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5 Mantras for Trading Derivatives

5 Mantras for Trading Derivatives
by 5paisa Research Team 06/09/2021

5 Mantras for Trading Derivatives

 

 The underlying is what matters: Derivatives get their value from an underlying asset. This could be a stock, commodity, currency, or even interest rates. Since the value is derived from an underlying asset, we talk of derivatives in terms of contracts. Two broad categories of derivatives include futures and options. When you trade a futures contract, you must honour it at the pre-decided time and price. When you trade an options contract, you have the right but not the obligation to honour the contract at the time of expiry.

 Customised vs Standardised: Derivatives could be over-the-counter (OTC) customised or exchange traded and standardised. OTC derivatives have customisable features tailor-made to suit your needs (Forwards) or they could be completely standardised by the exchange for the retail investor (Futures)..

 Leverage is a double-edged sword: You can enter a futures contract at a fraction of the price it would take for you to buy the same number of shares. This means that you can trade derivatives with a lower capital base. However, it is important to note that a lower capital base might give you higher Return on Investment (ROI) but, it will also increase the risk since both returns and losses get magnified.

 Marked to Market: At the end of each day, the futures contract closes at a certain price. Based on this closing price, you would either be making a profit or loss. The exchange, with the help of brokers and the clearing house, collects money from the loss bearing party and pays the same money to the profit-making party. This is called marking to market.

 Payoffs can be symmetric or asymmetric: Symmetric returns means when the trade has the potential for unlimited profit or unlimited loss. This would be the case in a futures contract where the potential to gain money and lose money is unlimited. Asymmetric means when the potential to make a gain or loss is not equal. For example, when you buy a call option, your loss is limited to the premium that you pay. However, if the price of the underlying moves in your favour, you can make unlimited profits. This refers to asymmetrical returns.
 

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Chemspec Chemicals and Northern Arc get SEBI IPO approval

Chemspec Chemicals and Northern Arc get SEBI IPO approval
by 5paisa Research Team 06/09/2021

SEBI has approved the IPO proposals of Chemspec Chemicals and Northern Arc Capital. Both these companies had filed the DRHP with SEBI towards the end of July. While Chemspec Chemicals is a specialty chemicals company, Northern Arc is a non-deposit taking NBFC registered with the RBI.

Chemspec has received approval for its Rs.700 crore IPO, which will entirely be an offer for sale (OFS). There will be 3 of the promoters / early investors participating in the offer for sale. The selling shareholders include Mitul Vora (Rs.233.30 crore), Rushabh Vora (Rs.233.30 crore) and Bhakchand Amoluk Consultancy LLP (Rs.233.40 crore). 

Chemspec manufactures additives that go into ingredients for manufacturing skin and haircare FMCG products. In addition, Chemspec also manufactures intermediates that go as inputs for manufacture of pharmaceutical APIs (Active Pharma Ingredients). Chemspec currently has manufacturing capacity of 6,000 tonnes per annum (TPA).

Northern Arc Capital, on the other hand, will be a combination of fresh issue and an offer for sale. The IPO will entail a fresh issue worth Rs.300 crore plus an OFS of 3.652 crore shares by the promoters and early investors. Some of the participant sellers in the OFS include Leapfrog Financial Inclusion Fund, Eight Roads Investments Mauritius, Dvara Trust and IIFL Special Opportunities Fund.

The fresh issue component of Rs.300 core will be used by Northern Arc Capital to boost its capital adequacy ratio. The CRAR is already comfortable at 28.89%, which includes Tier-I capital ratio of 27.62%. Being an NBFC, Northern Arc provides access to credit for the under-served segments. Northern Arc has an AUM (assets under management) of Rs.5,221 crore as of Mar-21. Northern Arc has a fairly widespread network across India and has presence in 657 districts spread across 28 states.

The dates for the Chemspec Chemicals IPO and the Northern Arc IPO are yet to be finalized. The IPO dates and other details like price bands will be finalized in the next couple of weeks in consultation with the lead managers.

 

Also Read: 

Upcoming IPOs in 2021

IPOs in September

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Energetic Rally in the IRCTC Stock

Energetic Rally in the Stock of IRCTC
by 5paisa Research Team 06/09/2021

When we talk of ecommerce value creators, the first names that come to our mind are Flipkart, Byju’s, Zomato and Paytm. There was been one listed ecommerce ticketing player doing phenomenally well since its listing in Aug-19. IRCTC came out with its IPO at Rs.320 and got listed in mid-August 2019. Over the last 2 years, the stock price has grown 10-fold from Rs.320 to Rs.3,295, an incredible 221% CAGR.

IRCTC

 

In the last 10 months since November 2020, IRCTC has grown 2.55 times from Rs.1,290 to Rs.3,295. What triggered such a sharp bounce at a time when Sensex gave around 30% returns? There are 3 factors that can explain this rally since the lows of November 2020.

1)    The rapid opening up of economic activity, post COVID 2.0, is likely to be a big boost. It is expected that by December the vaccination process should be done and rail activity should resume in totality. That is a big boost to IRCTC.

2)    The National Monetization Plan worth Rs.600,000 crore will entail intense private participation in highways and railways. IRCTC will not be constricted by the monopoly of the Indian Railways as private trains will give a big boost to IRCTC.

3)    Lastly, there is a huge investment planned in rail infrastructure and that would mean greater efficiency in the railway network and deeper business prospects for IRCTC. All these factors helped the IRCTC stock in the last 10 months.

Don’t forget the Zomato effect

Most people may not have noticed this, but just look at the performance of IRCTC since the day of Zomato listing on 23rd July. IRCTC is up 42% since the day of Zomato listing. What is the link? It shows that IRCTC with its incredible digital reach may actually be a very cheap franchise on the digital edge that it holds. That could unfold in the coming months.
 

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Tamilnad Mercantile Bank files DRHP for proposed IPO

Tamilnad Mercantile Bank files DRHP for proposed IPO
by 5paisa Research Team 06/09/2021

Tamilnad Mercantile Bank (TMB), is one of the oldest banking institutions in South India with a pedigree of more than 100 years. Now, Tamilnad Mercantile Bank has filed its draft red herring prospectus (DRHP) with SEBI for its proposed Rs.1,000 crore IPO. TMB is a profitable bank with gross NPAs well under control. It has a fairly strong base in semi-urban and rural segments of the state of Tamil Nadu.

The issue will predominantly be a fresh issue with a very small component of OFS by some of the early investors. In fact, out of the total offering of 1,58,40,000 (1.584 crore) shares, the fresh issue of shares will be 1,58,27,495 shares. In other words, 99.9% of the total IPO is a fresh issue and the OFS will just consist of 12,505 shares. The total size of the issue is estimated to be Rs.1,000 crore.

The bank’s financials have shown good traction in the financial year FY21. For example, net profits were up 48% at Rs.603 crore as compared to Rs.408 crore in FY20. The company also saw its deposit base grow by 11% to Rs.40,970 crore. The bigger progress was on the asset quality front. 

The gross NPAs fell from 3.62% to 3.44% in FY21 and the bank has not seen any substantial slippage in the asset quality numbers. However, the IPO proceeds will be used to boost the capital adequacy ratio to be in sync with their aggressive asset book expansion plans.

Unlike most South-based smaller banks, TMB does not have any identifiable promoter family and the business is managed by professional managers. The company is yet to finalize the terms of the issue which will be done only after the SEBI approval is received. 

TMB IPO will have 75% allocation to QIBs, 15% to Non-Institutional Investors and only 10% to retail investors. The issue will be lead managed by Axis Capital, Motilal Oswal and SBI Caps while Link Intime will be the registrars to the IPO.

 

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IPOs in September

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UCO Bank Partners with Fisdom for Wealth Management

UCO Bank partners with Fisdom for Wealth Management
06/09/2021

Kolkata based UCO Bank has partnered with Fisdom, the wealth start-up operated by Finwizard Technology, for offering wealth management products to its clients. UCO Bank is one of the few surviving PSU banks after the spate of mergers that the government had piloted in the last 3 years. Fisdom is a wealth management products platform, which offers mutual funds, insurance and pension products along with research  and content support.

The partnership will allow UCO Bank to offer the wealth management products on the Fisdom platform to its banking customers through the m-banking app. Customers of UCO Bank will have a more organized way to plan their finances with mutual funds and other financial products with the Fisdom platform integrated into the UCO banking application. In a way, it offers an integrated experience of banking and wealth nurturing.

For UCO Bank it becomes a product extension to the existing customer base. In the last two years, there has been a surge in equity and mutual fund investors with millions of new demat accounts and SIP accounts being opened. This agreement will allow UCO Bank to capitalize on this trend by offering the add-on wealth product offerings to banking clients. 

With the number of banks reducing by merging into larger sized banks, the onus is on each bank to deepen their relationship with their existing customers to improve ROI. The digital nature of the product allows them to scale up their offerings at minimal cost.

For Fisdom, the partnership provides them the much needed banking partnership which is the key to offering wealth management products on a much wider platform. For Fisdom, this is an opportunity to offer a largely customized wealth management experience to the large mass of UCO Bank customers. 

To begin with, it does look like a symbiotic relationship in which the bank gains from the customer deepening experience and the platform gains from the banking customer access.

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Record Premium Collections by Private Life Insurance Companies in Aug-21

Record Premium Collections
07/09/2021

Jul-21 was a month of 11% contraction in life premiums but new business premiums (NBP) bounced back to 2.88% growth in Aug-21. Interestingly, while LIC reported lower premiums in Aug-21 comparable to last year, the premium collections of private insurers was sharply higher YoY. Much of this growth came from ULIPs and protection products.

The bigger story was the dichotomy between private insurers and LIC. During Aug-21, the total NBP mop-up was up 2.88% YOY at Rs.27,821 crore. Big daddy LIC saw the NBP falling by -3.82% in Aug-21 to Rs.18,961 crore. However, private insurers saw new business premiums grow by an impressive 20.94% yoy to Rs.8,860 crore. 

This is the highest levels of premium collected by private insurers in a month. Private insurers also compensated for the fall in LIC premium collections so the life insurance industry overall ended with growth of 2.88%. For FY22 (Apr-Aug), LIC saw NBP premiums taper by -6.75% YOY while private insurers saw premiums grow 23.05%. As a result, overall NBP premiums FY22 (Apr-Aug) was up 1.62%.

How the Big four private insurers stacked up in Aug-21?

1)    SBI Life Insurance: The second largest private insurer reported 24% growth in NBP flows for Aug-21 YOY. However, Aug-21 premiums were up 74% compared to the average for first 4 months of FY22.

2)    ICICI Prudential Life: The third largest private insurer reported 43% growth in NBP flows for Aug-21 YOY. However, Aug-21 premiums were up 37.5% compared to the average for first 4 months of FY22.

3)    HDFC Life Insurance: The largest private insurer reported muted -6% fall in NBP flows for Aug-21 YOY. However, Aug-21 premiums were up 22% compared to the average for first 4 months of FY22.

4)    Max Life Insurance: Max reported 16.5% growth in NBP flows for Aug-21 YOY. However, the Aug-21 premiums were up 34.8% compared to the average for first 4 months of FY22.
 

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