7. Zero Coupon Bonds by Infrastructure Debt Funds (IDFs): Proposed to make Zero Coupon Bonds issued by notified IDFs eligible for tax benefit.
8. Tax incentives for IFSC: These include tax holidays for capital gains incomes of aircraft leasing companies.
9. Relaxation in conditions for exemption to sovereign wealth funds and pension funds (SWF/PF): Proposed to relax some conditions for availing 100% tax exemption (introduced in the last budget) – such as prohibition on loans or borrowings, restrictions on commercial activities, direct investment in entities owning infrastructure, etc.
10. Exemption for Leave Travel Concession (LTC) cash scheme: Will provide tax exemptions to the amount given to an employee in lieu of LTC, subject to incurring of specified expenditure.
11. Rationalisation of taxation of Unit Linked Insurance Plans (ULIPs): Will allow tax exemption for maturity proceeds of ULIPs with annual premiums up to Rs 250,000.
12. The government will smoothen GST and remove anomalies such as the inverted duty structure.
13. Custom Duty Rationalization: Revised the customs duty structure to make it free of distortions. The government will review more than 400 old exemptions this year.
In the Union Budget 2021-22 presented on Monday, Finance Minister Nirmala Sitharaman proposed to do away with the tax exemption for interest income earned on provident fund contributions above Rs 2.5 lakh per year. Once the budget is approved by the Parliament, the provision will come into effect from 1 April 2021.
This was done to stop giving tax-free interest income to high-income earners. Currently, the Income Tax Act, 1961, provides for an exemption to any payment from a provident fund and to the accumulated balance due and becoming payable to an employee. There have been instances where some employees are contributing huge amounts to these funds and getting tax exemption.
The contribution limit for tax-free interest income has now been set for an annual contribution of Rs 250,000 which will be applicable only for the contribution made on or after April 1, 2021. The exact formula and way of tax taxes will be given by the government soon.
The restriction will largely impact Voluntary Provident Fund (VPF) contributions, which gives fixed interest. Many high earners use the VPF route to save more. An employee’s contribution to the Employee Provident Fund (EPF) account also earns a tax break under Section 80C of up to Rs 1.5 lakh. This amounts to 12% of salary that is deducted by an employer and deposited in the EPF or other recognised provident funds.
In the previous year’s budget, the deductions available on employer contributions to retirement benefit funds (including PFs) was restricted to Rs 7.5 lakh.
By now, you must have heard about ‘GameStop’. The US-based video games retailer has been in news globally after its stock went from less than 3 dollars to 325 dollars (at present) in less than a few months. The stock has appreciated over 1600% in January alone. But that is not the main reason why $GME has become a global sensation. Continuous short squeezes in GameStop, due to the coordinated buying by an army of retail investors, has put the stock on the global map.
The fight is being billed as modern class war, and the small guys are winning! In the process, short-sellers, including giant hedge funds, were caught in a tsunami of losses running into billions. Here is a low down on the GameStop saga and the takeaways for Indian investors. What is GameStop
GameStop Corp. is an omni-channel retailer, offering games and entertainment products in its over 4,000 stores and comprehensive e-Commerce properties across 10 countries. It sells new and pre-owned video gaming consoles, accessories and video game titles, in both physical and digital formats. It also makes some money from toys, collectibles etc.
How is GameStop doing as a company
With the Covid induced problems in the economy, the shift from offline to online and lower consumer spending, the company has been slipping. It reported a Q3 adjusted operating loss of $62 million on a 30% drop in revenue of $1billion. The company has close to $500 million in debt. It has closed more than 800 stores since 2019.
What exactly happened with GameStop shares
GameStop shares have risen from a 52-week low of $2.57 a piece to a 52-week high of over $400. The stock is trading at $325 levels now. That’s a massive gain and in an incredibly short time.
Essentially, many small investors made a huge bet against gigantic financial institutions. And, the small guys are currently winning that game. The episode has been viewed as one of the largest wealth transfers from the financial ruling class to the middle and middle-upper classes.
How can small investors win against big investors
The members of a discussion group called wallstreetbets in Reddit (a social media platform) analyzed the GameStop stock and concluded that its price was undervalued. Then, they identified a weakness in the strategies of several giant hedge funds, who had bet millions of dollars that GameStop stock would fail.
What was the modus operandi
These Redditors (Reddit users) bought huge numbers of GameStop stock at low prices, held them and even kept buying more as the prices rose. This has led to a giant short squeeze, which is again driving the price of GameStop up but emptying the coffers of these hedge funds in the process such as Melvin Capital.
Why were Wall Street hedge funds hit
Hedge funds bet GameStop’s stock will become less valuable. So, they sold shares that they do not own. It’s done by locking the stock price at a higher price in the belief that sometime in the near future the price of that stock will go down. When that happens, short sellers buy the stock at lower price and close the deal.
In the case of GameStop, short sellers actually lost. They bet the stock price would go down, but Redditors ensured $GME goes up instead. With stock prices going up, short sellers were left waiting for a price crash to cover their positions. But that crash never happened. The problem was compounded because short sellers apparently shorted more shares of GameStop than actually exist!
Can a GameStop saga happen in India
Yes and No. Shorts are squeezed daily, but in India the quantum may not be as high as that of GameStop. Market regulator SEBI and the exchanges have many curbs in place to restrict uncontrolled risk-taking. In the cash segment, naked short selling (selling without owning shares) is banned in India. If the transaction is a short-sale, then investors have to deliver the shares of the shorted securities during settlement.
Plus, exchanges also impose circuit filters on stocks that stop their daily price swings at 2 to 20%. In the case of GameStop, due to the lack of stock price limit, the US based company shares rose more than 100% on some days.
The impact on global markets
The Wall Street has corrected sharply in the last two days, mainly on account of the GameStop short squeeze news. In case large hedge funds end up losing big money – or they may even go bankrupt – if the GameStop stock continue to go up, then the broader market is going to take a hit. Then the question is will this be the beginning of a larger market crash from hereon?
Brookfield India Real Estate Trust, backed by Canada’s Brookfield Asset Management Inc., is seeking to raise upto Rs 3,808 crore in an initial public offering.
This would be the third REIT in India, after Mindspace Business Parks REIT which debuted on the stock exchange in August 2020 and Embassy Business Office Parks that launched in 2019.
Brookfield REIT IPO details
Brookfield REIT is selling 13.82 crore units to 13.85 crore units at Rs 274 to Rs 275 each.
The minimum bid lot is 200 units. The minimum bid amount is Rs 54,800 to Rs 55,000.
The IPO will open on February 3 and close on February 5. Listing is scheduled for February 17.
Brookfield REIT will use the funds raised in the IPO to partially or fully repay existing debt and general corporate purposes.
Bank of America Corp., Citigroup Inc., HSBC Holdings Plc and Morgan Stanley are global coordinators and book running lead managers for the IPO.
What is a REIT
A REIT is a vehicle that enables owners of real estate to pool primarily income generating assets together in a portfolio. REITs give all investors access to the benefits of real estate investment with the advantage of investing in publicly traded units.
In India REITs are governed by SEBI (Real Estate Investment Trusts) Regulations, 2014 which primarily lay down the framework in line with the global REIT’s standards including:
* Minimum 80% of total value of assets to be comprising of completed and income generating properties
* Net Debt to not exceed 49% of total asset value
* Minimum 90% of distributable cash flows to be distributed
REITs are typically listed on stock exchanges through an Initial Public Offering (IPO).
About Brookfield India
Brookfield manages $578 billion in assets globally. It owns and operates about 22 million square feet of office properties in India. It also operates toll roads, solar and wind assets, a construction business and real estate management services in India.
The Brookfield India Real Estate Trust is India’s only institutionally managed public commercial real estate vehicle. The REIT wants to be a leading owner of high quality income producing commercial real estate assets in key gateway Indian markets, which have significant barriers to entry.
Realty portfolio
As per its website, the Brookfield India Real Estate Trust comprises of grade-A commercial assets located in four major cities – Mumbai, Gurgaon, Noida and Kolkata.
Its initial portfolio of four large campus-format office parks, which are “business-critical†totals to 14.0 M sf, comprising 9.8 M sf of Completed Area, 0.6 M sf of under construction area (occupation certificate for 0.5 M sf received on September 22, 2020) and 3.6 M sf of Future Development Potential and comprises of Kensington, Candor Techspace, Sector 21, Gurugram, Candor Techspace, Sector 62, Noida and Candor Techspace, Rajarhat, Kolkata.
The “Pro Forma Portfolio†comprises initial portfolio along with Candor Techspace, Sector 48, Gurugram and Candor Techspace, Sector 135, Noida, assuming the completion of the acquisition of these two Call Option Properties by us. Candor Techspace, Sector 48, Gurugram and Candor Techspace, Sector 135, Noida are referred to as the “Call Option Propertiesâ€.
Stove Kraft Ltd, a kitchen solutions and an emerging home solutions brand, is launching its initial public offer of equity shares on January 25. The company, promoted by Benguluru-based Gandhis, has raised a little over Rs 185 crore from anchor investors ahead of the over Rs. 400-crore IPO. Here are the details of the Stove Kraft public issue and the company’s business. Read on.
The public offer details
Stove Kraft Limited IPO opens on Jan. 25 and will close on Jan. 28. Shares are available for subscription at IPO price band of Rs. 384/- to Rs. 385/- per equity share. The Stove Kraft IPO minimum lot size is 38 equity shares, entailing a minimum investment of Rs 14,630.
Stove Kraft offer comprises a fresh issue of Rs. 950 million and Offer for sale of 82,50,000 equity shares. The offer for sale comprises up to 6,90,700 shares by promoter Rajendra Gandhi; up to 59,300 shares by promoter Sunita Rajendra Gandhi; up to 14,92,080 shares by Sequoia Capital India Growth Investment Holdings and up to 6,007,920 shares by SCI Growth Investments II.
The face value of each Stove Kraft share is Rs.10/-.
Listing of shares will be on BSE & NSE.
Resident Indian individuals, HUFs, Companies, Corporate Bodies, Scientific Institutions, Societies and Trusts, Eligible NRIs, Category III Foreign Portfolio Investors can invest in Stove Kraft IPO.
The book running lead managers to the offer are Edelweiss Financial Services and JM Financial.
Company background
Incorporated in 1999, Stove Kraft is engaged in the manufacture and retail of kitchen solutions under the Pigeon and Gilma brands. It proposes to commence manufacturing of kitchen solutions under the BLACK + DECKER brand, covering the entire range of value, semi-premium and premium kitchen solutions respectively.
The company is into cookware and cooking appliances across their brands, and their home solutions comprise various household utilities.
Sequoia had first picked up a significant minority stake in Stove Kraft in 2010 for Rs. 50 crore. In 2013, it had infused more capital into the company, and currently holds a 25.37% stake.
Financials
During the six month periods ended September 30, 2020 and September 30, 2019 and for Fiscals 2020, 2019 and 2018 their Pigeon branded products contributed 76.90%, 80.86%, 86.20%, 81.24% and 86.89% to their overall sales, respectively.
Stove Kraft’s Restated Total Income for the year ended March 31, 2020 Rs. 6,729.14/- million, while Restated Profit after tax for the year ended March 31, 2020 Rs. 31.70/- million.
The company’s Restated Return on Net worth for financial year ended on March 31, 2020 is 2.51%. Restated Net Asset Value (“NAVâ€) per Equity Share as on March 31, 2020 is Rs. 41.84/-, as per Kotak Securities.
The company’s leading brands in the market for certain products such as free standing hobs, cooktops, non-stick cookware, LPG, gas stoves and induction cooktops.
Use of IPO funds
IPO factbox
Company
Stove Kraft Ltd
Open date
Jan. 25
Close date
Jan. 28
Probable allotment date
Feb. 2
Approx. listing date
Feb. 4
Face value
Rs 10 per share
IPO band
Rs 384 to 385
Minimum order
38 shares
The Sequoia Capital-backed firm (Stove Kraft) proposes to utilise the net proceeds from the fresh issue towards repayment or pre-payment of certain borrowings availed by the firm and for other general corporate purposes.
Industry outlook
The Indian consumer appliances market is expected to grow at a CAGR of ~9% during FY17-22. This growth will be driven by incremental spending on consumer durable goods by Indian households bolstered by Government policies and initiatives.
Policies favourable for the consumer appliances industry include lower tax brackets (5%, 12% and 18%) for Indian kitchen items vs excise + VAT taxed at ~31% and the target to provide 5 Crore LPG connections to under privileged womenthrough the Pradhan Mantri Ujjwala Yojana, as per Ventura Securities.
Positives
Stove Kraft has three main positives.
1. It offers investors a one stop shop for well recognized, award winning portfolio of kitchen solutions brands with a diverse range of products across consumer preferences.
2. The company enjoys a widespread, well connected distribution network with a presence across multiple retail channels and a dedicated after-sales network. Stove Kraft has partnered with e-commerce platforms like Flipkart. It also exports its products in the U.S. and Mexico.
3. Stove Kraft IPO gives an opportunity for you to take advantage of manufacturing capability with efficient backward integration.
Negatives
There are some investment concerns for Stove Kraft IPO.
Firstly, the trademark for their marquee brand ‘Pigeon’ is the subject matter of litigation.
Secondly, the company sources their raw materials from third parties with whom they do not have long term contract.
Thirdly, Stove Kraft relies heavily on their brand portfolio.
Also, there are various proceedings involving the Company, their Promoters and their Director.
IPO Valuation
Stove Kraft IPO has priced its issue at 34.5 times PE (price to earnings) on a trailing basis. Its much larger peers TTK Prestige and Hawkins Cookers are currently trading at 61.0 times and 47.5 times respectively, as per Angel Broking.
Do note the company’s brand value, margins and return on capital are lower than its peers.
The Price Earnings ratio, or the PE ratio, is a commonly used metric for investing. It is used to value a company. The ratio is known as “earnings multiple†or “price multiple†because it measures the present price of the share relative to its earnings.
How to check PE ratio of stocks? PE ratio of stocks is calculated by dividing the price of a share by the per share earnings (EPS) of the company. For instance, a share price of Rs. 750 divided by EPS of Rs. 25 represents a PE ratio of 30. In simple words, this means that if you want to buy this company’s shares today it will take 30 years for you to earn back your investment.
The PE ratio will tell you how much the market is willing to pay for every rupee of the company’s earnings. A higher PE ratio means that investors in the market are willing to pay more for the earnings of the company. Why? This might be because they think that there are high prospects for the future of the share. However, a low PE stock indicates that the investors don’t think much about the future earnings of the company and don’t place confidence in it.
Even though the PE ratio seems to be a fair metric, there are plenty of issues with the ratio.
Why a high PE ratio may not always be good?
Even though a high PE ratio indicates good future prospects for the company, the PE ratio might be overvalued. Why? This is because the ratio often depends on estimated future earnings of the company. The ratio assumes that the future earnings of the company will be at least what they are presently. For instance, if a company is trading on a 25 times PE ratio, the investors are assuming that the earnings of the company will be at least what they are today for the next 25 years. When estimating earnings for a year or two itself is difficult, assuming earnings for 25 years isn’t right. If the future earnings of the company turn out to be lower, then the investment in the company will fall flat.
Another problem with the PE ratio is that it does not account for the debt of the company. Most companies with major debt issues will obviously be highly risky investments. The PE ratio takes into account the equity price and not the debt that the company has incurred. This means that a stock with a high PE ratio and high debt might actually turn out to be a dud investment.
The biggest component of the PE ratio is the earnings of the company. Most of the times these are the earnings as defined by the accounting standards that are relevant to a particular country. They are not the cash earnings of the business, that is, it doesn’t include the company’s cash flows. So, a company’s shares with a high PE ratio might be making profits without cash flows. If that is so, the investment should be avoided.
When investors use the P/E ratio, they think that a stock with 9 times earnings is way cheaper than that with 16 times earnings. This may not always be the truth. A company might have a very low PE ratio because its future earning prospects are low. A higher PE ratio stock might actually be cheaper when you compare it to its peers. So, a high or low PE stock has to be seen in the context of future earnings, business prospects, competitors, etc. Ideally, fund managers will prefer to own a company whose earnings go up significantly over the coming years. The P/E ratio alone has no way of telling us about future earnings. That’s why fund managers use it with other metrics.
The most important point is that the PE ratio does not take into account the company’s balance sheet. For instance, a company might be trading on a high PE multiple while it has a lot of present debt that it has low cash flows to pay. So, the company’s PE ratio can fall significantly in the present financial year. So, a high PE ratio doesn’t mean the investment is good enough.
One other reason why a mutual fund manager avoids buying high PE stocks is because the PE ratio tells nothing about the quality of a company’s earnings. A company might be trading at a higher PE because earnings might include a one-off profit. Fund managers will look at those companies who have steady per year earnings growth.
While the P/E ratio has its place in valuing stocks, it should be used in combination with other valuation methods. It shouldn’t be the sole reason for investing in a company.
Another interesting IPO is here. Home First Finance, founded in 2010 by PS Jayakumar, Jaithirth Rao and Manoj Viswanathan, is a technology-driven affordable housing finance play. The IPO opened for subscription on January 21 and will close on January. Shares are being offered at Rs 517-518 apiece, valuing the company at a market cap of Rs 4,500 crore. There is a lot of buzz for Home First Finance given that it is backed by marque private equity players like True North, Warburg Pincus, Aether Mauritius and Bessemer India. Read on to know more about this offering.
Business strategy
Home First Finance targets first time home buyers with average loan ticket size of Rs 10 lakh. Over the past few years, it has focused more on customers with existing credit history, whose share rose to 67% by 1HFY21.
The company has built a wide distribution network of 70 branches spread across 11 states with Gujarat and Maharashtra contributing 60% share in loans. The company claims to have invested deeply in digital and analytical capabilities, enabling effective credit underwriting and sanctioning loans with a Turn Around Time of 48 hours.
Financials
Disbursements quadrupled to Rs 15.7 billion over FY17-19, while it was stable in FY20. Home First Finance delivered loan book CAGR of 56% over FY17-20 and increased to Rs 37.3 billion by 1HFY21. Over this same period, share of home loans declined from 97% to 92% while that of LAP rose from 3% to 5%.
With strong underwriting, Home First Finance experienced healthy asset quality with GNPL ratio at sub-1%. RoA of 2.7% (FY20) is healthy v/s peers, according to MOSL.
IPO size and details
The Rs 11.5 billion Home First Finance IPO consists of fresh issue of Rs 2.7 billion and OFS of Rs 8.9 billion (by promoters and investors). This would result in promoter’s stake reducing from 52.9% pre-IPO to 33.7% post-IPO. The funds raised will be utilized to augment the capital base.
At the offer price of Rs 517 to 518, you can bid for a minimum lot of 28 shares. This means a minimum investment of Rs 14504. Home First Finance shares have a face value of Rs 2.
Home First IPO details
Company
Home First Finance
Open date
Jan. 21
Close date
Jan. 25
Probable allotment date
Jan. 29
Approx. listing date
Feb. 3
Face value
Rs 2 per share
IPO band
Rs 517 to 518
Minimum order
28 shares
Valuation
At the IPO price band, Home First Finance is valued at 4.8 times FY20 Price to Book Value which is comparable to peers.
Another way to look at valuation is post issue. At the higher end of the price band of Ra 518 per share, the stock is available at a Price to Book Value of 3.6 times on H1FY21 book (post issue), as per ICICI Securities.
Risks
Watch out for pandemic impact on Home First Finance’s books. The company’s customers are primarily in the low and middle-income groups and have less financial wherewithal than other borrowers.
Monitor the concentration of business operation. The company’s operations are concentrated in the states of Gujarat and Maharashtra.
Lastly, the Indian housing finance industry is highly competitive. Home First Finance competes with banks, other HFCs, small finance banks and NBFCs in each of the geographies in which it operates.
A Government Security (G-Sec) is a tradable instrument issued by the Central Government or the State Governments.
So, what are the different types of government bonds?
In India, the government issues short term as well as long term government securities (G-Sec). Short-term G-Sec are those that have a maturity of less than one year. These are often treasury bills, or T-bills. Treasury bills are zero coupon securities and pay no interest. Treasury bills come with a maturity of 91 days, 182 days and 365 days.
G-Sec with a maturity of one year or more are long-term government bonds. While the Central government issues treasury bills and government bonds, State governments issue only bonds called the State Development Loans (SDLs).
How are government bonds issued in India
The government sells bonds using auctions where it announces auction dates and the details of the bonds that will be sold. The government will disclose the value of securities it intends to sell. Two auction processes are employed: There are yield-based auctions and price-based auctions. The former is used to sell new G-sec bonds while the latter is where the government will reissue securities issued earlier.
The Reserve Bank of India (RBI) conducts auction of G-sec and T- bills on a weekly basis as per the schedule below.
Government Security
Bidding Period Starts on NSE e-Gsec
Bidding Period Ends on NSE e-Gsec
Auction Date at RBI
Settlement Date
T-Bills (91 day,182 day, 364 day)
Monday
Tuesday
Wednesday
Thursday
GoI Dated Securities
Tuesday
Thursday
Friday
Monday
*Source: HDFC Securities
The stock exchanges offer a non-competitive bidding window to retail investors every week for all G-Secs. You can bid using your trading account and the funds will be deducted from your linked bank account. The G-Secs will be credited to your demat after they are successfully allotted. The interest payments will be credited to your bank account. Since government bonds are listed on stock exchanges, you can sell them anytime.
Which are the government bonds you can consider?
Usually, bank fixed deposit interest rates are more for the short term when compared to those offered by short term government securities. However, most of the time long term government bonds offer better interest rates than bank deposits. One such bond is the Floating Rate Savings Bond, 2020 (Taxable). These bonds were launched on July 01, 2020. The government is using these bonds to enable Resident Indians to invest in a taxable bond, without any monetary ceiling. The tenure for the bonds is 7 years. You can hold these bonds jointly.
Since the bonds will have a floating interest rate, they are floating rate bonds. The interest rate of the bond will be based on the interest rate of the National Savings Certificate (NSC). The interest rate for the floating rate bonds will be NSC interest rate plus 35 basis points over the rate. The interest rate for the floating rate bonds will be reset on a half-yearly basis. The interest on the floating rate bonds will be payable at half yearly intervals. One payment will be made on January 1st and the other will be on July 1st every year. The present interest rate for these bonds is 7.75%. The interest received from the bonds will be taxable under the Income-tax Act, 1961.
The floating rate bonds will be issued only in the electronic form. You will need to hold the bonds in an account called Bond Ledger Account (BLA), opened with the Receiving Office.
Other government bonds such as the Sovereign Gold Bond (SGB) (read this article to learn how to invest in SGB), Capital Gains Bonds and Tax-Free Bonds can also be considered.
How are government bonds taxed?
There will be no tax deducted at source (TDS) for government bonds. However, the interest for the bonds is taxable. Capital gains on sale of bonds will be taxed as per the investor’s income tax bracket if they are short term. Long term capital gains will be taxed at 20% with indexation benefit.
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Indigo Paints Ltd will open its initial public offer (IPO) for subscription on January 20 with a price band of Rs 1,488-1,490 per share. The company is targeting to raise Rs 1,170 crore for the IPO. The Indigo IPO opens on 20th January 2021 and closes on 22nd January 2021. Here are 10 things you must know about this upcoming IPO.
1. The beginning
From a humble start in 1999-2000, when it set up a cement paint manufacturing unit in Jodhpur, Indigo has become the fifth largest decorative paint manufacturer in India.
The company today has three manufacturing facilities – in Jodhpur, Kochi and Pudukkottai, strategically located in close proximity to the company’s raw material sources.
As of FY20, the company had a distribution network of 36 depots and 11,230 active dealers and a tinting machine population of 4,296 across India. Indigo is currently present in 27 states and 7 union territories as of date.
2. Fresh issue plus offer for sale
The public issue of Indigo Paints consists a fresh issue of Rs 300 crore and an offer for sale of 58,40,000 equity shares by investors Sequoia Capital India Investments IV and SCI Investments V, and the promoters Hemant Jalan. The offer for sale portion can fetch Rs 870 crore at the upper price band of Rs 1,490 per share.
The offer includes a reservation of up to 70,000 equity shares for subscription by eligible employees of the company. Eligible employees will get these shares at a discount of Rs 148 per share to the offer price.
3. How Indigo is different
Compared to the top 4 players, around 28% of the company’s revenue comes from highly differentiated products, which have high gross margins. Such differentiated products take about 4-5 years to gain traction and the company believes that by the time larger players try to enter these categories, Indigo is already the leader in them.
Indigo has entered one state every year since inception. It follows a bottom-up approach for entering a new geography i.e., first it enters tier 3/4 towns & rural areas and then penetrates into larger cities. Around 85 per cent of the company’s sales come from areas with population less than 300,000-400,000, whereas for the large players, about 50-55% sales come from small towns & rural areas.
In terms of dealer base and tinting machines, the company intends to grow at a faster pace in the coming years. At a dealer base of 11,230, Indigo is inching closer to the No. 4 player but has a long way to go compared to the market leader’s base of +70,000. About 40 per cent of Indigo’s dealers have its tinting machines. This ratio stands at 90 per cent for Asian Paints and 65-70 per cent for Berger Paints.
4. Better margins
Given that Indigo generates nearly 28% of its revenue from high gross margin differentiated products where no discounts are offered, the company’s overall gross margin tends to be higher compared to its peers.
Further, since the company’s plants are located in close proximity to raw material sources, inward freight costs are lower, thereby aiding higher gross margins.
In terms of A&SP spends, all the large paint companies have been advertising for emulsions, but Indigo has been focusing on advertising its differentiated products over the past 4-5 years. In absolute terms, core media spends of Indigo was as high as that of Berger Paints and Kansai Nerolac.
The company claims low attrition rate as it prefers to recruit freshers even for the mid-level management (which has fair amount of responsibility, thereby driving employee performance) and eventually incentivizing them with variable compensation and ESOPs.
5. Fresh issue of shares worth Rs 300 cr use
The proceeds of the fresh issue are proposed to be utilized for financing the project cost towards expansion of the Pudukkottai (Tamil Nadu) plant (likely to commence in August 2022), purchase of tinting machines & gyro shakers and repayment/prepayment of certain borrowings.
6. Finances
Post the IPO, Indigo would be a debt free company.
Sequoia Capital, which invested in FY15, intends to remain invested for another 5-6 years.
Indigo’s average working capital cycle of 23 days is the lowest in the business.
From P&L perspective, Indigo Paints reported net sales of Rs 625 crore in FY20. First half or FY21 net sales is Rs 260 crore, due to Covid impact.
FY20 adjusted profit after tax is Rs 48 crore, a growth ofof 50 per cent. Profit margin in last few years has been between 4-10 per cent.
As per the management, the company has a significantly high level of corporate governance on account of Sequoia being a marquee investor and E&Y being the company’s auditor for the last 6 years.
7. Strategy
Since the conventional method of a top-down approach would have been counter-productive, the company took up a bottom-up approach while entering new markets.
While large paint players have 12-15 sub-brands, Indigo has followed the one-brand strategy (similar to AMUL).
The company has no intention of manufacturing raw material for captive consumption.
Management finds it logistically feasible for manufacturing activities to remain in its current locations for the next 5-6 years.
All large players use Bollywood personalities as their brand ambassadors while Indigo chose M.S. Dhoni.
8. Valuation, mcap
Indigo Paints is targeting a market cap of Rs 7,100 crore at the issue price. This implies a P/E multiple of 66 times FY22 and 44 times FY23 earnings assuming an earnings CAGR of 50 per cent over FY20-23.
In comparison, Asian Paints and Berger currently trade at 62 times and 73 times FY23 earnings, respectively..
9. Tough industry, weaknesses
Indigo Paints is the 5th largest player but it has 2.5 per cent market share only
Although there are fewer competitors, the competition is very stiff since the competing companies are bigger and have larger operational budgets. Hence, a small lapse of judgment can be costly.
Also, Indigo Paints spends a large portion of its revenue on marketing. In 2020, the company spent around 12.7 per cent of its revenue on marketing alone. This can put a strain on its finances in the long-run and seems unsustainable.
The trick for the company would be to continuously execute it’s strategy without flaws.
10. Kerala dependence
Indigo Paints derives a significant portion of sales from the state of Kerala. This puts a lot of emphasis on its business in the state and exposes it to risks.
Just to give you an idea, Kerala is the largest revenue generating state for the company where it ranks third (Asian Paints is the leader, followed by Berger). Around 7-8 states compete for the second and third spot for the Indigo Paints (including states like West Bengal, Bihar, Maharashtra, Uttar Pradesh, etc)
Listing details
IPO Open Date: Jan 20, 2021IPO Close Date: Jan 22, 2021Allotment Date: Jan 28, 2021IPO Listing Date: Feb 2, 2021
Face Value
₹10 per equity share
IPO Price
₹1488 to ₹1490 per equity share
Market Lot
10 Shares
Min Order Quantity
10 Shares
Listing At
BSE, NSE
Company Promoters:
Hemant Jalan, Anita Jalan, Parag Jalan, Kamala Prasad Jalan, Tara Devi Jalan and Halogen Chemicals Private Limited.
