Month: November 2007

How are profits on shares taxed?

For the income generated in the year 2007-08 In India there are two ways in which the profits on listed shares in registered stock exchanges are taxed based on whether the shares are long term or short term. 

Short term shares are those which are bought and sold within a period of less than an year. Which means a if you buy a stock at Nov 08 2007 and sell it within a one year period whatever profit you make would be taxable as short term capital gains. The tax on such profit would be 10%. 

On the other hand if your share is a long term one then there is no tax at all. So if you buy a share on Nov 08 2007 and sell it after Nov 08 2008 and make a profit on your sale there is no tax that has to be paid on your profit. 

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Probability vs Expectation

I came across this concept of Probability vs Expectation when I was reading Nicholas Taleb’s Fooled by Randomness and he has explained it very lucidly (I do not recommend this book to anyone). Although all traders and investors know this concept intuitively, I have never seen anyone act upon it. Although I must admit that my dad was once planning to do something very close to it. 

I will take the same example as in the book, modify it a little and explain it here. Once during the author’s trading days he was asked in a meeting whether he was bullish or bearish and he said that he was bullish and a little later he said that he had shorted the market. 

These are two contradictory things and he was asked to explain himself. He said that although he did think that the market will go up, if it goes down it will go considerably down and therefore greater money is to be made from that unlikely considerable downwards movement than a likely small upward movement. 

I don’t know what the author had in mind but it is akin to being in a bull run where everyday the market moves up a little and then waking up one morning to read about the finance minister and SEBI’s outlash on PNs and the next thing you know the whole market is down 10% 

The key idea here is although the probability is greater the expectation is still lower. I myself am a long term investor and have very little faith in short term predictions of say 3 months on the market but the concept in itself is quite interesting. 

I have heard my dad telling me once that these market crashes are inevitable and every month one should buy a ‘cheap’ PUT so that when once in a year the market falls spectacularly that PUT is worth a gold mine and covers up for all the remaining 11 months when the market followed its due course. He was talking about low probability and high expectation and I think a lot of investors do think about this but not really do anything about it. 

I myself have never tried buying PUTs hoping that the market crashes and certainly do not recommend it to anyone but it is certainly a thought that is worth a thought. And while one is at it why not buy a ‘cheap’ Call as well just to take care of the ridiculous 1000 points upward moves too! 

Manshu Verma 

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Surya Food & Agro Limited IPO

Business of Surya Food & Agro Limited 

Surya Foods is in the business of manufacturing biscuits for the last 15 years and is one of the leading manufacturers of biscuits in the country. Priyagold which is the brand under which the biscuits of the company are sold is quite well known and the trademark “Hak se Maango” is quite well known in the FMCG sector.  Surya Foods is also present in the fruit juices segment and has the brands – “Fresh Gold” and “Treat”. An interesting and positive development for the company has been the awarding of a contract to run 130 kiosks in railway stations by the Indian Rail Catering Corporation. By operating in a busy place like a railway station the company will get a substantial boost to its revenues. 

Financials of Surya Foods & Agro Limited   

 

In the last three fiscals Surya Foods has not shown growth in the topline with the revenues shrinking from Rs.28,372 lakhs to Rs.26,974 lakhs. In the corresponding period the profits have grown a from Rs.248.10 lakhs to Rs.283.67 lakhs. If anything there is a wide fluctuation in the profits that the company has made in the last five years. These have been Rs.33.94, Rs.444.12, Rs.248.1, Rs.130.16 and Rs.283.67 lakhs in the last five years respectively.  The EPS for the year ended March 31 2007 is Rs.16.36 and this will be a key figure to determine what is the P/E multiple at which Surya Foods is offering its shares. This is because if you take the average of the last three years it comes out to be Rs.20.43 however the EPS for year ended 2005 is 35.87, 2006 is 18.82 and hence the figure of 35.87 skews up the average to the higher side. 

Risks faced by Surya Food & Agro Limited   

 

There are various legal proceedings going on against Surya Foods both in the nature of criminal and civil. The cases if held against Surya foods will impact the business negatively.  Though the company is a veteran in the biscuit manufacturing its proposed expansion into chocolates is a new field and as such poses all the threats that any new entrant who is not well established faces. 

Objective of the IPO   

 

Surya Foods IPO is intended at raising money in order to increase its biscuit manufacturing facility and setting up a Chocolate Plant. The expense of the former is expected to be Rs.3958.56 lakhs and the latter is expected to be Rs.5852.67 lakhs respectively. Other than this the proceeds from the IPO will also be used for meeting working capital requirements and public issue expenses. 

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When is the right time to sell?

There is an adage in Dalal Street which goes – “regret after selling and not after buying”.

 

Many a times you would see investors who have sold stocks at profit however as soon as they sold their shares, the share went up another 10% in a matter of days.  Hence the investor rather than basking in profits is brooding about the loss in profits that he could make if he had waited for a few more days.

 

Wisdom says this is better than buying a stock and then repenting because it goes down 10% after a few hours of your purchase, which incidentally occurs more number of times than is good for any honest tax paying citizen’s metabolism.  
With the market scaling all time highs and that too bouncing back in a really short time and being as volatile as it is today, one can rest assured that the stocks which have gone up will go down as well and its best to book profits at least to some extent so that if the market goes down your profits do not vanish away completely and at the same time if the market goes further up you are not just sitting on the sidelines and watching the value of the stock that you ‘once owned’ go up.

 

For a long term investor it important not to rush while selling, and there isn’t a need to book profits out of all stocks that you hold in your portfolio. If you have been patient enough and have bought and kept stocks for over a couple of years, chances are that at least one or two of them are bringing you excess of 100% returns.  In all probability one of these stocks would be overvalued as well, because of the general atmosphere that exists in a bull run, another great plus is that if you own stock for over one year it comes under a long term investment and no tax need to be paid for the capital gains from such appreciation.

 

Therefore a combination of these three factors – 1. One of the stocks which are bringing in the greatest return in your portfolio, 2. Stock priced more than what you think should be the fair value and 3. Stock owned for over a year give a good yardstick to sell.

 

If you are holding a stock for a fairly long term you would have a good idea on what its worth is but as a general and quick guideline if the P/E exceeds the growth rate considerably then you can look at booking some profits in the stock.

 

There is no sure shot way of either predicting the bottom or the top when one is dealing with the markets the best one can do is over a long term stick to some sort of game-plan which brings more profits than would have accrued if the investor had just invested in fixed deposits or bonds.

Manshu Verma

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Jhaveri Flexo India Ltd.

Business of Jhaveri Flexo India Ltd 

Jhaveri Flexo is coming out with an IPO and is in the business of packaging. Jhaveri Flexo has two manufacturing plants in Aurangabad and Silvassa and produces Laminated Packaging material, PVC Cling Film, Surface Protection tapes, Lamination Film and LLDPE Stretch Film. 

This material is used for packaging and some of the better known clients of Jhaveri Flexo are Hindustan Unilever, PepsiCo, Nestle, Pillsbury, ITC, Tata,Marico, Dabur India, Perfetti, Jet Airways, Taj Group, Oberoi’s. 

Financials of Jhaveri Flexo India Ltd. 

The company had total income of Rs.105.92 crores in the fort the fiscal ended 31.03.07 of which the profit after tax and extra ordinary items was Rs.2.61 crores, which is slightly greater than 2% of revenue. The company had incurred a loss to the tune of Rs.92.7 lakhs in the fiscal before that. In the latest fiscal Jhaveri Flexo India is in a negative cash flow situation for its operations and financing. 

Risks faced by Jhaveri Flexo India Ltd. 

There are certain risks faced by Jhaveri Flexo India Ltd. which an investor must keep in mind while investing in the IPO. 

The company is in a negative cash flow situation for the period ending 31/03/07 for its operations and investment activities. This means that the cash generated by the company has not been sufficient to finance its day to day operations and it had to borrow more money. 

The company had made certain projection of revenues in a rights offer in 1996, but Jhaveri Flexo has been off target for most of its revenue and profits projection for made at that time 

The promoter company Wellworth Securities limited is also a loss making company therefore eliminating any chance of a bail out by the promoter company in case anything goes wrong with this one. 

The company has been referred to BIFR in the past. BIFR had declared Jhavaeri Flexo as a sick industrial company and had appointed ICICI as the operating agency. 

Jhaveri Flexo has an export obligation upwards of US$3.7 million which pertains to various EPCG councils. If these obligations are not discharged as per the scheme then the profitability will be hit as Jhaveri flexo will have to pay duty and interest as applicable. 

Object of the IPO 

Jhaveri Expo is coming out with the IPO to comply with the guidelines of SEBI according to which the promoter holding should be less than 75% which at present stands at some 84%. 

Another reason for that is to finance a few projects which it is planning to set up. This involves increasing capacity in the existing plants and setting up a new manufacturing plant in Silvassa. 

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