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5 Things to Monitor After You Have Invested in Mid-cap Stocks

5 Things to Monitor After You Have Invested in Mid-cap Stocks
07/03/2019

Between 2015 and 2017 mid-cap and small-cap stocks consistently outperformed large caps in India. However, from 2018, mid-cap have been consistent underperformers and have also given negative returns. During the 2015-2017 mid-caps benefited from lower oil prices and a stable rupee. However, the mid-caps took a hit in 2018 because of the tax imposed on long term capital gains and the additional special margins imposed by SEBI. But over a longer period of time, mid-caps are a must as they give you the much needed alpha in the portfolio. The challenge is to monitor your mid-cap portfolio closely with a different set of parameters. Here are five things to monitor about mid-cap stocks.

Monitor the financials of mid-caps on a quarterly basis

Typically, mid-cap companies tend to be focused single product companies. This focus works to their advantage as their resources and management bandwidth does not get frittered away. However, the downside is that it tends to make their products and their business fortunes cyclical. You need monitor if there is any faltering on growth in sales volumes, growth in profits or in the operating margins. This consistency lies at the core of mid-cap investing. This is important because your investment selection process in mid-caps is normally bottom-up and not top-down.

Are the mid-cap returns outperforming the index?

When you invest in mid-caps, benchmarking is very critical as it puts the performance of the company and the stock in perspective. Invest in mid-caps for the alpha and not for the Beta. Hence mid-cap stocks need to be constantly benchmarked with the index, the large cap universe and also the peer group. After all, mid-cap stocks entail a higher risk and should also give higher returns.

Make it a point to monitor liquidity of the mid-cap stock

This is an important parameter to track, especially with respect to mid-cap stocks. Liquidity is the Holy Grail for mid-cap stocks and it must be monitored on 3 fronts. Firstly, whether sufficient liquidity is available in the market and there is enough floating stock. Secondly, if the bid-ask spreads are narrow enough to reduce your cost of trading. Finally, check for the impact cost. A reasonably large size order to purchase or sell the stock should not move the price significantly. That could work against you.

Management quality and corporate governance hold the key

In the last one year, we have seen a lot of mid-cap stocks taking deep cuts. Stocks got battered for various reasons ranging from the resignation of auditors to non-disclosure of group transactions to the management taking on excessive risk without informing shareholders. These are issues of management quality and of corporate governance. In the last few years, the issue of corporate governance has come to matter a lot more in the case of mid-cap stocks where the research coverage is limited compared to large caps. The negative reaction to corporate governance lapses is severe in case of mid-caps and hence that needs to be monitored closely.

Focus on how mid-caps hold value in tough times

The art of buying mid-caps is all about separating the wheat from the chaff. Focus on the mid-cap stock performance in the downturns rather than in the upturns. This is important for 2 reasons. Firstly, mid-caps normally outperform in a good market and hence stock quality gets hidden in good times. A down market presents a clearer picture. Secondly, in a down market the ability of the company management to handle risk becomes more critical and that separates the wheat from the chaff.

Last, but not the least, in any mid-cap portfolio you need to be cautious because there is a limit to the number of quality mid-cap and small-cap stocks available in the market. In fact, you must also track if funds or FIIs are selling these mid-cap stocks as that can have a profound impact on the prices of these stocks. The bottom-line is that mid-caps are a must for every investor for that much-needed alpha boost to your portfolio. A better understanding of the nuances of monitoring a mid-cap portfolio can help you make better and smarter decisions in the stock market.

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MSTC Ltd IPO Note - Not Rated

MSTC Ltd IPO Note - Not Rated
by Nikita Bhoota 14/03/2019

Issue Opens: March 13, 2019
Issue Closes: March 15, 2019
Face Value: Rs10
Price Band:  Rs121-128
Issue Size: ~Rs225 cr
Public Issue: ~1.77cr shares
Bid Lot: 90 Equity shares       
Issue Type: 100% Book Building

Shareholding (%)

Pre IPO

Post IPO

Promoter

89.8

64.6

Public

10.2

35.3

Source: RHP

Company Background

MSTC Ltd, a Category-I Miniratna, is a leading e-commerce service provider in the country and is also a major player in bulk raw material trading. It has entered into a recycling business through a 50:50 joint venture with Mahindra Intertrade Limited (MIL) for setting up a shredding plant and collection centers across the country. Its business is broadly classified into three segments – E-commerce (~7% of revenues, FY18), Trading (~81%), and Recycling through Mahindra MSTC Recycling Private Limited (MMRPL). A significant portion of its e-commerce revenue is derived from government and government-controlled entities.

Objective of the Offer

The offer consists of an offer for sale (OFS) of ~1.77cr shares by the promoters with employee reservation of 70,400 shares. There is a discount of Rs5.5 per share for eligible employees and retail investors

Financials

Consolidated Rs Cr

FY16

FY17

FY18

^H1FY19

Revenue from operations

3,225

1,739

2,265

1,477

EBITDA Margin %

-5.2

7.3

-18.2

4.5

PAT

-247

139

-6

-16

EPS

-35.0

19.8

-0.9

2.26

P/E (x)

-3.7

6.5

-139.0

--

P/BV (x)

2.9

2.2

2.5

--

RONW (%)

-78.4

34.3

-1.8

--

 Source: RHP, 5Paisa Research; *EPS & Ratios at higher end of the price band; ^H1FY19 numbers are not annualized.

Key Points

MSTC provides seamless services, from designing the model architecture, to programming, and the final roll out of e-auction platforms. Its strength lies in its ability to convert any business activity conducted through the brick and mortar method and/or in any other method to an online activity. It has conducted e-auctions of a variety of materials ranging from scrap, minerals, to land/real-estate, human hair, and forest/agro products. Considering the government’s emphasis on promoting digital modes of business and e-governance, the volumes of transactions are likely to gather pace going forward. This will be on the back of rising internet penetration and increasing basket of commodities being auctioned and procured via the e-commerce route. MSTC, with its first-mover advantage, has built several capabilities and is likely to benefit with newer state governments and companies appointing it as the service provider.

The company intends to further augment and develop its recycling business by investing in recycling capacity building. In addition to expanding its auto shredding venture, MSTC will, in the future, foray into recycling of e-waste. India is among the largest producer and importer of e-waste. MSTC may either partner with an established collector, dismantler, or recycler for setting up the e-waste facility in order to dispose and recycle the e-waste in an environmentally sustainable manner. It will sell the precious metals extracted from e-waste on our online platform for better realization.

Key Risk

Its e-commerce and trading businesses both have high dependence on small set of clients/customers. In the e-commerce business, revenues generated from the contracts awarded by the government and government-controlled entities constitute ~91% of the total revenue (H1FY19). Similarly, its top three customers account for ~93% of total revenue from the trading line of business for H1FY19.

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Ten Tips for Successful Long-Term Investment

Ten Tips for Successful Long-Term Investment
14/03/2019

With many avenues to multiply wealth, an individual can go for long-term or short-term investments based on their financial goals and liquidity position.

Investing in the market is one of the preferred avenues for wealth accumulation as it yields better returns when compared to the traditional forms of investments such as bank deposits, FD’s, PPF and others.

Nevertheless, when opting for long-term investment, hasty and uninformed decisions can lead to massive losses. An individual requires patience, fiscal discipline, and constant research on the markets when going for long-term investments.

Here are some tips for being a successful long-term investor:

1) Know it all:

Before proceeding to purchase stocks or securities, thorough research is vital. Don’t invest in a company just because of its name. Browse through information on the trends of the market, read up on the company and its performance in the past years, and check how the stock is performing before purchasing. This information will assist you in understanding how the stock or company is fairing in the market.

2) Invest in the business:

‘Never invest in stocks, invest in a business’ is the success formula used by expert investors. Knowing the business methodology and about the industry will help you in assessing the future of the company. It will be easier to pull out in time if the business prospects go on a downhill.

3) Never accept tips:

Regardless of who says, it is not advisable to chase a hot tip. It is always better to analyze and research before pursuing the tip. Even though some tips might prove to be profitable, it is better to have all the facts checked before investing your hard-earned money. It is wise to follow a well-researched decision than go with the crowd when it comes to investing in stocks.

4) Don’t panic:

Never panic when there is short-term volatility in the market. It is essential to focus on the bigger picture rather than sweating on the small stuff. Markets rise and fall now and then, and any movement that pertains to the short-term graph is not relevant for long-term investments. The success of long-term investors lies on staying focused and not taking any hasty decision.

5) Never stress on the P/E ratio:

Many investors give more importance to the Price to Earnings ratio or the P/E ratio over other parameters when selecting stocks. But being dependent on only one equation is not the right way to choose successful investments. A low P/E ratio does not necessarily mean that the stock is undervalued nor a high ratio indicates that the stock is overvalued.

6) Avoid penny stocks:

There is a common misconception that low priced stocks like penny stocks result only in lower losses in times of adversity. But it is not the case and it is better to invest in the quality stocks over penny stocks. These stocks are very speculative in nature and are considered highly risky because of lack of liquidity, smaller number of shareholders, and limited disclosure of information.

7) Have a strategy:

There are many techniques to select stocks and sticking to one of them is very important. Having a strategy that is suitable to your financial goals and risk appetite helps in building a successful long-term investment.

8) Regular dividends:

Wealth accumulation is a primary motive when opting for long-term investments, but dividends are a great source of passive income. When the company is in profits, it will distribute a certain percentage of the profit as dividends to its shareholders. Holding an investment that gives returns on not only selling but also as a regular income, is one of the ways to become a successful long-term investor.

9) Focus on the future:

The most tricky factor to successful investing is making informed investing decisions based on future events that are yet to happen. It is essential to base your decision focused on the future potential of the business and not just the past performance.

10) Keep an open mind:

When aiming for long-term investment, you need to have an open mind for selecting stocks. There are many good investments hidden among the bigger players, and there small companies that have the potential to become noteworthy companies. Therefore, if the investor feels the company can grow, then they should invest in them.

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Embassy Office Parks REIT- Information Note

Embassy Office Parks REIT- Information Note
15/03/2019

This document summarizes a few key points related to the issue and should not be treated as a comprehensive summary. Investors are requested to refer the Red Herring Prospectus for further details regarding the issue, the issuer company and the risk factors before taking any investment decision. Please note that investment in securities is subject to risks including loss of principal amount and past performance is not indicative of future performance. Nothing herein constitutes an offer of securities for sale in any jurisdiction where it is unlawful to do so. This document is not intended to be an advertisement and does not constitute an invitation or form any part of any issue for sale or solicitation of an offer to subscribe for or purchase any securities and neither this document nor anything contained herein shall form the basis for any contract or commitment whatsoever.

Issue Opens- March 18, 2019
Issue Closes- March 20, 2019
Price Band- Rs299- 300
Issue Size- 15.8cr units
Allocation to Strategic Investors~2.9cr units
Net Issue Size-~12.9cr units
Issue Size#- ~Rs4,750 cr
Post Issue MCap#- Rs23,046cr
Bid Lot- 800 units

 Note: # - at upper band         

Share Reservation

% of Net Issue

Institutional

75.0

Non- Institutional

25.0

Source: offer document

Company Background

Embassy Office Parks REIT’s (Embassy REIT) Portfolio comprises seven best-in-class office parks and four prime city-center office buildings totaling 32.7 msf as of December 31, 2018, with strategic amenities, including two completed and two under-construction hotels totaling 1,096 keys, food courts, employee transportation and childcare facilities. It has invested in amongst the highest quality assets in the key office markets of Bengaluru, Pune, Mumbai and Noida.

Issue Details

The issue consists of Fresh Issue of up to 15.8cr units.

Financials

Consolidated Rs.Cr

FY16

FY17

FY18

9MFY19

Revenue from operations

1,397

1,485

1,612

1376

Growth (%) yoy

-

6.3

8.5

-

EBITDA*

1,229

1,240

1,241

1,139

EBITDA margin (%)

88.0

83.5

77.0

82.7

Reported PAT

93

177

257

285

Source: Company, 5Paisa

For additional information and risk factors please refer to the Offer Document. Please note that this document is for information purpose only.

*EBITDA is excluding share of profit of equity accounting investees

Key Points

India is the sixth-largest and the fastest growing major economy in the world and has become a leading services hub for global corporates over the last 20 years. As the owner of one of India’s largest Grade A office portfolios, Embassy REIT is in a prime position to continue to capitalize on this incredible growth story and the sustained demand from services sector tenants (72.2% of its tenant base) for Grade A office space.

Although its properties have world class infrastructure and high-quality tenants, capital values for our assets as per CBRE’s valuation are $150 per square foot as of March 31, 2018, implying a 82.9%-95.2% discount to Grade A properties in New York, Tokyo and Hong Kong. Moreover, capitalization rates for such properties in India at 7.5%-8.5% represent a 175-575 bps premium to capitalization rates for assets of similar quality and tenant profile in countries like the US, Japan and China.

Key Risk

Its Gross Rentals as of December 31, 2018 and March 31, 2018, 2017 and 2016 from its top 10 tenants amounted to 42.31%, 44.84%, 46.72% and 48.35%, respectively of its combined Gross. Rentals as of these dates. Tenants in the technology industry accounted for approximately 49.40%, 49.48%, 52.76% and 56.15% of its combined Gross Rentals over the same period.

Its Leases with tenants across our Portfolio may expire and may not be renewed. The Asset SPVs and Investment Entity may face delays in finding suitable tenants which could also have an adverse impact on the revenue from the Portfolio Assets and the Portfolio Investment.

Summary of key line items for the period of Projections

INR cr, except percentages

FY2019

FY2020

FY2021

Portfolio Assets

Revenue from operations

1,882

2,304

2,512

NOI(1)

1,614

1,967

2,145

NOI Margin (%)

86%

85%

85%

EBITDA(2)

1,517

1,856

2,026

EBITDA Margin (%)

81%

81%

81%

Cash flows from operating activities

1,349

1,608

1,825

Portfolio Investment

Revenue from operations

343

400

416

NOI(1)

330

388

405

NOI Margin (%)

96%

97%

97%

EBITDA(2)

310

364

379

EBITDA Margin (%)

90%

91%

91%

Cash flows from operating activities

272

281

303

NDCF for Embassy Office Parks Group(3)

1,634

1,910

2,074

  1. For details in relation to NOI, refer to General Terms, Definitions and Abbreviations
  2.  For details in relation to EBITDA, refer to General Terms, Definitions and Abbreviations
  3. For details in relation to NDCF, refer to General Terms, Definitions and Abbreviations

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What are REITs and should you invest in them?

What are REITs and should you invest in them?
19/03/2019

With the launch of the first REITs IPO in India by the Embassy Group in partnership with Blackstone of the US, the focus is back on REITs as an investment product. SEBI permitted REITs in 2014 but there were a lot of procedural and tax related grey areas which delayed the actual launch of REITs in India.

REITs promises to be a game changer for the investors and for the real estate developers. For the investor, this is an additional asset class to invest in; and for the real estate developers REITs offer an opportunity to monetize their portfolio of commercial assets and also to give a viable exit route for the investors who had committed money to the project. But first, let us look at what this concept of REITs is all about?

What REITs are all about?

Real Estate Investment Trusts (REITs) are securities that are linked to a portfolio of real estate properties in India. Generally, the REITs make more sense in properties that are revenue generating and hence REITs are more popular on commercial property; and not so much on residential property. These include malls, commercial offices, industrial units, special economic zones, and other commercial spaces. The role of a REIT fund is exactly like that of a mutual fund. Just as a mutual fund creates a diversified portfolio of assets by purchasing equities selectively across the spectrum, the REIT fund does a similar job with realty. Commercial property is owned by the REIT fund and the income accruing from the property in the form of rentals on property and capital gains (if any) are distributed to the REIT holders. The REIT fund just acts as an intermediary to pass through the benefits of owning the property to the investors.

Is there a case for investing in REITs?

  • Unlike in the case of equity and bonds, there is no history of performance available since the first REIT IPO has only just been launched. However, there are some important considerations for investors in REITs.

  • REITs offer a good way to hold real estate as a financial asset. Normally, realty does not fit into your portfolio of investments as it is a hard asset. With the launch of REITs it is possible to hold real estate as an asset class in the form of financial securities.

  • REITs offer a good way of diversifying your portfolio risk. Normally, realty as an asset class is extremely regional in India and it is not impacted by the vagaries of equity and bond markets. This helps in diversifying the risk of the investor due to its low correlation with existing asset classes like bonds and equities.

  • The REIT Fund is mandatorily required to distribute 90% of income earned in the form of rentals and capital gains to the unit holders in the form of dividends. Being pass-through investments, the dividends received by investors are entirely tax free in the hands of the investor. That makes it more tax efficient than equity and debt funds.

  • Effective March 1st 2019, SEBI has reduced the minimum investment stipulation in REITs from Rs.2 lakhs to Rs50,000. This will make REITs more widely accessible. REITs are financial securities and its units can be held in your regular demat account and no additional administrative support is required for that.

  • While there is no history of REIT returns in India, one needs to remember that rental yields are relatively lower in India. However, experts estimate that the returns on REITs could range from 8% to 12% on an annualized basis and investors should take a long term approach to invest in REITs.

  • Lastly, REIT returns are expected to be less volatile compared to equity returns due to the long term nature of most commercial lease contracts. This will help the REIT investor to reduce the volatility in the overall portfolio.

REITs have surely emerged as an interesting addition to the investment portfolio.

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5 Things To Know Before You Start Online Trading

5 Things To Know Before You Start Online Trading
26/03/2019

Online trading is not entirely different from offline trading. While technology is a major difference, there is also a difference in terms of the responsibility for trades. When the order is placed via a call, the onus is on the dealer to execute instructions. In case of online trading the entire responsibility is on you to get the best trade at the best price. The buck stops with you. Our 5-point agenda can help you be more successful in trading online once you start.

A. Have a clear cut trading plan in place

What do we understand by a trading plan? It is all about defining the objectives of online trading. Obviously, you are into online trading to make profits but what you need to understand is that there has to be a clear process. That process is captured in your trading plan. Basically, the trading plan encompasses, how you select stocks, how you scale up your exposure to a particular position, how much risk you are willing to take in a day, how much risk you are willing to take per trade and how much risk you are willing to take overall. There are also discipline limits - at which point you must stop trading and get back to the planning board. Ideally, make it a habit to keep a trading book or an excel sheet. At the end of the day, critically evaluate where your trades went right and where they went wrong. This can form a part of your future strategy.

B. Do you homework thoroughly

The more you sweat in peace, the less you bleed in war. As a trader, you need to be well read and have adequate knowledge of company reports, sector views, macro research etc. Also, make a list of all the global and domestic cues that will impact the price of your stock universe. Keep that ready as a sensitivity spread sheet so that at any point of time you know how a Fed rate cut or a RBI rate hike will impact your focus group of stocks. Your homework should be on a focus group of not more than 20 stocks. Don’t try and trade outside this universe. You should be thorough on these 20 stocks in terms of fundamentals, news flows, and technical charts, among others.

C. Be a fanatic about your online security

This is perhaps the most important thing to take care before you get into online trading. It entails quite a few steps. Ensure that your anti-virus and anti-malware are updated before you start trading. Avoid downloading any unknown software and games on your hard drive to protect the integrity of your trading system. Use dual authentication for trading and keep your password complex and hard to guess. Needless to say, don’t write down your password anywhere. In case you are using the mobile app to trade, ensure that you only use secured gateways. Trading via public wi-fi in malls, airports and metro stations is best avoided. Also, never trade from any cyber café as the hardware may be compromised. Adopt a dynamic approach to changing your passwords frequently so that the secrecy is maintained. Finally, make it a point to always log out of your system when you are not on the trading desk.

D. Learn to separate the online wheat from the online chaff

As an internet trader, you are connected to internet 24X7. That has its merits and demerits. You have easy access to all the news, information and insights at the click of your finger. However, you are also exposed to a deluge of calls and ideas on WhatsApp messages or other online platforms; many of which may look awfully enticing. That is where you must separate the wheat from the chaff. Stick to your trading plan and don’t get diverted by the noise.

E. Focus on visible and invisible costs

You trade online because you want convenience and low costs. Do a complete evaluation of your costs in terms of brokerage and other statutory costs. Also look at invisible costs like missed opportunities, basis risk, liquidity costs, volatility costs, among others. You need to have a comprehensive understanding of all kinds of costs before you venture into online trading.

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