July 2018 – OneMint

HDFC AMC IPO Review – Should You Invest or Not @ Rs. 1,095-1,100?

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

HDFC AMC IPO Details

Here are some other important dates as the issue gets closed on July 27:

Finalisation of Basis of Allotment – On or about August 1, 2018

Initiation of Refunds – On or about August 2, 2018

Credit of equity shares to investors’ demat accounts – On or about August 3, 2018

Commencement of Trading on the NSE/BSE – On or about August 6, 2018

Financials of HDFC AMC

(Note: Figures are in Rs. Crore, except per share data & percentage figures)

Should you invest in HDFC AMC IPO or Not @ Rs. 1,100?

Reliance Nippon Asset Management Ltd. (RNAM) is currently the only asset management company listed on the stock exchanges. Its IPO came in the last week of October 2017 at a price of Rs. 252 a share. It touched a high of Rs. 335 on January 16, 2018, a low of Rs. 205.35 on June 1, 2018 and is currently trading at Rs. 235.75. At Rs. 235.75 a share, the company has a market cap of Rs. 14,394 crore and its price/earnings (P/E) ratio currently stands at 26.3 times. The company generates an RoE of 22% for its shareholders.

In comparison, HDFC AMC IPO is priced at Rs. 1,100 a share. At this price, the company will have a market cap of Rs. 23,319 crore and P/E ratio of 31.46 times based on its trailing twelve months EPS. The company generates an RoE of 33.41% for its shareholders. Also, HDFC AMC is the industry leader in equity-oriented funds, having 51% of its AUM in equities as against 42% industry average. Having 51% of its AUM in equities helps HDFC AMC earn higher management fee for managing these funds. Such high profitability and focus on garnering investors’ money for its high margin schemes justify its rich valuations vis-a-vis Reliance AMC, based solely on the fundamentals attributes of both the companies.

However, the biggest factor, that makes investors avoid investing in ADAG group companies, is the quality of their management and the legacy of their actions that have led to the downfall of many of their group companies and the resulting destruction in shareholders wealth.

On the other hand, the biggest factor, that differentiates HDFC group companies from their respective industry peers and command a premium in valuations, is the quality of their management and the legacy of their actions that have resulted in a phenomenal growth of all its group companies and the resulting healthy growth in shareholders wealth.

Despite of a poor performance of many of its schemes in the last 2-3 years, I expect HDFC AMC to keep growing its business at a healthy pace and maintain its leadership in equity oriented schemes for a long period of time. At Rs. 1,100 a share, I have a view that HDFC AMC is fairly valued, but still leaves a scope of money to be made on listing, and also due to long term sustainable growth in business and profitability.

For many of us, HDFC’s year on year consistent growth of 20%+ has been a matter of a case study. So, if 20% is a magical number for the HDFC group companies, then I would expect a 20% listing gain here too with this HDFC group company.

HDFC AMC IPO Details – Price Band Rs. 1095-1100

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

The initial public offer (IPO) of India’s second largest asset management company, HDFC Asset Management Company Ltd (HDFC AMC), is getting opened for subscription from today, July 25. HDFC AMC is the 56.97% subsidiary of HDFC Limited, while HDFC’s JV partner Standard Life owns around 37.98% in the company. This IPO is a 100% offer for sale (OFS) of around 2.55 crore equity shares by these promoters.

The company has fixed its price band in the range of Rs. 1,095-1,100 a share and no discount has been offered to the retail investors. The offer would constitute 12.01% of the company’s post-offer paid-up equity share capital. The issue will remain open for the next three days to close on July 27.

Here are some of the salient features of this issue:

Size of the Issue – This IPO is a 100% offer for sale (OFS) of 2,54,57,555 shares by the JV partners, HDFC Limited and Standard Life. This makes it a Rs. 2,800 crore IPO at the upper end of the price band i.e. Rs. 1,100. HDFC Limited and Standard Life are selling 85,92,970 and 1,68,64,585 of their shares respectively in this IPO. Post this IPO, HDFC will hold 52.92% stake and Standard Life will have 30.03% stake in the company.

Price Band – HDFC AMC has fixed its IPO price band to be between Rs. 1,095-1,100 a share and the company has decided not to offer any discount to the retail investors.

Retail Allocation – 35% of the issue has been reserved for the retail individual investors (RIIs), 15% for the non-institutional investors (NIIs) and the remaining 50% shares will be allocated to the qualified institutional buyers (QIBs).

No discount for Retail Investors or Employees – The company has decided not to offer any discount to any of its investors or to its employees either.

Bid Lot Size & Minimum Investment – Investors need to bid for a minimum of 13 shares in this offer and in multiples of 13 shares thereafter. So, a retail investor would be required to invest a minimum of Rs. 14,300 at the upper end of the price band and Rs. 14,235 at the lower end of the price band.

Maximum Investment – Individual investors investing up to Rs. 2 lakh are categorised as retail individual investors (RIIs). As a retail investor, you can apply for a maximum of 13 lots of 13 shares each @ Rs. 1,100 a share i.e. a maximum investment of Rs. 1,85,900. At Rs. 1,095 per share, you can apply for a maximum of 14 lots of 13 shares, thus making it Rs. 1,99,290.

Listing – The shares of the company will get listed on both the stock exchanges i.e. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) within 6 working days after the issue gets closed on July 27. Thus, these shares are expected to get listed on the stock exchanges by August 6.

Here are some other important dates as the issue gets closed on July 27:

Finalisation of Basis of Allotment – On or about August 1, 2018

Initiation of Refunds – On or about August 2, 2018

Credit of equity shares to investors’ demat accounts – On or about August 3, 2018

Commencement of Trading on the NSE/BSE – On or about August 6, 2018

Financials of HDFC AMC

(Note: Figures are in Rs. Crore, except per share data & percentage figures)

Should you invest in HDFC AMC IPO or Not @ Rs. 1,100?

I will update this post soon with HDFC AMC IPO Review.

Edelweiss’ ECL Finance 9.85% NCDs – July 2018 Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

ECL Finance Limited, one of the finance arms of the Edelweiss Group, is launching its public issue of secured and redeemable non-convertible debentures (NCDs) from today, July 24, 2018. The issue will carry an effective annual rate of 9.85% for 10 years, 9.65% for 5 years and 9.45% for 3 years.

The company aims to raise Rs. 2,000 crore from this issue, including a green-shoe option of Rs. 1,500 crore. The issue is scheduled to close on August 16, but in case of oversubscription, the company will have the option to foreclose it.

So, before we take a decision whether to invest in this issue or not, let us first check its salient features.

Size & Objective of the Issue – Base size of the issue is Rs. 500 crore and total issue size is Rs. 2,000 crore including the green shoe option of Rs. 1,500 crore. The company plans to use at least 75% of the issue proceeds for its lending activities and to repay its existing loans and up to 25% of the proceeds for general corporate purposes.

Coupon Rate & Tenor of the Issue – As mentioned above, the company is issuing these NCDs for a period of 3 years, 5 years and 10 years. Moreover, these NCDs will carry coupon rates in the range of 9.25% to 9.85% with monthly, annual and cumulative interest payment options.

There is a floating interest rate option as well, in which the interest rate will be reset on a periodic basis as per MIBOR. The company has decided to offer a spread of 2.50% over MIBOR with this option and the rate will be reset on an annual basis.

Minimum Investment – Investors need to apply for a minimum of 10 NCDs in this issue with face value Rs. 1,000 each i.e. an investment of Rs. 10,000 at least.

Categories of Investors & Allocation Ratio – The investors have been classified in the following four categories and each category will have the below mentioned percentage fixed in the allotment:

Category I – Institutional Investors – 20% of the issue i.e. Rs. 400 crore

Category II – Non-Institutional Investors – 20% of the issue i.e. Rs. 400 crore

Category III – High Net-Worth Individuals (HNIs) – 30% of the issue i.e. Rs. 600 crore

Category IV – Retail Individual Investors (RIIs) – 30% of the issue i.e. Rs. 600 crore

Allotment on First-Come First-Served Basis – Subject to the allocation ratio, allotment will be made on a first-come first-served basis, as well as on a date priority basis, i.e. on the date of oversubscription, the allotment will be made on a proportionate basis to all the applicants of that day on which it gets oversubscribed.

NRIs Not Allowed – Non-Resident Indians (NRIs), foreign nationals and qualified foreign investors (QFIs) among others are not eligible to invest in this issue.

Credit Rating & Nature of NCDs – CRISIL and ICRA have rated this issue as ‘AA’ with a ‘Stable’ outlook. Moreover, these NCDs will be ‘Secured’ in nature.

Listing, Premature Withdrawal Option – These NCDs will get listed on both the stock exchanges i.e. Bombay Stock Exchange (BSE) as well as National Stock Exchange (NSE). The listing will take place within 12 working days after the issue gets closed. As there will be no option of a premature redemption, the investors can always sell these bonds on the stock exchanges.

Demat A/c. Mandatory – Demat account is mandatory to invest in these NCDs as the company is not providing the option to apply for these NCDs in physical or certificate form.

TDS – Though the interest income would be taxable with these bonds, NCDs taken in demat form will not attract any TDS. The investor will have to pay tax on the interest income while filing his/her income tax return. TDS @ 10% will be deducted if these NCDs are held in physical/certificate form and annual interest income is more than Rs. 5,000.

Should you invest in ECL Finance NCDs?

During 2013-14 and 2014-15, ECL Finance came out with three of its NCD issues offering 12.52% p.a. for 60 months, 12.68% p.a. for 70 months and 10.64% p.a. for 60 months. But, those were times of high interest rates and it seems the scenario has changed somehow. Corporate issuers are not offering high rate of interest now and that is a new normal these days.

As none of the issuers in the recent times has offered 9.85% coupon, this issue by far is carrying the highest coupon rate. In March 2018, Edelweiss Retail Finance in its public issue of NCDs offered 9.25% for 10 years, 9% for 5 years and 8.75% for 3 years. So, ECL Finance is offering attractive interest rates relatively.

But, then this issue is rated ‘AA’, lower than all the previous issues of the recent times. Edelweiss Retail Finance issue was also rated ‘AA’ Stable by CRISIL and ICRA. So, the conservative investors, who go by credit ratings of such issues, might prefer to avoid this issue and wait for a higher rated issue. You also need to make a decision whether you want to have a relatively higher rate of interest with a slightly lower credit rating, or just skip it and wait for a better issue.

Investors, who fall in lower tax brackets and are looking for relatively higher interest rates to deploy their investible surplus, can think of investing in this issue. However, even if you decide to invest in this issue, I would advise you to go for a shorter possible duration and monthly interest payment option.

Application Form – ECL Finance NCDs

Note: As per SEBI guidelines, ‘Bidding’ is mandatory before banking the application form, else the application is liable to get rejected. For bidding of your application, any further info or to invest in ECL Finance NCDs, you can reach us at +91-9811797407

Computation of Tax on Gains from Futures & Options (F&O) Trading

This post is written by CA Karan Batra, who is the Founder and CEO of Chartered Club. He can be reached at [email protected]

The Gains from trading in Future and Options (F&O) are not considered as Capital Gains but are considered as Business Income. These gains are considered as non-speculative business gains and therefore income tax on these gains is levied as per the income tax slab rates.

To levy income tax – the first thing which is required to be done is computation of income. Once the income is computed, the tax would be levied on the income so computed. The lower the income, the lower is the tax payable and the higher the income, the higher is the tax payable.

There are 2 ways to compute the Income from F&O Trading:-

Normal system of computation i.e. Income = Sales – Purchase – Other Expenses – Depreciation
Presumptive system of computation i.e. Income = Assumed percentage of Sales

These 2 systems have been explained below in detail.

Normal System of Taxation

Under the normal system of taxation, the income is computed as per the following formula:

Income = Sales – Purchase – Other Expenses – Depreciation

This can be explained with the help of an example.

Example: During the complete year 2017-18, Mr. A traded in Nifty several times. His total purchases were worth Rs. 70 lakhs and Sales were 80 lakhs. Apart from these, he also incurred several expenses related to his business which are:-

Subscription plan for receiving stock market tips: Rs. 3,000
Telephone and internet expenses: Rs. 20,000
Salary paid to employee(s): Rs. 2,00,000
Fee paid to CA for tax return filing: Rs. 10,000
Other business expenses: Rs. 15,000

Therefore, his total other expenses are Rs. 2,48,000 (Rs. 2,00,000 + Rs. 20,000 + Rs. 3,000 + Rs. 10,000 + Rs. 15,000)

In addition, the depreciation on assets during the year was Rs. 1,25,000

In this case, the Income of Mr. A would be as follows:-

Income = Rs. 80,00,000 – Rs. 70,00,000 – Rs. 2,48,000 – Rs. 1,25,000

= Rs. 6,27,000

Under this system, the income is computed on actual basis and the taxpayer is required to maintain a record and invoice for each and every expense which he has made. Moreover, he is also required to maintain all the books of accounts, Profit & Loss A/c. as well as the Balance Sheet.

It gets very difficult for a small business owner to maintain so many records and to keep a copy of all the invoices.

Therefore, for small traders – there is another option wherein no records are required to be maintained and the tax is to be paid on an assumed basis. This scheme is called Presumptive Tax and is explained below.

Presumptive Scheme of Taxation – Section 44AD

Under the Presumptive scheme of taxation, the law gives the small traders an option to declare his income as a percentage of total turnover.

The law says that the small trader can disclose his income at any level above 6% of Turnover. The small trader would be required to disclose his total turnover and the income which he would like to disclose (Min 6%). Earlier the minimum required to be disclosed was 8% but this was reduced to 6% from Financial Year 2016-17 onwards. As the payment is always received in bank in case of F&O Transactions, they can disclose the income as 6% of Turnover.

In case the small trader feels that his income is less than 6%, he would be required to shift to the Normal Scheme of Taxation and prepare all books of accounts and keep copies of all invoices.

The presumptive scheme of tax is only applicable to traders whose annual turnover is less than Rs. 2 Crores.

However, in case of F&O Trading, as the value of contracts traded is huge – the manner of computation is a bit different and the same has been explained below.

Computation of Turnover in case of F&O Transactions

In case of F&O transactions, the total of all contracts sold would not be considered as the total turnover.

In case of F&O transactions – the turnover would be computed by taking into account the total of all favourable and unfavourable trades. This can be explained with the help of the following example:-

Mr. B enters into the following 2 transactions during the year:-

Purchased 1 Lot of Nifty for Rs. 8,00,000 and sells the same for Rs. 8,50,000, thereby earning a profit of Rs. 50,000.
Purchased 1 Lot of Reliance Industries for Rs. 9,50,000 and sold for Rs. 9,40,000, thereby incurring a loss of Rs. 10,000.

In the above case, the total turnover would be considered as Rs. 60,000.

Which of the above 2 systems is better?

The normal scheme of taxation may turn out to be better in some cases whereas Presumptive Scheme of taxation may turn out to be better in other cases.

Therefore, it is very difficult to state which option is better. The trader should himself assess as to which system is better for him.

In case you have any query regarding the tax treatment of F&O trading, or you have any special case of F&O trading gain/loss, please share it share. It might help other investors or tax-payers to get their issues resolved.