Sensex above 40,000; where to invest now?

Sensex above 40,000; where to invest now?
11/01/2019

When the Sensex touched the 40,000 mark for the third time during the year, the big question was what next? On the last two occasions, the markets had dipped sharply after touching that level. However, this time there are a number of factors that have come together to make this rally more sustainable.

Why this time Sensex could rally beyond 40,000?

There are, in fact, a number of reasons why the Sensex could convincingly rally beyond the 40,000 mark this time around. Let us look at some of these key drivers for the market.

  • The classic budget blunders have all been done away with. So the public shareholding hike is shelved and capital gains on equities have been kept out of the higher surcharge. That should keep the FPIs happy.

  • The clarification on the buyback tax applicability has also given some room for hope, although the markets will still like the tax to be abolished in totality.

  • The tax cut from 30% to 22%, giving a total payout reduction of 9.77%, will be the real big bang for the markets as it adds nearly $20 billion to the bottom lines.

  • The concessional tax of 15% on new manufacturing investments will also be a boost for companies to revive the capital cycle in a big way.

  • The latest quarter results have indicated that while slowdown may have hit the top lines, the profits are still being sustained through better product positioning and cost cuts.
  • BREXIT looks like getting resolved and the US-China trade war is abating. Global risk may not be gone, but it is surely looking a lot more sober.

  • The A/D (Advance/Decline) ratio is gradually looking up and that is an indication of the broadening of the market rally and that is normally more sustainable.

  • Finally, there is the next big bang if the government abolishes the DDT and revamps the LTCG taxes. A small shift here could have a multiplier impact on market sentiments.

Logic accepted, but where to invest now?

That is the million dollar question. Even assuming that the market does have steam left, where can one invest without taking on too much of valuation risks? Here are five investment ideas at this market level.

  1. Like it or not, consumption still remains the big theme. If the tax reforms come through then the big push could come from the consumption story. That includes FMCG, private banks and a part of two wheelers too. It may be too early to become positive on the auto stocks as they still need the financial taps to flow. Consumption stocks have also used this opportunity to reposition products and cut costs. Weak oil is an advantage.

  2. It may be too early to talk about a revival of the capital cycle but the impact of the 15% concessional tax is currently being underestimated. India has been talking about weak capital cycle for over 7 years now but finally, there is a favorable tax policy to encourage capital investments. Over the next few months we will see a lot more companies opting for lower taxes and for tax concessions on capital investments.

  3. The PSU story appears quite attractive in the current scenario. PSU banks are likely to benefit from the bottoming of the NPA cycle. In addition, PSUs in areas like mining, oil and even metals may be serious candidates for divestment, strategic sale or even total privatization. That could be a big trigger even at these levels.

  4. Look for laggard surprises like telecom and power. That may not look like a great investment idea but here is the logic. Between them,  power and telecom companies owe close to $100 billion to the Indian banks. There is no way the government is going to allow these two sectors to fail. There could be a new telecom and also a new power policy that could rethink the way these sectors operate in India. Watch out, they could be the surprise package.

  5. Finally, don’t ignore the mid cap stories; you can look at small caps at a later date. Focus on sound model mid caps where the correction has been more in sympathy.  Focus on stable business models, low levels of debt and good standards of corporate governance. If these three conditions are satisfied, you can seriously look at such mid cap stocks.

The moral of the story is that there are a plenty of opportunities in this market irrespective of the levels of the Sensex. That is what you need to look out for!

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Thriving to Surviving - Reshaping the Broking Industry

Thriving to Surviving - Reshaping the Broking Industry
by Prakarsh Gagdani 14/01/2019

By Prakarsh Gagdani

At an event organised by ANMI, I was invited as a panelist to present my views on a very relevant topic – ‘Thriving to surviving – Reshaping the broking industry’. Here are some key takeaways from the discussion.

In my opinion, Mobile has been the game changer. The broking industry, notably, has transformed from the dependence on a dealer to lock-in trades, into a more independent and mobile-driven trading. Considering the evolution of the broking industry over the past five years alone, it should come as no surprise that Mobile is set to bring even more disruptions to the industry.

Now consider these facts: one, India is a young country, with majority of population under the age of 35; two, about 4% of the country participates in the capital market against around 40% in the developed countries; and three, the market cap of Indian equities is roughly USD 2.1 tn against USD 30 tn in the US.

 Given this reality, there is undoubtedly a huge opportunity for further penetration of the broking industry in India. And to capitalise on the sector’s prospect, the best way forward to reach out to the masses can only be driven by ‘Mobile’.  

At 5paisa.com, Mobile has been the cornerstone from our humble beginnings two and half years ago. Till date, every product that we have launched, went up on the mobile app first and was then introduced on our other platforms. We were the first broker to open our mobile app to general users and not just our customers. In another first, we introduced m-pin, which only featured in internet banking apps back then. We were also the pioneers to enable end to end online account opening through mobile. Consequently, today, ~ 75% of our transaction volumes come from mobile.

One of my co-panelist also indicated that in the US ~ 30% of the trades happen through mobile devices and this ratio is over 50% in Singapore already.  He acknowledged that Mobile is the way to go forward and more so for countries dominated by the youth.

Interestingly, in India, over the past few years, retail participation has been on a rise and a large part of the growth is coming in the discount broking segment. Looking ahead, I believe that discount brokers possibly will have a dominant share, similar to countries like South Korea, where capital market activities are prominently driven by discount brokers or wealth managers.

To conclude, I strong feel that the broking industry has still not unleashed its potential in our country. With burgeoning young population, strong digital penetration and growing focus on financialization, the segment will remain promising and witness huge participation from the retail segment - both in direct equity as well as mutual funds, in the coming years. Consequently, there will immense growth opportunity for all the players in the market and the best is yet to come for the industry.

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Four Asset Allocation Strategies to Create Wealth Through your Investments

Four Asset Allocation Strategies to Create Wealth Through your Investments
18/01/2019

The primary aim of every investor is to accumulate wealth or to achieve their long-term goals without the need for loans. Asset allocation is dividing one’s investment portfolio into categories of debt, equity, stocks, bullion, real estate, and other financial investments. Having a correct mix of these investments, which is in accordance with the risk appetite and financial goal of the individual, will help in wealth accumulation. Put simply, asset allocation balances the risks involved with every asset class.

However, certain factors should determine your asset allocation strategy:

  • Goal: It is imperative for investors to decide their need for investing and the range of the investment (short-term or long-term) before they start investing.
  • Risk appetite: Risk appetite refers to how much an individual is willing to stake in order to earn substantial returns. For example, investors who are risk-averse predominantly invest in securities with guaranteed profits. On the other hand, risk-tolerant investors choose securities that come with high risk with an aim to earn higher returns.
  • Period: The duration for which an investor will stay invested is the time horizon of the investment. Primarily, the investor’s goal determines the period of the investment and also the risk tolerance.

It is important to figure out the above points before you begin your investing journey.

Here are four commonly used asset allocation strategies to create wealth.

Strategic Asset Allocation

This is a traditional method where the target allocation of investments depends on the investor’s preference of risk tolerance, time horizon, investment objective, and other conditions. Strategic asset allocation changes its holding as per the investor’s preferences. It aims to provide an optimal balance between risk and return for long-term investments. Strategic asset allocation is based on the modern portfolio theory, which recommends diversification to lessen risk and increase portfolio returns.

In the case there is a deviation from the investment goals, the portfolio is brought back to its original allocation.

Tactical Asset Allocation

Tactical asset allocation is also based on the modern portfolio theory and is a moderately active strategy. It is an alternative for investors who think that the strategic asset allocation model is too rigid in the long run. This strategy aids investors in making tactical deviations from their investments to profit from any unique or unexceptional opportunities present in the market. It adds timing to the portfolio and allows the investor to benefit from economic conditions favorable to an asset. However, when investors gain short-term profits, the asset portfolio is brought back to its original allocation.

Dynamic Asset Allocation

Dynamic asset allocation is an active strategy which continuously allocates asset classes as per the prevalent market and economic conditions. Through this strategy, investors sell weakening asset classes and purchase assets that are increasing in value. Dynamic asset allocations allow investors to benefit from the best-performing investments, thereby ensuring exposure to market momentum and substantial returns if the trend rises upward. Equally, it will also lower the portfolio’s exposure to those classes that are trending lower to minimize losses.

Diversification is the key feature of this model as it exposes the portfolio to many asset classes and reduces risk. The portfolio may consist of equity, mutual funds, index funds, currencies, and other investments.

Insured Asset Allocation

This type of asset allocation sets a limit under which the base portfolio value should not decrease. If the investors can garner returns above the threshold, they can undertake active trading based on analytical research, market forecasts, and expert views on various asset classes to increase value. In the case the value drops, the investor should invest in risk-free assets to bring back the threshold. At such times, most portfolio managers overhaul their allocation or might altogether change the investment strategy. Insured asset allocation is suitable for risk-averse investors who want active trading with a guarantee of a safety net.

Asset allocation involves both active and passive trading techniques for investors to realize their financial goals. Nevertheless, it differs for every investor, and the investor has to continually change their strategies according to the market and economic conditions to achieve their financial goals.

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Things One Should Know Before Investing in ELSS

Things One Should Know Before Investing in ELSS
23/01/2019

An equity-linked savings scheme (ELSS) is an investment that derives its earnings from the equity markets. ELSS funds come with a mandatory lock-in period of three years and the investor cannot withdraw their investment during this period. ELSS funds are popular as they are tax-saving instruments under Section 80C of the Income Tax Act and allow one to claim a tax deduction of up to Rs1,50,000.

Nevertheless, before investing in ELSS funds, an investor should know some things, namely:

Risks

Investors who are looking for higher returns should be well-prepared for the risks and the volatilities of the equity market. ELSS funds are a type of mutual funds that invest only in the equity markets or equity-related products, which are known for their high volatility. Due to this volatility, which increases the risk-reward ratio, ELSS funds give higher returns than most investments.

Past Performance

Past performance is not a deciding factor when choosing for the best ELSS fund as the current top-performing fund might not perform so well in the future. Hence, the investor should conduct due diligence and have realistic expectations before investing in an ELSS fund. Balancing risk and reward by choosing the correct mix of schemes can help investors enrich their financial journey.

Investment Period

ELSS funds come with a mandatory lock-in period of three years, but there is no need of divesting the units immediately after the end of this term. In the equity markets, investors can take advantage of the power of compounding by staying invested for longer periods. This will allow your money to grow exponentially over the years. Investors can even reinvest their earnings into a different scheme if they do not wish to continue with their investment.

Reuse and Recycle

If the investor has been in the market for a long time, they can sell their investments and invest the proceeds in the market to maximize their earnings. ELSS funds also offer the option of dividend reinvestment, where the investor’s dividend returns are reinvested in the ELSS scheme and treated as a fresh investment. At the same time, if an individual has opted for the Systematic Investment Plan (SIP) route to invest in an ELSS, every SIP payment will be treated as a fresh investment with a separate lock-in period for each SIP.

For example, if the investor has made an SIP payment in July 2018, he/she can redeem it in July 2021, while the SIP payment of August 2018 can be redeemed in August 2021.

Taxation

Before the Union Budget of FY2018-19, long-term capital gains (LTCG) were tax-free in the hands of the investor. However, Union Budget FY18-19 introduced the LTCG tax of 10% on capital gains, including 10% dividends, exceeding Rs1 lakh. To tackle this issue of taxation, it is prudent for an investor to opt for a growth plan ELSS as it will help reduce your tax burden.

These are some of the things an investor should be aware of before investing in ELSS funds, which are an excellent option for saving tax. Do remember to conduct proper research before taking a decision.

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What to expect from the Union Budget 2019?

What to expect from the Union Budget 2019?
25/01/2019

Union Budget 2019-20 will be special in quite a few ways. It will be the first budget presented by a non-finance minister Piyush Goyal, who is filling in for a sick Arun Jaitley. It will also be the first time we will have an interim budget instead of vote-on-account in an election year.

Above all, the budget is being presented in the midst of very challenging domestic and global cues. Globally, there is the US-China trade war, the Chinese economic slowdown, warnings from the IMF, and oil spikes. Domestically, there is rising inflation, currency, interest rates, and the IL&FS crisis.

Here is what we can expect from this year’s Budget.

A budget built around the farmer

If the NDA should have any chance of doubling farm incomes by 2022, this is their golden chance. MSP has had halting success and the government may now opt for direct cash transfers instead of paying subsidies. States like Telangana have adopted this method quite successfully. Cash transfer could cost the government Rs70,000cr but the impact will be visible. The budget could also witness the revival of full-fledged rural job creation and enhanced lending to the rural sector. Instead of loan waivers, this budget may make the first attempt at introducing Basic Guaranteed Income (BGI) in rural India. That could be a trump card.

Prefer pump priming over fiscal prudence

Fiscal deficit is under pressure on two fronts. The government has huge spending plans and the revenues are just not keeping up. GST collections are expected to fall short by Rs1,00,000cr in the current fiscal while divestment proceeds may fall short by Rs20,000cr. This will stretch the fiscal deficit from 3.3% to 3.5%. The budget could also see a clear shift in government stance. It may take a stand in favour of boosting the economy through fiscal measures even at the cost of higher fiscal deficit. That is what China has done and the budget may see merit in following that route.

Critical decisions on GST and disinvestment

Leaving decisions to the GST Council may work for micro issues but not for GST at a macro level. The government may look to hit two birds with one stone by bringing oil and oil products progressively under GST. This could be the real boost that GST was looking for. Also, the budget may look to simplify GST substantially and focus on the quality of filings.

The other big shift could disinvestment. Apart from setting targets, the budget may look at a new approach to disinvestments, i.e. a strategy that encompasses a holistic strategy for minority stake sale, strategic sale, monetization of tangibles, monetization of intangibles, consolidation, and SOTP valuations etc. This could be the exciting area.

Come elections, the common can rejoice in this budget

One way to keep the people happy through the budget is to give generous tax incentives to enhance disposable incomes. It is likely that the basic exemption slabs could be raised and the Section 80C limit could be expanded. Also, Section 24 may be made more relevant to boost property sales in booming Indian cities.

Equity markets may see reduction of cascading effect

IF LTCG tax collections are tepid, we could see the abolition of the LTCG tax on equities or, at least, witness the extension of indexation benefits to equity and equity funds. This will reduce the cascading effect.

Secondly, dividends are being taxed at almost four levels now (company level, DDT, equity investors, and MF investors). This cascading effect needs to be reduced to make it meaningful. STT is most likely to stay as it is.

The budget is likely to be predicated on leaving more money with people in an election year, doling out a farm rescue package, and making a noise on disinvestment and GST.

Now we wait to hear it straight from the horse’s mouth!
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Chalet Hotels Ltd IPO Note- Not Rated

Chalet Hotels Ltd IPO Note- Not Rated
29/01/2019

Issue Opens: January29, 2019

Issue Closes: January31, 2019

Face Value: Rs 10

Price Band:  Rs 275-280

Issue Size: ~Rs 1,641 cr

Public Issue: ~5.86cr shares

Bid Lot: 53 Equity shares       

Issue Type: 100% Book Building

Shareholding (%)

Pre IPO

Post IPO

Promoter

100.0

71.4

Public

0.0

28.6

Source: RHP

Company Background

Chalet Hotels (CHL), a part of K. Raheja Corp group, is the owner, developer and asset manager of high-end hotels in key Indian metro cities. CHL’s hotels are managed through third-party operators (four hotels) across luxury-upper upscale and upscale segments. The hotels are branded with Marriott group brands (leading global hospitality group) like JW Marriott, Westin, Marriott, Marriott Executive Apartments, Renaissance and Four Points by Sheraton. CHL operates across five operating hotels, with 2,328 keys as of September 30, 2018. CHL’s average occupancy and ARR (average room rent) during H1FY19 (managed hotels) stood at 73.82% and ~Rs7,830 respectively.

Objective of the Offer

The offer consists of an offer for sale (OFS) of ~2.47cr shares by the promoters and fresh issue aggregating up to Rs950cr (total issue size of ~Rs1,641cr at the upper end of the price band). The net proceeds of the fresh issue will be utilized to repay / prepay debt (Rs720cr) and for general corporate expenses.

Financials

Consolidated `Cr

FY16

FY17

FY18

^H1FY19

Revenue from operations

573

706

874

470

EBITDA

131

212

294

107

EBITDA Margin %

22.9

30.1

33.7

22.7

Adj. PAT

(112)

127

31

(44)

Adj. EV/EBITDA* (x)

52.0

32.8

23.6

-

Adj. EV per key*

3.6

3.1

3.0

-

Debt-to-Equity ratio (x)

4.5

5.6

5.4

5.8

RONW (%)

(20.7)

26.0

4.4

-

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

Key Points

  1. CHL leverages upon K. Raheja Corp group’s extensive experience in developing large scale real estate and commercial projects. The company has a strong backward integration process for development of hotel assets at optimal cost and quality owing to the experience and relationships of the promoter group.
  2. CHL has an existing pipeline of three hotels with 588 keys and two commercial office space projects (~1.12mn square feet). CHL’s hotels under development across locations are as follows:

•          Hyderabad (proposed to be ‘Westin’ hotel) - 178 keys

•          Navi Mumbai (proposed franchise of Hyatt Regency) - 260 keys

•          Powai, Mumbai (proposed to be ‘W’ hotel) - 150 keys

CHL has traditionally acquired large parcels of land at competitive prices with the intention to develop projects. CHL has developed two projects towards commercial / retail spaces representing ~0.86mn square feet (as on September 30, 2018) adjacent to the existing hotel properties. These projects accounted for 3.62% of total revenue from operations during H1FY19. CHL further intends to leverage upon the unutilized FSI at few of its existing hotel properties, which allows developing additional hotels and commercial / retail spaces.

Key Risk

  1. CHL’s four owned hotels are operated and marketed by Marriott group. They accounted for 90.2% and 84.7% of the operating revenues during FY18 and H1FY19 respectively. Non-renewal / termination of management contracts could significantly impact CHL’s operations.
  2. CHL’s hotels located in Mumbai contributed 61.7% and 57.3% during FY18 and H1FY19 respectively. Increased competition or supply, or reduction in demand in the markets in which these hotels operate, may have an adverse effect on the business and results of the company.

Research Disclaimer