Tuesday, 19 February 2019

Good news for health insurance buyers

Buying a health insurance policy is often recommended to be the first step towards financial protection, even before one starts to save for financial goals. However, at times, it becomes difficult for someone to buy it because of the varying benefits it offers. Even though the structure and features are somewhat standardised, comparing them becomes difficult. Also, choosing one amongst many with different add-on features becomes difficult.
This is set to change once the draft guidelines are finalised and new rules are framed. Buying health insurance may become easier than it is now. IRDAI has issued draft guidelines that will make available a Standard Health Product across the industry and will be offered by all insurers doing General and Health Insurance business. It will be mandatory for all insurers to offer such a product.
The Standard Health Product will be uniform across the market with no additional add-ons or optional covers will be allowed to be offered along with the standard product. The proposed Standard Product shall be offered on indemnity basis only i.e. only the expense made will be reimbursed up to the limit of sum insured. No deductible features are permitted under the base cover but a standard Co-Pay mechanism will be allowed and a 5 per cent of Co-pay could be part of the product feature.
In the Standard Health Product, no plan variants will be allowed. Currently, insurers offer several variants with add-ons and hence varying premium thus leaving limited choice to the buyer to select what is required at the basic level. The draft guidelines proposes that Add-on or Optional Covers are not allowed to be attached to the base cover in Standard Health Product.
The minimum basic sum insured under standard product shall be Rs 50,000, while the maximum could be capped at Rs 10 lakh. The standard product shall be offered on family floater basis also and dependent children shall be covered from the age of 0 days to 25 years. It shall not be combined with Critical Illness Covers or Benefit Based covers.
Minimum entry age shall be 18 years for principal insured and maximum age at entry shall be 65, along with lifelong renewability. There shall be no maximum exit age. All the modes (Yly, Hly, Qly, Mly) shall be allowed for the standard product.
Some of the mandatory covers in the Standard Health Product shall be Hospitalization Expenses, AYUSH Treatment, pre and post Hospitalization, Health Check-ups, Outpatient consultations or treatments, Cumulative Bonus.

Promoter Pledging: Definition & Importance

In recent weeks, the stock market investors have been hit by major sharp swings in stock prices after the news of high promoter pledging and sale of pledged shares by lending institutions. In such incidents, the share prices of Reliance ADAG group, Apollo Hospitals, and Essel/ Zee group have dipped nearly 15-30 percent.
How come the promoter pledging could affect the share prices this much and become the reason for sharp swings in the stock market.
So, what is promoter pledging and why is it important?

Promoter Pledging: Definition

If we put it simply, it is taking a loan against the shares one holds to himself/herself. Whether you are an investor or promoter, you can take a loan against the shares. The promoters are the majority of the shareholder group that handles the company’s day-to-day affairs. In doing so, when there is a need to raise funds, very often, these promoters, of listed companies pledge some or all of their shares as collateral to banks on-banking financial companies in exchange of money needed as a loan.
This is one way of borrowing money from lenders to invest in the business and the company’s operations.
These company promoters are no different from normal people. Just like us, they approach the bank for a temporary loan where the bank asked them the same thing to provide the collateral on the basis of which it can give you the loan. Except for one thing, when one of us approach the bank, the bank held property, shares, or gold jewelry as collateral but in case, of company promoters, it held the shares to give loan against them.

Why is it Important? – Promoter Pledging

As we said earlier, the pledging of shares helps in generating quick wealth in a short period of time. Many corporations and entrepreneurs raise funds with the help of promoter pledging where the ownership is retained by promoters while pledging shares. However, there are certain risks of pledging a large proportion of shares to the lenders in order to raise funds, especially in volatile markets.
The higher the pledging, higher the volatility will be in the share’s price of the company. It is because when the share prices fall, the overall value of pledged shares falls. If that happens, the pressure will automatically increase on promoters to increase more assets as collateral. Sometimes banks or other non-banking lenders sell the pledged shares if the price of the stock fall closer to the value agreed in the contract between two parties.
But, it usually happens when the promoter failed to meet the margin call.
In India, over 5000 listed companies, promoters of nearly 4274 companies have almost pledged all of the shares to the lenders, according to the analysis report by SEBI. On them, around 286 companies have pledged more than 50% of their shares.

Monday, 18 February 2019

Importance Of 52 Week High And Low In Stocks

Share prices fluctuate in the stock market regularly, where they reach the highest and lowest prices at some point in time. When it comes to making an investment decision, then many people give prime importance to the 52 weeks high and low. Now, what is it and importance to the investors or traders? Let us find out the answers.

What is 52 Week High and Low?

A 52 week high and low is primarily the highest and lowest prices of the shares over a 52 week period. One of the main benefits of keeping a tab on the 52-week share prices that it helps you to identify the excellent investment opportunities and also lets you track the performance of your stocks.
For example, suppose you are tracking the changes in the shares prices of a Company ABC over the course of 52 weeks. You find out that shares of the Company ABC traded at Rs 300 per share at its highest and Rs 100 per share at its lowest. Hence, it can be said that the 52 weeks high and low for the Company ABC’s shares was Rs 300 and Rs 100.

What is 52 Week High?

The 52 weeks high implies the highest price that a particular stock of the company has attained in the 52 week period.  An increase or rise in the share prices is altogether good news for the company. There are many reasons for the 52 week high, which are as follows:
  • The sales of the company are increasing.
  • The profit of the company is increasing.
  • The earnings prospects of the company are bullish.
Here are the examples of the 52 weeks high that can be found easily on the National Stock Exchange (NSE):

What is 52 Week Low?

A 52 week low essentially implies the lowest price that a particular stock of the company has reached in the 52 week period. Determining the 52 week low is extremely important for the traders or investors before they take an investment decision. The prominent reasons behind 52 week low are as follows:
  • Unplanned management of the debts.
  • Not controlling unnecessary costs with respect to the revenue generated resulting in more debts.
  • The new product of the company has fallen badly in the market.
Here are the examples of the 52 week low that can be found easily on the National Stock Exchange (NSE):

Why 52 Week High and Low Matters for the Investors?

The 52 week and high and low share prices are extremely important for the potential investors. More often than not, many investors take into the account 52 weeks high and low of a particular share when looking at the current price. If the share prices reach 52 week low, then the investors might think that it is an excellent time to buy. On the other hand, if the share prices reach 52 weeks high, then the investors might not think that it is the right time to buy, however, they may consider selling or shorting the shares.

Bottom Line

It is important to know that the 52 weeks high and low only just gives a clear picture of far the shares of the company have fluctuated in the 52 weeks. There is no doubt that going through 52 weeks high and 52 week low columns on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) websites everyday help in arriving at an excellent investment decision. However, it also cannot be denied that the 52 weeks high and low may not provide a good understanding about the reasons behind the increase or decrease in the share prices. Hence, it is important that you must act smart by undertaking a comprehensive research work before investing.

Sunday, 17 February 2019

Q3 Earnings Review


The Nifty 50 companies missed the average estimate for the quarter ended December, dragged by the loss of Tata Motors Ltd.—the biggest in India’s corporate history. The combined earnings per share of the benchmark index constituents missed the consensus estimate by 19 percent, according to BloombergQuint’s calculations. That’s when 41 of the 50 companies have either met or beat estimates—the highest in at least six quarters. Of this, 20 companies beat estimates, and 21 reported numbers in line with expectations.

The companies reported a combined earnings per share of Rs 97 for the three months ended December. That compares with the Rs 119 estimated as on Jan. 9 when the earnings season kicked off with IndusInd Bank Ltd. reporting its numbers.

While almost all automakers missed estimates, corporate-facing banks and oil and gast firms aided overall earnings in the reporting quarter. Here’s how the sectors have fared this quarter:


Agriculture
UPL Ltd. reported strong double-digit growth in all geographies, barring India.
 It closed the Arysta LifeScience acquisition.

Automobile
All automakers missed estimates in the third quarter.
Raw material costs and weak demand impacted financials.
Muted outlook by managements.
Tata Motors Ltd. loss weighed on Nifty EPS.

Cement
UltraTech Cement Ltd. met estimates, but the management’s outlook was weak.
Subdued pricing impacted earnings.
Realisations and utilisations were lower-than-estimated in the third quarter.
Construction
Larsen & Toubro Ltd. set sales guidance higher at 12-15 percent.

Consumer Stocks
Volume growth surprised, but margin pressure remained.
Continued  to see resilient top line and volume growth.
Commodity input prices dragged gross margin.
Titan Company Ltd. beat estimates, led by the jewellery segment.

Oil & Gas
Reliance Industries Ltd. showed strong performance across segments.
Hindustan Petroleum Corporation Ltd. and Bharat Petroleum Corporation Ltd. beat estimates on higher refining margins.
Gas trading aided GAIL (India) Ltd.’s financials during the quarter.

Financial Institutions
Infrastructure Leasing & Financial Services Ltd. concerns continued to weigh on private sector banks.
Corporate banks outperformed retail-focused lenders.
State Bank of India beat estimates on account of better asset quality and lower slippages. Margins remained stable for banks.
Cautious stance on lending by housing finance companies.

Information Technology
Tech Mahindra Ltd. outperformed peers on the back of strong deal wins.
All other IT companies reported numbers in line, but margin remained weak.
Metals
Metal stocks met estimates.
JSW Steel Ltd.’s India business reported strong numbers, but it remained weak for Tata Steel Ltd.

Pharmaceuticals
U.S. sales improved but outlook remained cautious.
Domestic markets continued to drag.
Sun Pharmaceutical Industries Ltd. beat estimates on the back of one-time adjustments related to deferred tax.

Telecom
Average revenue per user of mobile operators grew for the first time in last 10 quarters.
 Bharti Infratel Ltd. beat estimates on the back of cost cuts and higher rentals.






How To Evaluate A Company For Investment?

Making an investment in the stocks is quite challenging, particularly when you are a beginner.  Investing in the stocks demand a lot of discipline and research work. You must have an excellent understanding of the various aspects such as the profitability, debt, management, etc of the company before you decide to invest in the stock market. To minimize the risk of losing your hard-earned money, you must carry out a comprehensive research work about the company to get the better returns.
For instance, if you purchase the shares of the Company XYZ and it is making good profits over the next 1-3 years, then you can expect to get better returns. On the other hand, the company performs poorly over the next few years, then eventually the value of the share prices will decline and you may lose your money.
It is no surprise that most the investors, especially the first-timers, take the investing decisions without researching the prominent facts about the company. As a result, they end up losing their investments. Therefore, it is extremely important to research the company before investing. You may be wondering that researching consumes a lot of time and energy. Do not worry as it is not rocket science and a lot easier than you could imagine. You just need to research the following aspects of the company before putting your hard-earned money into their shares:

High Debt Companies

The shares of the high debt companies must be totally avoided for investment. By using the debt-equity ratio, you can quite easily determine the amount of debt that a company is carrying when compared with the amount equity shareholders have in the company. Generally, it is used to analyze whether a company is able to repay its debt obligations in a hassle-free manner or not. As a thumb rule, the companies with the debt/equity ratio of more than 1 are considered riskier for the investment.

Companies with Zero Transparency

There are very few companies in the stock market that suffer from lack of transparency i.e. it is quite a challenging task to find their information online. This problem is most visible in case of the small and micro-cap companies. Researching information of these companies can be quite hard work for the investors. Furthermore, it is tough to ascertain the reliability of the information or there are chances that the data can be manipulated. Hence, it makes no sense to invest in those companies that suffer from a lack of transparency.

Inefficient or Unstable Management

The management of the company is just like a ship’s captain. They formulate the important policies and their decisions define the growth of the company. When you are planning to invest in a particular company, then do not forget to find out about the management of the company. For this purpose, there are few questions that you must ask yourself with regard to the management before taking any investment decision:
  • What is the structure of the board of directors of the company and the qualifications of the members?
  • Do the members of the management have the desired experience and track record of success?
  • Is the management of the company changes more often, if yes, then what are the reasons?
  • How the decisions of the management affected the company?
  • What is the financial net worth of the company directors and other members?
  • Have any of the directors of the company ever been in trouble with the stock market regulator i.e. Securities and Exchange Board of India (SEBI)?

Companies with Weak Growth Track Record

Before investing, make sure whether the company has a good history of growth or not? The company with the poor or weak track record is considered to be risky for making an investment. For determining the track of the record of the company, you can check out the financial statements or prospectus of the company to find out whether it is losing money or growing continuously. If the record of the company, in terms of the growth, is not good, then it is quite obvious that the share prices may fall.

Conclusion
For the beginners in the stock market, taking into consideration the above important aspects before making an investment will help them a lot avoid the problems and invest in the best-performing companies. All in all, it is important that you carry out in-depth research work and invest in the companies having good or stable leadership and running successfully over the years.
Happy Investing!

Right time to invest? Equities appear less risky, higher returns in long-run

The first month of 2019 was positive for Indian equities as the S&P BSE Sensex rose 0.5% during January. However, S&P BSE Midcap and S&P BSE Smallcap index had declined by 5.7% and 5.3%, respectively in January. Sector such as IT, consumer durable and banking performed well during the month. Auto, capital goods and metal stocks were laggards.
Foreign institutional investors (FIIs) in the month of January were inactive with sell orders of $75 million. Domestic institutions were net buyers during the month to the tune of $300 million approximately. Mutual funds were buyers of $1.2 billion while insurance companies sold stocks worth $880 million. The rupee depreciated 1.9% during the month.
The US Fed in its meeting during the month indicated that it will be patient with raising interest rates. It will also go soft on normalisation of its balance sheet, meaning it will be less aggressive in reducing the balance sheet size. This news was cheered by the equity markets. Fears related to recession and trade sanctions led the U.S. Fed to change its stance.
Over the long term, interest rates will rise in developed markets. This will be detrimental to stock prices in emerging markets including India. Investors getting higher return in home markets will likely reduce exposure to riskier emerging markets as interest rates move up overseas.
Budget eye on polls
A major event at the start of February was presentation of the interim union budget. The budget presented had an eye on elections. A number of schemes were launched for the agriculture sector of which guaranteed money transfer to farmers was highlighted. Salaried tax payers also stand to benefit with increase in exemption for paying income tax.
The government borrowing and fiscal deficit is likely to increase due to welfare schemes and forego tax revenue. Sectors such as housing also stand to benefit from budget proposals. However, since this is an interim budget, its measures can be reversed if the new Government takes charge.
In fact, January saw a number of listed companies announcing their third quarter results. There was heightened volatility in a media stock after rumours of involvement in money laundering of a group related company. This was further accentuated by selling of its pledged shares by financiers. Another housing finance company was targeted by a media house of loans being routed to founders. Many stocks with links to these entities were hit.
There has been a good correction in stock prices in the past few months since September 2018. Many stocks which looked highly valued earlier now seem to come within reach. Scheme cash level now is in low single digits, offering decent potential return. Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many countries. Investors can thus expect decent return from equities over a long period in future. Investors should put more money given that valuations appear more reasonable. They now appear less risky than earlier.

How is the price of a stock decided in an IPO and who decides it?

An IPO can typically be a fixed price issue or a book built issue. In a book built issue, the price band is determined, but the actual issue price is discovered during the IPO. Since Indian IPOs are predominantly through the book built route, we shall focus on the indicative pricing of the book built issues.
 
Factors impacting the price of an IPO
The following factors are the key to the pricing of an Initial Public offering:
  • Financial performance of the company over the last 3 years on a quarterly basis
  • Projected growth in revenues and profits suitably ratified by channel checks
  • Unique nature of the product and the moat that the company has been able to create
  • Comparative valuation of companies in the similar industry group
  • Qualitative factors such as management pedigree, brands, and corporate governance.
 
Absolute vs. relative approach to IPO valuations
The first step to determining the indicative price of a book built issue is the combination of absolute and relative parameters.
 
Absolute approach to IPO valuation
In case of profit making companies, the focus is on discounting the cash flows of the future. Typically, the future cash flows of the company are projected, and then an appropriate discounting of these factors is done to arrive at the present value. But, what about companies that are not making profits? This is quite common in case of companies that have long gestation periods or where the business involves higher initial outlays such as ecommerce and pharma. In such cases, the Enterprise Value is measured as a percentage of EBITDA to arrive at an indicative valuation parameter.
 
Relative approach to IPO valuation
Stock valuations and IPO valuations are never done in absolute terms but in relative terms. For example, even with robust cash flows, companies dealing in commodities attract lower valuations due to the cyclical nature of their business. Hence, such commodity companies attract lower valuations (P/E) compared to brands. Typically, relative valuations use parameters such as P/E, P/BV, Dividend Yield, and EV/EBITDA. Normally, once the absolute valuations are arrived at, the relative valuations are considered based on the peer group comparisons and overall market P/E benchmarks.
 
Finally, it is all about demand and appetite
  • Even after considering the quantitative and qualitative factors, the process of IPO pricing is far from complete. Some more critical inputs are considered before the final indicative price range for book building is arrived.
  • Pricing of the IPO depends on the stage of the IPO cycle. In the early stages, the valuations tend to be muted but get more aggressive over time. In the early stages, promoters and investment bankers try to leave more on the table for investors.
  • What is the state of the market at the time of the IPO? Markets may go into a temporary or permanent bear phase by the time the issue is opened. In such cases, the promoters and investment bankers may take a conscious call to tone down valuations.
  • Are there any sectoral last mile issues? NBFCs planning IPOs at this point may have to settle for lower valuations considering that the sector is currently facing a crisis of liquidity and asset-liability mismatch.
  • Feedback coming from institutional roadshows is also a critical input. Normally, the institutional appetite is clear only when the management meets the FPIs and Mutual Funds across geographies.
  • Retail feedback from brokers, sub-brokers, and distributors is a key input in the final pricing.

It is the aggregation of all these factors that results in the indicative price of the Book Built IPO.An IPO can typically be a fixed price issue or a book built issue. In a book built issue, the price band is determined, but the actual issue price is discovered during the IPO. Since Indian IPOs are predominantly through the book built route, we shall focus on the indicative pricing of the book built issues.
 
Factors impacting the price of an IPO
The following factors are the key to the pricing of an Initial Public offering:
  • Financial performance of the company over the last 3 years on a quarterly basis
  • Projected growth in revenues and profits suitably ratified by channel checks
  • Unique nature of the product and the moat that the company has been able to create
  • Comparative valuation of companies in the similar industry group
  • Qualitative factors such as management pedigree, brands, and corporate governance.
 
Absolute vs. relative approach to IPO valuations
The first step to determining the indicative price of a book built issue is the combination of absolute and relative parameters.
 
Absolute approach to IPO valuation
In case of profit making companies, the focus is on discounting the cash flows of the future. Typically, the future cash flows of the company are projected, and then an appropriate discounting of these factors is done to arrive at the present value. But, what about companies that are not making profits? This is quite common in case of companies that have long gestation periods or where the business involves higher initial outlays such as ecommerce and pharma. In such cases, the Enterprise Value is measured as a percentage of EBITDA to arrive at an indicative valuation parameter.
 
Relative approach to IPO valuation
Stock valuations and IPO valuations are never done in absolute terms but in relative terms. For example, even with robust cash flows, companies dealing in commodities attract lower valuations due to the cyclical nature of their business. Hence, such commodity companies attract lower valuations (P/E) compared to brands. Typically, relative valuations use parameters such as P/E, P/BV, Dividend Yield, and EV/EBITDA. Normally, once the absolute valuations are arrived at, the relative valuations are considered based on the peer group comparisons and overall market P/E benchmarks.
 
Finally, it is all about demand and appetite
  • Even after considering the quantitative and qualitative factors, the process of IPO pricing is far from complete. Some more critical inputs are considered before the final indicative price range for book building is arrived.
  • Pricing of the IPO depends on the stage of the IPO cycle. In the early stages, the valuations tend to be muted but get more aggressive over time. In the early stages, promoters and investment bankers try to leave more on the table for investors.
  • What is the state of the market at the time of the IPO? Markets may go into a temporary or permanent bear phase by the time the issue is opened. In such cases, the promoters and investment bankers may take a conscious call to tone down valuations.
  • Are there any sectoral last mile issues? NBFCs planning IPOs at this point may have to settle for lower valuations considering that the sector is currently facing a crisis of liquidity and asset-liability mismatch.
  • Feedback coming from institutional roadshows is also a critical input. Normally, the institutional appetite is clear only when the management meets the FPIs and Mutual Funds across geographies.
  • Retail feedback from brokers, sub-brokers, and distributors is a key input in the final pricing.

It is the aggregation of all these factors that results in the indicative price of the Book Built IPO.