FROM BANE TO BOON - Nirmal Bang Issue 151.pdf · on behalf of Nirmal Bang Financial Services Pvt...

RNI No. MAHENG/2009/28962 | Volume 10 Issue 11 | 16th - 30th Nov ’18Mumbai | Pages 56 | For Pr ivate Circulat ion

The fall in crude prices will reduce government spending, thus lowering inflation

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before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the Commodity segment. The securities quoted are exemplary and are not

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DB Corner – Page 5

A Commendable FeatIn�ation is low and economic growth prospects are bright – Page 6Just A Cease�reRelations between the RBI and the government have thawed a little after talks, but simmering tensions remain – Page 9From Boon To BaneThe fall in crude prices will reduce government spending, thus lowering in�ation – Page 12Overly CautiousThe pessimism in the banking sector emanates from the risks associated with lending to NBFCs – Page 16Saving FaceThe biggest success of the Insolvency and Bankruptcy Code is that it has instilled fear among promoters that they will lose their companies if they don’t pay up – Page 19A Rural PushRising growth opportunities is encouraging FMCG companies to tap the rural market further – Page 22A Booster ShotA number of factors are giving a boost to the hospital sector in India – Page 26Room For MoreKey steps need to be followed in case a residential society goes in for redevelopment – Page 29Painting A Pretty PictureBetter fundamentals conjure up a positive image of the paint sector in India, going forward – 2

Breath Of LifeThe IRDAI has proposed regulatory changes in the interest of the policyholders – Page 35Showing PromiseSmall-cap stocks hold a lot of potential and could be considered from investment perspectives – Page 38

Technical Outlook – Page 41Buckfast Recommendations – Page 42

Acquiring The Best DealThe acquirer’s multiple is a comprehensive way of selecting the most valuable stock – Page 47Vying For The Top Spot ULIPs have their own advantages and must, therefore, be chosen after thoughtful consideration – Page 50

Important Jargon – Page 53

Editor-in-Chief & Publisher: Rakesh BhandariEditor: Tushita NigamSenior Sub-Editor: Kiran V Uchil

Art Director: Sachin KambleJunior Designer: Orianne Fernandes

Operations: Namrata Sabbani

Printed and published by Mr Rakesh Bhandari on behalf of Nirmal Bang Financial Services Pvt Ltd, printed at Uchitha Graphic Printers Pvt Ltd65, Ideal Ind. Estate, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 and published at Nirmal Bang Financial Services Pvt Ltd, 19, Sonawala Building, 25 Bank Street, Fort, Mumbai-400001. Editor: Tushita Nigam

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Research Team: Sunil Jain, Vikas Salunkhe, Swati Hotkar, Nirav Chheda, Amit Bhuptani

It’s simpli�ed...Beyond Market 16th - 30th Nov ’18 3

Volume 10 Issue: 11, 16th - 30th Nov ’18

Beyond Market 16th - 30th Nov ’184

Tushita NigamEditor

It’s simpli�ed...

The recent correction in crude oil prices and other commodities has caught people’s attention. While the reasons for this are many, one must take into account the positive impact of this correction on various economic factors. Lower crude oil prices will reduce government spend, thus impacting inflation and interest rates subsequently. In our cover story, we have explained in detail the impact of falling crude oil prices on the Indian economy on the whole. Read on to get a clearer picture.

Other articles featured in this issue include the current state of the Indian economy wherein inflation has become comparatively low, raising growth prospects, how the Reserve Bank of India (RBI) and the government have agreed to a truce at the moment, the pessimism over issues plaguing the banking sector, how the Insolvency and Bankruptcy Code is forcing defaulters to pay up and the rising growth opportunities for fast moving consumer goods (FMCG) companies in rural India.

Also covered in this issue are articles on the growth opportunities in the hospital sector in India, the steps that need to be followed by residents of a building/ society that is going in for redevelopment and the factors that are adding colour to the Indian paint industry.

An article in the Beyond Basics section dwells on the regulatory changes suggested by the Insurance Regulator and Development Authority of India (IRDAI) in the interest of life insurance policyholders. Another article in the same section focuses on the renewed interest of investors in small-cap mutual fund schemes going by the current state of the Indian stock markets.

Do not miss the Beyond Learning section as it covers two interesting reads. While one talks about a comprehensive method of selecting valuable stocks called the Acquirer’s Multiple, the other article sheds light on unit-linked insurance plans (ULIPs), stating their advantages and disadvantages for anyone looking to invest in theM.

From Bad To Good

It’s simpli�ed... 5

Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

rude oil prices witnessed a correction in the previous fortnight on the back of oversupply and concerns over growth. Other commodities too saw a correction in prices during this period. The Indian rupee cooled off during this period as well.

The Reserve Bank of India has put to rest fears over liquidity crisis for non-banking financial companies (NBFCs), indicating that the crisis has passed without any major damage to the sector.

The Indian stock markets look good in the coming fortnight. The Nifty Futures has support at the 10,620 and 10,570 levels. On the upper side, it is likely to touch the 10,780 and 10,980 levels.

Market participants must look forward to the outcome of the G-20 meeting where the US and China are likely to come head to head, giving direction to their issues at hand, and the Organization of Petroleum Exporting Countries (OPEC) meeting to be held in the coming weeks.

Furthermore, they should keep a close eye on the RBI’s monetary policy meet to be held in the month of December as well as the outcome of the state general elections.. All these events are likely to determine the course of the marketS.

C

The Indian stockmarkets lookgood in the

coming fortnight.

Sensex: 35,513.14Nifty: 10,685.60

(As on 27th Nov ’18)

Beyond Market 16th - 30th Nov ’18

Inflation is low and economic growth prospects are brightA

COMMENDABLEFEAT

It’s simpli�ed...Beyond Market 16th - 30th Nov ’186


Inflation, in fact, slid to a one-year low of 3.31% in October this year, driven down mainly by cheaper fruits, protein-rich items as well as kitchen staples and essential goods.

Here it must be highlighted that retail inflation is at its lowest since September ’17 when it touched 3.28%. The Consumer Price Index (CPI)-based inflation was 3.7% in September this year while it stood at 3.58% in October last year.

Vegetable prices declined by 8.06% in October as against a 4.15% fall in September while the fruit basket also witnessed a slowdown in inflation to 0.35% as against 1.12% in the month of September.

Protein-rich items such as cereals, eggs, milk and other related products also recorded a cooling down in inflation. However, inflation rose to 8.55% in the fuel and light category as against the 8.47% clocked in the previous month.

Inflation is expected to remain on the lower side in the coming months. In fact, it will come as no surprise if inflation remains below 4% for some time to come.

A fairly good monsoon will also help rein in food prices and the government in the last four years has taken some measures to combat structural bottlenecks, which in the past had fuelled inflation.

This combination should help keep inflation under control for some months to come.

With the national general election scheduled to be held within the next six months across the country, a low inflation rate will definitely be a huge morale-booster to the Narendra Modi-led government at the Centre, fighting to tame this issue.

here is every reason to cheer for the Narendra Modi-led National Democratic Alliance

(NDA) government as the country’s economy has stabilized post- demonetisation and the introduction of the new GST (Goods and Services Tax) regime. Demonetisation was initiated in November ’16 while the GST regime was launched from 1st July last year.

Inflation, which is always a prime concern for the government and especially so in a year when the nation goes to polls, is presently firmly under control and is unexpectedly low while economic growth has remained steady.

Monsoon has been kind this year and though some parts of the country are still in the rainfall-deficit territory, the agriculture sector is expected to do reasonably well this fiscal (FY19), which will have a positive impact on the GDP growth in India, which is expected to be in the range of 7.3% to 7.5%, quite a healthy figure in the current circumstances.

That the country is faring well on several economic parameters was highlighted recently by Union Finance Minister Arun Jaitley who said that India would number among the top three economies in the world in the coming years.

Here, it is worth noting that India has now emerged as the sixth largest economy in the world, surpassing European powerhouse France and is just behind the United Kingdom - another European power, which ranks fifth in the world. India is already a recognized Asian powerhouse but now with its increasing economic clout, it is being strongly reflected in the global landscape as well.

T The top four countries in the world in terms of the size of the economy are the United States (US $19.39 trillion), China (US $12.23 trillion), Japan (US $4.87 trillion) and Germany (US $3.67 trillion).

As mentioned before, the United Kingdom occupies the fifth and India the sixth position with France being pushed behind by India on to the seventh spot.

Finance Minister Jaitley also highlighted the fact that in the World Bank’s ease of doing business index, India has zoomed 65 notches to occupy the 77th position under the present Narendra Modi-led National Democratic Alliance government, which came to power on the back of a thumping majority in the year 2014.

Pointing out that the implementation of the Goods and Services Tax (GST) regime has helped the Micro, Small and Medium Enterprises (MSME) segment, the Union Finance Minister said that this was so because taxes were reduced on 334 items within the first year of the indirect tax regime’s roll out itself.

He also said that the controversial and much-criticised Aadhaar has helped the government save about `90,000 crore annually.

Under the NDA government (since May ’14), all economic parameters are now stable, he said, adding that during the last five years of the Congress-led United Progressive Alliance (UPA) rule, inflation averaged around 10.4%.

Inflation for long a bugbear of both the government and India’s apex bank, the Reserve Bank of India (RBI), is presently under control and is likely to remain on the lower side in the short- to medium-term unless some unforeseen developments occur.


There was good news on the GST collection front as well with collections in October this year breaching the `1 lakh crore mark at `1,00,710 crore.

In September, the collection stood at `94,442 crore. One important reason for the high collection in October was the demand shooting up during the festive season.

Other reasons included the anti-evasion measures taken by the government coupled with the finalization of audit statements by various businesses.

October is the first time in six months that the GST collection has crossed the `1 lakh crore-mark.

The first time this figure was achieved was in the month of April. Since then GST collection in the country has always remained above the `90,000 crore level.

In the month of April, the amount collected stood at `1,03,459 crore, which fell the next month in May to `94,016 crore. In June, there was a marginal increase to `95,610 crore and an increase once again in July at `96,483 crore.

The collection slid in the month of August to `93,960 crore before moving northward in September to `94,442 crore. In October it rose to `1,00,710 crore. The collections are healthy and clearly indicate that the GST regime has now more or less stabilized and businesses have got used to the new tax regime of the government.

Teething problems are getting erased slowly and gradually and the crucial GST regime has now very much been accepted by businesses, both big and small, in India.

This is clearly evidenced by the fact that the compliance rate was higher in October with 67.45 lakh businesses filing the summary GSTR-3B returns as against 67 lakh businesses filing their returns in September.

Here, interesting information relating to collections of states needs a mention. The states which achieved a robust growth in total taxes collected were the southern state of Kerala (44%), Jharkhand (20%), Rajasthan (14%), Uttarakhand (13%) and Maharashtra (11%).

Mizoram, Arunachal Pradesh, Manipur, Nagaland, Sikkim and Andhra Pradesh were the six states/Union Territories (UTs), which registered revenue surplus under the indirect tax regime. The rest 25 faced a revenue shortfall ranging from 3% to 42%.

News on industrial production or factory output measured in terms of the Index of Industrial Production (IIP) was also encouraging with the figure August this year being revised upwards from the provisional figure of 4.3% to 4.6%.

For the months of June and July this year, IIP clocked figures of 6.9% and 6.5%, respectively.

Here mention must be made of the fact that IIP growth for April to September this year stood at 5.1% whereas for the same period last fiscal it was 2.6%.

In September ’18, because of poor performance of the mining sector and lower off-take of capital goods, India’s factory output expanded at the slowest pace in four months at 4.5%. The previous low was 3.8%, which was registered in May this year.

Two significant developments need to be highlighted here. The first is that

the mining sector’s output growth decelerated to 0.2% in September this year as against the 7.6% in the year-ago period while capital goods output growth also slowed to 5.8% in September this year from 8.7% in September last year.

In the same period, electricity generation rose significantly to 8.2% from 3.4% in September last year while the manufacturing sector output too clocked a growth of 4.6%, up from 3.8% of a year-ago period.

The Indian economy has exhibited admirable resilience and its fundamentals remain strong.

This is clearly evident from the fact that the country has emerged relatively unscathed from the twin shocks of demonetisation and the introduction of GST.

A stable government at the Centre has helped in having uniformity in policies and instilling confidence in industry and investors, both domestic and international.

Nature too has been kind in the last two years, meaning rainfall has been adequate and the agriculture sector has rebounded to a large extent.

In addition to this, with the GST regime stabilizing and the post- demonetisation blues almost totally behind us, the Indian economy is at present clearly poised for a healthy and rapid growth.

Inflation has been reined in below the 4% mark and is expected to remain under control over the medium term, going forward.

India’s GDP growth is also likely to be encouraging in the 7.3% to 7.5% range this fiscal (FY19), which given the prevailing circumstances will be creditable indeeD.

JUST ACEASEFIRE

Relations between the RBI and the government have thawed a little after talks,

but simmering tensions remain

he board of the Reserve Bank of India (RBI), which met on 19th November amid

heightened tensions between the central bank and the government, managed to find a middle path on several contentious issues simmering between them.

T The ongoing tussle between the government and the central bank of the country is not new. But this time around the inability to accommodate each other’s standpoint and the subsequent breakdown in communication between the two warring entities, hit a new low in their already tumultuous relationship.

Allegedly the government contemplated triggering a key provision in the RBI Act to direct the central bank to do certain things in public interest. No government has so far invoked such a provision. If media reports are any indication, then there were some 12 odd issues



minimum capital of 9% of risk-weighted assets, which is higher than what is internationally prescribed for banks.

Expected: The government was seeking a dilution of the Basel 3 norms for India. The government thinks the RBI’s CAR regulation is tougher than needed.

Analysis: From the government’s standpoint, higher CAR means lower money available for lending to banks. Higher CAR also means higher recapitalization requirements of these banks, which is a drag on the government’s fiscal math. According to one research, the move could help banks save `55,000 crore in capital.

But CAR is a measure of banks’ financial strength. A higher percentage of CAR is a prudent measure and it enhances banking regulatory framework and safeguards depositors. As expected ratings agencies disliked the move. Moody’s Investors Service thinks the decision to extend the timeline for the full implementation of Basel 3 guidelines by a year is credit negative for the Indian banks.

PROMPT CORRECTIVE ACTION

Board’s Decision: With regard to banks under PCA, it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of RBI. The BFS is a separate unit under the RBI for the supervision of banks.

The RBI’s PCA framework was introduced in 2002 and later reviewed in the year 2017.

It is kind of an early intervention to help a bank survive if bad loans surge or capital ratios fall or return on assets fall below a certain level.

terms of reference of the expert committee will be jointly determined by the government and the RBI. The committee is expected to determine the range of adequate capital reserves required to be held by the country’s central bank.

Expected: This was the key demand of the government. The government feels that the central bank is sitting on excessive capital reserves to the tune of `3.6 lakh crore. The RBI’s reserves mainly comprise of currency account, gold revaluation account and contingency fund. For the year ended June ’18, the RBI had total reserves of `9.6 lakh crore. The government feels that the RBI’s reserves are higher by global comparisons. Analysis: Data does show that the RBI is overcapitalized. The government feels that the RBI is too conservative in arriving at the requisite level of reserves. The RBI on the other hand wants to keep higher reserves for any contingency - dip into its reserves can adversely impact macroeconomic stability. Having said that it is likely that in the coming years some reserves will be transferred to the government, which will be used to fill the fiscal deficit.

CAPITAL ADEQUACY FRAMEWORK

Board’s Decision: The board has decided to retain the Capital Adequacy Ratio (CAR) at 9%. But agreed to push the deadline for implementing it by one year to March ’20 from the earlier deadline of March ’19. CAR is akin to saying that for every `100 lent, the bank needs to have `9 as capital which it can rely on during exigencies.

Basel 3 norms - global standards prescribed by Bank for International Settlement - have prescribed CAR of 8%. The RBI currently prescribes a

over which the government sought RBI’s opinion.

Among other controversial issues, the government wanted the RBI to make liquidity available to non-banking financial companies (NBFCs), a restructuring scheme for small and medium firms, relaxation of tight lending rules on more than a dozen public sector banks under RBI’s prompt corrective action (PCA), leeway to stressed power sector assets, loosening up of the capital adequacy framework of state-run banks, and transfer of excessive reserve money in RBI’s balance sheet to the government.

One camp saw the government’s high handedness as an attempt to snatch RBI’s independence. The biggest worry was the possibility of political interference in the functioning of the RBI. The other camp saw the RBI as an institution, which lacks accountability for its actions and policies. The latter also thought the RBI’s stubbornness was impacting the country’s economic growth.

The rift between the two may have had adverse implications for the Indian economy and the markets. But the RBI board, which also includes government-nominated members, has managed to call a truce.

Here are a few issues that the board decided on. Some board decisions have been pro-government, while others favoured the central bank.

CAPITAL FRAMEWORK OF RBI

Board’s Decision: The board decided to constitute an expert committee to examine the Economic Capital Framework (ECF) of the RBI. The ECF governs the RBI’s capital requirements and conditions for the transfer of its reserves to the government. The membership and


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Commodity segment. The securities quoted are exemplary and are not recommendatory.NIRMAL BANG SECURITIES PVT LTD – MEMBER BSE, NSE , MSEI – SEBI registered No.INZ000202536 , Exchange Registered Broker in BSE Currency Segment , Commodity Segment .PMS Registration No: INP000002981; Research Analyst Registration No: INH000001766; NSDL/ CDSL: IN-DP-CDSL 37-99 and NIRMAL BANG COMMODITIES PVT LTD – Member MCX,

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It’s simplified...Beyond Market 16th - 30th Nov ’18 11

Under PCA, the banks are asked to cut lending. Banks are also restricted from opening new branches and paying dividends to investors.

Expected: The government thinks the PCA framework is harsher than what is needed and feels that the existing rules are choking credit growth in the Indian economy.

Analysis: At present, 11 public sector banks (out of total 21) and one private sector bank are under PCA. Although these banks have around 25% share in total advances, their share in bad debt is higher to the tune of 40% of the total bad debt pie. These banks have been posting heavy looses year after year. The objective of PCA is to limit

losses of banks, prevent erosion of bank capital and curb systemic risk, if any. The RBI is unlikely to significantly budge from the current position, but would ask the government to consolidate public sector banks.

IN A NUTSHELL

The board has also advised the RBI to consider a scheme for restructuring of stressed standard assets of MSME borrowers with loans up to `25 crore. But this will be subject to conditions drawn by the RBI keeping financial stability in mind.

This is negative in the short run. Moody’s Investors Service thinks

restructuring of the stressed standard assets of MSME borrowers is credit negative for Indian banks.

Although the board decided on various important issues, some issues like liquidity availability to NBFCs have been left out. This is likely to be taken up in the next board meeting on 14th December. Positively, easing tensions between the RBI and the government is constructive for all asset classes. Investors, especially long-term foreign investors, prefer political stability. They value democratic institutions. No government is likely to muddle with this cherished aspect of the Indian economY.

The fall in crude prices will reduce government spending, thus lowering inflation

FROM BANETO BOON



India relies more than 82% on imports to meet its oil needs. Crude oil accounts for around 25% of the goods shipments into India. India imported 213.93 million tonnes (MT) of crude oil in 2016-17 for US $70.196 billion. For 2017-18, the crude oil imports were at 220.4 MT for US $88 billion. For 2018-19, the imports are estimated at 228.6 MT at US $124 billion.

In fact, for the October ’18 to March’19 period the Indian basket of crude oil was estimated at $77.88 a barrel at an exchange rate of `72.22 against the USD. To remind, the Indian basket of crude oil price averaged $80.08/bbl during October ’18 as against $77.88/bbl during September ’18 and $56.06/bbl during October ’17.

enchmark Brent crude oil prices have corrected sharply from $86 per barrel to $59 per barrel in

the last few weeks. Being the third largest oil-consuming nation after the US and China, India will be the key beneficiary of the slide in global oil prices. India’s crude import bill will come down, offering the much- needed tailwind to the economy.

The benefits of lower crude prices include reduced government spending on fuel subsidies, and lower impact on inflation, translating into a cut in interest rates. But lower oil prices help India’s external position the most.

Lower oil import bill will help bring down India’s current account deficit

B (CAD). The Indian rupee, which fell to a record low of 74 against the US dollar, has already reacted to potentially lower CAD. The rupee is trying to settle at around 70 against the USD.

CAD

If oil prices stay lower (See box to know what led to the recent one-way fall in the crude oil prices), India’s current account deficit (CAD) should shrink, which, in turn, will help the Indian rupee stabilize against USD .

According to one research, for every US $10 per barrel fall in oil prices, the CAD shrinks by 40 basis points. Currently, the CAD stands at 2.4%. Anything under 2 is considered favourable for India.

Why The Crude Fell?

The price of international Brent Crude averaged $81.15 per barrel during October ’18 as against $78.85 per barrel during September ’18. The prices were $57.36 per barrel during October ’17. But the benchmark crude oil prices fell dramatically in the recent weeks on account of the following reasons:

1) More Supply: As the US decided to impose sanctions on Iran from November onwards, it was widely anticipated that the global oil market would run a deficit. Saudi Arabia and Russia however, increased their output to fill the gap. But later the US sanctions on Iran were diluted as eight countries, including India, were allowed to buy oil from Iran. Hence there was an oversupply.

2) Less Demand: The outlook for global growth is negative. The International Monetary Fund has cut its global economic growth forecast for 2018 and 2019. Lower economic growth means lower demand for oil.

3) Rising American Output And Inventories: US oil production has hit an all-time high of 11.6 million barrels a day. This, along with a huge build-up in inventories, translates into lower demand for crude oil by the US.

Which Is The Key Event To Watch Out For?

While the above reasons will ensure a bearish sentiment in the global oil market, cuts in oil production by producing countries will initially stabilize and later allow prices to rise. Much to the dislike of the US, Saudi Arabia, a key oil producer and also an important member of the Organization of the Petroleum Exporting Countries (OPEC), a 15-member cartel of oil-producing countries, is pushing for cut in oil production. OPEC meets on 6th December, which the crude oil market will closely track.

Data on American production will also drive the oil market.


But now estimates will change. From November onwards, the import bill will fall further if international oil prices stay lower. For every one dollar per barrel fall in oil prices, India’s crude oil import bill falls by `6,158 crore. If the Indian rupee appreciates by one rupee against the dollar, India’s crude oil import bill falls by `6,639 crores. The estimates hold even if price swings are in the opposite direction.

FISCAL DEFICIT AND RETAIL PRICES

Lower crude oil prices will ensure that the government will spend lower on fuel subsidies. According to one estimate, the fiscal deficit reduces by `180 billion to `200 billion for a $10 per barrel fall in oil prices.

As retail prices are adjusted daily, retail prices for petrol and diesel have already started to fall, tracking lower international prices. Apart from international prices and foreign exchange, retail prices include taxes (Central excise and State’s value-added tax (VAT) and sales tax), transportation charges and petrol pump dealers’ margin.

According to recent research if crude averages $65 per barrel and rupee stays at `70, then retail petrol and

diesel prices could fall further on an average by `4 or more, implying that diesel prices could head well below `70 per litre and petrol below `75.

Adjustments in retail prices will allow the government to keep taxes on fuel intact. This will keep the government revenue unaffected even as retail prices fall. According to Union Budget estimates, the Centre expects to collect more than `2.579 lakh crore by levying taxes on petroleum products by the end of this fiscal.

Early October the government had to lower prices on petrol and diesel by `2.50 to douse unpopular sentiment around higher fuel prices in India, ahead of few State elections and general elections in 2019.

INFLATION AND INTEREST RATES Oil prices impact inflation directly and indirectly. Fuel-related items have a weight of nearly 2.7% to 2.8% directly in consumer price index (CPI). Softer oil prices will keep overall inflation lower. Reserve Bank of India (RBI) projects retail inflation at 4% for Q2 FY19, 3.9% to 4.5% for H2 FY19 and 4.8% for Q1 FY20.

With lower oil prices, risks to achieving CPI inflation targets are

lower - reviving hopes of rate cuts by the RBI.

OUTLOOK

Only a few months back rising crude oil prices was cited as the biggest risk for India. Now, with crude oil near 12-month low and it is likely to stay subdued, India’s macro indicators look favourable. CARE Ratings expects price of Brent to range between US $68 per barrel and US $73 per barrel in the coming months. Lower crude oil prices also provide an impetus to economic activities. For instance, lower spending on fuel allows higher surplus in the hands of people, which they can spend. Declining fuel costs also boosts sale of automobiles.

From the sectoral perspective, oil marketing companies (OMCs) are favourably placed as lower crude oil prices and stable Indian rupee help boost margins on petrol and diesel.

Positives are already getting factored in by the markets as reflected in appreciation of Indian rupee against the US dollar. Both domestic and foreign investors will show renewed interest towards India as lower crude oil prices keep India’s twin deficit (CAD and fiscal deficit) in checK.

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Tensions between US and Saudi on the case of the murder of a Saudi Journalist

Onset of Hurricane Florence

Global concerns of of the markets due to the sanc ns imposed by US on Iran

Prices started to decline as Saudi Arabia assured any shor all in the supply will be taken care by them; Data indica n rise in US

ac vity

Si ns of slowdown in the Chinese economy; Increase in output from the US

Source: Bloombe , CARE Ra n s

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Tensions between US and Saudi on the case of the murder of a Saudi Journalist

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The pessimism in the banking sector emanates from the risks associated with lending to NBFCs

OVERLYCAUTIOUS



Due to this, trouble in the infrastructure space came to the fore. Many subsidiaries of IL&FS, which used part of this capital, have been unable to produce cash that can allow it to service its debt.

Thankfully, before the crisis could spread further the government intervened and extended its support, effectively bailing out the institution. If a balance sheet is leveraged by ten times, effectively a mere 10% loss can wipe out the entire equity and thus make a business unviable or bankrupt. Dena Bank had a gross NPA of about 23%. It is almost impossible to run a bank with that kind of NPAs because the entire capital would be wiped out on account of NPAs. It is not just Dena Bank. There are equally stressed cases among banks in the PSU and private space. Dhanlakshmi Bank, a private sector bank, is running at a gross NPA of almost 8%. The failure of a bank has huge reparations on the banking system. Hence, such struggling banks are bailed out and do not face similar fates as other businesses, which are ultimately auctioned or cease to exist. But from the investors’ point of view the stress could be painful in terms of generating returns for shareholders. Dhanlakshmi’s share prices nosedived from a high of about `60 a share in mid-2014 to a low of `10 a share recently. Dena Bank had a similar performance. It fell from about `90 a share to a low of about `13 a share. Dena Bank is now being merged with Bank of Baroda along with Vijaya Bank. Similarly in case of IL&FS even though the new management including some of the stalwarts of the industry like Uday Kotak, Managing

his is probably the first time since the global financial meltdown of 2008 that investors are

seen questioning the viability of banks and non-banking financial companies (NBFCs). Both PSU and private sector banks have caused biggest wealth destruction and have consistently underperformed.

PSU banks that have almost run out of capital are now getting merged. The ongoing crisis in the case of Punjab National Bank, Yes Bank and few NBFCs like DHFL and IL&FS has only shattered the faith of investors. For time immemorial, investing in banking and financial stocks on Dalal Street was considered to be one of the safest options. Any investor with slightest idea about investing in the stock markets would have said that investing in banks and NBFCs were great given that the businesses are run by assets.

A large chunk of lending to banks and NBFCs is considered to be secure and backed by assets. Over the last 10 years many listed companies, including prominent ones, have been reduced to almost zero and become insolvent. Many of them are being auctioned under NCLT. However there was not a single case of a bank or an NBFC, which has been declared insolvent so far. BANKING ON RISK

However, this traditional belief is posing to be a challenge in present times. Hence, investors need to reassess the risks of investing in banking and financial companies, which are as susceptible as other sectors in the economy.

Banking and financial services work on high financial leverage. They are the most leveraged. These institutions

T are allowed to leverage their balance sheets to the extent of almost 8-10 times of their net worth. This is sometimes even higher if it is in secured lending options like home loan, infrastructure, etc.

Banks use much more leverage than other businesses and earn a spread between the interest income they generate on their assets (loans) and their cost of funds (customer deposits). This leverage is almost like sin or unviable for any other business. But for banks, this works well because it is considered secure. Leveraging can benefit organisations greatly during boom in the markets. Nonetheless, it can have a cascading effect on the markets and cause serious cash flow problems during recessionary periods.

This is precisely the reason why most banks and financial institutions in India are today struggling to stay afloat. Some of them are in fact on the verge of a fall. IL&FS is an infrastructure development and finance company, which operates through various subsidiaries. In September ’18, one of its group companies, IL&FS Financial Services defaulted on its inter-corporate payment obligations. Ratings agency ICRA downgraded the ratings of its short-term and long-term borrowings, which jeopardized the interests of hundreds of investors. The debt to equity in this case was a shocking 16.8 times in FY18. While it had increased because of losses and resultant reduction in equity, even in FY17, this debt to equity ratio stood at 10.6 times. With such a high leverage, the precision required to manage capital is like operating a space shuttle where margin of error is extremely low.

Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the

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It’s simplified...Beyond Market 16th - 30th Nov ’1818

Director, Kotak Mahindra Bank is looking into the affairs of the company and devising a revival plan along with financial support from the government, the equity value of the listed IL&FS group companies have been completely wiped out. A bank is only as good as the quality of its loans. The riskier the loan portfolio, the greater the risk of loan defaults, which jeopardizes long-term profits of a bank.

Not every loan a bank lends out will get repaid. Banks make an allowance on their balance sheets for these defaults. But sometimes, unhealthy and questionable lending practices create an environment that breeds disruption in the sector. Like any other business, banks too are risky or in fact far more risky in the light of leverage. Because the capital is leveraged, the margin of safety is very low. Even a slightest loss or mismatch in asset liability could finish any bank or NBFC.

Investors are increasingly questioning

the quality of lending in the case of NBFCs that have built a huge asset base, aggressively providing loans without much due diligence.

Many NBFCs have grown their books while lending to real estate builder or extending loan against property rather than using the funds for the actual home loan purpose.

Compared with the home loan they are far more lucrative and boost their margins. Many NBFCs have been reporting net interest margins of about 3% to 5%, which is quite good by any standard. Companies have been selling loans irrespective of the quality of the products.

Today, even if you do not have proper documents, it is easy to get a loan for any household requirement. Companies compromise on lending standard on the belief that they will get higher spread, which will take care of the associated risks or the NPAs that come because of lowering of lending prudence.

However, that is the choice that each

and every institute makes, which is very important to understand as an investor because that could be a big source of destruction. Everything was going well as long as the economy was doing well. But all of a sudden with the stress in the economy and markets those NBFCs were toppled down and investor started worrying about their ability to recover money.

If they are not able to recover the money, the leverage would work against them and penalise them like any other leveraged business. Thus, investors have to be mindful of the risks that come while investing in banking and financial institutions.

Due to the leverage, it requires extremely sound banking practices and efficient use of capital.

More importantly, the management is the key for the success of any financial institution. Institutes, which have failed to allocate capital properly on a risk-adjusted basis have often destroyed wealtH.

The biggest success of the Insolvency and Bankruptcy Code is that it has instilled fear among promoters that they will lose their companies if they don’t pay up

ast month the promoters of Essar Steel, spooked with the prospects of losing their company, made a

dramatic offer to repay `54,000 crore and settle complete outstanding dues of all its creditors.

The offer came within hours of Essar Steel lenders approving ArcelorMittal’s bid of `42,000 crore. The move stunned the industrial world as the promoters had kept their offers low in a high-stakes game of bids and counter bids that played out for several months. Two years ago, such a scenario was even unthinkable as promoter loan defaults were a norm and any attempts of recovery by lenders were lost in the labyrinth of legal process.But thanks to the Insolvency and

L

SAVINGFACE



them as “public category shareholders” from being promoters after the deal.

In the Era Infra Engineering case, the NCLT admitted insolvency plea against Era despite several winding up petitions pending against it in other courts. It ruled that unless a winding up order had been passed by another court, Era will have to face proceedings under IBC. This has closed the route for defaulters to take refuge in the argument that they are facing multiple litigations in multiple courts, experts said.

In the case of Jyoti Structures, in response to a petition filed by over 800 employees, the NCLT disallowing the liquidation proceedings temporarily and gave the resolution process more time professionally, keeping in mind the interests of the employees, in an example of how IBC balances the interests of both lenders with that of operational creditors or employees.

IMPACT

Banks are the biggest beneficiaries of IBC as the fear of insolvency action has helped in the recovery of `1.1 lakh crore from loan defaulters who were earlier unwilling to clear dues.

While 977 cases have been admitted by the NCLT, experts said many are withdrawn even before they are admitted as the borrower agrees to settle the dues.

The banks recovered `36,551 crore in the first quarter of 2018-19. During 2017-18, banks recovered `74,562 crore from loan defaulters. The IBC is also boosting the distressed merger and acquisitions market in India with deals worth $14.3 billion completed in the past two years, said corporate

The lenders of Essar Steel would be able to take home `42,000 crore on dues worth `49,000 crore if ArcelorMittal’s offer is approved by NCLT. If the courts agree to the offer made by the promoters of Essar Steel, then the lenders would end up recovering 100% of their debt. Lenders of Alok Industries would take a hit of 77%, the most among all the cases.

In five cases, Lanco, Era Engineering, Jaypee Infratech, ABG Shipyard and Jyoti Structures, the lenders are still awaiting resolution for the lack of good offers.

In a few cases, there were single bidders who could not come up with attractive offers. In the case of Jaypee Infratech, the Supreme Court has ordered re-bidding and audit of the company. Lenders are hopeful that by the end of the current financial year, they would be able to find a resolution plan for all the cases.

PROMOTERS IN TROUBLE

The Essar Steel lenders have gone ahead with the offer from ArcelorMittal and the promoters - Ruias - are now set to litigate. If the Ruias’s offer is approved, then it will mean a 100% recovery for the lenders, but experts said the last-minute offer by the promoters doesn’t do justice to other bidders.

Also, it would be contrary to an IBC goal that promoters who have defaulted on loans should end up losing control.

If the Ruias indeed had the money, why did they not offer to pay earlier, asked experts.

In case of Bhushan Steel, the desperate attempt by the then promoter to prevent the takeover was dismissed by NCLT by reclassifying

Bankruptcy Code (IBC) that was enacted 17 months back, the prospect of losing their companies has now become real for promoters. This has raised the recovery rate to about 50% from 28% on an average. So how has the process turned out?

THE STATUS

As many as 1,198 cases have been admitted under IBC process in the last two years, where 52 cases have been resolved and about 212 debtors sent for liquidation.

In 30 of these 212 cases of liquidation, the resolution value proposed was greater than the liquidation value. Four of the 12 large cases of bank loan defaults referred to the National Company Law Tribunal (NCLT) for resolution by RBI in June ’17 have led to a recovery of 52% of the claims of financial creditors.

The banks have been able to recover `48,117 crore against claims of `92,817 crore. Electrosteel Steels was bought by Vedanta for `5,320 crore against claims of `13,175 crore at a recovery rate of 40%.

Bhushan Steel was acquired by Tata Steel for `35,571 crore against a claim of `56,022 crore, a 63% recovery rate. Monnet Ispat was sold for `2,892 crore against bankers’ claim of `11,015 crore, a recovery rate of 26%, while Amtek Auto was bought for `4,334 crore, a recovery rate of 34%.

The 12 large cases together accounted for an outstanding debt of `3.45 lakh crore. The lenders will take a 56% haircut on loans worth `2.65 lakh crore to these companies.

In a first big resolution under IBC, lenders made a 100% recovery as UltraTech Cement bagged Binani Cement for `7,950 crore this month.


investigations and risk consulting firm Kroll.

Distressed M&A formed 12% of the total M&A value, led by Bhushan Steel, Reliance Communications and Fortis Healthcare.

The deal volume should increase as more cases get referred for resolution under the IBC.

An additional 600 to 1,000 cases are expected to enter the IBC over the next 12 to 18 months, creating a large pipeline of acquisition opportunities, it said.

Enthused by the impact of the new insolvency and bankruptcy law, the government expects bad loan recoveries from defaulters to exceed `1.80 lakh crore target for the current financial year.

THE GOVERNMENT

Satisfied with the progress of IBC, Finance Minister Arun Jaitley had said, “Now people have become broadly aware that the rules of the game in India have changed. The banks won’t chase you anymore. You will have to chase them.”

As a result of this, recoveries have picked up, he said, adding, recoveries are not just because resolutions have taken place in NCLT but they have also picked up because of fear that if they cross the red line they will be condemned to the IBC process.

“The unintended consequence was that potential defaulters started realizing that the moment you cross the red line, at least you will go out, and never get back. And if you have seen the last quarter or two, potential defaulters are begging, borrowing and stealing and paying back. And that’s why the banks have started getting monies even outside the NCLT

system from potential defaulters not wanting to cross the red line,” Jaitley had said.

DELAYS

According to the Insolvency and Bankruptcy Board of India, the IBC allowed resolution time of 270 days are over in 238 cases. The current law allows maximum 270 days for resolution - an initial 180 days and an extra 90-day extension on a case-by-case basis.

By September end, 158 cases had crossed the initial deadline of 180 days. More than half of the 12 companies referred to IBC in the first list have completed more than 400 days. One reason for the delay is that the government has made many changes in the law through two amendments. Also, there are lengthy legal proceedings due to complications in defining the law.

The lack of sufficient resources in terms of insolvency professionals, judicial benches and technical experts at NCLT is another issue. The lenders for the initial 12 companies in the RBI’s list are estimated to have lost out about `4,000 crore in additional income due to the delays in the resolution process beyond the 270-day period, according to ratings agency ICRA.

While a number of steps have been taken for the implementation of the IBC, challenges persist at multiple levels, including infrastructure issues, inter-creditor conflicts and limited development of the secondary market, according to an Assocham-Crisil study.

BENEFITS

A recent study has noted that India’s corporate bond market, which is highly concentrated in the AAA-rated

bonds, is expected to change once the IBC brings about successful resolution of stressed assets in a time-bound manner.

As per Assocham-Crisil study, reduction in the timeline for resolution of stressed assets under the IBC would not only enhance the confidence of investors but would also make them go in for bonds less than AAA rating.

Presently, about 90% of trading is restricted to AAA and AA-rated categories. “With the greater certainty of outcome and expectations of a faster resolution because of the IBC, the interest of both domestic and foreign investors in the lower-rated paper will increase over time,” the study said.

FUTURE

Experts say India Inc will be able to recover more than 50% of its dues under the IBC in the near future. IPs feel that recoveries will rise in the coming months as price discovery of stressed assets improves with more than one buyer entering the fray.

Incidentally, India’s national average recovery rate was as low as 25% to 28% all these years.

However, a section of experts feels the IBC success is driven by the steel sector, thanks to the upsurge in prices of the alloy sparking a rush to acquire ready assets. The other companies in the process from infrastructure to real estate may not see the same traction.

Nevertheless, with several promoters like Electrosteels and Bhushan Steel losing their companies, the goal of efficient allocation of capital is being met, experts said.

Loan defaults in India won’t be a cakewalk, as was the case in the pasT.

Rising growth opportunities is encouraging FMCG companies to tap the rural market further

A RURALPUSH



tax, we have passed on around 7% to 8% price cut benefits to consumers, which has helped us witness strong volume growth in the quarter.

“With the increase in crude oil prices and other commodity costs, we may look at calibrated price hike in the coming quarters. Our strength of agility and responsiveness gives us confidence to navigate the headwinds arising from crude inflation and currency depreciation.”

Mehta said while crude oil prices are increasing, the good thing is vegetable oil prices continue to remain low. In the last couple of months the company has increased around 2% to 3% price mainly in the home care segment.

The revenue of the company during the quarter increased 11.1% year-on- year to `9,234 crore with volume growth of 10%. The results were ahead of street expectations.

On the operational front, EBITDA (earnings before interest, tax, depreciation and amortisation) grew by 20% to `2,019 crore and margin expanded by 160 basis points to 22.9% compared to a year ago. Raw material cost increased 15.9% year- on-year to `3,343 crore in Q2FY19.

Mehta said that all three divisions of the company witnessed strong growth in the quarter. Home care business during the quarter grew by 12.4% to `3,080 crore with its EBIT rising 28.5%, driven by strong volume growth y-o-y. The company’s beauty and personal care segment revenue increased 10.4% y-o-y to `4,316 crore with EBIT growing at 17.6%. The food and refreshment revenue grew by 11.7% to `1,704 crore and its EBIT grew 24.7% to `288 crore compared to a year-ago period.

However, ITC’s key verticals are

he fast moving consumer goods (FMCG) sector posted a steady performance in July-

September ’18 quarter on the back of improved demand mainly from the rural market.

Despite witnessing strong earnings in the second quarter of FY18-19, FMCG companies indicated that there were signs of margin pressure which was evident in the coming quarters with rising input costs due to subsequent hike in crude oil prices.

Also, the falling rupee impacted their global businesses while companies are pinning hope on rural demand to drive growth in the coming quarters.

After a period where some fundamental changes were seen in the economy, the turbulence was behind the fast moving consumer goods sector in July-September ‘18.

Overall, consumer demand has been stable with volume growth moving up to 6% to 7% on an annual basis. However, while demand growth is expected to continue, inflationary pressure is likely to impact the margins of FMCG companies, going forward, said experts.

Rural customers continued to help boost the growth of FMCG companies like ITC, Hindustan Unilever and Dabur. The sales of ITC grew by 15.4% and that of Hindustan Unilever by 10% in the July- September ’18 quarter.

Nearly two-thirds of the country’s population are part of the rural economy and over the last few years rural growth has tapered down to more or less at par with urban growth. However, in the last few quarters rural growth has rebounded to 1.3 times of urban demand. The surge in agri-business and rural sales has been

T the driving factor of the future growth potential of FMCG businesses in India. Rural demand contributes 35% to 40% of the overall sales value.

The growth of the rural sector is on the radar of sector experts that are assessing the roadmap of ITC and HUL in India.

HUL operates in three segments of home care, beauty care, and food solutions business. Of this, home care and beauty care products are widely distributed in rural and semi-rural areas too, given rising youth lifestyle aspirations of rural India.

“Rural growth continues to grow ahead of its urban counterparts. So, we certainly believe that it has the potential to grow much faster,” said Sanjiv Mehta, Chairman and Managing Director, HUL.

As per reports, HUL has reportedly grown its rural business 1.2x its urban growth. This could also be on part of lower current comparison base in rural consumption. The reports suggest that in the past quarter rural growth was 1.5x urban growth.

Hindustan Unilever reported 19.5% year-on-year (y-o-y) growth in standalone profit to `1,525 crore in the July-September quarter, driven by strong volume growth in home care, beauty and personal care segments.

HUL may take calibrated price hike to mitigate the impact of the rise in commodity prices. Near-term demand is likely to remain stable but increase in crude prices and INR depreciation will be key for price increase. Mehta said, “Our well-established savings programme and leverage in other expenses has enabled us to mitigate material inflation and drive margin improvement. Post implementation of goods and service


cigarettes, FMCG, hotels, agri, and paper. ITC uses e-choupals and associated distribution to tap rural areas with agri and FMCG items.

Reports suggest that ITC’s agri and fast moving consumer durable business are growing around 13% with recovery in rural consumption.

The ITC management has highlighted a stable demand environment with visible signs of recovery, especially in the rural markets. Industry experts expect cigarette volumes to recover, driven by a recovery in rural consumption, which forms two-thirds of smokers.

FMCG major ITC reported a 12% y-o-y rise in net profit to `2,954.67 crore for the quarter ended 30th Sept ’18 due to robust growth across business verticals including tobacco, consumer goods, agri-products, and hotels. The earnings were in line with Street estimates.

The tobacco-to-hospitality major’s revenue from operations grew over 15% y-o-y to `11,272.51 crore. The company’s operating income, or earnings before interest, taxes, depreciation, and amortization rose close to 12% y-o-y to `4,206 crore. Revenue from the sale of cigarettes during the quarter under review rose 10% y-o-y to `5,026.06 crore.

ITC posted a healthy performance for the quarter despite a challenging business environment, and continuing pressure on the legal cigarette industry, ITC said in a statement.

Experts feel ITC may have benefited from volume growth, much like many other consumer goods companies that have reported earnings for the July-September period.

The net revenue of ITC’s hotel business grew 20.8%, while the

agri-products business saw a 12.8% growth y-o-y. Improved operating profit from the hotels business, which was up 35% over the same period last fiscal, on account of higher room rates, strong food and beverages sales, and high operating leverage, also helped the company’s overall financial performance.

For other players in the sector too the rural market has played an important role in driving growth. For Dabur in the Q2 FY18-19, the rural growth has been higher than urban by 3% to 4%, as per its management.

FMCG major Dabur reported 4.10% y-o-y increase in consolidated net profit to `377.55 crore for Q2 FY18, buoyed by growth of its core business in the domestic market.

Its total income during the quarter under review was up by 7.97% to `2,206.18 crore. Dabur’s total expenses in the second quarter were up 8.81% to assent1,732.80 crore. Sunil Duggal, CEO, Dabur India, said, “Despite higher competitive intensity, we have sustained good growth momentum in the domestic FMCG business with our key brands reporting strong market share gains during the quarter.”

Dabur’s revenue from consumer care business was up by 10.03% y-o-y to `1,776.66 crore in the second quarter of FY18-19. The revenue from its food business was up 2.33% y-o-y to `289.43 crore. Revenue from the retail business in the July-September quarter grew 6.94% year-on-year to `28.33 crore.

In the September quarter, Dabur’s sales in the foreign market was “muted” due to INR devaluation in overseas markets. “Performance in our international business was relatively muted due to the weakness in the Middle East and North Africa

(MENA) region and currency devaluations in markets like Turkey,” added Duggal.

IMPROVING RURAL CONSUMPTION

The rural markets were impacted on the downside during demonetisation and GST implementation due to the large informal sector in rural areas. As per Nielsen report of August ’18, after GST implementation, supply chain inefficiencies have been ironed out, helping rural supplies. Thus, rural consumption will depend largely on current inflation and rural income.

The government intends to double farm income by 2022 through increased budget allocation in water and electricity and also raising of the Minimum Support Price or MSP to agricultural produce. This bodes well through demand pick up for large FMCGs like HUL and ITC that already have a vast rural distribution network in place.

The Nielsen report states that post GST implementation, the price advantage of the informal sector will go down, helping branded FMCG firms to compete on an equal footing.

The rural segment continued to grow faster at 1.2-1.25x for FMCG companies but still remains lower than historical levels. Industry experts estimate that future growth of FMCG would be more in rural areas with nearly three times of urban growth.

But it remains an overall balanced picture for rural consumption due to its large dependence on monsoon, which recorded 92% on all-India basis as per Skymet estimates.

Inflationary trends are the only concern of the sector going forward as companies may be forced to take price hikes, impacting demanD.

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A number of factors are giving a boost to the

hospital sector in India

ABOOSTER

SHOT



Analysts believe this model has short-term benefits. However, for a hospital chain that aspires to have a pan-India scale, this strategy dilutes its brand. Besides these basic parameters, another key parameter is the performance of hospital companies especially in the listed space. The Return on Capital Employed (RoCE) is a key metric for hospitals due to the capital-intensive nature of the business. As the cost of land increases in prime locations, the cost of running a hospital goes up considerably. This has been a cause of great concern among analysts.

This is one of the key reasons why companies choose to go in for the lease model wherein the upfront capital cost is low and the expansion of the hospital is faster, making the cost of installing a bed a critical evaluation metric.

Analysts point out that Max Healthcare has the highest cost per bed among its listed peers. It is `9.1 million per bed. This is largely due to the land cost, which it had to bear in prime location of the National Capital Region (NCR). Analysts say that the company has enough land for expansion over the next 10 years. It can double its bed count from 2,400 to close to 5,000.

On the other hand, NH and HCG have the most favourable cost per bed. One critical metric to monitor is Average Revenue Per Occupied Bed (ARPOB) cost per bed. The ratio is a direct reflection of the returns per unit against capital invested per unit — the higher the metric, the better the returns on a per unit basis.

The metric is the highest for NH and HCG as both hospitals have lowest costs per bed. This ratio is the lowest

n India’s large healthcare space, hospitals occupy a key position. The Indian healthcare sector is expected to reach US

$280 billion by 2020. The hospital industry in India stood at `4 trillion (US $61.79 billion) in FY17 and is expected to reach `8.6 trillion (US $132.84 billion) by FY22.

Rising income levels, greater health awareness, growing cases of lifestyle diseases and improved access to insurance are a few key factors, which are contributing to the growth of India’s hospital industry. The sector is expected to generate 40 million jobs in India by 2030.

Also from the government’s side, in March ’18, the Union Cabinet approved a budget support of `85,271 crore (US $13.16 billion) for the period of April ’17 – March ’20 under the National Health Mission to encourage medical infrastructure in the country.

Given these factors, a key question that may pop up in readers’ minds is how is India’s hospital sector functioning and what factors ensure smoother functioning of hospital companies in the sector? Here is a detailed analysis of these important questions that come to mind: THE NITTY-GRITTY It goes without saying that doctors play a crucial role in hospitals. According to various estimates, there are 0.8 doctors per bed on an average in the hospital industry. Among listed hospital companies, Shalby has the lowest ratio of 0.3 doctors per bed.

Fortis Healthcare has highest doctor density of 1.4 doctors per bed followed by Max Healthcare, which has 1.2 doctors per bed. This ratio does not seem alarming or worrisome as hospitals which focus on one

I particular therapeutic area are likely to have fewer doctors.

According to analysts’ estimates, Shalby has the highest ratio of support staff to doctors. It is 6:1. Apollo Hospitals and Fortis Healthcare have the lowest ratio of support staff to doctors at 2.5:1. Hospitals typically follow two models when it comes to doctors. These are: payroll doctors or visiting doctors. a) Payroll Doctors It has been observed that 95% of total doctors at Apollo Hospitals and HealthCare Global Enterprises (HCG) are on their payrolls. This has helped its chain of hospitals to establish their brand successfully and earn people’s acceptance.

Patients visit Apollo or HealthCare Global Enterprises (HCG) because the hospital is a brand in itself and it is not just because of a particular doctor.

No wonder Apollo Hospitals has consistently ranked among the top ten hospitals in terms of its therapies. Analysts believe this strategy has a downside too. The clinician cost per doctor is the highest for Apollo as it pays large retainer fees to incentivize doctors from joining competition or following their own practice. b) Visiting Doctors In this model, a large number of doctors are visiting doctors. They spend only a few hours in the hospital. This helps hospitals to manage clinician cost as the cost of visiting clinicians becomes a variable expense for the hospital. Max, Fortis and Narayana Hrudayalaya (NH) follow this model with 50% to 60% of its total doctors empanelled as visiting doctors.

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for Max as its cost per bed (more than three times as high as NH’s) is the highest at the moment.

PERFORMANCE

FY18 was a tough year for the hospital sector due to the after-effects of demonetisation, pricing caps and the implementation of GST. An analysis of the annual report of key listed hospital companies for FY18 shows their financial health.

It has been observed that despite price controls on stents and knee caps, gross margins of listed hospital companies have remained flat largely due to price hikes in other areas.

Besides, clinicians’ costs and other expenses continued to outpace the revenue growth, which dragged the EBITDA margins of hospitals by about 180 basis points (bps).

For the hospital sector, debt rose by `800 crore and RoCE slipped by 120 bps to 4%. With respect to related- party transactions, Fortis wrote off `580 crore largely pertaining to loans given to ex-promoter entities, and Apollo recorded a 20% jump in

purchases of drugs/ consumables from related parties.

a) Flat Gross Margins In FY18, average gross margins for the sector remained flat, whereas there was a sharp diversion among companies. With the exception of Narayana Health (NH), GMs have improved across the board, especially in case of Max (210 bps), HCG (160 bps) and Apollo (140 bps) on the back of price hikes to offset the impact of price controls and to a certain extent on case mix.

On the other hand, all hospital companies generated lower EBITDA margins with a sharp reduction at Max (380 bps), NH (290 bps) and Fortis (240 bps) primarily on account of overall personnel cost as well as other expenses. b) Free Cash Flow Dwindles Free cash flow has been declining for most companies and continues to be negative on account of: (i) lower FY18 profits and (ii) elevated capex. Furthermore, NH, Max and Fortis have suffered steepest declines in

RoCE – NH (570 bps) on account of debt-funded acquisition of a 200-bed capacity hospital and Max (370 bps) and Fortis (160 bps) due to the impact of regulatory issues.

In FY18, the overall net debt in the hospital space increased by around `800 crore. c) Related-Party Transactions During the year, Fortis wrote off deposits and loans given to ex- promoter entities and others worth `5.8 billion and impaired the investments as well as goodwill worth `326 crore.

For Apollo, purchase of drugs from related parties for Apollo’s pharmacy business jumped 20% y-o-y, in-line with pharmacy business growth. EBITDA margins for all related parties from whom Apollo buys is 4% as against 4.4% for Apollo’s pharmacy business.

Facility management companies to which Apollo has outsourced its food & beverages and housekeeping services clocked EBITDA margins of 8% and 14%, respectivelY.

n a metropolitan city like Mumbai, lack of space is almost a perennial issue. To make things complicated, real

estate prices are prohibitively high. To deal with these issues and to keep the business in the sector active, a large number of real estate developers are looking at redeveloping residential societies.

I Residential societies which have been in existence for more than 30 years are suitable targets for developers. Besides, the Maharashtra government’s decision to offer additional Floor Space Index (FSI) for redevelopment is an added attraction for redevelopment of such realty projects.

Given these factors, a key question that most people may be facing is: what factors should one keep in mind

when one’s society goes in for redevelopment? This can be understood from the stages of redevelopment of real estate projects. Redevelopment of old buildings or a complex of old buildings across the state can now be undertaken with consent of 51% of those owning apartments there, as opposed to the consent of all owners earlier.

This move by the government is expected to speed up reconstruction of old buildings as earlier projects used to be delayed even if a single resident opposed the redevelopment of the building/ society.

Currently, there are around 90,000 housing societies in the state, in addition to which 75,000 are registered under the Maharashtra

ROOMFOR

MOREKey steps need to be followed in case a residential society goes in for redevelopment



Rights (TDR). TDR means making available certain amount of additional built-up area in lieu of the area relinquished or surrendered by the owner of the land, so that he/ she can use extra built-up area either himself or transfer it to another in need of extra built-up area for a pre-decided sum of money. SECURITY DEPOSIT The developer is responsible for giving a security deposit to the society members. The amount must be equal to the entire redevelopment cost of the building/ society. BANK GUARANTEE The developer is responsible for giving a bank guarantee. This should amount to the cost of constructing the same size of the room in the event of default by the developer. TDR IN SOCIETY’S FAVOUR On the receipt of plans from MCGM approving the loading of TDR, the developer will purchase the TDR from the open market in the name of the society and get the same deducted and loaded from MCGM. This step is taken with the intention of making the society feel secure about the entire development process. INTIMATION OF DISAPPROVAL (IOD) Obtaining the IOD is the most crucial in the key stage of the redevelopment of a society. After the TDR is loaded, the IOD is obtained from MCGM, the developer then starts fulfilling all conditions as mentioned in the IOD before obtaining the Commencement Certificate (CC). SHIFTING OF THE MEMBERS The members will feel a lot more

committee. Among the tender submissions, at least three developers are shortlisted on the basis of merit and its past and present works. Then a developer is selected after intense and long deliberation in the society. The selected housing developer is informed accordingly and his terms are invited in writing as an offer letter to the said society. CONDITIONS This is one of the important stages in the redevelopment of a society. The terms and conditions, which a builder sets are discussed at great length till a consensus is reached among members of the society. The terms and conditions proposed by a builder include extra area, corpus money, shifting charges, alternative accommodation, time of re-development, and amenities in the new building. THE DEAL The redevelopment plan will be made to suit the requirements of the existing members and will be approved by them before applying for sanction from the Municipal Corporation of Greater Mumbai (MCGM). The execution of the redevelopment agreement will be done once things are clear for both the parties - the developer and the society.

Then a draft copy of the agreement is approved by the solicitors of both the parties. It is possible to appoint a common solicitor so as to reduce the time in executing the document THE FORMALITIES After the execution of the redevelopment agreement, plans are put up for sanction from MCGM with regard to the entire layout as well as the concession plans in favour of plot area and Transfer of Development

Apartment Ownership Act (MAOA). The move is likely to benefit 11,000 housing societies in Mumbai – especially those with less than 11 members. However, dilapidated and cessed buildings – around 14,000 in the city – will not be included under this Act. Sanjay Kumar, Additional Chief Secretary, Housing Department recently said, “The amendment in the [Maharashtra] Apartment [Ownership] Act was carried out long back…which has now got the President’s assent. Now, whenever many of these buildings need redevelopment – excluding cessed buildings – consent of 51% of the residents would be required.” Here is a low-down on the key factors a tenant needs to bear in mind: KEY DOCUMENTS A society planning to undertake redevelopment must possess registration certificate, an original building plan, a lease deed/sale deed, a copy of resolution, an agreement and a title certificate. Property card and an NA (non-agricultural) order are additional requirements for the process of redevelopment.

The society’s name must appear in the property card maintained by the City Survey Office as the owner or the subsisting lessee. Else the society would not be eligible for redevelopment as the Municipal Corporation will not permit the demolition of the existing structure and its reconstruction. OFFER LETTER This is the first step. A housing society is required to advertise in two leading newspapers inviting potential developers to redevelop the society. The society sets up a redevelopment

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The securities quoted are exemplary and are not recommendatory.

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confident after the IOD has been obtained from MCGM towards the entire development of TWO FSIs. The members will now shift to their alternative accommodation as a pre-requisite before the demolition of the building, which is a must before obtaining the CC from MCGM. BUILDING’S DEMOLITION Once the members have shifted into their alternative accommodation, the demolition of the building will take place either of all the wings simultaneously or phase-wise depending upon the scheme of re-development.

Usually about three months are given to the members from the date of execution of the development agreement before asking them to shift to the alternative accommodation.

GETTING COMMENCEMENT CERTIFICATE (CC) The IOD approval and demolition of the building will be followed by the issue of the commencement certificate by the MCGM, which shall enable the developer to start the construction work. After proper verification of implementation of rules, MCGM officers grant CC to the society going in for redevelopment. CONSTRUCTION The building construction work begins in full swing according to the plans approved by the MCGM. The MCGM takes into consideration various safety factors during construction work. The quality and the amenities will be provided according to the terms and conditions agreed upon between the parties.

OCCUPATION CERTIFICATE Before the construction work is termed as complete, the developer obtains Occupation Certificate enabling him to allot the occupation to the old as well as new members. SHIFTING Then begins the shifting of the old members. On the receipt of the OC, the developer can lawfully allow the possession of the flats to be taken over by their original owners. Besides these key factors, it makes a lot of sense to constantly monitor the progress of the re-development once the building is vacated by its tenants. If a large number of tenants go on rent in the vicinity of the to-be-constructed building, then it works highly in favour of the tenantS.

Better fundamentals conjure up a positive image of the paint sector in India, going forward

PAINTINGA PRETTYPICTURE



paint, cement paint, primer and thinner, and ancillary products. The industrial market is mainly divided into general industrial paint, automotive coatings, powder coatings and OEM paint, among others. THE SITUATION The scope for the growth of the paint industry can be understood from per capita consumption. Against the global average of 15 kg, the per capita consumption in India is 4 kg as against the global average of 15 kg, indicating a huge scope for growth. In the current fiscal, there are a few fundamental factors, which point out to good demand - 15%. These fundamental factors are good monsoon and lower taxes.

In a media interaction, Indian Paint Association President and Berger Paints India’s Managing Director and CEO Abhijit Roy said, “Outlook for the industry is positive and we are expecting around 15% growth in sales this year as the demand is expected to pick up on the back of reduction in the GST (Goods and Services Tax) rate, a good monsoon resulting in higher rural incomes and because of the approaching festive season.”

According to him, the demand for the paint industry usually picks up after monsoon season from September onwards and the 10% reduction in GST from 28% earlier, would not only lead to higher volumes but also open the scope for premiumization. This is echoed in analysts’ observations too. In their interaction with the management of companies they sense a wave of bullishness across paint companies. But there are certain challenges. The falling rupee is a challenge to the industry. It is estimated that with the rupee depreciating, there would be

ndia’s paint industry is gearing up for good times. There are a few fundamental factors, which are likely to play a

crucial role in boosting demand in the paint sector. This has attracted the attention of a large number of analysts who have developed optimistic estimates for India’s paint companies. Here is a low-down on the exact source of this optimism: THE BASICS India’s organized paint industry charts its journey from Shalimar Paints, which set up shop in Calcutta in 1902. In this journey of 116 years, the industry has seen it all, weathered it all and survived and thrived to become one of the most important sectors in the country. Today, it contributes to 0.4% of the GDP. Urbanization, changing social structures, rising disposable incomes, industrial growth and infrastructure expansion, coupled with easy availability of housing loans, are the drivers of the decorative paint industry, which accounts for 75% of the estimated $8.2 billion paint market in India.

The track record shows the industry clocked a growth of 1.5 to 2 times that of GDP growth. Research reports suggest that the decorative paint industry is expected to touch $10.42 billion in the next few years. However, the recent subdued growth signals from real estate and auto sectors are a challenge. With lower crude oil prices during CY17, the industry remained attractive, as about three-fourths of its raw materials are derived from crude. The increase in raw material prices attributable to the increase in crude prices during CY18 (till July) - estimated at an average of `4,387 ($60) compared with `3,320 ($46)

I per barrel that prevailed during CY17 - will remain a challenge. For the industry to prosper, competitive and economic pricing will remain two key factors in the coming years. With raw materials accounting for about 50% of net sales, the paint industry is cost-sensitive.

Key raw materials used can be divided into four categories: pigments, binders, solvents and additives. Titanium dioxide is widely used, and other raw materials including phthalic anhydride, pentaerythritol, methyl methacrylate, aromatics, etc, which act as binders, solvents and additives, are derivatives of crude oil distillate.

Production costs will remain sensitive to the movement of crude oil prices, albeit with a lag. The change in raw material costs and the change in crude oil prices show a strong correlation. Over the last few years, India has been experiencing a major growth in paint sales. Increasing levels of income, education and growing urbanization have helped the paint market grow considerably. In addition to this, the usage of enamel and emulsion paint over traditional white wash, increasing penetration in the rural market and digitalization are also driving the paint industry. Between FY18 and FY23, India’s paint industry is expected to grow with over `75,000 crore in terms of value on account of change in lifestyle, urbanization, and increased level of education and high margin on paint. Overall the paint market is segmented into organized market and unorganized market. Apart from this, the market is divided into decorative and industrial market. The decorative market is mainly divided into emulsion and enamel



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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the Commodity segment.

The securities quoted are exemplary and are not recommendatory.NIRMAL BANG SECURITIES PVT LTD – MEMBER BSE, NSE , MSEI – SEBI registered No.INZ000202536 , Exchange Registered Broker in BSE Currency Segment , Commodity Segment .PMS Registration No: INP000002981; Research Analyst Registration No: INH000001766; NSDL/ CDSL: IN-DP-CDSL 37-99 and NIRMAL BANG COMMODITIES PVT LTD – Member MCX, NCDEX , ICEX – SEBI Registration No. INZ000043630; NCDEX Spot: 10084;

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some possible adverse impact on the imported raw materials. Of the total raw materials, the import share is about 25% to 26%. The cost of raw materials could go up by 1% to 2%, which can be borne. But then, margins could be under pressure.

The industry is keeping a close look on the situation and would take a decision on whether the rising cost is to be borne or to be passed on to consumers. Sector analysts point out that paint companies could take up pricing as early as October or November to pass on the cost push, at least partially.

The experts also feel that the industry

is pinning its hopes on growth in housing and automobile sectors for paint demand to pick up, both in the decorative and industrial segment. It is estimated that new housing launches in India’s top seven cities increased by approximately 27% on a year-on-year (y-o-y) basis during January-March ’18.

Similarly, the demand for commercial and office space went up by approximately 23% during the same period. These new launches should generate enough opportunities for the growth of the decorative paint business, which accounts for 70% of the domestic paint industry according to sector analysts.

On the other hand, the growth of the industrial paint segment, which has a share of 30% of the overall industry, is dependent on the automotive industry as 45% of industrial paints is consumed by this sector. It has been observed that there is a clear trend for incremental demand for industrial paint in the automobile sector with growing sales of passenger cars, commercial vehicles, along with two- and three-wheelers.

Analysts point out that near-term and long-term outlook also depends on the premiumization in the industry. This will be a key differentiator in gauging the performance of paint companies in the coming quarterS.

�e IRDAI has proposed regulatory changes in the

interest of the policyholders

he Insurance Regulatory and Development Authority of India (IRDAI) in its latest exposure draft on IRDAI (Linked Insurance Products) and (Non-Linked Insurance

Products) Regulation, 2018 has proposed a slew of measures aimed at benefitting policyholders.

Few proposals include increasing the minimum death benefit to seven times for regular premium products and 1.25 times for single premium products for all ages. Also, all non-linked policies to acquire guaranteed surrender value after two years. Even the revival period is proposed to be extended to 5 years from 2 years currently in respect of non-linked products. These regulations were last notified in the year 2013. And in the last five years, there have been significant changes in insurance product structures owing to customers’ needs, wants and preferences.

The insurance industry was also keen that various provisions of the current product regulations be reviewed to ensure that insurance products cope with the dynamism

T

BREATHOF LIFE IR

DAIIRDAI



promote better health of insured lives the insurers may offer discounts on mortality/ morbidity charges to the policyholder depending upon the progress of the health score of that particular policyholder.

The insurer may use wearable/ portable devices technology to capture health score of the policyholder during the term of the policy. This move will ensure that policyholders who are fit and healthy might get discounts on premiums or premium renewals. CHANGES IN PENSION AND LINKED INSURANCE PRODUCTS

Tweaking of pension plans was much needed for the industry as sales of pension plans have been going down every year. Now, in order to bring in parity between insurance pension products and National Pension System (NPS), the draft exposure suggests commutation of up to 60% and utilize the balance amount to purchase immediate annuity/deferred annuity from the same insurer at the then prevailing annuity rate. In simple terms, policyholders can now withdraw 60% of the money as lumpsum at the time of maturity in pension plans, which was around 33% currently. For the remaining amount, policyholders need to buy annuities compulsorily. The draft proposes partial withdrawals for linked pension plans, similar to what is presently there in NPS. As per the draft, a policyholder can make partial withdrawals after the lock-in period of 5 years and can subsequently make three partial withdrawals during the policy term.

The withdrawals cannot exceed 25% of the fund value and can happen only for specific purposes like child’s

policy by mistake or have been forced to take the same by someone. All individual savings and protection-oriented products such as non-linked life insurance products, and non-linked pension products, other than pure protection products such as term insurance, health insurance and annuity products, shall acquire, both, a guaranteed surrender value and special surrender value, if it is higher.

Also the quantum of how much the insurer has to return has increased slightly from 30% to 35% of the premium paid. Apart from this, the guaranteed surrender value will comprise surrender value of any bonus - which is now defined as at least 30% of the amount accrued to the policy. The surrender value beyond the seventh year shall be filed by the insurer under the product approval procedure. Such surrender value shall follow a smooth progression and converge to at least 90% of the total premiums paid as the policy approaches maturity. Therefore, 90% of the total premiums paid less any survival benefits already paid, if the term of the policy is less than 7 years. The draft proposes to decrease the minimum mandated level of insurance cover from 10 times the annual premium to 7 times the annual premium for regular premium policies for holders.

This will ensure that more money goes towards savings and policyholders will earn better returns than what they used to get till recently. However, to enjoy tax benefits policyholders will have to take a policy with a sum assured of 10 times the annual premium.

The draft also says that in order to

of the market.

Apart from this, innovations in the methods of placing the products in the market, coupled with innovations in product benefits and structures are the main reasons responsible for the review of existing product regulations by IRDAI. In order to look into all the issues, the regulator had constituted a “Committee on Review of Product Regulations – Life” for reviewing the said regulations.

The exposure draft also proposes that with respect to pension products, the option for commutation up to 60% be allowed along with the partial withdrawal of linked pension products on offer.

Another important point from the policyholder’s perspective is that switches will now be allowed during the settlement period, which will help the customers of unit linked policies to manage their funds better in volatile market conditions.

And insurance companies can now design individual term, group term and credit and micro insurance products, which offer a range of policy terms. This article attempts to understand how these steps will help policyholders and what they should do after these regulations are notified. WHAT HAS IRDAI PROPOSED?

Supposing an individual has taken a policy with a term of 10 years. The policyholder is eligible for surrender value only after three years.

However, the draft exposure suggests that this time frame be reduced by one to two years. This will help a lot of policyholders who have taken the

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education or their marriage, treatment of critical illness or disease and purchase of a house. There are multiple changes that have been proposed in regard to unit linked insurance plans (ULIPs) where switches will now be allowed during the settlement period. This helps customers of unit linked policies to manage their funds better in volatile market situations.

For example, several insurance companies give an option to switch between debt to equity or balanced funds five times in one year, which gives the option to policyholders to access their risks and make investments accordingly. The insurance regulator in its draft also said that settlement options shall clearly indicate in the promotional material the inherent risks being borne by the policyholder during the period and shall be explicitly understood by the policyholder. The period of settlement shall not, in any

case, be extended beyond a period of ten years from the date of maturity or the original policy term of the policy, whichever is lower. The first installment under settlement option shall be payable on the date of maturity of the policy. The insurer may levy fund management charge during the settlement period and no other charges shall be levied. However, the provisions of this regulation shall not apply to linked pension products. IN A NUTSHELL

Life insurance and pension plans will witness new products emerging in the market after these draft guidelines will be implemented. Policyholders might now see individual term and group term insurance products that can offer a range of policy terms.

The draft also has provisions for permitting modification of group products to allow a broader choice of products based on customer

requirements. The draft regulations further add that insurers can now design individual term and group term insurance products that offer a range of policy terms.

Furthermore, it has provisions for allowing modifications of group products to allow a wider range of products based on customer requirements. Even the switching option during the settlement period is important because when markets are volatile, customers may want to stay invested even after maturity.

Since insurance companies can only levy fund management charges during the settlement period, it’s a cost efficient and flexible option from the policyholders’ point of view.

Savings plans are not right products to address the protection gap and the draft proposes the reduction of the minimum sum assured requirement from 10 times to 7 times the annual premium. Savings products should ideally focus on maximizing savingS.

Small-cap stocks hold a lot of potential and could be considered

from investment perspectives

n the last one year, Nifty Smallcap 100 Index has been down by over 25.5%. Furthermore, with the current

volatility in domestic and overseas markets looming large, we wonder if it is the right time to invest in small caps through mutual funds.

I On an average, small-caps have given returns of around 13% in the last one year, better than the benchmark but, most of the schemes are in red. However, industry participants feel this is the right time to enter small-cap schemes as several stocks have corrected and interesting

SHOWINGPROMISE

opportunities are available in the segment currently.

Not only have fund houses begun filing offer documents to launch new small-cap schemes, but several schemes that had stopped taking investors money have also started



and particularity in mid- and small-cap schemes, which were giving very high returns at that time.

Those who had initiated SIPs in small-cap funds over the last one or two years would be staring at losses now. Investors should remember that both small and mid-cap mutual funds have proven to be highly rewarding for those who stayed invested for the long term.

In the last one year, the worst performing schemes were from the infrastructure sector, public sector undertakings (PSUs) as well as small- cap funds.

Out of the 17 small-cap schemes, only one scheme has given positive returns. Maximum negative returns have been 23% by Sundaram Small Cap in the last one year. However, if we look at the returns over the past three years, then we see that all the schemes have given positive returns in the range of 8% to 18%, while for five years most returns from the scheme are in excess of 20% to 25%.

Investors wanting to build long-term wealth should not only depend on investing in multi-cap or large-cap funds as the wealth-generating opportunity is higher with small-cap mutual fund schemes.

WHAT CAN INVESTORS DO

Investors should be selective and choosy while looking at investing in small-cap schemes. Just because stock prices have crashed giving investors give a good entry point does not mean it is the best thing to do as far as investments are concerned. If pure equity funds require investment with a minimum of a three-five year time horizon, small-cap funds require more patience from the investors.

When small companies turn bigger,

hold cash levels in their small-cap funds, investors can still start looking at investing in this category.

Fund managers holding cash means they are still not comfortable with valuations and are waiting to see some more correction, and then entering the markets.

Also with the reclassification exercise, small-cap funds have given more options for fund managers to choose from. Earlier, fund managers had the liberty to invest in small-cap stocks and invest some part in mid- and large-cap stocks.

But now small-cap funds can pick stocks ranked beyond top 250 in terms of market capitalization for their core portfolios comprising 65% of the fund corpus. Fund managers can now look at the entire listed universe beyond the top 250 stocks to unearth under-researched or under- owned names. Moreover, with a 65% allocation requirement for small caps, they can devote the remaining 35% to either mid-caps or large caps to manage liquidity risks. This will bring much needed stability into funds.

PAST PERFORMANCE

Since 2014-15 when the equity markets started rising, investors began investing in equity mutual funds. But after demonetisation was announced and the markets were at their peak, investors invested aggressively in mid- and small-cap schemes. But a sharp correction in the markets in the last six to eight months has led to negative returns for most mutual fund schemes.

Market participants say that many investors started coming to mutual funds through SIPs in 2014-15 when equity markets were on the rise. There were investors who just looked at the past performance of equity schemes

accepting fresh inflows once again.

DSP Small Cap Fund, L&T Emerging Business Fund and SBI Small Cap are schemes that had stopped fresh flows or had put restrictions on accepting fresh money previously but have now opened them again for investors.

With a sharp correction in several small-cap stocks and opportunities available in the current market scenario, is it the right time for investors to look at such mutual funds? If yes, then should they invest as lumpsum of systematic investment plans (SIPs) or buy aggressively instead? Is it also possible to start investing with a small exposure?

We will try to explain what investors can do and what have been historical returns of small-cap funds to get a clearer picture.

RIGHT TIME OR NOT

There is no denying that small and mid-cap schemes come with a lot of volatility and uncertainty in the short term. Investors who are willing to invest for longer horizon (of more than five to seven years) should only look at this category. As said earlier, most small-cap schemes have given negative returns in the last one year due to the sharp fall in stocks.

However, there are several good quality small-cap funds that investors can consider at this point in time. In the last one year, several small-cap stocks have gone up so fast, turning them highly valuable. This is why several fund houses had stopped taking fresh inflows in the funds. However, now with the sharp correction in stocks, fund managers feel they can find good and reasonable opportunities in the market at this point in time.

Even though some of the funds still

There is no shortcut to reach your �nancial goals. But there is always a proper path. We help simplify the path for you through in-depth

research backed by decades of valuable experience in the industry.


they will make investors a lot of money. But we cannot rule out the possibility of several large companies faltering, thus hurting investments too. Therefore, everything depends on the reputation of the fund house and the fund manager who is managing the said fund.

Before investing in small-cap schemes, one should look at the track record of the fund manager and how long he has been managing the scheme. Look at the scheme’s track record across market cycles and then decide on one, depending on how much allocation to such funds is necessary in your allocation.

He/she should also look at the historical performance of the schemes and how they have fared during bull and bear markets. But if investors are

investing for more than 10 to 15 years, then they should turn out to be substantially more rewarding.

An investor must review his/ her SIP and investment strategy every two to three years. He/ she should always invest through systematic investment plans (SIPs) and not through lumpsum investments.

Having said that, one does not know how the markets are likely to go up or go down. But for investors who are currently investing in small-cap funds and are looking at negative returns, they should continue with their investments and not stop their SIPs.

All they have to do is manage their minds and keep investing the same amount that they have set aside, even in the worst of times.

IN A NUTSHELL

While the small-cap schemes segment is prone to high volatility, sharp corrections provide an ideal opportunity to invest as then the risk- return profile is more in investors’ favour over longer duration.

If we look at the five-year and ten-year data, we see that on an average small-cap funds have given returns of 24% and 20%, respectively, the highest among all equity classes. Investors should stick with funds with a proven track record of many years. Also, the allocation towards small-caps should not extend beyond 20% to 25% of the portfolio. If they stay invested despite the volatility, good returns can be generated over longer duration from these fundS.

7



Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the Commodity segment .The securities

quoted are exemplary and are not recommendatory. NIRMAL BANG SECURITIES PVT LTD – MEMBER BSE, NSE, MSEI – SEBI registered No.INZ000202536 , Exchange Registered Broker in BSE Currency Segment, Commodity Segment. PMS Registration No: INP000002981; Research Analyst Registration No: INH000001766; NSDL/ CDSL: IN-DP-CDSL 37-99 and NIRMAL BANG COMMODITIES PVT LTD –

Member MCX, NCDEX , ICEX – SEBI Registration No. INZ000043630; NCDEX Spot: 10084; Comtrack Participants: CPID-5040; CDSL Commodity Repository Ltd: 12013300

TTECHNICAL OUTLOOK

he Nifty is likely to remain volatile due to a host of events including state elections, Brexit,

RBI monetary policy, the ongoing tussle between the RBI and the central government. However, the bulls will be able to take control only if the Nifty closes and sustains for 1-2 trading sessions above the 10,740 level, i.e., 200-DMA.

As long as the Nifty remains below the 10,740 level, the overall range-bound move with limited upside could be seen in the market. While on the downside, the next major support exists at 10,450; then 10,370 zones.

In the previous update, it was mentioned that the current upmove is nothing but a pullback to the sharp fall and one must be cautious while trading at the upper boundary of the range. In fact, the readers were advised to reduce weak long positions or to create short selling. The overall structure of the market is indicating a “tussle between bulls and bears.”

Technically, the Nifty has good support at 10,450-10,370 levels, whereas resistance is placed at 10,740-10,770. Once the Nifty manages to achieve a breakout of 10,770 level on the closing basis, only then would we witness fresh longs, which might take the Nifty towards the 10,940-11,100 levels. The Relative Strength Index or RSI on the Daily Chart is 53.76 and it stays neutral showing no divergence against the price. The Daily MACD continues to remain bullish as it trades above its signal line. However, it is seen narrowing its trajectory.

Overall, the view is cautious; Market

participants are advised to not gener-ate major long positions at current levels. Fresh positions can be taken only above the 10,740-10,770-mark on the closing basis. Market partici-pants should be stock-specific as the quarterly results session is going on, and follow the trend till it reverses.

The Bank Nifty support lies at the 26,000-mark, supported by 200- DMA. The Bank Nifty is well-placed above the 200-DMA, indicating a good sign. Going ahead, the rally is likely to continue towards the 26,540 level. If it moves above the 26,540 level, then we may witness a rally towards 26,800-27,000 levels.

On the flip side below 26,000, we may see a sell-off towards 25,600- 25,200 levels. The technical set-up on the Bank Nifty is positive to cautious. Therefore, traders are advised to trade with a strict stop loss.

On the Nifty Options front for the December series, the highest Open Interest (OI) build up is seen near the 10,500 and 10,200 Put strikes, where-as on the Call side, it is observed at the 11,000 and 10,700 strikes.

India VIX, which measures the imme-diate 30-day volatility in the market,

remained in the range of 14-20 for most part of November. Going forward, VIX will likely remain range-bound within 15-22 levels.

The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options has been in the range of 1.45-1.72 in the month of November. Going forward, it is expected to remain in the same range, implying a high volatility undertone in the market.

The markets are believed to remain highly volatile for December and early January with bouts of aggres-sive selling pressure near resistances and below important support areas.

OPTIONS STRATEGY

LONG STRADDLE SPREAD

It can be initiated by ‘Buying 1 lot 27DEC 10700 CE (`200) and Buying 1 lot 27DEC 10700 PE (`190)’. The net combined premium outflow comes to around 390 points, which is also your maximum loss. Maintain a Target of 100 points premium gain. The maximum profit that one can get is unlimited. Maintain a stop loss of 50 points premium. The volatility is likely to continue in the next month with VIX at elevated levelS.

Nifty Weekly Chart


Buckfast Recommendations

About Buckfast Research

Disclaimer Mutual Fund Investments are subject to market risks. Please read the offer document carefully before

investing.Source: ACE MF, NAV as on 22nd Nov ’18.

SIP returns as on 30th June ’18. M=Months, Y=Year, D=DaysPast performance is no guarantee of future performance.

Returns are of Growth option of Regular plans Returns which are below 1 year period are Annualized Returns

Finance is a maze of umpteen possibilities and choices. And it is easy for individuals to lose their way in this tangle. In such a scenario, an expert comes handy. For, he alone can wade through the enigmatic world of finance and simplify choices for investors.

Buckfast Research, the research arm of Buckfast Financial Advisory Services Pvt Ltd, recommends mutual fund schemes that can be considered by investors.

Buckfast Research, the research arm of Buckfast Financial Advisory Services Pvt Ltd is guided by a team of professionals with more than 50 years of cumulative experience with leading Indian and Global Mutual Fund companies.

A number of parameters have been taken into consideration while making the recommendations. Some of the guidelines are track record of the scheme and consistency, risks associated with the scheme, fund house pedigree and credentials of the fund manager.

However, there is no specific time frame for the investment as such. It depends entirely on an investor’s objectives, investment timeline, risk tolerance and type of scheme he/she wishes to invest in. By and large, equity schemes are suggested with a long-term investment horizon.

SCHEME NAME

25.52277.9446.87

135.14126.85

0.95-4.75-0.85-7.94-7.53

1 Year

-20.0623.0917.8320.86

10 Years

14.4111.6513.7812.7714.12

16.7118.3119.5018.5622.05

5 Years

-16.6018.2418.0517.65

7 Years

5904373090337984746

AUM (Cr)3 Years

Historic Return (%)

Axis Focused 25 FundHDFC Capital Builder Value FundMirae Asset India Equity FundPrincipal Multi Cap Growth FundTata Equity P/E Fund

NAV

Diversified Funds

42 It’s simpli�ed...Beyond Market 16th - 30th Nov ’18

ELSS Schemes (Tax Saving u/s 80-C)

SCHEME NAME

16.1716.0229.7752.95

197.49

-2.09-6.81-3.03-6.60-8.60

1 Year

--

20.00-

17.30

10 Years

-12.7112.1211.9812.41

5 Years

--

18.1917.2818.02

--

19.9617.5418.34

7 Years

1133104864801607368

AUM (Cr)3 Years

Historic Return (%)

Mirae Asset Tax Saver FundMotilal Oswal Long Term Equity FundAditya Birla SL Tax Relief '96IDFC Tax Advt(ELSS) FundPrincipal Tax Savings Fund

NAV

43It’s simpli�ed...Beyond Market 16th - 30th Nov ’18

Large Cap Funds

SCHEME NAME

25.9139.52

451.4532.4432.52

5.33-0.95-2.41-0.190.53

1 Year

-19.5818.2317.94

-

10 Years

11.1911.5111.3911.6110.01

14.7815.4315.5118.5014.18

5 Years

15.5414.9214.1416.9214.39

7 Years

2927188701469911070

132

AUM (Cr)3 Years

Historic Return (%)

NAV

Axis Bluechip FundICICI Pru Bluechip FundHDFC Top 100 FundReliance Large Cap FundEdelweiss Large Cap Fund

Mid and Small Cap Funds

SCHEME NAME 1 Year 10 Years5 Years 7 Years2020532051631141758

AUM (Cr)3 YearsHistoric Return (%)

Aditya Birla SL Small Cap FundHDFC Small Cap FundL&T Emerging Businesses FundSBI Small Cap FundEdelweiss Mid Cap Fund

NAV

33.3741.8324.3049.3024.89

-21.21-2.48

-10.68-13.49-11.90

21.2521.98

--

22.37

10.2116.4617.0114.818.91

21.4821.31

-31.1322.93

17.5618.74

-25.5420.47

Dynamic Asset Allocation Funds

SCHEME NAME

27.0213.00

-30.29-10.30

3 month

12.13-

5 Years

-9.640.77

-4.728.73

1 Year

8.069.73

3 Years

1039325

AUM (Cr)6 month

Historic Return (%)

Invesco India Dynamic Equity FundSBI Dynamic Asset Allocation Fund

NAV

Balanced Funds

SCHEME NAME

50.2025.1213.7252.15

-11.36-3.610.74

-4.94

1 Year

15.93--

18.29

10 Years

5.588.6111.848.92

5 Years

10.2815.60

-14.79

13.6916.19

-16.12

7 Years

2123199751326

13039

AUM (Cr)3 Years

Historic Return (%)

HDFC Hybrid Equity FundL&T Hybrid Equity FundMirae Asset Hybrid - Equity FundReliance Equity Hybrid Fund

NAV

Monthly Income Plans

SCHEME NAME

40.6729.3442.04

-0.32-10.09

0.96

3 month

11.509.5410.39

5 Years

4.95-0.606.63

3.75-1.712.33

1 Year

8.946.937.13

3 Years

1573290

2045

AUM (Cr)6 month

Historic Return (%)

ICICI Pru Regular Savings FundKotak Debt Hybrid FundReliance Hybrid Bond Fund

NAV

Equity Savings (Arbitrage MIP) Funds

SCHEME NAME

35.1112.3913.63

-6.66-15.32

-7.48

3 month

9.92--

5 Years

2.31-1.633.36

0.79-1.053.91

1 Year

10.046.727.77

3 Years

688523482247

AUM (Cr)6 month

Historic Return (%)

HDFC Equity Savings FundReliance Equity Savings FundKotak Equity Savings Fund

NAV

SCHEME NAME

18.1563.7522.2320.43

7.205.934.533.31

3 month

8.469.7010.399.03

5 Years

7.358.185.984.45

4.016.204.182.46

1 Year

6.918.388.497.43

3 Years

155363819991090

AUM (Cr)6 month

Historic Return (%)

Axis Dynamic Bond FundFranklin India Dynamic Accrual FundICICI Pru All Seasons Bond FundUTI Dynamic Bond Fund

NAV

Dynamic Bond Funds


SCHEME NAME

68.9863.1519.9412.28

7.605.106.386.03

3 month

8.668.848.62

-

5 Years

8.036.857.497.44

5.715.434.865.05

1 Year

7.707.487.58

-

3 Years

12462795

1127110888

AUM (Cr)6 month

Historic Return (%)

Aditya Birla SL Corp Bond FundFranklin India Corp Debt Fund-AHDFC Corp Bond FundIDFC Corp Bond Fund

NAV

Corporate Bond Funds

SCHEME NAME

12.8418.7616.2724.96

-25.205.574.104.58

3 month

-9.118.648.55

5 Years

-8.567.905.666.88

-1.036.374.585.01

1 Year

6.337.937.387.54

3 Years

101770075093

10580

AUM (Cr)6 month

Historic Return (%)

BOI AXA Credit Risk FundFranklin India Credit Risk FundUTI Credit Risk FundReliance Credit Risk Fund

NAV

Credit Risk Funds

SCHEME NAME

19.493152.03

19.9236.58

9.2510.45

9.6511.30

1 month

7.028.417.386.78

3 Years

6.156.376.546.75

7.138.717.717.64

6 month

5.107.005.915.09

1 Year

42511149486274974

AUM (Cr)3 month

Historic Return (%)

Axis Short Term FundFranklin India ST Income-InstHDFC Short Term Debt FundIDFC Bond Fund - Short Term Plan

NAV

Short Term Funds

SCHEME NAME

17.5121.4613.11

5.954.943.85

3 month

9.419.06

-

5 Years

7.377.925.44

5.396.454.35

1 Year

8.117.987.56

3 Years

12613770269

AUM (Cr)6 month

Axis Strategic Bond FundFranklin India Income Opportunities FundUTI Medium Term Fund

NAV

Medium Duration FundsHistoric Return (%)

45It’s simpli�ed...Beyond Market 16th - 30th Nov ’18

SCHEME NAME

14.4340.5914.75

5.717.046.31

3 month

-8.09

-

5 Years

7.257.787.33

3.925.235.41

1 Year

7.327.368.12

3 Years

2801864790

AUM (Cr)6 month

Historic Return (%)

HDFC Banking and PSU Debt FundKotak Banking and PSU Debt FundUTI Banking & PSU Debt Fund

NAV

Banking & PSU Debt Funds

SCHEME NAME

24.6843.2552.59

4.984.152.62

3 month

8.778.218.40

5 Years

6.135.693.63

2.652.711.52

1 Year

6.517.346.57

3 Years

28411305807

AUM (Cr)6 month

Historic Return (%)

ICICI Pru Bond FundSBI Magnum Income FundUTI Bond Fund

NAV

Medium to Long Duration Funds

SCHEME NAME

242.66251.16

2036.30

8.218.038.22

1 month

7.397.287.32

3 Years

7.837.537.85

7.977.657.94

6 month

7.607.407.53

1 Year

608855942516

AUM (Cr)3 month

Historic Return (%)

Aditya Birla SL Money Manager FundICICI Pru Money Market FundUTI Money Market Fund-Inst

NAV

Money Market Funds


SCHEME NAME

22.1525.9013.3124.38

6.707.666.937.31

3 months

6.817.18

-6.88

5 Years

6.236.916.496.59

6.206.486.226.27

1 Year

6.056.336.156.14

3 Years

31413183

8701197

AUM (Cr)6 months

Historic Return (%)

Invesco India Arbitrage FundKotak Equity Arbitrage SchemeL&T Arbitrage Opp FundUTI Arbitrage Fund

NAV

Arbitrage Funds

SCHEME NAME

20.932213.372497.402499.81

9.737.838.368.28

1 month

8.627.737.377.63

3 Years

7.496.356.866.63

8.487.527.807.65

6 month

7.456.656.656.73

1 Year

64954592

113478024

AUM (Cr)3 month

Historic Return (%)

Franklin India Low Duration FundKotak Low Duration FundReliance Low Duration FundUTI Treasury Advantage Fund-Inst

NAV

Low Duration Funds

SCHEME NAME

2198.174020.762820.80

25.32

8.538.728.62

10.63

1 month

8.177.336.558.74

3 Years

7.277.837.148.50

7.638.077.728.83

6 month

7.277.606.937.95

1 Year

49941734176

14643

AUM (Cr)3 month

Historic Return (%)

BOI AXA Ultra Short Duration FundSBI Magnum Ultra Short Duration FundReliance Ultra Short Duration FundFranklin India Ultra Short Bond Fund-Super Inst

NAV

Ultra Short Term Funds

SCHEME NAME

291.392012.134267.863677.87

7.657.587.267.50

1 month

7.267.266.567.21

3 Years

7.377.406.867.27

7.417.456.827.37

6 month

7.317.346.607.25

1 Year

54133205365381

31746

AUM (Cr)3 month

Historic Return (%)

Aditya Birla SL Liquid FundAxis Liquid FundFranklin India Liquid FundKotak Liquid Fund

NAV

Liquid Funds

The acquirer’s multiple is a comprehensive way of selecting the most valuable stock

e it shopping for groceries or stocks, everybody enjoys bargains. While there are many ways of

getting one, market pundits from around the world have developed screeners or templates to find bargains in any market condition.

There are many such screeners and

B one of them is known as magic formula developed by Joel Greenblatt. For several years, this particular screener has been known among investors for its utility to find bargains and deliver market-beating returns from the selected stocks.

What is interesting is that there is a new kid in the market known as

“Acquirer’s Multiple”. Some investors have lauded this metric as being exactly as methodological as the magic formula.

However, the acquirer’s multiple has in fact provided even better returns to investors. It has not only won the magic formula, but has also trounced the entire market.



(EBIT/enterprise value) in the case of magic formula and that is where the biggest difference occurs. So when we prepare a screener based on Acquirer’s Multiple we would rank companies based on the enterprise value to operating earnings.

Second, in the case of acquirer’s multiple, you would look at operating earnings differently as against EBIT, which is also taken as operating profit from the point of magic formula.

The use of operating earnings to solve for the Acquirer’s Multiple, rather than EBIT is based on the premise that operating earnings is calculated from top to bottom, while the EBIT is calculated from bottom to top.

As such the top-down nature of this calculation allows standardization in calculation across various variables in a company and removes unnecessary adjustments or accounting juggleries that might take place.

Operating earnings in this case on its own is calculated as: Revenue - (costs of goods sold + Selling, General and Admin Costs + Depreciation and Amortization).

So, on the income aspect, the measure of earnings, which has been used in the enterprise multiple mainly contains more information than net income. This makes it more sophisticated and comprehensive than the Magic Formula.

For the rest of the things, such as quality (return on capital invested by an individual) and ranking of the stocks remain the same.

WHY IT IS MORE RELEVANT AND RELIABLE

The important point here is that when we use operating earnings, we are eliminating interest costs, tax and

return on capital as defined as EBIT/(net fixed assets + working capital) Summation of the ranking.

Step 3: Ascertain the combined ranking and stake each stock based on the combined ranking.

Step 4: Purchase of these best stocks or top 30 equally.

If you had followed these steps, according to a study, the $10,000 invested in stocks thrown out of the magic formula screener in the year 1972 would have been worth $7.6 million by the end of 2017, which is an annual share price return of 15.8%.

However, if one had applied the acquirer’s multiple for the same period, the $10,000 invested in 1972 would have been worth $18.7 million, growing at an annual growth rate of a whopping 18.2%.

In one of the interviews Tobias said, “Theoretically, Magic Formula will give you the cheapest and the best securities. It’s modelled on Buffett’s wonderful companies at fair prices approach to investing. And it works really well. It tends to beat the market. It has periods of underperformance, but it’s a very good strategy.”

However, he also suggested that the biggest problem with the Magic Formula is that it is too theoretical to be real. In the use of the magic formula, it was discovered that some markets using earnings yield, almost likely outperformed the whole magic formula. As a result, this hunch was put to test in the state and was discovered to be true.

ACQUIRER’S MULTIPLE

Coming back to Acquirer’s Multiple, it uses the enterprise value to operating profits as multiple compared with earnings yield

A BRIEF BACKGROUND

The Acquirer’s Multiple is the value metric, which acquirers look for deep value ideas. It was developed and coined by Tobias Carlisle, an author of various books on value investing.

US-based Tobias runs Acquirer’s Multiple Funds, which is a deep value investment located in Torrance, Los Angeles, California. This company manages capital in line with deep value principles, which have been discussed in books such as ‘The Acquirer’s Multiple’, ‘Deep Value’ and ‘Quantitative Value.’

In these books, Tobias describes the methods he uses to optimize his funds to ensure better returns. Tobias trained as a lawyer. However, he broke into the world of finance in 2008, when he took the job of an analyst in Trojan Investment Management. In 2010, he became the principal at Acquirer’s Funds and held this position up till date.

MAGIC THAT FAILED

Acquirer’s Multiple is an extension or also known as an improved version of the magic formula. To understand Acquirer’s Multiple, we need to first fathom the parts of the magic formula. The magic formula is a quantitative value investment model. Its idea is simply that one buys stocks when they are very cheap by following steps after applying certain rules of exclusions like market capitalization and liquidity, etc. Step 1: Ranking of every stock based on the cheapness of the stock, which is basically stocks offering the highest earnings yield based on the formula as earnings before interest and tax/ enterprise value.

Step 2: Ranking every stock based on quality, which is nothing but the

48

Contact at: 022-6273 9600 | e-mail: [email protected]


Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the Commodity segment. The securities quoted are exemplary and are not

recommendatory. NIRMAL BANG SECURITIES PVT LTD – MEMBER BSE, NSE , MSEI – SEBI registered No.INZ000202536 , Exchange Registered Broker in BSE Currency Segment , Commodity Segment .PMS Registration No: INP000002981; Research Analyst Registration No: INH000001766; NSDL/ CDSL: IN-DP-CDSL 37-99 and NIRMAL BANG COMMODITIES PVT LTD – Member MCX, NCDEX , ICEX – SEBI Registration No. INZ000043630; NCDEX

Spot: 10084; Comtrack Participants: CPID -5040; CDSL Commodity Repository Ltd: 12013300



other bottom line adjustments. This makes it easy for the universe of stocks, which may have a different capital structure.

Under this method, one can compare a heavily financial leveraged company with a zero debt company, yet retain the essence of the exercise to compare each stock irrespective of the capital structure and other adjustments such as one-offs or exceptional items that may come below the operating profits.

The probability of the operating earnings being comparable for two companies are far higher than comparing them on the basis of net earnings, which makes this ratio far more superior than any other ratio based on the earnings such as other two important valuation ratios, price to earnings and enterprise value (EV) to EBITDA.

Second, it relies on the enterprise value, which is a superior measure. It defines enterprise value as the market

cap of a company + preferred equity + non-controlling interests + total debt - cash and equivalents.

Unlike the price to book value, which compares market capitalization of a company with its net worth, enterprise value looks at the derived value if the entire firm is bought at the current market price.

Thus, it not only includes market capitalization (price of a company) and debt (excluding cash) to provide holistic and far more appropriate value. This puts the company with or without debt on a common comparable ground. IN A NUTSHELL

Acquirer’s multiple is a comprehensive way of selecting the most valuable stock. Once an investor uses this method and makes sure to follow all the rules, this is bound to provide a good return.

For a devout investor given to value

investing, one must use the Acquirer’s Multiple to buy undervalued stocks using the above methodologies.

Moreover, one must be patient enough to stay entirely invested in these stocks without any prejudice and bias for particular stocks and sectors. Finally, a period of underperformance must not deter an investor hoping to make progress with the acquirer’s multiple. It is possible that in a certain period, investments may underperform.

These are mostly less favoured stocks and investors may continue to stay away from them for quite a long period or riding on some favour or growth stocks.

Thus, the actual performance may depend on whether the investor has applied all of its rules or not.

Before applying the acquirer’s multiple, investors, therefore, need to thoroughly understand the concept and each of its componentS.

49

ULIPs have their own advantages and disadvantages and must, therefore, be chosen after thoughtful consideration

VYING FORTHE

TOP SPOT



investing based on his prerogative at any point in time. So, in case of shortage of funds, he can immediately stop investing and restart when things are back on track. Even in case of ELSS, there is no compulsion to invest on a regular basis. A one-time investment can be made, which has a lock-in period of three years.

Also, under ULIPs, the investor is stuck with the same company for the life span of the product. While the switching facility is present, which gives the investor the free will to switch between debt and equity without incurring any tax liability, in case of poor performance by the fund house, the investor has to stay put as he cannot exit even after five years without a cost attached to it (loss of insurance cover).

Mutual funds on the other hand, provide investors with total flexibility to exit schemes and switch with the same company or to a new company altogether. Thus, investors can make decisions based on the return profile of the scheme at any point in time, which a ULIP cannot offer.

We all understand the benefits of ‘rupee cost averaging’, which entails investing through the up- and down-market cycles.

Mutual funds encourage systematic investments through Systematic Investment Plans (SIPs), which help investors to start early because an investment of as little as `500 a month suffices. Also, investors can discontinue an SIP without any penalties keeping the investment intact. ULIPs don’t offer any such feature to investors.

One has to remember that an ULIP is a hybrid product, which comes with an insurance cover. The minimum investment is much higher and also the monthly investment option is not

nion Budget 2018 surprised the investor community with the introduction of

long-term capital gains (LTCG) tax to the tune of 10% on equity, bringing mutual funds into its gamut.

The tax-free treatment for long-term gains was backed by the rationale that investors should be encouraged to invest for the long term. Therefore, this change in tax policy was treated with discontent, particularly by the mutual fund industry.

As the saying goes one man’s loss is another man’s gain, Unit-linked Insurance Plans (ULIPs) turned out to be beneficiaries on the tax front as they have been exempted from the gamut of LTCG tax.

This is because its applicability is being restricted only to direct equity investments and equity mutual funds. Thus, ULIPs are being actively marketed for being attractive for investors from taxation point of view.

This has sowed the seed of confusion in the minds of investors especially with so much being said about how ULIPs will stand out because of this change in tax stance.

It is interesting to note that ULIPs have always had an edge over mutual funds when it came to taxation. Even before the introduction of LTCG, under section 10 of the Income-tax Act, ULIPs were exempt from short-term capital gains (STCG) while 15% tax was imposed on equity mutual funds. There is no denying that on the tax front, ULIPs appear to be the clear winner.

So we come to the moot question which is: is it time to switch from mutual funds to ULIPs? One should not draw a premature conclusion as that would mean you are not looking

U at the big picture. By that I mean, you are making taxation the primary consideration for investment decision. Having tax benefits doesn’t naturally mean your returns will be higher because returns are a function of how well your fund manager is managing the portfolio. It is possible that despite the tax breaks, the returns from mutual funds may be similar or higher. What about things like liquidity, flexibility to switch or stop. Don’t these also play a pivotal role in determining where your money should be parked? No investor has identical investment needs. So, let us explore ULIPs features to make an informed choice. LIQUIDITY

While equity investments should be made with a long-term objective, restrictions imposed by the product on withdrawal at any time can be a major hindrance. The most effective way to encourage long-term investment is by instilling investor discipline rather than having a product feature such as a lock-in which constrains access to liquidity.

That’s where mutual funds tend to score over ULIPs. ULIPs have a lock in period of 5 years, which means the money is not accessible during this period. On the other hand, equity mutual funds (excepting ELSS, which have a lock in of 3 years) are highly liquid and one can redeem it at any point in time. So, if you need funds at your fingertips, a mutual fund is a more appropriate product.

FLEXIBILITY

Under ULIPs, an investor is required to pay the premium for the full premium-paying term. Otherwise the policy will lapse. However, in case of mutual funds, there is no such restriction. The investor can stop

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available besides the lock-in period. Thus, mutual funds give you a greater hold over your portfolio because of the in-built flexibility. Hence, it would be fair to conclude that while ULIPs provide partial flexibility with the switching feature, it is mutual funds that give investors the freedom to manage their portfolios in a more active manner.

RETURNS

There is no clear-cut consensus about which of the two stands out in terms of performance. In fact, historical data analyzed by experts indicate that mutual funds have performed better in most instances though it is not a given and that too after taking into consideration the tax advantage that ULIPs have. After all, the key determining factor for good returns is the underlying portfolio, which is selected by the fund manager. Tax breaks definitely help to push up returns, but will not guarantee outperformance.

Thus, mutual funds tend to have a slight edge over ULIPs on this parameter because of flexibility, which enables switching to chase higher returns.

COMPLEXITY AND TRANSPARENCY

Insurance embedded in ULIPs brings in complexity because of additional charges such as premium allocation charge, mortality charge, fund management charge, policy administration charge, etc, each of which is reported separately. This makes it a little difficult for investors to comprehend.

While IRDAI, has brought in significant transparency since 2010 after ULIPs were widely mis-sold and

investors were over-charged, this product is still not as widely tracked as mutual funds. It may not be easy to find the best performing ULIP. ULIPs today may be as competitive as mutual funds but because of the sheer number of charges, and the way it is done, it confuses more than it simplifies.

For example, some charges are levied by cancellation of units rather than being charged to the NAV. In contrast, apart from being tightly regulated, mutual funds are fairly transparent on charges. All charges are bundled under one head making it easier for investors to understand. The fund management charges are built into the NAV and there is an exit load if the investor redeems before a minimum holding period.

Also, mutual funds are widely tracked. Hence, it is easy to assess, which one is a winner and which one is a laggard. Thus, on this parameter, mutual funds stand out because of easy accessibility of comparable data, simplified structure and ease of understanding in general.

EASE OF INVESTMENT

On account of the insurance element embedded in ULIPs, things such as medical tests, declarations, etc may be essential depending on the size of the investment.

So, it is not completely digital because paperwork is essential. Thus, investment takes much longer. On the other hand, if you are an existing investor in mutual funds, KYC formalities are already done. So, investment can be done digitally without any paper work. FINANCIAL PLANNING GOALS

ULIPs bundle together investment

and insurance needs. While it is good to use ULIPs to add on to an insurance cover, using them as the primary insurance product can get you in trouble. This is because you lose the cover if the product lapses or you exit the product before the full term of the policy and it is also unable to provide the actual cover you need to meet your insurance goals (ULIPs give you a maximum cover of 10x of the premium paid).

Besides, as you get older, mortality charges increase. So, if you exit the product after a few years, taking a term plan will get more expensive. It is thus best not to bundle the two needs together.

Have a term plan to cover your basic insurance needs and if required use ULIPs to add on to it. Mutual fund on the other hand is a pure play investment product making it simpler to assess and understand.

IN A NUTSHELL

If tax was the only criteria for investment, ULIPs should have been the go-to product because of the tax advantage it has always had (short term capital gains). No doubt the introduction of LTCG has given it a leg up, but remember to do an overall assessment of all the product characteristics and then make an informed investment decision.

Each product has its distinct advantage and certainly mutual funds tend to score better than ULIPs on parameters like liquidity, flexibility and transparency. But ULIPs inculcate investment discipline and with IRDAI getting tougher on transparency, over time it has become much more investor- friendly.

It’s time to put on your thinking caps to zero in on the best fit for you to meet your investment goalS.

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India is entering into a busy election period. Elections will be held in five Indian states, namely, Rajasthan (200 assembly seats), Madhya Pradesh (230 seats), Chhattisgarh (90 seats), Mizoram (40 seats) and Telangana (119 seats) in November and December. Results will be out on 11th December.

The outcome of these elections will a have bearing on the general elections to be held in April-May next year. The election results can influence future performance of the stock markets. Which Are The Ruling Parties In These Assemblies? We focus specifically on three of the five politically important states – Rajasthan, Madhya Pradesh and Chhattisgarh. They are traditional strongholds of the Bharatiya Janata Party (BJP), which not only is the ruling party in these states, but also rules at the centre along with its allies. What Do Private Opinion Polls Predict? While private opinion polls have a poor history of predicting assembly elections, they point to a tight race in Madhya Pradesh and Chhattisgarh between the BJP and the Indian National Congress (INC), and a potential loss for the BJP in Rajasthan. How Can The Assembly Elections Influence The General Elections? The voting choices at state and national elections differ. But this time around, the proximity of assembly elections to the general election, which will be held in the months of April – May next year, increases the market relevance of

IMPORTANT JARGON

these state elections. How Important Are These States In The General Elections? At the national level, the BJP has 272 seats out of total 543 seats in the Lok Sabha. Rajasthan (25), Madhya Pradesh (29) and Chhattisgarh (11) in total have 65 seats.

In the general elections held in the year 2014, the BJP had won 59 of these seats. Clearly, the results in these seats will reflect the underlying mood of the voters in the general elections. How Will The Stock Markets Perform On 11th December? A positive possible scenario for the Indian stock markets is if the BJP wins in at least 2 out of the three states. A negative possible scenario could be if the BJP loses in all three or two out of the three states. The former scenario will lead to a rally, while the latter scenario may trigger a sharp correction in the markets. What Can Be Expected From The Government Ahead Of The General Elections? In the last few general elections held in India, the stock markets have run-up before the elections. In case the BJP losses all three or two out of three states, the government may take some populist measures to attract voters. This may come at the cost of fiscal stability, which the stock markets may dislike.

The Indian stock markets have factored in a BJP-led government (if not with a majority) forming the next government post-2019. The markets are looking for stability and continuity in policies rather than any disruptive populist rhetoric.

BUSY ELECTION SEASON



DOMESTIC INFLOWS RESILIENT FOR OCTOBER ’18 The Association of Mutual Funds in India (Amfi) has come out with data on inflows into domestic mutual funds for the month of October. Retail participation remained upbeat. Systematic Investment Plans (SIPs) remained popular among small investors. How Much Money Does The Indian Mutual Industry Manage? There are as many as 43 Securities and Exchange Board of India (SEBI)-registered Asset Management Companies (AMCs) in India running around 1,900 mutual fund schemes and manage assets worth `22.24 trillion (till October ’18). By March next year, AUMs are estimated to reach `25 trillion. What Were The Net Flows Into The Mutual Fund Industry For October? The mutual fund industry witnessed net inflows (after redemption) of `35,529 crore in October ’18. September ’18 witnessed net outflows of `2,30,158 crore primarily due to redemption in liquid funds following default by Infrastructure Leasing & Financial Services (IL&FS) and the subsequent liquidity crisis in the non-banking financial company (NBFC) space. How Much Was The Net Flow Into Equity Mutual Funds? Around 35% of the total assets are into equity schemes. AUM under equity schemes, excluding equity-linked savings schemes or ELSS and balanced funds and other ETFs, which have some equity component, till October ’18 stood at `6.5 trillion. Net inflows into equity mutual funds rose to `12,622 crore in October, up nearly 13% from September. What Is Unique About The Inflows? Benchmark equity indices were down around 5% in October. Foreign portfolio investors have been negative on the Indian markets.

Despite the volatility, domestic investors showcased their confidence in the Indian markets by being positive for 53 successive months till October ’18. For October, net inflows (after withdrawals) into equity schemes of mutual funds were the highest in seven months. Inflows were primarily due to the launch of 4 new funds and also

prolonged popularity of systematic investment plans (SIPs) among small investors. How Much Money Came Via SIPs? SIP is an investment plan wherein one could invest a fixed amount (as small as `500) in a mutual fund scheme, periodically at fixed intervals – say once a month instead of making a lumpsum investment.

Inflows through SIPs continue to show an upward trend with the contribution of `7,985 crore in October ’18 as against `7,727 crore in September ’18. As of October ’18, there are 2.5 crore SIP accounts. What Were The Flows Into Liquid Schemes Like? As much as 20% of the AUM is held in liquid or money market schemes. Liquid schemes invest into shorter maturity debt instruments like commercial papers, etc. Post the IL&FS crisis, investor sentiment turned weak. September ’18 witnessed net outflows of `2,11,050 crore in liquid schemes. But in October the trend reversed, and saw net inflows of `55,296 crore. What Were The Flows Into Income Schemes? 31% of AUM is held in various income schemes. Income category invests in corporate and government bonds. For October, the category witnessed net outflows of `37,642 crore as against a net outflow of `32,504 crore in September ’18. This is because investors are unsure of the long-term interest rates in the system. What Is The Total Folio Count? Folios are numbers designated to individual investor accounts, though an investor can have multiple accounts. There were 8 crore investor folios till October ’18. Nearly 77 lakh new folios were added in this fiscal till October. Fiscal 2017-18 added 1.6 crore folios; fiscal 2016-17 over 67 lakh folios were added, while 59 lakh folios were added in 2015-16. Are Domestic Mutual Fund Flows A Match To Foreign Investor Flows? According to the latest shareholding pattern, FPIs own more than 20% of India equities, while domestic mutual funds hold less than 7%. FPIs withdrew `28,921 crore from equities and `9,979 crore from the debt market in October. Clearly, FPIs are a big driver of Indian markets despite sustained inflows into DMFs.

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DISCLAIMERIn the preparation of the content of this magazine, Nirmal Bang Securities Private Limited has used information that is publicly available, including information developed in-house. Such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgement of Nirmal Bang Securities Private Limited at the date of this publication/ communication and are subject to change at any point without notice. This is not a solicitation or any offer to buy or sell. This publication/ communication is for information purposes only and is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. For data reference to any third party in this material no such party will assume any liability for the same. Further, all opinion included in this magazine are as of date and are subject to change without any notice. All recipients of this magazine should seek appropriate professional advice and carefully read the offer document and before dealing and/ or transacting in any of the products referred to in this material make their own investigation. Nirmal Bang Securities Private Limited, its directors, officers, employees and other personnel shall not be liable for any loss (financial or otherwise), damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary and consequential, as also any loss of profit in any way arising from the use of this material in any manner whatsoever. The recipient alone shall be fully responsible/ are liable for any decision taken on the basis of this material. This magazine is prepared for private circulation only. Nirmal Bang Securities Private Limited, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Securities Private Limited or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.




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