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DHFL fails to pay Rs 1,000 cr interest on bonds, debt schemes loose upto 53% of NAV

 
 Image result for DHFL CRISES

Dewan Housing Finance Ltd (DHFL) has missed Tuesday’s interest payment deadline on a set of outstanding bonds, as per reports the company is in talk with financiers to help meet its Rs 1,000-crore-plus obligation within the seven-day grace period and prevent a default.

Rating agencies Crisil, ICRA have downgraded DHFL’s CP rating to 'default' grade. “DHFL has Rs 850 crore of outstanding CPs of which Rs 750 crore is due in June 2019. The first CP maturity is on June 7, 2019. With liquidity inadequate as on date to service debt and visibility very low on timely fund raising, CRISIL expects the CP to be in default on maturity,” the rating agency

Meanwhile, ICRA has also downgraded the rating on the Rs 850-crore CP of DHFL to ‘D’ from ‘A4@’.

“The rating revision factors in further deterioration in company’s liquidity profile and delays in meeting scheduled debt obligation on June 4. While the mentioned debt is not rated by ICRA, given the stretched liquidity profile and limited visibility on fresh funding, company is unlikely to be able to service its debt obligation with regard to commercial paper programme in a timely manner,” the rating agency said.

The DHFL default and downgrade may have widespread implications not just for investors in NCDs, but also for mutual fund investors, given that as many as 164 schemes across 23 asset management companies (AMCs) are exposed to DHFL papers. Total industry exposure to DHFL alone (excluding group companies) is ₹5,183 crore, as on 30 April 2019, UTI Asset Management Co. has the highest exposure to DHFL papers, followed by Reliance Nippon Asset Management Ltd.

Corporate bond funds are mandated to hold 80% of their assets in debt with the highest credit rating and are perceived as relatively safe.

Debt schemes witnessed a massive fall yesterday as several schemes revealed sharp losses to their net asset values (NAVs). The worst hit was DHFL Pramerica Medium Term, which posted a loss of 52.99%. DHFL has seven-day grace period available to avoid an actual default scenario. But mutual funds have to mark down their exposure to DHFL by up to 75%, before an actual default is announced. The mark down caused severe losses, taking away a year’s worth of returns of a debt scheme, in a single day.






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Exposure of mutual funds to Essel group firms

 

Image result for essel group crises


Troubles in the debt market have finally reached the doorsteps of mutual fund investors, with Kotak Mahindra Asset Management Co. Ltd withholding part of the redemptions from one of its fixed maturity plans (FMP). Two leading mutual fund houses--Kotak Mahindra AMC and HDFC AMC--Wednesday admitted to redemption pressures in their select fixed income schemes and sought more time for payouts.

In a written communication to investors of Kotak FMP Series 127 that matured on April 8, Kotak Mahindra Asset Management Co said that it may not be able to pay the entire redemption amount to its investors.

The scheme said it may face a delay in recovering its money that it had invested in the non-convertible debentures (NCD) of two of Essel group companies, namely Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd.

The development has attracted the attention of the stock market regulator, which has asked all mutual funds to provide details of debt schemes backed by promoter shares.

Mutual funds have an exposure of more than Rs 17,000 crore to three entities, according to data by fund houses and credit rating agencies. These investment decisions have impacted investor sentiment in the last few months.

Chairman Subhash Chandra earlier stated that they have "arrived at an understanding" with the lenders, which are having pledge on shares held by the promoters, not to be declared defaulter following any steep fall in share prices of listed entities such as Zee Entertainment and Dish TV.

Many investors are concerned about the impact the Essel Group fiasco will have on their mutual fund investments, say mutual fund advisors.

Typically, in a situation where assets are not realized, AMCs have three options—take a hit on their books, roll over the scheme or mark down the value of security to zero.

Multiplier Wealth has pulled out the exposure of mutual funds to the group companies.

ZEE3



You can check if you are having exposure to the above stated schemes and take your call accordingly.

Happy Investing
Multiplier Wealth

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5 Simple Ways To Generate Stock Investment Ideas

 
Image result for stock ideas





Idea generation is both art and science. When it comes to investing, quantitative methods based on criteria such as PE Ratio, Sales growth, or Return on Equity can give us various results for consideration. On the surface, the companies with the lowest ratios will be the cheapest publicly traded companies at the moment. However, successful investing is far beyond picking the quantitatively screened cheapest companies.
Quantitative methods suffer from many limitations. for example a one-time item, such as a non-recurring gain on the sale of subsidiary, can inflate reported income, making a company appear cheaper on the basis of P/E than it would be if the one-time gain was excluded. In the absence of such one-time items, cyclical businesses will report the higher earnings at the top of a cycle and lower earnings during the bottom of cycle.
 Most of the times cheap companies are cheap for a reason, it can be high debt, corporate governance issues, regulatory issues or anything. 
Due to time constraints, its not possible for retail investors to analyze every single company out there. This time limitations force us to prioritize. Let's look at five simple ways of generating stock investment ideas-


1) Buying what you know-  Start with an industry or a company that's familiar to you. It takes lots of research and study to finalize any investment idea, focusing on companies that you have knowledge of will make the exercise interesting and engaging. Suppose, if you have been working in a IT company, you could start looking at IT companies, or if you have been working in FMCG companies ... start by looking at FMCG companies. Try studying the top players of the industry and then gradually move to mid caps and small caps. You can apply both fundamental and technical analysis to select stocks for investment.


While its important to invest in what you know, but its not recommended to put all your eggs in one basket. If things don't turn out favorable as expected  for the industry that you are invested in, you could end of loosing your capital. So, always diversify your capital among stocks and sectors to minimize risk.



  • Invest in multiple sectors. If you are heavily focused in technology, consider investing in real estate, consumer good or other industries as well.
  • Avoid putting all of your investable funds into the stock market. Consider bonds, currencies and commodities as well.
  • Have a portfolio of around 15-20 different stocks that aren't related. Make sure you can keep track ofl your stocks easily while still providing a wide array of earning opportunity.
  • Buying stock means buying part-ownership of a company, check if you are willing to the entire company (assuming you had the money)
  • Calculate how long it would take to pay off your initial investment from the profits assuming you bought the entire company. Use these results to determine if it is worthwhile to buy the shares of the company.
  • Always remember, profits can fluctuate wildly with markets change. New technologies, government regulations or competition can make company's products less valuable or even useless.


2) Use online screeners-  You can easily screen stocks based on different financial parameters using websites like http://screener.in. Simply enter your preferred financial parameters and narrow down to a list of stocks satisfying those parameters. For example you can get a list of stocks satisfying these parameters, Debt to Equity < 1, Price to earnings <12, price to Book value < 1.5 roce> 20 etc. etc. You can have as many screening criteria as you like and narrow down to stocks that meet those criteria. Once you have narrowed them down you can perform more in depth fundamental or technical analysis (ideally both) to select stocks for investment. Since everyone like to own only those stocks which are financially sound, it is a good strategy to reject financially unsound stocks using tools like screener. 


3) Read Read Read-   Read annual reports of companies. Check the Investor Relations section of company's website, read financial newspapers, magazines and reports. Instead of focusing on recent results focus on finding a company with consistent history of profitability and financial health, not just one good quarter.

Look for revenue growth and profit growth. In long run, stock price rise with growth in revenue and profitability of the company.

The share price of a company with high debt is likely to be more volatile because more of the company's income has to go to interest and debt payments. Compare a company to its inudstry peers to see if it's borrowing an unusual amount of money for its industry and size.

Find companies with good dividend yield. Regular dividends are a sign of a company in good financial health. If a company pays a dividend, look at the history of their payments. Are they increasing dividend or not?


4) Exchange announcements -  Exchange announcements can be good source of generating stock ideas. Companies are required to announce specific events such as corporate acquisitions, quarterly results or changes in stake ownership of its promoters/insiders where the last example is my common trigger for finding attractive buys. Its recommended to keep an open eye to companies which announce open market purchases by its insiders. These insiders can be either its own management directors or investment funds who have taken a huge stake in the company. Again, the idea behind this is  to ride on the information that these people possessed. In other words, when insiders made an open market purchase/sale, they are actually sending a signal to the public that they are confident/skeptical about the company’s performance and hence, have invested their own money into it. But this is not flawless as well. It is by no means that an investor can safely commit his capital to a stock simply because the management have invested in it as well. As Warren Buffett had mentioned before, management will always think that their stock is cheap. However, by keeping an eye to the above, chances are likely that you can stumbled upon an attractive stock.

5) Blogs & websites
Forums, blogs and websites can also be a good source of generating stock investment idea. The financial market is a place of hundreds and thousands of investors and each one of them is constantly searching for their next attractive investment opportunity. Some of them keep it to themselves while others may choose to share it on their blog, website or forums. If you keep your eyes opened attentively to these website, there might be a chance of finding a good buy. Of course, this method should be used only to screen out investment opportunities for further analysis and one shouldn't be buying stocks only because someone else is positive on it.

 You'll need to do some research and calculations to determine the value of a company. Maruti Suzuki at Rs. 8000 per share can be far more valuable than any ABC Ltd. trading at 50 paise.


  • Buying stock means buying part-ownership in a company, determine if it would make financial sense to buy the entire company (assuming you had the money).
  • Calculate how much time it would take to pay off your investment from profits if you bought the entire company. Use these results to determine if it is worthwhile to invest in shares.
  • Keep in mind that profits can fluctuate wildly with markets changes. New technology, changes in regulatory environment, court orders etc. can make company's products less valuable or even useless.


In Conclusion 

We have reviewed 5 simple ways that investors can use to generate investing ideas. Regardless of which approach you choose, make sure your approach makes sense to you and that you are persistent in your efforts. The best investors, even Warren Buffett, are constantly looking for new investing ideas. If you are diligent and consistent in your approach, you will be sure to find some quality investment opportunities. After all, developing the ability to pinpoint quality investment opportunities is the first step to becoming a successful investor. 



Happy Investing

Multiplier Wealth

Ways To Limit Your Drawdowns In Trading Capital

 

While each of the strategy may not fit into your trading systmen but, some of these rules could help traders limit the drawdowns in their trading capital.
  1. Make protection of capital your number one priority, not your profits. It is much easier to be profitable when you don’t lose a lot of money.
  2. Try not to lose more than 2-3% of your total trading capital on any one trade.
  3. Avoid taking multiple positions that are all closely correlated to the same trend.
  4. Only trade your highest probability entry signals.
  5. Do not become biased as a bull or a bear. Stay open minded to what the markets and your signals are saying about the current trend.
  6. Make sure you don't have more than 2-3 positions open at a time, so even big whipsaws in price action do not damage your account too much.
  7. Only trade markets you are very familiar with, and have done excessive research on with charts and backtests.
  8. Trade only a method you fully understand.
  9. Trade smaller and smaller during losing streaks, and only get back up to full size during winning streaks.
  10. Use option contracts to cap possible maximum losses to only the contract size.
Happy Trading
Multiplier Wealth

Initial Public Offering (IPO) - The fun begins here :-)

 

Image result for ipo
What exactly is an Initial Public Offering? How does it work? Why is it done? Want to know? Read on...


Dear investors & friends,

Hope you are all doing great.


In my previous article (click here), we learnt about pledging of shares and its impact. This week, Ill introduce some more terms in a simple way.. 


Initial Public Offering or IPO - Sounds familiar???



You are running a successful business and have become famous. Multiple big shots are willing to invest in your business and want a chance to own a share or part of your business. You now decide to go public and give a chunk of your shares to others. What do you do? You will decide to file for IPO or Initial Public Offering :-)

Now, you already have a good amount of money getting rotated in your business. You need to decide on the number of shares. For this, you need to decide on your Capital. 


As you already know, 


Number of shares = Share Capital / Face Value of your share


There are 2 terms you need to understand - Authorized and Issued Capital


Authorized Capital - This is the maximum share capital which you are authorized to issue to shareholders when going public. This can be any amount above Rs 1 Lakh.


Issued Capital - This is the capital which you are choosing to convert into shares and issuing to various people (promoters, retail investors, institutions etc.)


So now, the above equation becomes:


Number of shares = Issued Capital / Face Value of your share


Now, you need to set an Authorized and Issued capital for yourself. How do you set this? 


Lets try to work backwards. Lets say that you need 100 Cr cash to expand your business. How do you raise 100 Cr. One way is to go to the bank and take a loan. But you don't want to do that. You want to raise it by giving shares of your business to others. You know that lots of people will invest in your company's potential.


Now, you go to an investment banker and try to create a valuation for your ever-growing business. Now, valuation of a business is a tough thing to do, especially when you are doing it for Initial Public Offering. Investment valuators have a tough job. They not only need to consider your past performance, but need to fix a price for your share keeping the future in mind as well. Let us say that keeping all this in mind, they value your company at Rs 80 - 100 per share.


Now, you want to raise 100 Cr. The number of shares which has to be given to others to raise 100 Cr is 


100 Cr / Rs 80 = 1.25 Cr shares

to
100 Cr / Rs 100 = 1 Cr shares

Lets say that you decide that to give 1 Cr shares to public (Institutions, Retail investors etc.). Lets say that you want to keep 50% of the stake with yourself and the promoters.


So that means you need totally 2 Cr shares, out of which you will issue 1 Cr shares to public and keep 1 Cr shares with yourself.


Now, let us decide on the Face Value of the shares. Lets keep FV = 10. So what is the capital?


Issued Capital = Number of shares x FV = 2 Cr x 10 = 20 Cr


So 20 Cr becomes your Issued Share Capital in your balance sheet. This is the minimum share capital which you promise to maintain records for in your financials. If this amount goes lower than 20 Cr, it has to be shown in the Liabilities part of the sheet. If this happens, it can be a worrying situation :-)


You can choose your Authorized share capital a little higher so that tomorrow, you can give more shares to public by increasing your Issued Capital. Lets set the Authorized Share Cap as 40 Cr. The Authorized share capital should be chosen keeping the future plans in mind. 


Ok so here is the summary so far.


Authorized Share Capital = Rs 40 Cr

Issued/Equity Share Capital = Rs 20 Cr (This can never be more than Authorized Share Cap)

The above 2 details are for shares with FV = 10.


Now, you go for listing with an Authorized Share Capital of Rs 40 Cr. You have to pay a fees for listing in an exchange. The fees goes higher if we have a higher authorized capital. Ok.. We have paid the fees and now decide to go public. We release a circular which says that we are issuing 1 Crore shares of FV 10 in the Primary market at a rate of 80 to 100 (lower band to upper band).


Now, immediately, 2 big institutions come to us and tell us that they want to be Anchor investors. They each want 20 Lakh shares for Rs 100 each. That means, you can raise 10 Cr immediately. You also know that the confidence of the public will go up since these big investors want to get in. You agree for this.


So out of 1 Cr shares, 40 Lakh shares are taken by Anchor investors. This leaves 60 Lakh shares for public (Includes retail investors, institutions and all others). You set a time period for public to apply for your shares in the price range of 80 to 100.


How many shares are allotted to the people who apply is based on the demand for the shares of you business. You only need bids for 60 Lakh shares. If the mood is really good, sometimes you might get bids for 80 - 90 Lakh shares - Over Subscription). In this case, the number of shares given to each person might decrease. If public are not too interested in your business, you might only get bids for 20 - 30 Lakh shares at Rs 80. In this case, your IPO has got Under Subscribed


By looking at the subscription, the price of your shares on the day of listing in the exchange might go above 100 or below 80. Assume that you have given the 60 Lakh share to investors at Rs 100 per share. You have raised your 100 Cr of cash from investors. Until now, everything was in the Primary Market. 


Primary Market - The stage/market where the shares are allocated by the company to the public shareholders at a price. Investors cannot trade/sell them to anyone else yet. This is the stage where the listing company raises its funds.


On the listing day the shares of the Initial Public Offering will be available in the secondary market. The price of the share will be based on the demand. The shares will be available in the secondary market now for people to buy and sell the shares. From now on, the pricing of the share will not give any direct funding to the company.


Secondary Market - Once the company is listed in an exchange, the owners of the shares can sell/buy to others for a price. The price will be based on demand and supply and the company does not get any benefit from these transactions since they have already raised their money in the Primary market. 


Now, the total number of issued shares is 2 Cr of FV 10 each. You have raised 100 Cr by giving 1 Cr shares at Rs 100 each to other shareholders.


Now, there are 2 things to keep in mind.


Shareholders have paid a Premium of Rs 90 to get your share whose Face Value is only Rs 10.


Paid up capital = Number of shares bought by shareholders x FV

Additional Paid in capital or Capital Surplus = Number of shares bought by shareholders x Premium

So here Paid up capital = 2 Cr x 10 = 20 Cr

Additional Paid in capital = 2 Cr x 90 = 180 Cr

Now, the additional Paid in capital will be shown separately in the Balance sheet. 


Please remember that dividends are only given on the Paid up Capital (on the Face Value of the share). 


Hope this gives you a good perspective of how things begin for a company when it goes public.


Please feel free to ask me queries.


Read the other interesting Articles by clicking on below links and share with your friends.


Who are shareholders of a business in stock market

Fundamentals of Investing in the Stock Market

Decoding Trade/Order Book in the Exchanges


Top 10 Greatest Trades of All Time


Stock Market Basics - Value vs Price


and many many more...



Please share this post with your friends so that they can be benefited and master the art of Investing in the Stock Market !!!

Good luck,
Article By-Fundamental Investor
http://www.fundamental-investor.com/

Who are the shareholders of a business in the Stock Market?

 

Image result for shareholders
Dear friends and investors,

Hope you are enjoying your weekend. I am having a lot of fun and enjoying myself. I have been travelling for the last few weeks and hence couldn't write any article. Anyway, this week, lets look at something very important and is, for me personally, a key aspect in fundamental analysis of a business.

In one of my previous articles, we looked at the Top 10 Greatest Trades of All Time - Click here to read it. Hope you enjoyed reading it.


Let us now have a quick look at the shareholders of any business and what it essentially means.

There are multiple investors in a business. The primary market is the place where the company raises funds by giving its shares at a premium based on future potential. The interested buy the shares at a premium. But who are the people who finally hold shares of a company? Let us have a look.

1) Promoters group - A promoter is a person who understands the business well enough to be a face of the company. Normally a promoter would be the founder of the company. But it is not always necessary. He/She can be an ambassador for the company, and due to rich experience can ensure that the business attracts customers and investors alike. Raising capital is a piece of cake for promoters with excellent track record, since they have built their brand image and shown success in their experience. They have a huge say in the company and can control the company. They are instrumental in the plans and visions of the company and also in giving shares to public investors. Please note that the director / officer of the business who is doing so just professionally will not be a part of the Promoter Group. The Promoter group can be the promoter, and immediate relative of the promoter, or a company as well. You will have both Indian as well as Foreign Promoters. The experience and history of the promoters play a huge role in the success of the company and the valuation which the business will command.

Institutional Investors:

Banks, Financial Institutions, Insurance Companies, Mutual Funds, private Corporate bodies, Trusts etc.

2) Foreign Institutional Investors - Foreign Institutional investors (FIIs) are entities established or incorporated outside India and make proposals for investments in India. They can be international fund houses who have collected money from investors and invest in companies outside their country or region (internationally). In order to invest in the primary and secondary market, they have to go through some schemes like the Portfolio Investment Scheme. Now, there are some RBI regulations which also set an upper cap for the percentage of shares to be given to FIIs. More FIIs entering is normally considered as a good sign since it also shows the confidence of foreign investors in the business. Normally, when the business has a good global presence, FIIs would be interested to invest.

3) Domestic Individual Investors - As the name suggests, the institutional investors who are Indian would fall into this category. This includes the mutual funds and big big business houses which would fall in this category. They have huge money power and buy in bulk for long term.

Non institutional Investors:

4) Bodies corporate - This can be any legal entity, a company, associations etc who want to invest in the business.

5) Retail investors - Investors like you and me who want to buy a chunk of the shares.

When an IPO issues shares in the primary market, the preference is generally given to the Institutional Investors since they buy the shares keeping a long term view in mind. The retail investors are generally given a smaller chunk so that the secondary market does not get lots of shares to trade on a daily basis. 

Now when you are investing in a business, please have a look at the shareholding pattern in the BSE/NSE/Moneycontrol websites.

High promoter holding shows that the promoter is highly confident of the business. He would also be more than happy to pump in money and also raise money to fund the business. A very low promoter holding shows that the confidence on the business is low.
If the promoter shares are significantly lesser in current quarter as compared to previous quarter, we need to be prudent to understand why the promoter sold shares. The earlier we diagnose, the better our decisions will be. This information can be easily procured from the BSE/NSE websites in Disclosures.
High FII and DII holding is also a great sign. You can try to see the shareholding pattern on a quarterly basis to see if the Institutional investment is going up. If it is, that means that they are very confident on the future and hence your investment is a good one. The only bad part if that, if the FII or DII holding is high and they offload the shares, the price comes down crazily.

With this information in mind, try to have a look at the shareholding pattern of your business which you own. How does it look??

I hope I am sowing the seeds in your minds... Have a relaxed week ahead...

If you happened to like this article and want to continue learning, please subscribe for free email updates by clicking on the box below this post



You can also share this post on with your friends/well wishers so that many more can get benefited and master the art of Investing in the Stock Market !!!




Good luck,

Article BY-
Fundamental Investor

http://www.fundamental-investor.com/

Pledging of Shares and its Impact

 

Image result for pledging of shares
In the Shareholding Pattern of Listed Businesses, we see a section called Pledged/Encumbered shares. Ever wondered what it meant? Who pledges shares and to whom? Why does this happen? What's the impact? What should we do? Read on...

Dear investors and friends,

So far, we have all got familiar with some market jargons and we also covered how to read the shareholding of a business. I got a good number of emails and it was nice to see all of you actually studying the shareholding patterns of your businesses and replying back. I like it :-)

Here is the link for the best articles till date

Now, lets come to another important aspect which we investors look at in a business - The pledging of shares.


Now, what is pledging of shares? Who does it? Why is it done? What is the impact? I think you need to understand these concepts thoroughly.

A promoter generally would oversee the operations of the company and is the brand ambassador of the company. He/She believes in the company and is the face of the company. The promoter's report card will certainly drive the valuations of a business. If the promoter is having an excellent track record, is honest, a visionary, investor friendly etc., the business has a good chance of getting a nice and strong, smooth valuation.

Now, a promoter normally would hold a good chunk of shares (It is present in the Shareholding Pattern or SHP). A good promoter holding normally signifies the confidence of the promoter in the company. A promoter buying shares from the secondary market also is a positive sign for long term investors. As you very well know, nothing happens overnight.

Now, when promoters need money, they pledge/encumber some or all of their shares with some lenders. This essentially means that their shares are given as security/collateral to the lenders in exchange of loans. Since equity is a highly liquid asset, the lenders also are in an advantage to recover the money easily (in case there is a major problem) as compared to other security. Normally promoters pledge their shares to raise money for capacity expansion, pay off debts. etc. Ideally, a high promoter pledging signifies that the cash is not utilised well and it calls for caution.

Please note that, pledging doesn't mean that the lenders own the business. The ownership of the shares is still with the promoters only. 

Now, normally, what is the impact of promoter pledging? Firstly, it should be very clear as to why the promoters have pledged their shares. More importantly, the plan for releasing the pledged shares also needs to be clear for investors. Ideally, I do not find it wrong if a promoter pledges his shares and is slowly releasing them from pledge over quarters with higher cash flows. The problem is when there is no certainty or vision of when the shares will be released. If there is no plan, poor investors get caught in the volatility of the share price due to greed (as always).

Also, you will find that the share price of highly pledged businesses will be very volatile in a falling market. This is mainly because, if the market price of the business falls, the promoter will have to pump in more assets for the loan taken and hence, there is extreme pressure on the share price and the promoters. Also, please note that if the promoter is not able to service or repay the loan on time, the lender may sell the shares in the open market to recover it. This would bring the valuations extremely low and would result in huge wealth loss for investors who didnt do their homework. Also, if the share price falls below a certain price limit, the lenders can choose to sell off the shares to recover the collateral. 

Today, there are some regulations for the pledging and all, but there is a large number of companies who have pledged their shares. 

Time to have a look at your businesses and see if there is a pledging. If yes, why? What is the plan to release them? Is the business intact? You need to know this, my friends. If not, its time to pick the phone, write emails and bug the CS/MD until you get the answers. Else, you will be sitting on a volatile stock which would be a risk.

Think about it.


Good luck,


Article By-
Fundamental Investor
www.fundamental-investor.com

Impact of Bonus and Split of Shares - Myth Unraveled

 
Multiple listed companies go for a Bonus Issue or Split their shares. Do we actually understand what that means? What is the implied impact? What does it really signify? Should we get excited? Has anything really changed? Read on...

Image result for bonus and split

Dear investors and friends,

In my investing experience and my interaction with various investors, I see a lot of people getting very excited and overwhelmed when a listed business offers bonus shares or splits the shares. Some are carried away without actually understanding the basis or the concept. I actually get a lot of emails asking whether a business can be bought since it is going for a split or offering bonus shares. Today, I would like to present a good perspective about the two and the difference. Once this is properly understood, all of us can take an informed decision and try to put the pieces together.

Before we move ahead, you can check out articles, if you have not yet read them. 


How to Get A Tax Free Income of Over 10 Lakhs Legally!

What Does A 100-200% Sure-Shot Profit Every Month Means



Alright, lets understand the Bonus issue first.

Bonus Issue:
When a business offers shares to others, the understanding is that, the profit and loss will be borne by investors as well (in terms of market price). Whenever there is a surplus earnings which a business makes, the patient investors get rewarded with a small part of the earnings called dividends. The rest is kept as reserves and shown in the balance sheet as well. Many companies choose to keep the entire earnings with themselves and let it grow over a period of time. This accumulates over a period of time and finally the company decides to distribute a huge chunk. Instead of doing this in terms of dividends, the businesses decide to expand their authorized share capital by increasing the number of shares. What this essentially means is that the company converts a part of their reserves into shares.

From my previous articles, I am sure you understand some basic terms. Let's try to put the above understanding in terms of an example.

Lets say that a company has issued 1 Lakh shares to the public at Face Value 10. Lets say that the reserves are 10 Lakh. The company wants to increase its share capital. Now, for a FV of 10, the number of shares for reserves of 10 Lakh is 1 Lakh shares.

Number of shares created by reserves = Reserves / FV

1 Lakh = 10 Lakh / 10
So now, in addition to the 1 Lakh shares in the market, we have 1 Lakh shares created out of reserves. This means that for every share the company has given, there is one bonus share. This comes out as 1:1 bonus issue.
Now, there will be 2 Lakh shares in the market. Now since the number of shares have doubled, the market price would halve. Essentially, please remember that market price would not change in terms of value since nothing has changed in the company in terms of its business. So, even though the number of shares have doubled, there would be no increase in the value of the holding in any way.

If the market price of the share was Rs 100, after the bonus issue, it would be at Rs 50.

Market cap before bonus issue = Rs 100 x 1 Lakh shares
Market cap after bonus issue   = Rs 50 x 2 Lakh shares

Market cap has no effect.
Now lets understand the stock split.

Stock Split:
A company's market price depends on its profitability, sustainability and future vision. As a company keeps outperforming, its market price goes up and up. There are so many companies like MRF, Eicher, Page etc which trade at a very high price. For eg, as I write this article, MRF is trading at around Rs 38000 with a Face Value of Rs 10. Lots of retail investors cannot afford to buy even 1 share of MRF since it is quoting at such a price. If an investor wants to start a SIP at Rs 10000 per month, he will not be able to buy a single share of companies trading at above Rs 10000.

Read about Getting Rich with Systematic Investment Plan here

To help all investors to participate and own shares in a business, companies go for a stock split. A stock split means splitting the stock into multiple smaller units of lesser Face Value, so that the liquidity increases. 

If a company has 1 Lakh shares of FV 10 and is trading at Rs 20000 and decides to split the shares into 5 parts, we will have each share of Rs 4000. 

Market cap before split = 1 Lakh x 20000 (FV 10)
Market cap after split   = 5 Lakh x 4000 (FV 2)

So even though the new market price becomes Rs 4000, the value doesn't change. I hope you are understanding the difference between value and price in this article as well..

Lots of punters use these opportunities to artificially raise the price and many poor investors get excited by the bonus/split news and get stuck at high levels. With a good understanding, this can be avoided.

Now with this understanding, you will be able to analyze things in a more mature way. You will not be carried away by any of these. You need to understand that, by giving a bonus or split of shares, nothing really has changed. Everything depends on how the company performs and that's all matters.

Having said this, read this article on how patience alone can create wealth in long term (Click here)


Please remember that Market cap is a function of future profits and trends and since nothing has changed, it would remain same.

Think about it :-) Any experiences?? Good, bad, ugly?? Let us know..


Also Read: Everything You Wanted To Know About Multibagger Stocks

Also Read: Systematic Investment In Stock Market

Also Read: Investment Options To Save Tax

Good luck,


Article By: Fundamental Investor

http://www.fundamental-investor.com/

Wealth Creation with Natural Business Partners

 
Can we ever imagine creating wealth using the waste we generate every single day? That too, with business partners who work well with you at all times? Nature is the best, when we cooperate. Introducing Vellore Srinivasan ji and his amazing initiative using Solid and Liquid Resource Management (SLRM) which he has popularised and proven over the years... Read on...

Dearest investors and friends,

How are you all doing? I am sure many will be enjoying the returns in solid stocks in the last few months. Patience has always helped, I am sure.

I actually happened to visit a scrap/junk shop a month back. I found the owner really "well to do" and I started digging deeper. I found that he had amazing items in his scrap yard. It was a very very clean & organised place. His workers were busy in segregating, cleaning and stacking the waste. Every couple of hours, the so called "waste" was coming in a van into his junk yard. He had amazing computer tables, chairs, televisions, dustbins, buckets, flower pots, pipes, screws, pins and what not. Anything which is garbage or useless for anyone, ends up in shops like his. The prices were very good and the products were clean. The perspective is changing. He had been making gold out of waste.

Some statistics (from Shri Prakash Javedekar's press conference in April 2016)

62 million tonnes of waste is generated annually in the country at present, out of which 5.6 million tonnes is plastic waste, 0.17 million tonnes is biomedical waste, hazardous waste generation is 7.90 million tonnes per annum and 15 lakh tonne is e-waste.
43 million TPA is collected, 11.9 million is treated and 31 million is dumped in landfill sites, which means that only about 75-80% of the municipal waste gets collected and only 22-28 % of this waste is processed and treated.

Waste generation will increase from 62 million tonnes to about 165 million tonnes in 2030.

Today, waste management has become the need of the hour. Waste is not going to get any lesser. Its a common sight to see so much garbage being thrown out on the streets.

We need to act NOW...

Today, I am going to introduce all of you to an inspiring person, Vellore Srinivasan ji, who has some amazing business partners. They are not people who wear suit and boot, travel in amazing cars or stay in awesome bungalows. They neither ask for salary hikes, nor strike at any point in time. However, they are very much part of nature, as much as we are.


While many of us are helplessly living our lives, Srinivasan ji has been creating wealth from waste using our ancient technology and working closely with nature. He has impacted so many lives by educating and employing them to make this world a better place to live in.

The following piece taken from The Hindu, based on Srinivasan ji 's interaction in Bidar.

“With planned waste management based on people’s participation, governments can turn garbage into a gold mine,” the waste management expert Vellore C Srinivasan ji said.

“Making cities free of garbage is a headache for most city governments in the country. With a little effort, garbage can be changed into a source of job creation and endless resources,” he aded.

According to Srinivasan ji, segregated and processed garbage yielded over 150 types of recyclable materials and over 200 byproducts that had an assured market.

Srinivasan ji feels that the success of a waste management programme hinged on multiple levels of segregation at home and at the processing centre. Identifying different types of garbage and using distinct processing techniques to clean, treat and sell them, training workers and officials and creating awareness among residents to work with the government are the biggest challenges.



Srinivasan ji, who was featured on Aamir Khan’s TV show ‘Satyameva Jayate’, prefers to call it solid and liquid resource management (SLRM). “Calling it garbage or waste creates a mental block in most of us who don’t want to take it up later. Hence there is a need to change the vocabulary,” he said. He said that Vellore town had evolved a system of waste management that used age old techniques like composting and targeted processing. The city had eliminated roadside dust bins and was using self-help groups to collect segregated waste from every family. Various processing plants create products like fertilizer, natural gas, plastic and metal which were always in demand, he said. This had come to be known as the Vellore technique and was now followed by several cities.

He gave examples of cities like Vellore, Coimbatore, Jodhpur and Ambapuri that had successfully adopted the SLRM technique.

He showed videos of how Mysuru City Corporation was using vegetable waste to feed cows that produced compost, fish market waste fed the ducks that aerated waste waters and how chicken and fish ate away larvae and maggots and completed the cycle.

“Bidar city has 45,000 houses and 4,000 shops and offices. If it can properly segregate and process the garbage that it produces on a daily basis, the city municipal council can earn up to Rs. 40 lakh a month from recycling and reuse alone,” Srinivasan ji said. 

He said that a city like Bengaluru could earn over Rs. 1,500 crore a year from garbage, rather than spending similar amounts on garbage disposal, he said

Watch this video to know more - (Click here)




Srinivasan ji was also featured on Satyameva Jayate show. This video is also amazing (click here to view):



A document which I found online giving more insight about the model SLWM (Solid and Liquid Waste Management)

http://rural.nic.in/sites/downloads/pura/ZWM_models.pdf

Srinivasan ji is an inspiration for all of us. I am proud that a fellow Indian has been taking this noble initiative and thinking about our future generations. Can we all do our bit?

Something to think about...


Article By: Fundamental Investor
http://www.fundamental-investor.com/

“Rule No. 1 : Never lose money. Rule No. 2 : Never forget Rule No. 1.” ― Warren Buffett

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