News Bulletin: 14/09/2022

▫️ Income tax department has clarified that newly introduced TDS provisions will not apply to loans waived through one time settlements and other schemes.

▫️HCL Tech laid off 350 workers, involved in its Microsoft project.

▫️ Govt. is considering to allow 100% work from home for all employees working in SEZs.

▫️IT companies are struggling with high subcontracting costs.

▫️JSW Steel signed MoU with German based SMS Group to invest Rs 10,000 in reducing carbon emissions.

▫️US reported 8.3% inflation for August, more than the analyst expectation of 8.1%.

▫️ Federal Reserve may go for 75 bps rate hike after August inflation data suprise.

▫️PM to introduce National Logistics Policy on September 17. The policy aims to allow seamless movement of goods across the nation.

▫️ Jet Airways CEO is positive on beginning operations by October.

▫️Infosys warned its employees of dual employment and moonlighting.

▫️Bharat Forge and Harbinger announced joint venture to develop electrified drive trains for commercial trucking industry.

▫️ Offline food & beverage industry and grocery stores to see 20% revenue growth this fiscal year: CRISIL

▫️Accor to open 26 hotels in India in 2 years.

▫️US power price jumped most in 41 years. Average consumer’s electricity bill increased by 15.8% year on year during August.

▫️ France lowered its GDP growth forecast to 1.0% from 1.4% for 2023.

▫️RBI to go for 35-50 bps rate hike in next meeting.

News Bulletin: 23/5/22

▫️ Centre is planning to sell its minority (29.5%) stake in Hindustan Zinc.

▫️ Flipkart, Amazon and Apollo Hospitals are looking to invest in Metropolis Healthcare.

▫️ Supreme Court allowed export of already extracted iron ore from Karnataka’s 3 iron ore mines.

▫️ FDI touched all time high of $83.6 billion in FY22.

▫️ Consumer Protection Board has issued strict warning notice to online cab aggregators Ola and Uber for unfair trade practices and rising consumer complains.

▫️EPFO added 15.3 lakh users in March, 19% rise MoM.

▫️Half of Gujarat’s yarn mills are running at 50% capacity due to record high cotton price.

▫️Global Convience Store 7-Eleven, launched its solution centre in Bengaluru, first outside the US.

▫️ SEBI mandated cyber audit of stock exchanges, depositories and clearing coperation twice a year.

▫️ IDBI Bank to sell its entire stake in joint venture Aegas Federal Life Insurance Company for Rs 580 crore.

▫️SEBI fines IIFL for misuse of client funds.

▫️TRAI working on a proposal to flash callers name as per KYC registration.

▫️SEBI to issue norms for IPO pricing of startups.

▫️ RBI may hike rates by 50bps each in June and August: Morgan Stanley

▫️RBL Bank partnered with Amazon Pay for payment services.

▫️Zydus Life sciences got Board approval for Rs 750 crore buyback at Rs 650 per share.

▫️Govt. has reduced customs duty on petrol and diesel by Rs 9.5 and Rs 7 per litre, to tackle inflation.

▫️Govt. announced export duty on certain steel products and reduced import duties on some raw materials for steel production, to cool down domestic steel prices.

▫️FPIs have sold Rs 35,000 crore of shares in May so far.

▫️Tea Board of India sees jump in tea exports as Sri Lanka is struggling to export the same.

▫️JSW has stepped up use of pulverized coal from Russia.

▫️5G adoption by users may take more time than 4G adoption: Experts

▫️ Semiconductor shortage to negatively impact Telecos revenue: Experts

▫️Full Burden of fuel duty cut will be borne by Centre.

▫️ Vodafone Idea is close to raising Rs 20,000 crore via debt and equity.

▫️ Jet Airways get DGCA approval to fly again. The Company has stepped up hiring process.

▫️NHPC to set up 20.8GW of storage plants.

An easy way to select stocks for Investment: F-Score

We are often told to analyse financial statements/fundamentals before investing in a stock. But hardly anyone tells, how to analyse and what to analyse. In this blog we will explain a simple and well proven method to analyse a company’s financials, thanks to Professor Joseph Piotroski, for his Piotroski’s F score.

The F score segregates companies in 3 categories: Weak stocks (score b/w range of (0-2), Grey stocks (3-7) and Strong stocks (8 or 9). The score is based on the outcome of 3 parameters: a) profitability b) leverage, liquidity and source of funds and c) operating efficiency. The F-score is widely used as a screener by fund managers who invest in value stocks.

Profitability is measured via 4 sub parameters:

  1. Return on asset (ROA): If positive, score of 1 else 0
  2. Cash from operations (CFO): If positive, score of 1 else 0
  3. CFO/Net Profit: If >= 1, score of 1 else 0
  4. Current year ROA – Previous year ROA: If > 0, score of 1 else 0

Leverage, liquidity and source of funds is assed using 3 sub parameters:

  1. Present year current ratio/last year current ratio: If > 1, score of 1 else 0
  2. Present year long term debt/last year long term debt: If < 1, score of 1 else 0
  3. Equity issuance: If null in current year, score of 1, else 0

Operating efficiency is tested with the help of 2 sub parameters:

  1. Present year gross profit margin – last year gross profit margin: If > 0, score of 1 else 0
  2. Present year asset turnover – last year asset turnover: If > 0, score of 1 else 0

Overall F-score is the sum of 9 sub-parameters, with 9 being strongest and 0 being weakest. Historically, the companies screened via this method have given high returns to the shareholders’ in the long term.

If you look at latest earnings report of companies in the BSE500 then you may identify many companies with a score of 9. Some of them are: Aurobindo Pharma, Colgate, Emami, UPL, CESC, etc. A score of 9 solely doesn’t assure high investment return, as returns also depend on several other factors. But, you can certainly use the F-score as a guide for equity investment, wherein you should clearly avoid companies with a score of less than 2.

Hence, before buying any scrip, run the F-score to get an idea about its fundamentals. Further to ease your worries, we have developed an interactive excel sheet to calculate the F-score. Reply/Comment with your mail id, to have a copy of the same.

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The BUFFETT Indicator!

The mayhem that shook the financial markets all over the world in the month of March, has now seemed to have cool off, given the stellar rally witnessed by financial markets. During this period, one indicator that was doing the rounds was the Market cap to GDP ratio, popularly known as the BUFFETT INDICATOR:

Let’s understand the indicator and its implications!
The Buffett Indicator is defined as the ratio of total value of publicly listed stocks in a country divided by the country’s Gross Domestic Product (GDP). It is used to determine whether a market is overvalued or undervalued, compared to its historical average. A number between 50 to 75 per cent is considered to be undervalued, between 75 to 90 per cent is considered to be fairly valued and above 90 per cent is considered to be overvalued. This ratio was popularized by Warren Buffett around the time of dotcom bubble. For India, the average historical ratio has hovered around 75 per cent.


But, why does this ratio matter so much?
Given the stock prices reflect expected future earnings of the Company and the GDP as a whole, represents the total value of goods and services produced in a country, the indicator gives an estimate of whether the two are moving in tandem.

Although the indicator gives an idea about market overvaluation/undervaluation, it should be used keeping in mind the following things:

Firstly, in developed markets where the contribution of various sectors to the overall growth of the economy is better represented via the capital markets, the ratio could be considered a good estimate for market valuations. However, in developing countries like India, where agriculture, unorganized sectors, MSMEs play a pivotal role in the economic growth of the country, this ratio does not bode well, as the traditional sectors do not get accurate representation in the country’s capital markets. Moreover, the ratio is likely to get impacted as newer companies get listed given the developing nature of stock markets in these countries. So, in such countries, these indicators should be used in combination with other metrics to get an accurate indication of market valuation.

Secondly, using this metric for cross country comparison to make a conclusion on the valuation front is fraught with risks. This is because each country would have a different mix of listed vs unlisted companies. Also, the composition of each economy differs. Some countries might heavily rely on commodity-oriented businesses for their growth whereas others might be dependent on service sector.

Thirdly, one can say that it’s better to use this indicator to compare an economy over a certain period as this could indicate some trend on valuations. But this method also has its limitations. The proportion of listed vs unlisted companies in a country keeps on changing over time. For example, companies like TCS, Coal India, DLF weren’t listed on the Indian Stock Exchanges till 2003. However, these businesses were in existence for many years before getting listed.

Lastly, level of interest rates in the economy. One cannot compare Market Cap/GDP ratio, without adjusting the interest rate levels. At times of low interest rate, stock valuation tends to fly high and vice versa. Hence, while comparing one must also look at interest rate scenario. On the basis of Buffet indicator markets may look overvalued today. Nonetheless, interest rates are rock bottom today and the indicator does not take into account this fact.

As of 17Oct20, India’s market value to GDP ratio stood at c. 65%, and is believed to be fairly valued. If we go only by the Buffet metrics, then there doesn’t seem to be either long or short strategy at the current valuations. However, with interest rates going down and economy gradually recovering from the health crisis, we may expect some upward movement in the equity markets.

Although, BUFFETT Indicator is widely acknowledged by stock market pundit as a reliable measure to gauge stock market valuations, we think that using the metric in isolation can give a distorted picture. Rather, it should be used in conjunction with other tools to get a better sense of valuations. Moreover, using the metric in current times is not a prudent approach owing to uncertainty on future earnings of companies as well as negative GDP growth.

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Which is best for you, Index Fund or ETF?

You might have heard of the two terms Index Fund and ETF before, but you may not be aware of their obscure features. Your investment portfolio is incomplete without them. Inclusion of Index Fund or/and ETF in the investment portfolio provides the required diversification and helps in long term wealth creation . Hence, they form an essential part of every good investment portfolio.

We often get queries from our readers, which one to choose between the two. On the face, Index Funds and ETF may look like twins, but in reality they are different and have different finger prints. Here we will try to explain both the financial products, and will help you to decide, which one to choose for yourself.

What is an Index Fund?
In simple terms, Index Fund is a category of Mutual Funds, whose portfolio is similar to that of a stock market index. The stock market index can be any; Nifty50, BSE Sensex, Nifty 100, etc. For example, HDFC Index Fund- Sensex, consists of all the 30 stocks which are part of the BSE Sensex, and in the same proportion. For instance, if Reliance Industries has 18.5% weight-age in Sensex, then the HDFC Index Fund-Sensex, will also try to invest 18.5% of their total Asset Under Management in Reliance Industries. Hence, one can infer that the return generated by HDFC Index Fund-Sensex will be very similar to that of the BSE Sensex.

Index fund is a passive investment fund, i.e. its target is to achieve same return of that of the benchmark. The fund manager doesn’t have to scratch his head over investment strategies and stock picking, all he has to do is replicate the portfolio of the fund with that of the chosen Index. Hence, expense ratio (fund management charges) for these type of funds is very low.

What is an ETF?
ETF or Exchange Traded Funds, as the name suggests are funds that are traded on exchange, (i.e. listed on a stock exchange) and comprises of equity, bonds, or metals or a combination thereof. Generally, Equity ETFs are passive funds and mimic a stock market index, similar to that of an Index Fund. However, unlike Index Funds, ETFs are listed on exchange. The price of an ETF on the exchange is almost similar to its net asset value (NAV). For example: SBI ETF – Nifty 50, tracks the Nifty50 in a homogeneous manner. Return on SBI ETF -NIfty 50, is almost similar to the performance of Nifty 50.

One can buy ETF on the stock exchange just like any other stock. Hence, by buying just one unit of SBI ETF – NIfty50, one can get exposure to the entire 50 stocks of Nifty 50. It is as simple as it looks.

Now, after reading about both, you might be confused, which one is better. Don’t worry, we have juts the correct solution for your confusion. Which is better Index Fund or ETF?

Systematic Investment Plan (SIP): If you are a SIP lover and need a reminder every month to invest or save, you should go with Index Fund. An Index Fund gives you the SIP option. However, the same option is not available in ETF, as ETF is not a mutual fund scheme and trades on the exchange like any other stock.

Expense Ratio: Expense ratio is the annual cost paid to fund manager by investors for management of the fund. Although expense ratio of Index Fund is low, but in comparison to ETF, it is higher. For instance, expense ratio of Index Funds typically range between 0.15% to 0.50%, whereas for ETFs, it is usually between 0.05% to 0.20%. So, why would you give the Index Fund manager higher fees for just replicating the Nifty50. It is because of the convenience offered by Index Fund.

Convenience: Once you start a SIP in Index Fund, the entire headache is now with the fund manager. Your money will be automatically invested in the Fund, every month. You don’t have to do any transaction by yourself. However, in ETF, you have to place order for the ETF through your DEMAT/Trading account, which may be little difficult for a newbie. When to place the order, how to place, at what price to place the bid, etc. So, if you are a complete newbie and want the convenience of the Index Fund, you can incur higher expense ratio and invest in Index Fund, to get a peaceful sleep.

Expenses: While investing in ETF, you will have to incur brokerages and demat account charges, which is not there in case of Index Fund. All in all, if the amount being invested in ETF is large and you invest lump sum in ETF once in a while, then brokerage charges will be lower compared to the expense ratio incurred in Index Funds.

Control: ETF offers you complete flexibility and control over your investment. You can invest in ETF on any trading day at any trading time, which is not feasible in Index Fund. Net Asset Value of an Index Fund is only available at the end of the day, while for ETF it is available throughout the day. If you have fair market knowledge and you are sure of your timings, you can go for ETF, as that will allow you to invest your money, when the markets are down and sell your investment when markets are high.

Dividends: In case of Index Funds you have an option to choose, that whether you want the dividends from portfolio stocks to get reinvested or receive the same in cash in your bank account. As a long term investor it is always advisable to go for reinvestment option. There is no reinvestment option in case of ETF, you are forced to receive dividends in your bank account. If you want to reinvest dividends in ETF, then you will have to manually investment the dividend money in ETF by yourself.

Tracking Error: Tracking error measures the deviation of the fund from its benchmark. Since both Index Funds and ETFs replicate their respective benchmarks, tracking error in case of both is low. Nevertheless, tracking error is little higher in Index Funds compared to ETF, as the index fund manager has to keep some amount in liquid funds for unit redemption, which is not the case with ETF. If you want exact return like the benchmark, then ETF is more suitable financial product for you.

Tax Implication: Tax on Index Fund is charged at the time of redemption of units. You will incur Capital Gains tax for your Index Fund. If Index Fund units are sold before 12 months, the Short Term Capital Gains Tax of 15% will be applicable. While, if they are sold after 12 months, the Long Term Capital Gains Tax of 10% will be charged, over ₹1 lakh of capital gains. Equity ETFs are taxable in the same manner as the Index Fund. You may also be taxed on the dividends received from ETF.

Final Verdict:
Overall, merits and demerits of Index Funds and ETFs are quite balanced. Nonetheless, Index Fund is suitable for new investors who are not active in markets, lack investment discipline and desire convenient investing experience. On the contrary, knowledgeable folks, with fair bit of stock market experience and having the desire for control and flexibility over their investments should go for ETFs.

Thanks for reading! Hope this will help you in your investment journey!
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How to invest in international stocks?

Recently, Apple Inc. was in the news for reaching market capitalisation of $2.0 trillion, which is more than 50% of India’s GDP. Bewildered by the hefty returns of Apple Inc., many Indian investors expressed their willingness to invest in the Company. However, shares of Apple Inc. are not listed on Indian bourses.

Before we move ahead with the ways to invest in international stocks, let us learn about the merits and demerits of investing in international stocks. If you look around yourself, you are surrounded with products of international companies. When you binge watch your favourite show on Netflix/Amazon Prime, on your Apple/Samsung smartphone, while sipping Coca Cola/Pepsi and having your Lays potato chips, you are unknowingly boosting the share prices of these companies. Have you ever considered that you could invest in these companies too, and earn handsome returns? If not, consider it now!

Portfolio diversification is one of the important feature of successful investing. In the Asian Financial Crisis of 1997, markets all across Asia suffered, in contrast to western markets. Hence, by investing in international stocks one can gain geographic diversification of the portfolio. However, sky is not always blue, i.e. there are some inherent risks while investing in international equities. The biggest amongst them is: currency risk. Apple Inc. is listed in the US stock market. So, to invest in Apple Inc. you need to first buy US Dollar and then use your US Dollar to buy shares of Apple Inc. You may incur significant loss, in case of exchange rate volatility and it may turn out to be a nightmare. However, since you are reading this post, you are willing to take that extra currency risk.

There are various ways by which you can invest in international stocks, and it doesn’t require a minimum ticket size; you can invest in international equity with $1 also!!! Nevertheless, there is a maximum limit of $250,000 (₹1.8 crores) as stated by RBI under Liberalised Remittance Scheme (LRS). Coming to the most important question now, HOW?

  • Indian Brokers: Popular Indian Brokers like HDFC Securities, Axis Securities, ICICI Direct, Kotak Securities, etc. have tie up with foreign brokers and offer Indian clients access to international stock markets. They may charge some extra fees or premium or brokerage for international equities, and hence one must go through the terms and conditions very carefully before proceeding. We don’t advise retail investors to use this method, as the costs involved under it may outnumber the returns. It is suitable for people who want to invest large corpus in international equity and have the requisite expertise.
  • Foreign Brokers: There are few international brokers, which have branches in India and give their client an option to invest in foreign market. Some of them are Interactive Brokers, TD Ameritrade, Charles Schwab, etc. These brokers are generally expensive and require a minimum amount in the investment account of the client. This option is suitable for fund managers and full time active traders.
  • Startup Apps: Exploiting the opportunity and interest of Indian investors, many new age startups have come with apps to provide access to international stock markets. Vested Finance and Webull App provides easy access to foreign equities. Although they are regulated and registered, their recency creates a risk factor. Hence, it is advisable to not put a large sum of money through these apps. They can be used for small investments, to just get a taste of international markets.
  • Mutual Funds: There are many Indian Mutual Fund Houses that offer dedicated mutual funds for international stocks. You can easily invest in them and get exposure to international equity. Some of these funds are: Aditya Birla Sun Life International Equity, DSP Global Allocation Fund, ICICI Pru Global Stable Equity Fund, etc. This is the best option for retail investors to get international exposure. Low cost of investing (no currency conversion and transfer charges) along with minimum risk (presence of a dedicated fund manager), makes this a popular option amongst retail investors.

So, next time when you tune into your Apple Smartphone with Coca Cola Can in your other hand, you are actually creating money for yourself.

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Safe Harbour: This post is for education and awareness purpose only!

Bhartiya Economy!

All strange things are happening around the world currently. Gold and Stock markets which apparently have inverse correlation are moving north like best friends and there’s no halt, it seems. Amidst all this, another topic which is doing the rounds is the resurgence of the agriculture economy on the back of better than expected monsoon (India experienced the wettest June since 2013 according to the India Meteorological Department). One can also look at some of the agri-related stocks like Escorts, M&M, and Rallis India, to get a sense of investor’s optimism on this theme.
But, what’s perplexing, is that the Rural economy (popularly known as ‘BHARAT’) is going to revive the Indian Economy. This theory has gain prominence owing to data like tractor sales and motorcycle sales, which have been robust. Agreed, these are some encouraging signs, reflecting the drive in the rural economy, however here is a catch!!! Most of us assume that the rural economy is equivalent to agriculture, and hence believe that India’s growth story hinges on the revival of agricultural sector. But that shouldn’t be the case!


So, we have emulated some of the points to understand why BHARAT alone isn’t going to put back India onto the growth path.

  1. Rural is much more than Agri: In a note dated 20th July, Credit Suisse pointed out that the agriculture forms only c.29 per cent of the rural economy. The rest is the non-agricultural rural economy consisting of construction, manufacturing, financial services among others. In the last two decades, a bulk of new factories have come up in rural areas leading to job creation, and a gradual movement of people from agriculture to manufacturing, a more productive sector.
  2. MSME Conundrum: 50 per cent of the 63 million Micro, Small and Medium enterprises(MSMEs), which contribute to c.30 per cent of India’s GDP, are located in rural areas . That said, the pandemic has taken a heavy toll on their business, and banks, which were cautious of lending to them earlier, have become even more prudent. Moreover, out of the government’s 3 lakh crore package, 43 per cent of the total amount was SANCTIONED within the first 2 months of the announcement while disbursements as a proportion of total amount was only 27.35 per cent as on July 23.

Additionally, MSMEs play an important role in job creation in the rural areas owing to their widespread presence. However, as per Reserve Bank of India’s latest systemic risk survey, the MSME sector has been badly affected because of lack of cash flow, stuck working capital, lack of manpower, thereby affecting employment. The third national multi-institutional survey on MSMEs in India estimates that 25-30 million jobs had been lost in the MSME sector by the end of June 2020. It further estimates that another 10-15 million jobs will be lost by August.

  1. The tractor sales puzzle: Tractor sales in June was robust and was widely cited as a sign of rural recovery. There’s a saying “We shouldn’t judge the book by its cover unless we delve deep into it”. Same goes with the tractor sales. Traditionally, April to June is a tractor buying season and since April and May barely saw any sales due to the lockdown, June sales could just be a display of pent up demand. Also, one must acknowledge that tractors are too expensive for a normal farmer. In FY20, a little over 7 Lakh tractors were sold in India. Assuming an average tractor costs INR 5 Lakh, this amounts to around ₹35,000 crore. The size of the entire agriculture economy was at ₹32.6 trillion in FY20. At 1.07 per cent, tractors are an insignificant part of the overall agriculture economy and the increasing sales could mean that rich farmers are doing well. They don’t reflect the overall state of the rural economy.
  2. Spread of Coronavirus – Until now, it has been said that rural has been much better off than urban amidst the pandemic. However, post-June Covid-2019 is now spreading beyond India’s big cities to Tier-3/4 cities. And if it spreads deeper into rural areas, it could very well be a speed-breaker to the rural momentum. Moreover, different states have different medical infrastructure and thereby a limit to which they can manage the pandemic effectively, and with state finances in a dwindling situation, the government will have no other option than to reinforce local lockdowns.
  3. Declining share of agriculture – The share of agriculture in the total GDP of the country has been on a long term downtrend; falling from the peak of 42.77 per cent in1967 to 21.61 per cent in 2000 to 15.96 per cent in 2019.

From the aforementioned points, one must acknowledge the fact that BHARAT alone isn’t going to revive our economy,. Rather, it should be a combined effort of all the major sectors to restart India’s new growth phase. And, amongst all, Service sector would play a very dominant role because of its lion’s share in India’s GDP at 49.88 per cent in 2019, rising from 45.98 per cent in 2009.

Source: Livemint, statista.com, theglobaleconomy.com

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Rationale Behind Exceptional Returns!

In our previous post we mentioned 3 companies (Colgate – Palmolive, Britannia and Nestle) which gave excellent returns in the past.

Here we will try to explain the rationale behind these excellent returns.

All 3 companies are leaders in their segments.

1) Colgate – Palmolive’s market share in INR 10,000 Crore toothpaste market stands at 53.4%.

2) Britannia Industries Ltd. – 2nd largest biscuit maker in India which possess 32% market share in a highly fragmented Indian Biscuit Market.

3) Nestle India – Commands over 60% market share in Indian Noodles market and 50% market share in Indian Coffee Market!

Simplified business model and excellent corporate governance rides them on growth path.

Now let’s see their financial parameters.

Britannia

  1. 5-year Average ROE* – 41.39%.
  2. Debt Free
  3. Average 5 years Revenue Growth – 10.61%.
  4. Average 5 years EPS* – Rs. 58.90
  5. 5-year Average PAT* Growth – 34.35%
  6. 5-year Average Operating Margin* – 12.61%

Nestle

  1. 5-year Average ROE* – 35.08%.
  2. Average 5 years Revenue Growth – 4.32%.
  3. Average 5 years EPS* – Rs. 104.06
  4. 5-year Average PAT* Margin – 10.69%
  5. 5-year Average Operating Margin* – 17.70

Colgate-Palmolive

mktgmx-colgatepalmolive

  1. 5-year Average ROE* – 61.72%.
  2. Debt Free
  3. Average 5 years Revenue Growth – 6%.
  4. Average 5 years EPS* – Rs. 29.60
  5. 5-year Average PAT* Margin – 14.71%
  6. 5-year Average Operating Margin* – 20.78

All three of them not only stands out as a market leader but are also great example of healthy financials.

Appendix

ROE - Return on Equity: It reflects a company's ability to generate profits from its shareholder's investments.

EPS - Earning per share: EPS highlights the amount of profit company is generating from one share.

Operating Margin - Earnings Before Interest and Taxes: EBIT Margin highlights the amount of profit company earns by selling Rs. 100 worth of goods.