IndiGrid InvIT Fund IPO – should you invest ?

In the investment world we are all looking at newer ways to invest, always hoping that the next product coming across will hopefully give us better returns than our earlier ones. In this context the Infrastructure Investment trust bond issue from IRB Infra generated a lot of interest in the market and was oversubscribed 8.6 times, despite the high ticket size of 10 lacs. Close on it’s heels we have the IndiGrid InvIT fund IPO, open from 17th to 19th of this month.

To begin with, Infrastructure projects such as ports, roads, power projects and other kinds of construction are normally on a massive scale and need a lot of funding. These are also long gestation projects where the returns will only come after a certain number of years. If you look at NHAI for example, the several companies started by it for the different projects are all technically running at a loss, due to the high interest rates and depreciation that they have to deal with. Their loans are huge and though the marginal profits on EBITDA are very good, progress in some of these projects have been slow due to the adequate availability of cash at the right times.

The idea of an Infrastructure Investment Trust ( InvIT ) is to restructure these loans by paying it off with the investment they will get in the trust. The Trust will then have an arrangement with these companies to get returns from them through the profits generated. Investors in InvIT will get their returns through dividends, buyback etc. As all these companies are having pretty much assured revenue over a period of time, the returns are likely to be good.

The below information about the IndiGrid InvIT Fund IPo, is taken from the website http://www.chittorgarh.com and a few other sources of publicly available information:-

Incorporated in 2016, IndiGrid InvIT Fund is an infrastructure investment trust (“InvIT”) established to own inter-state power transmission assets in India. They are focused on providing stable and sustainable distributions to their Unitholders.

Sterlite Power Grid Ventures Ltd, sponsor of IndiGrid InvIT Fund is one of the leading independent power transmission companies operating in the private sector, with extensive experience in bidding, designing, financing, constructing and maintaining power transmission projects across India.

Company’s sponsor owns 11 inter-state power transmission projects with a total network of 30 power transmission lines of approximately 7,733 ckms and nine substations having 13,890 MVA of transformation capacity. Some of these projects have been fully commissioned, while others are at different stages of development. They recently won bids for two transmission projects in Brazil,

Of the 11 inter-state power transmission projects owned by the Sponsor, they will initially acquire two projects with a total network of eight power transmission lines of 1,936 ckms and two substations having 6,000 MVA of transformation capacity across four states (the “Initial Portfolio Assets”).

Objects of the Issue:

The object of the issue are to:

1. providing loan to BDTCL and JTCL for repayment or pre-payment of debt (including any accrued interest and any applicable penalties) of banks, financial institutions, SGL1, SGL2;
2. repayment of any other long term and short term liabilities and capital expenditure creditors.

Comparision of InvITs

Comparision of InvITs (IRB InvITs & IndiGrid InvIT)
Particulars IRB InvITs IndiGrid InvIT
Price band Rs. 100-102 Rs. 98-100
Issur Size Rs. 5921 cr. Rs. 2250 cr.
Sector Toll Road constructions Power Transmission
Likely yield 8 to 12% 10 to 15%
Entry Level At a Premium At par value
Tenure 16 years 35 years
Corporate Ratings AAA/Stable AAA/Stable
Proportionate Allotment 75% of the issue (i.e. except retail) 75% of the issue (i.e. except retail)
Risk Factors Inflation, Traffic Volume, Govt. policies Load Availability, Market trends
Market perception Bearing Risk as above Considered as Safe asset class Globally
Promoter IRB Group Sterlie Group

Should you be applying to this issue? Well, if you have not got an allotment in the IRB InvIT IPO then you should definitely look at it. The one thing which may be a spoiler here is that the yields are primarily going to be in terms of interest and this will be taxable in the hands of the investor.

In case you are not yet fully invested in equities through MF and stocks, you may want to delay investment in InvIT’s for now. Focus on building your equity investments and you can then look at future InvIT issues. There will surely be many more soon.

 

How will the Nifty perform now and in 2017?

As expected the Nifty levels hit a fresh high as a result of the positive sentiments emanating from the election results. The market players like stability and after the results there was renewed FII buying. However, it was not a runaway rally as many had predicted for 2 reasons. Firstly, a lot of the possible BJP victory in UP had already been factored in. Secondly, there are some serious factors which will come into play in the medium term.

So to address the first issue, where does one see the Nifty in the next week or so? Given that the March expiry is next week both transactions and medium term fundamentals will be pertinent. From all technical analysis the Nifty has serious resistance levels at both 9180 and 9220. If it is able to cross both these points then it is likely to rally for a couple of hundred points more. However, in terms of probability that is rather unlikely and like this week, the markets will probably be range bound. On the down side Nifty has strong support at 9050 and again at 8975 levels. In case both of these break there is every possibility of a deeper correction in April. Again, in probabilistic terms this scenario is also not very likely and therefore, we will probably be in a range of 9050 through 9200 for most part in the week.

What about 2017 then? Well, many analysts believe that an overall growth of Nifty by 15-25 % in the year is possible. So, given that we started 2017 at levels of 8000, we should be able to get close to the 10000 mark. As usual, there are many factors that can make this happen or prevent it from happening. Here are some of the key ones.

  • GST implementation from July 1st
  • Monsoon performance and whether the EL Nino effect is a serious one
  • US Fed rate hikes and impact of it on FII buying in our markets
  • Earning growth showing positive signs finally in this FY
  • Infrastructure spending by government to increase in the next 2 years or so

What is my call on the Nifty? Well, I think we may well get close to 10000 by the end of this FY but the path will obviously not be a linear one. There is a possibility of a sharp correction of about 10 % and that may well happen in the months of May and June, especially if the monsoon predictions turn negative and the GDP and IIP numbers show an unexpected decline. The route Nifty will take from 9100 now can well be as follows, though predictions are hazardous : 9100-9250-8700-8500-9000-9400-9200-9500-9700-10000. Each of the ranges may last for several weeks or months. While the route is tough to predict with any real degree of accuracy, I do think Nifty will end with 9700 plus by the end of this FY and may very likely get to 10000.

What does this mean for your investments this year and how should you plan them. Let me get back to this in another post.

Top B school salaries – What and Why

In one of my posts recently, I had touched upon the issue of salaries in the top IIMs and there were quite a few responses to it. Most of the responses were unfortunately not correct and some of them went the political way rather than a reasoned discussion. In this post let me try and address this issue in a more structured manner.

To begin with my top B schools will be as follows and this post is about these. There are several other good B schools but I am not talking about them here. In order of merit these are IIM ABC, IIML/XLRI/FMS, IIM KI / SP Jain / Bajaj etc. My focus in this post will be for IIM ABC as they are really what we are talking about.

So what companies come to these institutions and what salaries do they offer? Firstly we need to understand that there are several companies, specifically in the areas of Consulting and Investment banking to name a few, that come only to specific institutes and not to others. So if one is looking at an initial job in Boston Consulting Group ( BCG ) then it is almost impossible to get through unless you are in these institutes. Some companies like Accenture do go to several other Technology and Management institutes but they look for a different profile there and not Strategy roles.

Secondly, the top IIMs and other B schools get most of the top companies in the different areas. These companies come here for they are absolutely clear they will not get such quality of people anywhere else. If you look at the recruiters from these top companies, many of them have been Alumni of these institutes themselves, so it is very natural for them to pick people from their Alma Mater.

Thirdly for the people who debate as to whether a general candidate from a top IIM is actually one of the best that the country has, let me state what it really takes to get into a top IIM today:-

  • 95 % and above in X and XII board exams. These are normalised in case of IIM B, so getting 99 % etc in a weaker board will not help.
  • CGPA of 8 and above from a good Engineering college, 9 plus will be more like it.
  • 99.5 percentile and above in CAT. About 2 lac people take the exam so you will need to be in the top 1000 people.

The above is just to get a call, and rejection rates after that is also 80 % and more. So you can easily understand what we are talking about here.

So, given all this what are the salaries offered there? Let me give some data points rather than go by isolated figures:-

  • At the topmost tier will be jobs outside India where we get to hear of crores of Rs as salaries. These are very few in numbers and can be only secured by the top few people in every year. For all practical purposes these are statistical anomalies.
  • Highest domestic salaries are typically in the range of 50-60 lacs nowadays.
  • Average salaries are in the range of 20 lacs plus.
  • Median salaries are also in the range of 20 lacs plus – this means half the students in any batch ( 240 out of 480 ) get this salary.
  • The minimum salaries are still in the range of 10 lacs plus and this is normally for people in the reserved categories – even for these people the change in them is quite extraordinary once they go through the 2 year program.

Are these salaries justified? Well, ultimately all salaries are based on market demand and supply, so companies pay for the skills and potential of the people they are taking. The debate about others not getting the same salaries even after several years is not logical. An IT developer with 5 years experience will probably get about 10 lacs but the pressure and accountability he has to face in the job is significantly less compared to an MBA in the first 2 years of his career.

So if you are in the first 2-3 years of your working life and looking for doing something different, you can consider this as an option. Of course, you will need to be really good to get through a top B school.

In today’s India I do not think there are any better opportunities than this.

Impact of budget on asset classes

Now that the dust has settled a bit on the budget front, it is a good time to look into the fine print to check how the different asset classes will be impacted with the budget plans. Since there hasn’t been much changes on the taxation front, all investors will be hoping that the budget proposals will have a positive impact on their asset classes.

Let us start with equity then. The following are the most notable:-

  • The FM did not touch LTCG exemption for this asset class and that in itself came as a huge relief to the markets. A lot of the up move was due to this factor.
  • Reduction of corporate taxes for companies having less than 50 crores turnover in 2015-2016 will definitely increase their profit margins and consequently contribute to the elusive earnings growth that all are seeking.
  • The monetary policy is definitely looking at reduction of rates and companies can look forward to cheaper credit. This will hopefully push up profit margins.
  • The infrastructure push will be positive news for many companies linked to this area of business. Easier credit will help consumer product companies.
  • Banking industry will get some much needed support for the NPA problem.

Based on the above, it will be logical to assume that the performance of our companies will start to get better over time, quite possibly from the next quarter. The discipline shown on the fiscal deficit front as well as the seemingly firm deadline on GST implementation should help our credit ratings. Over the past few months FII money has been going away from our markets to other developed and emerging markets. With the above changes and the rally which has been largely driven by domestic liquidity, it is conceivable that some FII buying may resume in our markets, at least in specific stocks. Equity therefore, seems to be the asset class of choice for investors this year. Our markets have not really gone anywhere in the last 2 years though several stocks have given good returns. This can be a year when the markets do well overall and this gets reflected in an up move of the indices.

What about Debt in that case? Some changes to note are as follows:-

  • As with equity the LTCG treatment has been kept unchanged.
  • Availability of huge amounts of cash with the banks may push interest rates further down. This may happen as early as the monetary policy of February 8th.
  • LIC scheme of 8 % returns for senior citizens is actually an indication that interest rates may well fall further.
  • The rate reduction will happen but the cycle is close to bottoming out too, maybe another 50 basis points overall will be there.

Based on these, I think Debt will not really be the asset class where investors should invest fresh in 2017. It makes sense to only look at mandatory debt such as PF and PPF. For the rest try to invest as much into equity as possible, both through MF and stocks. For any of your existing debt products that may get redeemed this year, look at equity again.

What about Real Estate? Well, that presents an interesting scenario. Look at the following:

  • Home loan rates are definitely going down and announcements of discounts on lower amount of loans will help the housing industry.
  • Demonetisation has definitely impacted the prices though Real Estate companies will fight hard to resist any downgrades of pricing.
  • Builders will be helped by the one year window to sell the property without getting into the Deemed income stiff.
  • 2 year duration for LTCG can make investment in homes easier.
  • Capping the interest deduction at 2 lacs for the second home makes sense but it is a blow for people who were looking to get a second home as an investment.

Based on the above, it does seem that buying the first home is a great idea now and doing so for a second investment property is a not so good idea. Unless you are really flush with funds, avoid the investment idea. You can easily get caught into an increasing cycle of interest rates 2-3 years down the line and the income from your investment may not be that great due to the generally low rental yields.

Conclusions then? Buy a first home if you are interested, keep debt only at PF / PPF level and put all the rest into equity. This is the year of equity, get started even if you feel hesitant. If you are already into it then go on to take a deeper plunge.

My take on the budget

The kind of hype and expectation which is normally generated by any budget in India is tough to meet at the best of times. This year was more so due to the demonetization fallout that many of us were affected by. The price of inconvenience was sought and in many cases loss of business and jobs required some level of reparation. Lack of growth and clear decisions regarding black money and political funding also had to be tackled.

Based on all of this, the foremost question will be whether the FM has delivered or not? I would say that he has done it quite well, even though I feel there was room to do more in terms of personal income taxes. The 5 % reduction on the first slab was good but it should have been followed up with similar reductions in the other slabs. The surcharge on the incomes greater than 50 lacs is keeping with the sentiment that the richer people can afford to pay taxes. With the ongoing elections, this is something I can understand, though I do not agree with the approach.

Taxation and black money have been the recurring themes in our economy and polity in 2016 and the FM did a commendable job here. Firstly, he addressed the issue of poor tax compliance and brazen tax evasion in India – it is like an elephant in the room, everyone knew about it but no one mentioned it so far. The FM has put the numbers in context – only 1.7  lacs people saying that they earn more than 50 lacs is abysmally low. With the event of demonetization and the cash being brought into the banking system now, there is real hope that people who had stashed away their ill gotten wealth will now have to face the music. If they declare through IDS 2 then they pay 50 % tax and another 25 % as deposit for 4 years. In case they choose to just take a risk, they will definitely get caught and end up paying 82.5 % tax and in addition get a possible jail term.

As far as the growth part is concerned, the FM has avoided some potentially poor decisions like taxing capital gains on equity etc. On the other hand, reduction of LTCG tenure on property capital gains, shifting the base year to 2001, giving 1 year relief to builders on deemed income will energize the RE sector. With the earlier incentives on housing loans announced by the PM this gives a good fillip to the housing sector, which was much needed.

Agriculture has got a lot of attention in this budget and that is good given a lot of our people depend on it even today. Improvement in agricultural production and rural income will also be able to drive consumption which is vital for corporate growth. We also need to remember that resources are needed here far more, than people like us need it.

The corporate tax relief to companies doing revenues of less than 50 crores in the year 2015-2016, will help the earning of these companies next year. This will be a good push to the elusive earning growth that we have been waiting for. This reform is a harbinger of more things to come and will encourage buying in our stock markets. The fiscal deficit being on track will increase the confidence in the India story as far as the Rating agencies are concerned. FII buying will return and the general mood of our markets in 2017 will be upbeat, though there will definitely be periods of corrections.

Some other good things in the budget was the wait for GST, instead of trying to tinker with Service tax or Excise for 3-4 months. LIC coming up with a 8 % scheme for senior citizens, Companies like IRCTC going public, Safety fund for the Railways, divestment through CPSE ETF next year too are all good measures. Transformation to the Digital economy by stopping cash payments beyond 3 lacs is an excellent idea.

The political funding cap will reduce the impact of goons in our political syatem and this will have the best results in the near future. On the whole, this is definitely a budget in the TEC mode – India is well on the way to Transform, Energize and Clean.

In 2017 politics will decide market movement

Even a casual observer of the stock markets will know that there is a close link between politics and the market performances at most times. Market movements are often decided by news flows and in many parts of the world, particularly in India a lot of these news are from the political arena.

Till about 2 months back the narrative in the markets depended largely on corporate earning growth and the US Fed rate hikes. Both of these were thought to be determining factors in how the FII buying would pan out. As our markets depend a great deal on FII inflows, the overall consensus was for a dip in the start of the year and a pick up as time went by. The budget was likely to be a positive one and a Nifty high of 9000 plus sometime in the first half of the year seemed a definitely possibility.

Demonetization and the subsequent political realignments have changed all of this greatly. At a basic economic level it is clearly visible that several sectors have been affected badly due to liquidity issue and also the overall sentiment regarding consumption has a negative bias now. The FY 17 earning growth is therefore likely to be fairly flat, belying the promise that was evident till the second quarter. The government can point to the tax collections but markets will only consider the growth in corporate earning and that will not be good.

At a purely political level, the exercise and the subsequent coming together of disparate political parties in order to challenge it has created a somewhat unstable situation which is bad for the markets. In general the markets like status quo and is worried whenever some negative disruptions take place. The election dates being announced for the 5 states have made the situation more complicated. It may mean that the budget is delayed and the current political climate also makes the GST roll out difficult by April 1. 

And then of course, there are the elections due in 5 states. They were always going to be important but with the demonetization backdrop, they have virtually become a referendum on the Modi government. Should the BJP lose significantly there will be serious questions on whether the policies Modi wants to practice have any resonance with the citizens of the country. Such type of political uncertainty will inevitably see FII outflows and deep market cuts. How is it looking currently? Well, the BJP will probably retain Goa despite an upsurge from AAP, lose Punjab where their partners have a lot to answer for, win in Uttarakhand where the corrupt Congress government has definitely run their course and may continue their North East success with a win in Manipur.

As often in the past UP will have a huge say in Indian politics – win it and BJP will claim all their policies are a success. Lose it and they will have to be on the retreat for the next 2 years till the general elections are due. In the first scenario both the Economy and the markets will revive quite well in the latter half of 2017. The FII buying will resume with enthusiasm. In the latter scenario a likely sell off from the FII’s will be accompanied by deep red in our markets, maybe even a crash.

In the latter part of the year Presidential elections and the different cases the CBI is pursuing against opposition leaders in different parties will also have a bearing. With good wins in the elections the BJP will be able to deal with these easily, losses will dent it’s moral authority and they will need to be more conciliatory with the opposition in order to get things done. Also there are 62 Rajya Sabha seats to be decided next year, if the BJP can get most of these and strike a deal with AIADMK then their Rajya Sabha woes can be largely over. This will leave them a few months to pass whatever legislation they want and go into the 2019 elections in a confident mood. In Indian politics, the road to Delhi always passes through UP , this year will witness that once more.

How will Nifty be affected in the different scenarios? There are a lot of alternatives to be played out, let me address that in the next post.

How will the asset classes fare in 2017?

Now that we are into 2017, it will be a good idea to look into the prospects of the different asset classes. As usual, I will deal with the 3 asset classes of Debt, Equity and Real Estate as I do not understand much about the others. Also, I will look at the fundamental context and avoid the clutter of any numeric analysis.

In all ways 2016 had a rather unexpected end, which was surprising as it was progressing rather well till we hit November. Despite Brexit and some other events, the overall scenario in the Indian economy was a positive. The monsoons had been good, GST seemed to be on track and it seemed that the corporate earning was on the way to recovery at long last. However, the demonetization move by the government has changed things rather dramatically and the impact of it will be felt hard at least in the short run. Firstly, the economy as a whole and some specific sectors in particular have been affected rather badly. There will be a likely impact on the GDP and corporate earning momentum, which was almost a given from this quarter, will probably be pushed back by a couple of quarters. The Fed rate hike in the US and the FII sell off associated with it in the Indian markets will also have a negative impact.

So how will Equity behave as an asset class in our markets in 2017? Well, right now it does seem that times will not be very good for equity in the first half of the year. There are far too many negatives in terms of the news flows and even if the budget happens to be a great one, it will probably only be able to pull the equity markets back marginally. In the second half though, there are great chances of a revival in the economy as well as the stock markets. GST rollout, the cash situation being better, impact of assembly elections being over and the effect of the budget being felt will all add up significantly to improve consumer confidence and therefore business volumes and subsequently corporate earning. It is very likely that the markets will follow suit. I see Nifty having a strong support at 7500 and also a possibility of reaching levels of 9000 towards end 2017.

So, in essence equity will very likely be a rewarding asset class in 2017. You will need guts to participate in it in the first half, but it is important that you do so in order to reap the probable benefits later on. Once markets start rising, the feeling you may get is one of being left out.

What about debt as an asset class in 2017? Well, with the rate cut cycle now being nearly over, debt investments are really not looking very bright in 2017. Unlike in equity, the turnaround of the rate cycle will probably happen only in 2019 or so. As a result any fresh investment in debt, except for the long term ones such as PF, PPF and SSY really make very little sense.

What about RE as an asset class in 2017? The banks have now finally reduced their rates based on a nudge from the PM. It is therefore easier to buy a home now and the home prices may also see a dip based on the demonetization effect. So, if you are buying a home for your own stay, it will be a good idea to seriously look at it in the latter half of 2017. However, as an investment do not look at RE in 2017 at all. There can be serious changes in the RE landscape soon and dealing with property may not be everyone’s cup of tea. Locking up a large chunk of money when you can invest it in favorable equity markets will be a really bad idea.

In summary bet on equity this year, almost completely. I will write some future posts on asset allocation as well as my own plans.