Advantages And Disadvantages Of Investing In Equity-Linked Schemes

Advantages And Disadvantages Of Investing In Equity-Linked Schemes
10/09/2018

Equity-Linked Savings Schemes, or ELSS, are funds that derive their returns from the equity markets. They are also tax-saving instruments that are eligible for tax exemption of up to Rs1.50 lakh under Section 80C of the Income Tax Act.

However, despite being a popular investing instruments, ELSS funds have a mandatory lock-in period of three years, during which, investors cannot withdraw their funds.

To begin their investment journey in ELSS, investors have an option of making a lumpsum payment or starting a Systematic Investment Plan (SIP), i.e. investing a set amount at specific intervals.

Like every other investment avenue, ELSS funds also have their share of advantages and disadvantages.

Advantages

  1. A SIP into an ELSS fund has a very low investment threshold of Rs500, and there is no maximum limit of investment
  2. In the equity markets, the longer the investment, the higher the gains. ELSS funds come with this feature as they have a mandatory lock-in period of three years. Compulsory lock-in period develops a habit of savings
  3. They have equity exposure as an asset class which gives the power to generate high returns
  4. The SIP investment option in ELSS gives the benefit of rupee cost averaging.
  5. It also has the dividend payout option which helps the investor to earn some income during the lock-in period.
  6. Both individuals and Hindu Undivided Families (HUF) can invest in ELSS funds.
  7. The investor can start or stop the SIP at any time.
  8. Earnings after the lock-in period are tax-free provided they are under Rs1 lakh, else the LTCG (long-term capital gains) tax of 10% is applicable. Moreover, LTCG is applicable to positions held over a year and investments held under a year warrant 15% STCG (short-term capital gains) tax.
  9. Mutual fund houses undertake transparent transactions as they come under the purview of markets regulator SEBI.
  10. The lock-in period is lower compared to bank fixed deposits (FDs), Public Provident Fund (PPF), National Savings Certificate (NSC), and other investment avenues.

Disadvantages

  1. The market has too many ELSS funds; this confuses investor when selecting a fund to begin their investment journey.
  2. There is a need for higher documentation at the start of the investment.
  3. As the funds are exposed to equity markets-related risks, there is no guarantee of returns.
  4. The investor cannot prematurely withdraw the funds.
  5. The tax benefits are limited as Section 80C allows only a deduction of Rs1.50 lakh inclusive of all investments. So, if the taxpayer has already exhausted their limit with other investments, then they cannot claim a deduction for the ELSS funds.
  6. It is not suitable for risk-averse or conservative investors.

The Rundown

ELSS funds are a better choice for individuals looking to save tax and want to earn higher returns from equity exposure. The investor can claim a deduction up to Rs1.50 lakh under 80C, but this includes all investments mentioned in the Section and not just ELSS investments alone. However, the ELSS funds do give a considerable return on investment which makes it more appealing to the investors.

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5 Information Technology (IT) Stocks to BUY

5 Information Technology (IT) Stocks to BUY
by Nikita Bhoota 17/09/2018

The Indian IT sector is expected to perform well in the coming years on account of pick up in IT budgets and increasing adoption of digital technologies by the enterprises. Moreover, the depreciating rupee is an added advantage for the IT industry. The Indian rupee has recently touched a new low of ~Rs72.6 (source: Bloomberg) against dollar owing to factors like poor current account deficit numbers and surge in crude oil prices. International events such as better than expected US non-farm payroll data amid trade wars have strengthened the dollar.

Below mentioned are some IT stocks having good growth potential in the long run.

Cyient Ltd

Cyient is an established player in engineering design services, data transformation, network & operations and analytics. Its segment mix as on Q1FY19 included aerospace & defence ~34%, communication ~24% and utilities & geospatial (U&G) ~14%. Cyient is transitioning from a pure play service provider to an end-to-end solutions company (via strategic acquisitions) which will expand its addressable market. Moreover, third party vendors within ER&D space are projected to grow at faster rate (~14%) vs. traditional IT services (7-8%), which augurs well for Cyient. Design led manufacturing (DLM) business of Cyient turned profitable at operating level in FY18 and we expect gradual improvement in DLM margins going forward. We estimate 14.5% revenue and 15% PAT CAGR and EBITDA margin expansion of 66bps on better realisations and utilisations over FY18-20E. We expect an upside of 20% from CMP of Rs742 over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Adj Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

3,918

17.5

424

37.7

19.7

FY19E

4,540

17.8

473

42.0

17.7

FY20E

5,134

18.2

561

49.8

14.9

Source: 5paisa research

Persistent Systems Ltd

PSL, a technology services company focuses on helping clients build and manage software driven businesses. Its business strategy is aligned around Digital (24% of revenues, Q4FY18), Alliance (24%), Services (46%), and Accelerite (6%). North America accounted for 81% of the revenues as on Q4FY18, while Europe, India and RoW accounted for 8%, 8% and 3% of revenues respectively. The company has a robust business model with multiple growth drivers such as Digital (EDT and IP), IBM Alliance (IoT), Services (OPD for ISVs) and Accelerite (own IPs). Its two-pronged strategy involves collaborating with ISVs and enhancing its digital products and capabilities. We expect USD revenue CAGR of ~12% over FY18?20E driven by 29% revenue CAGR in the digital business. Growth will be supported by IoT Platform deal with IBM. Overall, we estimate revenue CAGR of 13.4% and EBITDA CAGR of 18.8% over FY18-20E aided by improving IP-led revenues. We project PAT CAGR of 18.7% over FY18-20E. We expect an upside of 13% from CMP of Rs842over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

3,034

15.4

323

40.4

21.0

FY19E

3,455

16.3

383

47.9

17.7

FY20E

3,891

17.0

455

56.9

14.9

Source: 5paisa research

HCL Technologies Ltd

HCL Tech, India’s fourth largest IT company. HCLT is better placed among peers with sector leading revenue growth and stable margins. We expect company to post 12% revenue CAGR over FY18-20E owing to recovery in Infrastructure Management Services (IMS), higher rate of Engineering and R&D (ER&D) services outsourcing in India and strategy of investing in IP partnership which provide sticky revenues that would offset pressure in legacy IMS business. Margins would remain stable over FY18-20E on better execution and IP revenue contribution. We expect PAT CAGR of 7% over the same period. We expect an upside of 14% from CMP of Rs1,070over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

50,570

22.6

8,780

63.2

16.9

FY19E

58,247

23.1

9,575

68.9

15.5

FY20E

63,740

22.3

10,088

72.6

14.7

Source: 5paisa research

L&T Infotech (LTI)

LTI is an Indian mid-cap IT company. We expect Larsen & Toubro Infoctech (LTI) to deliver revenue and PAT CAGR of 20% and 15% respectively over FY18-20E on the back of solid wins in recent past. Its Luxembourg-based Syncordis SA acquisition will help to expand its core banking implementation capability. Also, the company’s acquisition of AugmentIQ is expected to expand its high-end analytics offerings across industries. Post-acquisition, it will get access to MAXIQ, the big data platform developed by AugmentIQ. It also aims expansion in new markets of South Africa, Middle East and India. Moreover, LTI’s industry leading growth rates, on par valuations and impressive cash flow conversion make it an attractive bet. We expect an upside of 13% from CMP of Rs1,877over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Adj Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18

7,306

16.2

1,161

67.5

27.8

FY19E

9,177

23.1

1,317

76.6

24.5

FY20E

1,057

28.0

1,554

90.3

20.8

Source: 5paisa research

Tech Mahindra

Tech Mahindra (Tech M) is India’s fifth largest IT company. TechM is well poised to capture the opportunity arising out of 5G roll outs in US after the lackluster growth in the telecom vertical (in past two years), which accounts for 43% of the company’s revenue. The order pipeline is likely to build up 2HFY19E onwards. Its LCC and Altiostar network acquisitions would differentiate its offerings and focus on IoT based platforms would drive telecom revenues. Its wide portfolio and design capabilities are aiding deal wins and fueling the growth in enterprise segment. TechM has sufficient margin levers in place viz. turnaround in portfolio companies (LCC turned EBITDA positive), higher offshoring and efforts to tighten operations. We expect top-line CAGR of 10% over FY18-20E. We see EBITDA CAGR of 19.8% in the same period. we expect PAT CAGR of 10% over FY18-20E. We expect an upside of 15% from CMP of Rs760over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY18

30,773

15.3

3,800

43.0

17.7

FY19E

34,351

17.5

4,088

46.3

16.4

FY20E

37,334

18.1

4,624

52.3

14.5

Source: 5paisa research

Research Disclaimer

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IRCON International Ltd

IRCON International Ltd
IPO
by Nikita Bhoota 17/09/2018

Issue Opens: September 17, 2018
Issue Closes: September 19, 2018
Face Value: Rs 10
Price Band:  Rs 470-475
Issue Size: ~Rs 470 cr
Public Issue: 99lakh shares
Bid Lot: 30 Equity shares       
Issue Type: 100% Book Building

Shareholding (%)

Pre IPO

Post IPO

Promoter

99.7

89.2

Public

0.3

10.8

Source: RHP

Company Background

IRCON International Ltd, a Government of India (GoI) entity, is an integrated engineering and construction company, specializing in major infrastructure projects like railways, highways/bridges/ flyovers/tunnels, electrification, commercial/residential properties, etc. As of FY18, IRCON is undertaking a total of 33 railway projects in two countries and in 13 states in India, with an aggregate length of ~1,665 km and has one completed road project of 115 km in India. It has posted revenue and PAT CAGR of 27.1% and 2.3% respectively (FY16-18).

Offer Details

GOI, via Offer for Sale (OFS), is offering up to 99 lakh shares aggregating to Rs470cr (upper end). There is a discount of Rs10 per share to the retail investors and employees with employee reservation of 5 lakh shares.  The OFS constitutes 10.5% of paid up equity share capital.

Financials

Consolidated Rs cr.

FY15

FY16

FY17

FY18

Revenue from operations

2,975

2,493

3,067

4,028

EBITDA Margin %

21.4

10.6

10.7

11.2

PAT

563

393

384

412

EPS (Rs)*

59.9

41.8

40.8

43.8

P/E*

7.9

11.4

11.6

10.9

P/BV*

1.3

1.2

1.2

1.2

RoE (%)

16.3

10.8

10.1

11.0

Source: RHP, 5Paisa Research; *EPS &Ratios at higher end of the price band and on post IPO Shares

Key Investment Rationale

  1. Company’s order book as of March 31, 2018 was Rs22,407cr, which provides revenue visibility for the next 5-6 years. As of March 31, 2018, domestic projects made up bulk of the company’s order book (93%) and secured ~Rs6,106cr new contracts in FY18. The railway sector accounts for ~87% of the total order book as on FY18. Various industry sources suggest that the investments in railways and the construction opportunity is expected to double over the next four years, which is favorable for IRCON.
  2. IRCON is an established player in the field of railways and highways construction. It is a turnkey construction company that specializes in new railway lines, rehabilitation/conversion of existing lines, station buildings & facilities, bridges, tunnels, signaling & telecommunication and railway electrification. Revenue from railway projects accounted for 68.95% of total FY18 revenues. The company’s broad geographical coverage has helped it to achieve the objective of gradually moving from a construction company to a diversified company having a portfolio of BOT/DBFOT/EPC and other contracts as well as project development and operation through JVs/SPVs.

Key Risk

Any adverse change in the policies adopted by the government in awarding projects (viz. pre-qualification criteria) could adversely affect company’s ability to bid for/win such projects. In addition, any changes in the existing policies pertaining to incentives granted in respect of infrastructure development, could adversely affect the existing projects and opportunities to secure new projects.

Conclusion

IRCON has a healthy order book of Rs22,407cr (FY18), providing revenue visibility for next ~5 years. Robust revenue growth and focus on higher margin foreign projects would improve profitability going ahead. Apart from the retail discount and 4.3% dividend yield, the issue is favorably priced at 11x FY18 EPS. We recommend SUBSCRIBE on the issue.

Research Disclaimer

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What are Hybrid Funds?

What are Hybrid Funds?
19/09/2018

Mutual funds are classified according to their investment type, such as equity funds that derive their income from the equity markets; debt funds that derive their income from debt instruments, among others like liquid funds, gold funds, and ETF funds, etc. Hybrid funds, as the name suggests, are a mix of different types of mutual funds.

The most unique trait of hybrid funds is that they invest in both equity and debt funds. Hybrid funds maintain an investment ratio of 60%-40% in equity and debt instruments, with a majority in either of the two. If the asset allocation is more than 65% in equities, it is an equity-oriented fund, and if the asset allocation is over 65% in debt, it is a debt-oriented fund.

Hybrid funds are an avenue for income generation and capital appreciation. They are suitable for risk-averse investors as well as first-time investors.

Types of Hybrid Funds

1. Balanced Funds

Balanced funds are the prevalent type of hybrid funds. They invest a majority in equity and equity-oriented investments, while the balance is invested in debt securities. They are a good choice for risk-averse investors. As balanced funds primarily invested in equity funds, they qualify as equity funds for taxation purposes. According to the new budget rules, a long-term capital gains (LTCG) tax of 10% is applicable if the dividend and the capital gains of the investor is more than Rs1 lakh in a given assessment year.

2. Monthly Income Plans

This hybrid fund primarily invests in debt instruments with 15-20% exposure to equities, which helps the investor gain higher returns than normal debt funds. Monthly income plans provide dividends to investors and the latter can choose the duration of the dividend payment. They also offer the growth option.

3. Arbitrage Funds

These funds take advantage of the price difference in the derivatives and the futures markets. However, the downside of these funds is that these opportunities are very less and the funds will stay invested in debt or equity investment. For taxation purposes, these funds are treated as equity funds and the LTCG tax is also applicable.

Benefits of Hybrid Funds

  1. The fund manager can switch between different types of assets to take advantage of the market
  2. There is a diversity in the portfolio, which provides growth from stocks and safety from bonds
  3. Hybrid funds are professionally managed
  4. Investors can also receive income in the form of dividends
  5. It is suitable for first-time investors
  6. They come with low volatility and are tax-efficient

Hybrid funds are mainly popular for their diversification advantage, which acts as a safety net against market volatility. New investors can start their financial journey with these funds as they give exposure to both kinds of markets. However, an investor also has to understand that when opting for balanced funds, they will have a higher exposure to the equity markets, and consequently, more volatility. Hybrid funds offer the best of both worlds, and the investor should choose the hybrid fund that aligns with their financial goals.

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Aavas Financiers Ltd IPO Note - NOT RATED

Aavas Financiers Ltd IPO Note - NOT RATED
IPO
by Nikita Bhoota 24/09/2018

Issue Opens: September 25, 2018
Issue Closes: September 27, 2018
Face Value: Rs 10
Price Band: Rs 818-821
Issue Size: ~Rs 1734 cr
Public Issue: 2.11cr shares
Bid Lot: 18 Equity shares       
Issue Type: 100% Book Building

Shareholding (%)

Pre IPO

Post IPO

Promoter

81.3

55.5

Public

18.7

44.5

Source: RHP

Company Background

Aavas Financiers Ltd is a retail focused (99.3% retail loan book as of Q1FY19) affordable housing finance company, primarily serving low and middle income self-employed customers with underserved unreached customer segment built on semi-urban & rural distribution framework. For Q1FY19, its AUM mix was ~76% from home loans and ~24% from other mortgage loans; salaried and self-employed mix was ~36% and ~64% respectively. A majority of its customers have limited access to formal banking credit. As of Q1FY19, 61.22% of its gross loan assets were from customers belonging to the economically weaker section/ low income group and 36.27% were from customers new to credit. For Q1FY19, it has 166 branches covering 95 districts in 8 states. Almost all customers are sourced directly by the company.

Offer Details

The offer comprises a fresh issue (49 lakh shares) by the company and an offer for sale by the existing shareholders (1.62cr shares). The net proceeds of the fresh issue will be utilized towards augmenting its capital base to meet its future capital requirements.

Financials

Standalone Rs cr.

FY16

FY17

FY18

Q1FY19#

Total Revenue

191

306

457

144

PPOP

54

95

144

47

PAT

33

57

93

29

NIMs (%)

6.1

6.6

7.3

8.1

P/BV* (x)

15.5

8.4

5.2

4.9

RoE (%)

21.5

14.8

11.2

-

RoA (%)

2.6

2.6

2.7

-

Source: RHP, 5Paisa Research; *On non-diluted basis at upper band, # Q1FY19 nos. not annualized

Key Investment Rationale

 

  1. The company has been able to access cost-effective debt financing and reduce average cost of borrowings over the years due to better financial performance and improving credit ratings. The company’s long term credit ratings have improved from CRISIL BBB+/Stable in August 2012 to CRISIL A+/Stable currently. The management is expecting a further rating upgrade (from A+ to AA) post completion of equity listing. Its average cost of borrowings has reduced from 12.28% in FY14 to 8.57% in Q1FY19.

  2. The company will continue its focus on low and middle income self-employed customers and increase the market share in its existing products in the rural and semi-urban markets of India. A large segment of India’s rural and semi-urban population is currently unserved by formal financial institutions comprising customers without credit history. According to ICRA, the housing shortage in rural areas among the economically weaker section was for 3.93cr units constituting 89.93% and 99.84% of the total rural housing and urban housing shortage respectively, which offers significant opportunity to company like Aavas Financiers.

Key Risk

As of Q1FY19, 92.82% of its gross loan assets were located in the states of Rajasthan (alone accounting for 46.63%), Maharashtra, Madhya Pradesh and Gujarat. Any significant slowdown in real estate and housing market could hamper its asset quality and financials. Any significant change in interest rates would affect interest expense on its floating interest-bearing liabilities as well as its net interest income. Any increase in its cost of funds may lead to a reduction in net interest margin and hence could adversely affect its financials.

Research Disclaimer
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Five Short Selling Strategies for Traders

Five Short Selling Strategies for Traders
26/09/2018

Short selling is a type of technique traders implement in the stock markets to make a considerable profit. Short selling can be described as the sale of a borrowed security by a trader who believes its price will decline in the near future.

The process of short selling happens as follows:

1. The trader borrows the stock from the broker

2. He then advertises that the particular company stock is for sale on the trading platform

3. Once he completes the sale of the borrowed stock, the proceeds are credited to the trader’s account, also known as the ‘margin account’

4. When the price of that particular stock dips below the current market price, the trader buys the stock and returns it to the broker

5. The sale price minus the purchase price is the trader’s profit.

The following steps can help a trader accomplish short selling:

1. Follow the Market Trend

When short selling, the trader has to follow and monitor the market trends. In short, the bear market is an opportune market to perform short selling. A market on a downtrend is also a good time for short selling. If there exists an upward trend, the trader should refrain from short selling as it is an indication that the stock’s price will continue on a definite rise before adjusting to its normal cycle.

2. Time the Pullback

Timing is essential for stock market traders. The pullback is a brief situation where the complete opposite of the upward price trend takes place. The pullback is a stall where rising prices stop at a certain point. This trend has two outcomes: a rise in price or a reversal in price. The trader can choose to repurchase the securities at the pullback level or can also bump into profits if the price spirals down.

3. Find the Big Players

If there is a breakout or a correction in the markets, the big players will continue to rise at least 20-25%, before the pullback happens. This pattern can also lead to a new pattern, and the chart can dip or rise. So the traders can minimize their losses by short selling those stocks that have already had a huge run as there is a possibility that these stocks will go on an extended and deep correction.

4. Be Aware of the Risks

Short selling traders should also be aware of the mathematical risks it carries. The most the trader has to lose is their invested money, but they can also make a considerable profit if the price of the stock plummets. At the same time, if the price goes up, the trader will not lose only their invested amount, but will also incur a heavy loss.

5. Greed is the Enemy

Selling short is a highly risky proposition that needs careful analysis and timing. Short selling only works during certain trends and does not last for longer periods. The market will also revert back to the upward trend and will never be in the same position. So, the trader should not get greedy, always indulge in a short sale, and should also hold some long positions of the stock to gain profits. When attempting a short sale, the trader should not make emotional decisions and should have a thorough plan to make profits from short selling the borrowed stocks.

As the old Wall Street saying goes, “Bulls make money. Bears make money. But pigs get slaughtered.” Short selling does not always guarantee profit for the trader. A trader has to be very cautious and experienced to short sell stocks as there is a possibility that the price of the stock will rise in the near future.