Why Do Most Indians Not Invest In The Stock Markets?

Why Do Most Indians Not Invest In The Stock Markets?
07/03/2018

Indians have a love-hate relationship with the stock markets. Research shows that only 2% of the Indian investors invest in the stock markets. The average person’s view on staying away from stocks is because the equity markets have not been able to guarantee the same level of trust that other forms of investment provide (read: fixed deposits). Moreover, financial illiteracy prompts investors to prefer traditional methods of investment that give sure shot returns. Other reasons could be:

Reasons For Staying Away-

  1. Financial Illiteracy

    Having little or no knowledge about the stock markets keeps investors away from it. The common belief that “it is a place where you invest only to lose” should be cast away. Education in commerce has also failed to give proper insights and gain the trust of investors.

  2. Lack Of Money

    Lack of money often keeps investors away from the stock markets. It is a common belief that investing in stocks requires huge money. However, you can start with small amounts too provided you do your research and then invest in a stock.

  3. Patience

    Indians lack patience when it comes to the stock markets. Most believe that it is a place to make quick money. Lack of patience usually results in investors either entering or exiting a trade at the wrong time. Such premature decisions mostly end up against the investors.

  4. Traditional Investments

    Compared to the stock markets, traditional method of investments like bank FDs, certificates, and gold give sure shot returns. People do not have the time to study a stock and invest accordingly. So investing in traditional, risk-free instruments is preferred by most of India’s middle-class population.

  5. Past Experience

    If an investor has suffered losses in the stock markets because of wrong investments in the past, they would generally tend to keep away from it. Instead of analyzing the reasons for failure, the investor will find it safer to keep away and make investments in another form.

  6. Lack Of Courage

    Because of a fear of losing money, investors do not show courage while making investments in stocks. Also, the “bad” stock market experiences of people near to us are a big demotivation.

  7. 'Play Safe’ Attitude

    When it comes to investments, the risk appetite of Indians is not that high. Therefore, fixed deposits are the sure-shot, go-to bets for most Indians despite the stock market giving higher returns.

  8. Word Of Advice

    Elders in India like to guide and motivate their young ones about investing money. However, they are also unable to comprehend the stock markets and, hence, are cautious about investing there. According to them, it is not a safe place to invest one’s hard-earned money. This keeps most young investors away from the stock markets.

Today, there is a big disconnect between the Indian stock markets and the Indian investors. The reason for this is lack of awareness, anxiety about risk, high returns, and a need for risk-free investments that give stable returns. This affects investors’ earning capabilities and the benefits that they can reap in the long run.

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Why do children need to be financially literate?

Why do children need to be financially literate?
13/03/2018

Certain communities in India are known for their business acumen. An excellent example would particularly include people and communities from the western part of the country, viz. the Gujaratis, the Marwaris, the Jains and the Kachchhis, to name a few. If you have friends from these communities, you would have noticed how much they value money. The importance of money is ingrained in them from their very childhood. They are taught how to manage money and are given the required training in their familial businesses from a young age. These children go on to become financially savvy adults.

This goes to show the importance of being financially literate and savvy from an early age. It is not challenging for children to understand the basic concepts of money management. Children are quicker than adults at picking up concepts. Moreover, they are already being taught basic arithmetic at school, which is required to understand concepts like earnings, spending, and savings. With appropriate training and exposure, they can be made financially literate and thus, we can ensure a bright future for them from a very young age.

Here are four money management concepts that can be taught to children

  1. The value for money

    Children must learn that money has value, and that the moment it is spent, it is gone, and you lose that value. To demonstrate this, it would be best to take them grocery shopping. Since money is tangible, using cash would be prudent to teach them its value.

  2. Expenditures

    Children must learn the differences between necessary and frivolous expenditures. Learning the differences will help them realize that money should not be spent unnecessarily, but should rather be used as a means of fulfilling necessities.

  3. Allowances

    By giving them allowances, parents can teach and make children capable of handling money independently. It is proposed that children below the age of ten should be given weekly allowances, pre-teens bi-weekly, while teens should be proffered a monthly allowance. The parent has to be particular about these allowances and not over allocate. Giving them allowances will help them learn the concepts of saving and especially spending within their allowances.

  4. Basics of banking

 Taking children along on a visit to the bank will help parents teach them banking concepts in a live environment. While there, they can learn about depositing money, filling bank slips, withdrawals, savings account, interest rates, and checks, among other things.

Conclusively, when financial literacy is given the same importance as formal education, children become aware about the value of money. This way, they learn that money has to be earned. Children should not be under the impression that money magically flows out from the parents’ debit card. Financial literacy will teach them the correlation between working and earnings. From an early age, they will know that one needs to work to be able to earn money and thus, they will spend it wisely when the time comes. As they grow up, they will develop further insight on the importance of saving and investing. As adults, they will be able to categorize their money into essential spending, saving, and indulging, respectively.

As responsible adults, it will be easier for them to understand the concepts of the stock market. Investing in equity, debt, and other financial instruments will aid their budgeting and investing habits and subsequently, allow them to achieve and enjoy future goals in a systematic and planned manner.

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IPO: A Money-Making Process

IPO: A Money-Making Process
14/03/2018

An Initial Public Offering, better known as IPO, is the very first time a private company issues its shares to the public. In other words, it is the ‘sharing’ of ownership with the public or investors’. These investors buy a stake in the company, which is valued through the shares issued, and consequently, the company gets to raise capital for its growth.

Let’s take a hypothetical example of Frank Castle who has a thriving utensil-manufacturing business. Frank has one factory operating at maximum capacity and wishes to expand it. He also needs more capital to source materials internally to reduce costs. However, he already has a sizeable amount of debt owed to the bank and wants to avoid taking another loan.

For Frank, it would be wise to sell part ownership of his business to the public at large. The capital raised through this could then be used to pare existing debt and enable his business to grow. If the company heads in the intended direction, the investors stand to make a lot of money for themselves.

However, to make an IPO, Frank would also incur significant marketing, accounting, and legal costs. A substantial amount of attention, time, and, effort would be required to follow the protocol. Only companies that meet the requirements of the market watchdog Securities and Exchange Board of India (SEBI) are eligible to float IPOs. An investment bank or other financial institution is also needed to act as an underwriter to the company. The underwriters buy the shares from the company and then sell them to the public. The company also has to prepare a prospectus, called a draft red herring prospectus, that includes detailed financial records, future plans, and the expected price range of the shares for prospective investors. Valuation of the IPO, in particular, can get fairly complicated for newer companies.

After SEBI approval is received, the company, with the help of underwriters, decides on the price band and number of shares to be sold. Issues are mostly of two types: fixed price issue — where the company decides the price and number of shares to be issued; and book building issue — where the price is discovered through bidding. Finally, the shares are made available to the investors on the date mentioned in the prospectus.

A demat account is a prerequisite for an investor to bid for an IPO. They would need to fill an IPO form which can be obtained from a broker and write a cheque for the desired number of shares. Once the price is decided, shares are allotted to investors based on the bids and the unsold shares are made available with the underwriters. Today, this process can also be done online. Several trading applications and websites have made it easier to trade online and get share market tips constantly. For trading in shares, however, an investor must have a trading account.

Investing in stocks can be a great alternate source of income for anybody. Specifically, in the case of IPOs, the opportunities to grow significantly outweigh the potential risks. True, no investment is a sure thing, but with enough research and scrutiny, IPOs can provide huge gains over the long term. To quote Warren Buffet, “If you don't find a way to make money while you sleep, you will work until you die.”

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Bandhan Bank Ltd-IPO Note

Bandhan Bank Ltd-IPO Note
IPO
by Nikita Bhoota 15/03/2018

Issue Opens: March 15, 2018
Issue Closes: March19, 2018
Face Value: Rs10
Price Band: Rs370-375
Issue Size: ~Rs4,473cr
Public Issue: 11.93crore shares
Bid Lot: 40 Equity shares       
Issue Type: 100% Book Building

% shareholding

Pre IPO

Post IPO

Promoter

89.62

82.28

Public

10.38

17.72

Source: RHP

Company Background

Bandhan Bank started general banking operations on August 23, 2015. It has India’s largest microfinance lending portfolio with a total loan book size of ~Rs24,400cr as on 9MFY18. Its asset products for 9MFY18 comprise of retail loans including a substantial portfolio of micro loans (~88% of loan book, whereas small enterprise loans, SME loans and other retail loans account for 5%, 4% and 3% respectively of its advances). It has a distribution network of 2,633 DSCs (Door Service Centre) and 887 bank branches serving 21.3 lakh general banking customers. As of Q3FY18, 96.49% of its gross advances were in priority sector lending (PSL). Its distribution presence in India is particularly strong in East and Northeast, with West Bengal, Assam and Bihar together accounting for 56.37% and 57.58% of its branches and DSCs respectively (Q3FY18).

Objective of the Offer

The issue comprises of a fresh issue (Rs3,662cr) and an offer for sale (Rs811cr). The existing shareholders IFC and IFC FIG would offer 1.4 cr and 75.65 lakh shares for sale through this issue. The object of the fresh issue is also to augment bank’s Tier-I capital base to meet its future capital requirements.

Financials

Rs Cr

FY16^

FY17

9MFY18#

NII

933

2,403

2,169

Total Income

1,731

4,320

3,955

PPOP

467

1,793

1,726

PAT

275

1,112

958

NIMs (%)

-

10.4

9.9

P/BV* (x)

-

9.2

7.6

RoE (%) (Annualised)

-

28.6

25.5

RoA (%) (Annualised)

-

4.5

4.1

 

Source: Company, 5 Paisa Research; *On non-diluted basis at upper band; ^FY16 nos. are only for ~7 months and FY17 is the first full year of banking operations; #9MFY18 nos. are not annualized.      **non-annualized numbers

Key Points

  1. Bandhan Bank, over the years, has consistently delivered sound financial performance. For 9MFY18, its RoA and RoE stood at 4.1% and 25.5% respectively on annualized basis. The gross advances of the bank have gone up by ~56% (from ~Rs15,578cr in FY16 to Rs24,364cr as of Q3FY18) owing to (a) robust capital adequacy ratio (CAR) and (b) extensive distribution network of branches and DSCs. The bank is adequately capitalized with CAR at 24.85% (Q3FY18). Moreover, much of its IPO funds will be used to improve its Tier I capital aiding the bank to improve advances going ahead.
  2. The bank’s strategy is to tap the lower cost retail deposits. Its ratio of retail deposits to total deposits has increased from 37.95% in FY16 to 85.07% in Q3FY18. The bank’s CASA ratio has improved from 21.55% to 33.22% over the same period. The growth in CASA ratio and retail deposits has led to reduction in cost of funding. The focus on lower cost liability profile with improving micro lending loans provides it competitive advantage over its peers (maintaining profitable spreads and improve market share)

Key Risk

  1. The bank faces concentration risk (81% of its total advances and substantial number of branches and DSCs are concentrated in East and Northeast India). Bandhan Bank’s financial performance could be adversely impacted if there is penetration of other banks in this area.
  2. The bank has replaced majority of its bank borrowings with deposits and enjoys lower funding cost. Any inability to generate sufficient funding to support its micro banking activities could result in higher cost of funding and consequently lower yields, impacting the business and financial condition of the bank.

Conclusion

At the upper price band, the stock, post dilution is available at 4.1x and 3.5x on FY19E and FY20E P/BV respectively. We recommend SUBSCRIBE from a long-term perspective.

Research Disclaimer

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Hindustan Aeronautics Ltd-IPO Note

Hindustan Aeronautics Ltd- IPO Note
IPO
by Nikita Bhoota 15/03/2018

Issue Opens: March 16, 2018
Issue Closes: March20, 2018
Face Value: Rs10
Price Band: Rs1,215-1,240
Issue Size: ~Rs4,198cr
Public Issue: 3.41crore shares
Bid Lot: 12 Equity shares       
Issue Type: 100% Book Building

% shareholding

Pre IPO

Post IPO

Promoter

100.0

89.8

Public

0.0

10.2

Source: RHP

Company Background

Hindustan Aeronautics Ltd. (HAL) is engaged in the design, development, manufacture, and upgrade & servicing of a wide range of products. These products include aircraft, helicopters, aero-engines, avionics, accessories and aerospace structures. The company is the largest DPSU in terms of value of production (source: MoD Annual Report FY17). HAL was also the 39th largest aerospace company in the world in revenue terms in 2016, as per Flight International. The company has 20 production divisions and 11 research and design centres located across India.

Objective of the Offer

The offer consists of offer for sale of up to 3.41 cr shares (Rs4,198cr) by the government of India (GOI). It includes employee reservation of 6.69 lakh shares. There is a discount of Rs25per share to the retail investors and employees. The net offer consists of ~ 3.34cr shares. The object of the offer is to carry out disinvestment plan of GOI.

Financials

Consolidated Rs cr.

FY15

FY16

FY17

**H1FY18

Revenue

15,648

16,759

17,952

5,173

EBITDA Margin %

5.4

14.7

18.1

9.2

Adj. PAT

994

2,004

2,625

391

EPS (`)*

29.7

59.9

78.5

11.7

P/E*

41.7

20.7

15.8

-

P/BV*

2.8

3.8

3.3

-

RONW (%)

6.7

18.2

20.9

 

Source: Company, 5 Paisa Research; *EPS & Ratios at higher end of the price band and on post IPO shares, **non-annualized numbers

Key Investment Rationale

The company’s order book as on December 31,2017 was strong at Rs68,461cr (3.7xFY17sales), providing good revenue visibility. HAL also has an attractive order pipeline for Light combat aircraft (LCA) Mk1A. In December 2017, the company has received requests for proposal on nomination basis from the Ministry of Defence (MOD) for (1) the procurement of 83 LCA Mk1A aircraft (estimated cost of Rs60,000cr); and (2) the procurement of 15 LCH series production helicopters (estimated cost of Rs4,500cr). We believe materialization of these orders will lead to robust sales growth going forward.

The company is a leader in the Indian aeronautical industry and derives a substantial portion of its revenue from the Indian defence services. Being a GOI promoted entity, it is the preferred supplier for aerospace products and services. It boasts of a diversified product portfolio and indigenously designed and developed products. The company is also developing new products including the Indian Multi Role Helicopter (IMRH). It is also foraying into the civil transport aircraft segment with the civil variant of the Dornier Do-228 aircraft. The company also manufactures industrial marine gas turbines. The company typically spends ~7% of its revenue on research & development (R&D). Its R&D expenses grew at a higher (vs sales) CAGR of 11% CAGR (FY15-17).

Key Risk

HAL’s primary customer is IDS, from which the company derived 91.4%, 93.3%, of total revenue for H1FY18 and FY17 respectively. India’s defence sector still faces challenges in terms of slow decision making process. Therefore, any delay in award of orders could hamper company’s order inflows and revenues.

Conclusion

At the upper price band, the stock is valued at P/E of ~16x FY17. Given its strong growth prospects as the largest DPSU and leadership in the aeronautical industry, we recommend Subscribe from the long-term perspective.

Research Disclaimer

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Have you done your financial health check-up?

Have you done your financial health check-up?
15/03/2018

Most of us take our finances for granted. We assume that we will always be able to save and invest to build a corpus, and that we will be able to take care of any emergencies without emptying our emergency funds. But life is unpredictable, and situations can arise at any time that would require us to use savings. Hence, it is imperative to do a financial check-up to ensure that things are running efficiently. A financial check-up should be performed at least once a year, or with every significant life event, such as switching jobs, unemployment, marriage, having a kid, a death in the family, and so forth.

How to do a financial check-up?

It can take a while to perform a complete financial check-up. It depends on whether you want to complete it in one go or deal with one factor at a time. This is because financial health also depends on forces beyond our control. As physical fitness is a combination of behavior, genes, and access to proper medical care, financial health is the outcome of personal decisions, abilities, the economy, and access to good, honest financial services and advice.

Let us take into consideration the following points to begin with our financial check-up.

Identification of a financial goal

Have you ever set a financial goal? If so, have they transformed since the last time you set them? Assuring that you and your partner are on the same page when working on financial goals will make things easier. Hence, it is important to begin with this step as it will present a clear picture of your needs and desires and help you plan accordingly.

Examine your personal situation

Is there any major event taking place in your life or expected to happen shortly? If so, consider these events and modify your previous financial plan.

Evaluate your budget and spending

It is easier to use applications such as YNAB (You Need a Budget), Quicken, or similar finance management tools to track budget and spending. It is important to keep an eye on your cash flows. Have you been living paycheck to paycheck, or is there some cushion in the budget? Do you have new bills or EMIs from the last time you last examined your financial plan? Answering these questions will help you realize your present situation and prepare you to adapt and make appropriate changes to your financial plans.

Savings and debt

Do you have any outstanding liabilities? Are you trying to clear them off? Liabilities and debts, if unavoidable in the first place, should be cleared off as soon as possible. Debts owed to banks or other lenders charge interest rates. This would only increase the final amount you have to pay if not dealt with promptly. Also, it is prudent to keep a contingency fund or reserve funds in addition to your savings. This will ensure that you progress towards your savings goals without any hiccups.

Investment and retirement planning

Do you invest sufficiently to meet your retirement goals? Investing, either in mutual funds or stocks, is a great way to save for retirement. Moreover, some forms of investments also provide tax benefits. Therefore, it is important to study the pattern of your asset allocation. This lets you know if you are overspending, saving less, or have invested way too much in a particular business.

Asset protection

Significant assets like homes and vehicles should be insured. However, the most important asset is your life and this should be covered before anything. In case of unwanted incidents, having a mediclaim and a life insurance policy will ensure that people dependent on you are not left stranded for want of finance. If you already have these, ensure that your nominee details are correctly updated with the insurance provider.

Other factors

If you have any other financial inflows or outflows, you should review those as well. Mainly, if you have a business, have a property out on rent, any irregular income, medical issues, or any other factor that can, directly or indirectly, affect your finances.

Stay on track with retreat funds

How much you need will fluctuate with age and circumstances, but have you made the calculations and are setting aside cash regularly to get there. If one plans to buy a house, one should also save for it, and proper financial planning must be done accordingly.

With rising inflation, Rs1cr will not hold the same value 20 years from now. Therefore, you need to do a thorough health check-up, i.e. identify your incomes, expenses, savings, and investments, and ensure that everything is going according to your plan. By doing so, you will be able to be in control even if things stop going according to plan.