Archive for October, 2006

Info Edge (India) IPO : Too Many Questions.

9 comments Written on October 31st, 2006 by
Categories: InfoEdge, IPO
Info Edge India Ltd. has an Initial Public Offer (IPO) going at a price of (between) 290 and 320 Rs. per share. The company is better known for its portals: Naukri.com, JeevanSathi.com and 99Acres.com. The offer document contains a lot of data and makes me ask a few questions I believe are relevant to my analysis of the issue.

But first, the basic details: The issue is about 170 Cr. in size at the upper end of the band. Post issue, they will have 2.729 crore shares. They've made profits of 13.2 cr. in FY 06, and 5.9 cr.* in Q1 FY07. Very wayward before that - 31 lakhs (2005), 2.43 cr. (2004), 1.67 cr. (2003).

* Update: I got this figure wrong. I took a consolidated profit figure, which is irrelevant. You should use Rs. 5.2 cr. instead.

The post issue EPS is Rs. 4.84 for FY06, and Rs. 2.16 for Q107. The P/E at the higher band is 66 (past) and 37.04 (FY07, prorated from Q107). I think the Q107 results are a bit of an aberration, and that is to be expected as a "dress-up" of results pre-IPO. We don't have Q2 figures yet. (Why not? It's end of October, and you're going IPO, for heaven's sake)

They have around Rs. 25 cr. in Investments and cash.

Naukri.com makes for 92% of it's FY 2006 revenue, and that share has been above 90% over the last five years. They're focussed on IT and ITES, and any slowdown there is a hurdle in Naukri.com's growth.

My questions:

What's the "other income" stuff?

FY06 has a total of 1.6 cr. other income, on investments (which were around 12.5 cr.) That grew to an income of Rs. 1.4 cr in Q107, with investments of 22 cr. Around 3.78 cr. has FURTHER been added through pre-IPO placements.

Basically, out of the 5.9 cr. Net profit for Q107, 1.4 cr. has come from Other income. Meaning that operationally, they earn lesser profits - the rise of the other income figure is quite dramatic, and not explained at all.

Why did promoters sell their shares at a discount immediately before the IPO?

Sanjeev Bikhchandani sold 410,400 shares to Murugan Capital at Rs. 245 per share on Sep 14, 2006. Hitesh Oberoi sold 109,181 shares to Sherpalo LLC at Rs. 245 per share on the same date. Why did the promoters sell their shares at a discount? Granted, their lock in is one to three years, so they may have wanted some money up front. But this is like losing 30% by selling one and a half months before the issue!

If they wanted cash, they could have placed the shares with a bank after the issue, and the bank would give them a loan, surely at less than 30% a year. At 15% bank interest, and if the shares were only at Rs. 320 per share (upper band) at the end of one year, the promoters would have made a lot more money than selling pre-IPO. (Plus they pay capital gains tax, since the shares weren't sold on an exchange). To give you figures, Sanjeev Bikhchandani stands to lose at least 1.5 crores (plus capital gains tax) and Hitesh Oberoi Rs. 40 lakhs (plus cap gains) by selling pre-IPO.

Note also that Surabhi Bikhchandani also sold 436,723 shares to Sherpalo at Rs. 245 per share on Sep. 14, 2006. Another loss of money, by another promoter.

What if this means the promoters themselves don't have enough confidence to stay invested for a year? If the VCs (Sherpalo and Murugan) wanted more shares, the company can issue them, and they have done to the tune of Rs. 3.5 crores. True, this is KPCB and Sherpalo, but please, no one hands out money for free.

Note here that some directors have PURCHASED shares in the pre-IPO placements on August 7 and September 7, 2006 at Rs. 280 per share. How did the price fall to Rs. 245 per share when the promoters were selling them?

What's the money being used for?

The issue is between 154 and 170 crores. Expansion will be 20 cr. (10 in 2006, 10 in 2007), office space takes 30 crores (all in 2006, one single big office in Delhi).

Product enhancement will be 25 cr. (10 and 15), and 30 cr. is for acquisition. 25 cr. is kept for Jeevansathi.com and 99acres.com.

The remaining, they say, is for "General Corporate Purposes". This is an amount between 24 and 40 cr. rupees.

My recommendation

I'm a little concerned about the valuation - it seems to be quite high at nearly 66 past, and 40 forward. But they are collecting more than 150 crores, twice their annual turnover. If they return profits of about 15% of the money they collect, their net profit should scale up. I would estimate a forward earning of Rs. 13.78 per share in FY 2008, which translates to a forward P/E of 23.2. That's quite high.

Secondly, I'm concerned about the questions I've raised. I'm very suspicious of promoters selling their stake for a discount a month or so before the IPO. I don't know what to make of it, but it can be nothing positive.

Overall, given these factors my vote to this IPO is "Do not subscribe".

Posted in InfoEdge, IPO

Bonus shares: A tax saving scheme?

21 comments Written on October 29th, 2006 by
Categories: IncomeTax, Stocks
Lots of Indian companies offer "bonus" shares: a 1:1 bonus means that for every share you own, you get one "free" share. Now given that the company's fundamentals don't change, the number of outstanding shares doubles but the net profit remains the same. Meaning, to retain the same P/E, the share price must come down by half.

Only profitable companies can give a bonus, out of their profits. Technically, a bonus is nothing but moving a liability (profit or reserve) over to capital. So it doesn't affect the balance sheet at all on the assets side, only minor moves on the liabilities side.

But we notice that stock prices of companies that have offered bonus shares suddenly ZOOM ahead in the market. Why? There's no reason to do so, is there?

There is. And it's a legal way to avoid paying tax.

(Post Note: It Used to be legal, now it has been plugged. The following article is only useful for historical notes, and is no longer applicable - Deepak, 2007)

Avoiding tax through bonuses

Let's say you're a stock trader with Rs. 15 lakh in short term capital gains. This, in general, would need you to pay 10.2% short term capital gains tax, which is an outflow of about Rs. 1.5 lakhs, which you can only offset if you have a short term capital loss. How do you have such a loss without really losing money?

The answer: Bonus shares.

Let's say a company's stock is at Rs. 300, and offers a 1:1 bonus. You buy 10,000 shares for Rs. 30 lakhs (okay, you're a rich trader) before the bonus record date (usually a date much after the bonus announcement).

Now after the record date the price comes down to Rs. 150 and you now have 20,000 shares. Sell 10,000 shares. The tax department expects you to price shares based on "First In First Out", and for pricing purposes the cost of bonus shares is ZERO; so you have:

10,000 shares at Rs. 300
10,000 shares at Rs. 0

If you sell 10,000 shares at Rs. 150, the first lot is sold - so you incur a Short term LOSS of Rs. 150 per share, a total loss of Rs. 15 lakhs. This completely offsets your gain you had made earlier so you now have to pay no tax.

What about the remaining shares, you say? Well, hold them for a year, and since long term capital gains tax has been removed, you can safely take home the money. Other capital gains saving avenues need you to hold for at least 3 years, and this is a one year holding only!

That's why the share price of companies goes up when they make bonus announcements. So many traders buy to make their short term capital gains lesser!

Note: Bonuses are different from "split" shares in this regard. For tax purposes of Split shares, "The cost of such shares gets proportionately divided and the period of holding also continues to be the same as that of the original lot." So the aforementioned bonus based tax avoidance scheme is not available.

Note also that the method mentioned above is legal. The I.T. department may remove this loophole soon, of course, just as they did with dividends.

Post note, 2007: It seems that the MoF has cut the bonus stripping ability too. In Section 94, subsection 8, the law states that if you get any bonus units for shares purchased within three months prior to the record date, and then sell the original shares within nine months AFTER the record date, you can't claim the loss. (But the loss can be considered as acquisition cost of the remaining shares).

Meaning, if the record date is Feb, and you buy 100 shares in Jan for Rs. 200 each, and get another 100 as a bonus. Now if you sell the first 100 in March for Rs. 120 each, the loss will be Rs. 80 per share, which can't be taken as a loss - but it can be taken as the cost of the remaining 100 shares.

Posted in IncomeTax, Stocks

Capital Guarantee Plus Appreciation?

4 comments Written on October 27th, 2006 by
Categories: Commentary
Sandeep Shanbhag explains how you can get "assured" returns: by putting a part of your capital in a fixed income instrument like National Savings Certificate (NSC) and using the remaining to invest.

The example he uses is: If you have Rs. 6 lakhs, you can put Rs. 3,78,000 in an NSC at 6% and the remaining into a mutual fund (Rs. 2,22,000). The NSC, after 6 years, yields Rs. 6 lakhs, so your capital is secure. Whatever you get from a mutual fund is a bonus!!!!

Sandeep goes on to prove that if you had done this in 2000, you would have earned Rs. 25 lakhs from that 6 lakh investment!

Is this really something you should do? Uhm. I beg to differ. There are things you need to consider before you really invest.

Inflation

Prices go up about 5-10% every year, and so do rents, salaries etc. So Rs. 6 lakhs will buy you a lot lesser after 6 years than it does today. In reality, let's take 5% as an inflation rate; what will 6 lakhs need to grow in six years, so that it buys what it can buy today?

Answer : Rs. 8.04 lakhs.

To get Rs. 8.04 lakhs in an NSC after 6 years, you have to invest Rs. 5,07,000.

Okay, you think, so what? I still have Rs. 93,000 to put in a mutual fund, right? Uhm. Yes, but you must consider:

Income Tax

(To his credit, Sandeep does mention he hasn't considered tax) NSC earnings are chargeable to income tax. For the top bracket of 30%, you will have to pay around Rs. 90,000 over the six year period for that Rs. 5,07,000 invested. Now NSC Income is reinvested and the extra investment is non-taxable under section 80C, but I will assume that you will have used up the 1,00,000 limit through other methods, and that this income is taxable.

That means, nearly all the extra money will go into tax!!!! But then you still can invest the 93,000 and hope it will grow so much that you can pay off the tax and still have something left over right? Tax is payable every year, so this is the schedule: 

Year       Tax to be paid
1st Year : 12,168
2nd Year : 13,141
3rd Year : 14,192
4th Year : 15,328
5th Year : 16,554
6th Year : 17,878
If your Mutual fund goes up by 16% EVERY YEAR, you will just about break even after paying tax; you will end up with Rs. 99,000 after paying all the taxes.

To summarize: If you have Rs. 6,00,000 and you invested Rs. 5,07,000 in an NSC at 6% and Rs. 93,000 in a mutual fund that returned 16% a year, you will have Rs. 9,01,000 after six years (considering you pay out taxes).

Inflation means your Rs. 6,00,000 today is equivalent to Rs. 8,04,000 after 6 years. So your real gain, in six years, is only Rs. 1,00,000 (One lakh).

That's not as attractive as the 18 lakh return Sandeep mentioned. But that is really the ONLY way have a "capital guarantee"; you should be guaranteed against inflation AND tax, not just on your money today.

What if you consider tax saving as well? The initial corpus of 6,00,000 saves you tax - at 30% of the 1,00,000 80 C limit - which can go into the mutual fund! Let's also assume that the NSC interest is tax exempt (as part of future 80C contributions), only the last interest (Rs. 60,000) is taxable.

Then your corpus in the fund goes up to 8.04 lakhs (NSC) + 2.66 lakhs (mutual fund) totalling Rs. 10.7 lakhs. You have a tax on the last interest payable at Rs. 17,878 so your net corpus is Rs. 10.53 lakhs.

This is a much better figure - corresponding to about 10% annualised growth, and post inflation growth of about 4.8%. But that is a very positive estimate, considering your mutual fund goes up 16% - any lesser and your returns go down. Plus, now that you have all this money in 80C taken away, you lose that much opportunity to save tax elsewhere.

I hope this has provided you with more perspective about the real meaning of capital security. You have to think Post Tax, Post Inflation.

Posted in Commentary

Mutual Funds: Dividend option or Growth option

15 comments Written on October 18th, 2006 by
Categories: MutualFunds

Most mutual funds have multiple options for investment, for the same scheme:

1) Growth option
2) Dividend option
(with either automatic reinvestment or as a payout)

The concept behind Dividend option is that the mutual fund gives you "cash" regularly. and this can be either paid to you or reinvested in the fund (more units are purchased on the day of the dividend disbursement, at the NAV of that day). Note here that dividends are paid out of the assets of the fund, therefore the Dividend option's NAV will go down when dividend is paid.

Dividend payout is usually taken by people who want some cash return on their investments. In a way, this supplements their income, and also ensures some level of "profit booking" - that profits will be paid out as dividends so you keep your exposure limited.

The dividend re-investment and growth options are similar, in the sense that your dividend adds on to your investment and compounds itself. So why two different options?

That's based on tax history. Earlier, your capital gains were taxed at 20% (long term) and 30%(short term). Dividends were taxed at 10% and later, not taxed at all. Growth option funds only had capital gains (since there was no dividend) and when you wanted to exit you would pay a HIGHER amount of tax. Dividend reinvestment ensured that your dividends paid lesser tax and the re-investment, being usually at a higher NAV since the fund is growing, will attract less capital gains tax.

But now the equation has changed. Currently, Dividends are not taxed in your hands. (and equity mutual funds aren't charged a dividend distribution tax) Also, with the Securities Transaction Tax regime, you pay a 0.25% STT on the sale of your fund units, and therefore the law says that short term capital gains tax is 10% and long term capital gains are not taxed!

So what's the difference now? One factor to consider is that some funds must pay dividend distribution tax at 12.24% - this does not apply to equity funds. Obviously this affects the dividend options but not growth options of funds.

Further, there's capital gains. Let's say you invested in a fund 5 years ago, in "dividend reinvestment" and now you want money urgently. Some of the units you got as part of the dividend reinvestment were perhaps given to you in the last one year; selling those will mean a short term capital gains tax of 10%! If you had chosen the growth option, you would pay no capital gains tax (as all gains are long term = greater than one year of holding).

Always choose the Growth option. If you need cash regularly, choose the Dividend payout option. Don't really bother with Dividend reinvestment (unless tax laws change).

Disclosure: I have, unfortunately, invested in the "dividend reinvestment" option myself also. I will slowly change over and further investments will go into growth options only.

See the video by MarketVision:

Posted in MutualFunds

How much do you need, in order to retire?

32 comments Written on October 15th, 2006 by
Categories: Insurance, Retirement

I'm curious about this: what is REAL financial security? To me it is the ability to build income PURELY through returns on your investments, and have that return cover your expenses for the rest of your life.

Let's see what it means for me, taking figures I know. Over the year, I spend about Rs. 7.2 lakhs, which accounts for my regular expenses, travel, holidays, thrills, necessities etc. and some buffer I've included once I have a bigger family. I know this is a little high, but I will assume that I don't want to change my own lifestyle and see. I want to retire after 13 years, when I'm 45.

I've invested in high return securities like stocks, which have returned about 10% a year conservatively speaking. So let's assume I cash some stocks every year, and pay the tax of 10% of short term capital gains (If I keep reinvesting the portfolio). That's a net return on 9% on my investments.

Also I need to figure a cost of Rs. 10 lakh (today's money) for my kids' higher education costs.

So how much do I need to invest, if I expect to live till I'm 80? I've done my excel calculations and here's what I found:


Age now: 32
Age at Retirement: 45
To survive until age: 80
Funds grow at (tax adjusted): 9%
Inflation expected: 6%
Corpus needed at age 45: Rs.3.3 crores.

Wow. That's a big figure. To reach there, I have to invest Rs. 96,000 per month at a net return on 9% to make it!

Now to extrapolate this to right now: If I retired next year, how much money do I need?


Age now: 32
Age at Retirement: 33
To survive until age: 80
Funds grow at (tax adjusted): 9%
Inflation expected: 6%
Corpus needed next year: Rs. 1.98 crores.

This, really, is the amount of insurance I should have; since this is the money my family will need should something happen to me, or that I will need in case I'm in a bad accident that disallows me from working.

You can calculate this too - either as a simple calculation using excel or otherwise. You can even load in costs; such as kids education costs, marriage/college costs, any medical fees you expect etc. and find out how much money you need. Based on that, invest. Note that you need to beat inflation substantially - only investments that yield above 10% make sense; and the earlier you start investing, the better.

The excel sheet is with me - but it's not very easy to use. I can send it to you if you want (mail me) or I can load it up on the net as a separate application.

Update 27 Aug 2009 : I have finally found the time to upload this spreadsheet. Download it here. Enable macros, fill in the blue fields, and hit the calculate button.

Note: No warranties, no guarantees, and definitely no liability to me. This is not financial advice, just an educational exercise. and feel free to pass it on as it is. Modifications are welcome with due credit to all participants. Please pass it back to me so I can update the article too.

Posted in Insurance, Retirement

ULIP NAV comparison table

26 comments Written on October 7th, 2006 by
Categories: Insurance, ULIP
Plan Oct 6, 2005 Oct 6, 2006 Growth
SBI: Horizon 15.590 24.420 56.64%
Sensex 8,528.700 12,372.810 45.07%
Kotak aggressive 14.745 21.192 43.72%
Reliance Life (Equity) 14.724 21.105 43.34%
HDFC-Standard: All ULIPs 35.043 50.143 43.09%
ICICI-Prudential: LifeTime Plus 16.440 22.990 39.84%
ICICI-Prudential: LifeTime Super 30.860 42.790 38.66%
Nifty 2,579.150 3,569.700 38.41%
Bajaj Allianz: Unitgain plus 17.621 24.188 37.27%
Metlife Multiplier 12.474 16.646 33.45%
Kotak dynamic 18.795 24.699 31.41%
aviva Saveguard growth 18.970 23.988 26.45%
Max New York Growth 13.920 17.420 25.14%
TATA AIG Growth 14.218 17.660 24.21%
ING Vysya Growth 12.204 14.712 20.56%
Aviva Lifelong 24.459 28.375 16.01%
Birla Sun Life - Enhancer 19.427 22.384 15.22%

Posted in Insurance, ULIP

Cost Inflation Index announced for 2006-07

No Comments » Written on October 7th, 2006 by
Categories: Commentary
If you sell a capital asset (gold, real estate, stock not traded on the NSE or BSE etc.) you will need to pay Capital Gains Tax. This tax is paid only on the actual gain, which is calculated as:

Capital Gain = (Selling Price - Buying Price) * (CII for Year of Sale/CII of year of purchase).

CII = Cost Inflation Index. The tax department recognises that inflation affects the value of money, and therfore understands that Rs. 1000 in 1981 is not the same as Rs. 1000 today. It therefore releases a "Cost Inflation Index" for every year, with 1981-82 being the base year with an index value of 100.

The actual CII table is updated each year, and usually the CII value for the current financial year is announced in August or September as a "Notification". Most notifications are absolutely gibberish, so wading through them to find the notification you need is a pain in the you-know-where.

So for those of you who want it, here's the CII value for 2006-07:
Notification no. 270, dated 19/09/2006:
CII Value for 2006-07 is 519.

Posted in Commentary

India Investment Blogs

26 comments Written on October 6th, 2006 by
Categories: Uncategorized
As improbable as it may seem, you'll want to read more than my not-so-humble opinion on Personal Investment in India. Here's a list of places you can go to:

Journey to wealth by Amit
An interesting take on investments, though not updated very regularly (I know, people with glass houses...). Amit writes refreshingly well on subjects close to my heart, like real estate, stock market investing and the like.

Person finance in India - the not so obvious stuff
Vivek Venugopalan talks about taxes, banking, stock market investments etc. His take on "How to get financiall organised" is a good refresher - heck, I need to do some of them things!

Investment Guru by Rajesh Soni
Largely about stocks and IPOs, Rajesh dwells on company information, general stock news, and IPO updates. An interesting take for value investors.

Value Stock Plus by "Toughiee"
A well maintained, constantly updated blog about investments, largely links to articles elsewhere. The author works quite hard at updating posts and consolidating sites you, as an investor, should visit.

Arpit Ranka
Arpit provides an analysis of the behaviour behind investing, and lets your mind wander as he talks about intuition, reasoning, prediction, luck and so on. Interesting reading, and a financial perspective keeps material in scope.

Value Investing by Rohit Chauhan.
A well written blog on the fundas of value investing. Professing to be a Buffet fan, and quoting Ben Graham, Paul Fisher and so on, Rohit writes lucidly about value investing in India. Yes, there are some long paragraphs that stem more from his inability to induce correct formatting by blogger than from a fear of line breaks. But the site's well worth your time, and will hopefully continue to be as good!

ULIPs and MFs by Raj Gopal Vuppala.
A more recent blog about investing in Unit Linked Insurance Plans (ULIPs) and Mutual Funds. I personally don't like ULIPs but Raj comes across with strategies to invest if you're still hooked to the idea. He asks that you avoid endowment plans (a financial trap) and evaluate charges before you buy; something every investor must drill into herself to do.

Rupee Manager by Umesh Ladha
Umesh writes about Personal Finance for the young reader - the early twenties, I would imagine. Some of the concepts in there like TWINVEST and the like are quite interesting...it's a fairly new site, but I think it'll evolve. That's it for now. Post me more links if you like some other blogs!

Posted in Uncategorized