Pocketful

Category: Investing

  • Why Are PSU Stocks Falling? Key Insights and Considerations

    Why Are PSU Stocks Falling? Key Insights and Considerations

    The Indian infrastructure sector is the backbone of the nation’s economic growth. Financing these large-scale projects is crucial, and project finance has filled the gap. However, the RBI recently introduced draft guidelines aimed at revamping this system.

    In this blog, we will learn about these new RBI regulations and explore their impact on lenders and borrowers. Further, we will also understand whether they usher in a new era of prudence in project finance.

    PSU Stocks – An Overview

    PSU stocks refer to the shares of companies that are categorised as Public Sector Undertakings. These are businesses where the Indian government holds a majority stake, i.e., at least 51% ownership. Examples of PSUs include LIC, BHEL, Indian Oil, BSNL, NTPC, ONGC, SBI, etc.

    These companies operate across sectors like energy, oil & gas, power, banking, insurance, infrastructure, manufacturing, and telecommunications.

    PSUs have a profound impact on the economic growth of India through the provision of vital goods and services, the promotion of balanced development, as well as the effective implementation of government policies.

    Read Also: What is PSU Index? Performance, Comparison, Benefits, and Risks

    Why there was a fall in the PSU stocks?

    Fall in PSU Stocks

    The share of PSU stocks witnessed a sharp decline of up to 13% after the Reserve Bank of India’s implementation of more stringent regulations regarding project finance on 7 May 2024.

    But, what is Project Finance?

    Project Finance is a way to fund long-term infrastructure and industrial projects. It is distinct from conventional corporate loans, as it depends on the project’s cash flow for debt repayment rather than the creditworthiness of the sponsoring companies. In the event of default, lenders generally have limited recourse to the sponsor’s assets due to the project’s status as a distinct entity. The primary concern revolves around the security of the project’s assets and revenue.

    It is often used for large and complex projects that have high initial expenses, such as power plants, toll roads, bridges, tunnels, dams, etc.

    Let us have a quick overview of RBI’s new guidelines for project finance:

    As per the RBI letter dated 7 May 2024, Banks must increase their provisions for loan defaults during the project’s construction phase. The provisioning amount for this loan can be as high as 5% in contrast to the existing 0.4%. This may result in higher borrowing costs for developers and infrastructure companies.

    The proposed implementation of the 5% provisioning requirement is set to be carried out gradually until the fiscal year 2027.

    The provisioning requirements shall be alleviated as the project advances towards the operational phase. Once operational, banks may be required to only set aside 2.5% of the outstanding loan and this reduction can be further minimised to 1% if the project meets the specific financial performance benchmarks.

    The RBI has proposed minimum exposure requirements for projects that are financed by multiple lenders, also known as consortium lending. This means that each participating bank needs to have a minimum loan portion relative to the total project cost.

    Additionally, it is stipulated that when the participant lenders collectively have an exposure of up to INR 1,500 crore, no individual lender shall be permitted to have an exposure that is less than 10% of the aggregate exposure, and for projects where the aggregate exposure of lenders is more than INR 1,500 crore, the individual exposure floor will be 5% or INR 150 crore, whichever is greater.

    Objectives of RBI Guidelines

    Objectives of RBI Guidelines

    There are two main objectives behind RBI’s new guidelines on project finance:

    • The primary objective behind this is to prompt lenders, i.e., banks and financial institutions to exercise greater caution when providing financing for projects. The RBI has mandated banks to allocate higher provisions (up to 5% during construction) to ensure careful assessment of project risks before allocating funds. This can make project finance more stable in the future, with fewer loan defaults.
    • Implementing more rigorous loan approval procedures and emphasizing risk mitigation measures could catalyse project developers to enhance their project planning, feasibility, and overall execution. This will lead to higher quality projects with better chances of success and timely completion.

    Impact of the New RBI Guidelines

    The new draft guidelines for project finance by the RBI are anticipated to have a diverse influence on the myriad of stakeholders participating in this domain:

    • Lenders will need to set aside more money, which can go as high as 5%, for lending during construction. As a result, developers can expect borrowing rates to increase by 100-150 basis points. This means that loans will become more costly.
    • The implementation of more rigorous loan approval procedures and the presence of a cautious lending climate may result in setbacks in obtaining project finance.
    • New reporting requirements and consortium lending norms might add complexity to the loan approval process for banks.

    Read Also: RBI Retail Direct Platform

    Conclusion

    To sum it up, the RBI’s new guidelines for project finance aim to create a more balanced and risk-averse project financing environment. However, short-term challenges for borrowers and lenders may arise, but the long-term benefits of better project quality and stability could be substantial. The success of these guidelines will depend on effective implementation and open communication between lenders, borrowers and regulators.

    Frequently Asked Questions (FAQs)

    1. How will new RBI guidelines on project finance impact borrowing costs?

      With new guidelines, the Banks have to raise interest rates by 100-150 basis points because of increased provisioning needs, making project finance more expensive.

    2. Will new RBI guidelines on project finance affect borrowers?

      The Borrowers will face stricter loan approvals and higher borrowing costs, and there can be project delays.

    3. Can RBI’s new project finance guidelines slow down project financing?

      Tighter regulations and higher costs might cause a tentative slowdown, especially for smaller projects.

    4. Are project finance guidelines released by RBI the final one?

      No, these are draft guidelines. The final regulations may differ after considering the feedback of all stakeholders.

    5. When will RBI’s new guidelines for project finance come into effect?

      A phased implementation of new guidelines is expected, with full effect by March 2027.

  • Explainer On REITs: Should You Invest?

    Explainer On REITs: Should You Invest?

    Have you ever dreamed of possessing a portion of that luxurious house? Buying real estate can be a good investment in the long run, but it usually requires a lot of money. And don’t forget about the illiquidity that comes with real estate.

    What if there existed a means of investing in real estate with a reduced amount of capital, allowing one to reap the associated advantages without encountering the additional inconvenience?

    In this blog, we will explore REITs, their types, how they operate, and the features they have.

    REITs Overview

    REITs stand for Real Estate Investment Trust. REITs own, operate, or finance income-producing real estate. Think of REITs as a mutual fund for real estate. REITs pool money from many investors to buy and manage several properties. Investors can participate in the growth of real estate market without buying or managing any property themselves.

    Features of REITs

    REITs come with some distinct features that make them attractive investment options. Some of their key characteristics are listed below:

    • They are generally listed on the stock exchanges, i.e., NSE and BSE for public trading. Also, they may operate as privately owned, known as non-traded real estate investment trusts.
    • REITs are allocated to various revenue-generating properties, such as apartments, offices, buildings, shopping centres, warehouses, and healthcare facilities.
    • These trusts are generally required by law to distribute a minimum of 90% of their taxable income in form of dividends, which translates into a consistent and regular source of income for prospective investors.

    Did you know?

    Real Estate Investment Trusts (REITs) in the USA have outperformed equities for over 50 years-time frame.

    Types of REITs

    Types of REIT's

    REITs offer various options based on the investor’s inclination toward property type and preferred risk-return profile.

    1. Equity REITs

    These are the most common types of REITs. They directly own and operate income-producing real estate properties. They invest in properties like apartments, office buildings, shopping malls, and hotels and generate income primarily through rent collected from tenants and appreciation of their property value.

    2. Mortgage REITs

    Unlike Equity REITs, mREITs do not own physical properties. Instead, they invest in mortgages or mortgage-backed securities. They earn income from the interest paid on the mortgages and securities they hold and are considered less volatile than equity REITs. However, their returns can be more sensitive to interest rate fluctuations.

    3. Hybrid REITs

    These REITs combine the characteristics of both equity and mREITs. They invest in a mix of real estate properties and mortgages and generate income from rent and interest payments. The risk-return profile of a Hybrid REIT depends on its specific mix of investments.

    4. Public & Private REITs

    Public REITs are the most common and trade on major stock exchanges like any other stock. On the contrary, private REITs are not publicly traded and are generally offered by investment firms to accredited investors with a higher net worth.

    Who should Invest in REITs?

    Why should Invest in REIT's

    REITs can be a good fit for a variety of investors. The following is an analysis of who may find them attractive.

    • Income-Oriented Investors – REITs are known for their steady stream of dividend income, making them ideal for retirees or investors seeking additional income generation within their portfolios.
    • Long-term Investors – REITs are designed for investors with long-term investment horizons. While short-term fluctuations may occur, they provide stable returns and capital appreciation over time.
    • Diversification Seekers—REITs introduce a new asset class to your investment portfolio, mitigating overall risk by not relying solely on equities or bonds. REITs’ performance exhibits a limited correlation with conventional investment options.
    • Investors with limited capital – Investing in REITs offers the opportunity to access the real estate market with a reduced initial capital outlay compared to buying real estate directly. This creates opportunities for individuals who may not have the funds for a conventional real estate acquisition.
    • Passive Investing—REIT ownership entails a lower need for management than direct real estate ownership. Investors benefit from collecting dividends without the burden of property maintenance or tenant management.

    How REITs operate

    REITs function similarly to companies that pool money from investors. This can be done through an IPO or subsequent share offerings. These companies use this pooled fund to acquire and manage income-producing real estate properties. Real Estate Investment Trusts generate income primarily through two ways, i.e., rent and property appreciation.

    Furthermore, comprehending how REITs function can help determine whether they are compatible with your investment objectives and risk tolerance.

    REITs in India

    The concept of REITs is relatively new in India compared to other developed countries such as the USA, UK, etc. The Securities and Exchange Board of India (SEBI) introduced REIT guidelines in 2007, which were later updated in 2014. As of now, there are only five REITs registered with SEBI in India, which are as follows

    • Embassy Office Parks REITs
    • Mindspace Business Parks REITs
    • Brookfield India Real Estate Trust
    • Nexus Select Trust
    • 360 ONE Real Estate Investment Trust

    These REITs primarily focus on income-generating commercial properties like office buildings and business parks.

    Points to consider before investing in REITs

    1. Vacancy Rate: This refers to how many floors, offices or houses are vacant. Always look for REITs that have lower vacancy rates.
    2. Portfolio Mix: Watch the properties owned by REITs and analyse them properly. What kind of properties does each REIT own, and in which location. There should not be any concentration.

      Further, also look for a concentration of top tenants. There can be a case that most of the properties in a REIT are owned by a select few tenants.
    3. Dividend History: Have a look at the track record of dividend and analyse the dividend yield before investing in REITs.

    Read Also: Types of Investment in the Stock Market

    Conclusion

    The realm of REITs is continuously developing. As the market matures and new players emerge, thrilling opportunities will unfold. Conduct additional research on specific Real Estate Investment Trusts that align with your investment objectives, and seek guidance from a financial expert to explore your investment options further.

    Frequently Asked Questions (FAQs)

    1. What are REITs?

      REITs are similar to companies that own, operate or finance income-producing real estate.

    2. Are REITs a good investment?

      It depends on your goals and risk tolerance. They offer several benefits but are also affected by the market fluctuations.

    3. How can I invest in REITs?

      You can buy shares of REITs (individual units) on a stock exchange or invest in REIT mutual funds or ETFs. Further, one can start investing in REITs from as low as INR 500.

    4. What are the drawbacks of REITs?

      There are a few drawbacks of REITs such as risk of broader real estate market, lack of control over investments, etc.

    5. Are REITs 100% safe?

      No investment is 100% safe. In case of REITs, they carry inherent risks, but diversification can help mitigate them.

  • Delisting Of ICICI Securities : Reasons and Brief Explanation

    Delisting Of ICICI Securities : Reasons and Brief Explanation

    Ever heard of a company delisting itself from the stock market on purpose? That is precisely what is happening to the ICICI Securities. In March 2024, the minority shareholders showed their support by voting in favour of ICICI Securities’ delisting, and to merge with its parent company, ICICI Bank. But before you jump to conclusions, this was not bad news. It was a strategic move by ICICI Bank to simplify its structure and create a more robust financial force.

    In this blog, we will explore the reasons behind the proposed delisting of ICICI Securities, the process, and how this decision could benefit both ICICI Bank and its shareholders.

    ICICI Securities – Brief

    ICICI Securities is a listed company founded in 1995 as ICICI Brokerage Services Limited and is a subsidiary of ICICI Bank. The company embraced technology and launched a revolutionary online brokerage platform, ICICIdirect.com, in 2000 and pioneered online investment opportunities in mutual funds and government bonds. It expanded its reach through physical ICICI direct branches across India in 2005 and diversified services by offering health and life insurance products by 2006. The company name was officially changed to ICICI Securities in 2007.

    On November 9, 2023, the Reserve Bank of India approved ICICI Bank’s request to establish full ownership of ICICI securities. About 71.9% of the brokerage’s minority shareholders approved the delisting, which is higher than the regulatory requirement of a two-thirds majority.

    The ICICI Bank is offering 67 shares of ICICI Bank for every 100 shares of ICICI Securities held by the shareholders. However, there was some disagreement among investor groups. Institutional shareholders, who have a more significant stake, supported the delisting, while some retail investors opposed it.

    Additionally, the Quantum Asset Management Company (QAM), with a 0.21% stake in ICICI Securities, voted against the deal. According to QAM, ICICI’s offer for the stake is undervalued. It should be priced at approximately INR 940 per share, considering the lowest multiple among its comparable peers in the market. This valuation is significantly higher than the current offer on the table by the ICICI Bank.

    Why Retail Investors are not in favour of Delisting

    Why Retail Investors Not in favour of ICICI Delisting

    A few Retail Investors are opposing the delisting of ICICI Securities because of the Swap Ratio concern:

    Swap Ratio Concern – Retail investors felt that the exchange rate offered by ICICI Bank (67 shares of ICICI Bank for every 100 shares of ICICI Securities) undervalued the ICICI Securities. They believe that their holdings are worth more than the offered price, and the swap ratio would not translate to the same potential growth as holding separate stocks.

    If you’re not familiar with Swap Ratio, it refers to the exchange rate at which shares of the acquiring company (ICICI Bank in this case) are offered for shares of the target company (ICICI Securities). It establishes the percentage of ownership a target company shareholder will receive in the new or surviving company.

    Read Also: Delisting Of ICICI Securities : Reasons and Brief Explanation

    Reasons for Delisting of ICICI Securities

    Reasons for Delisting of ICICI Securities

    ICICI Securities is proposed to become a wholly-owned subsidiary of ICICI Bank, which would give ICICI Bank complete ownership and control over ICICI Securities.

    The Bank believed that merging the two entities would improve efficiency and allow it to offer a broader range of financial products and services under one roof. The Delisting would also allow for streamlining operations and decision-making processes within the bank.

    Delisting – An Overview

    The Delisting refers to removing a company’s stock from a stock exchange, i.e., NSE and BSE in India. This means the stock can no longer be traded on an exchange. The companies might delist their shares for several reasons, such as mergers and acquisitions, non-compliance with listing requirements, financial distress, etc. Generally, the delisting can be classified as voluntarily or involuntarily.

    • Voluntary Delisting
      A company might choose to go private or get acquired by another company. In this case, the company will generally offer shareholders a way to sell their shares before the delisting happens. ICICI securities is a case of voluntary delisting.
    • Involuntary Delisting
      This happens when a company does not follow the stock exchange listing requirements. There are different requirements a company needs to meet to stay listed, such as maintaining a specific price or filing several reports on time. The exchange can delist, if a company does not meet the listing requirements.

    You must wonder what happens to the shares after the company is delisted, particularly in case of Involuntary delisting. Even though delisting makes things trickier, you still own a stake in the company, as indicated by your shares. Let’s have a quick overview:

    • Once the company is delisted, you can no longer trade it on the stock exchange. This significantly reduces liquidity, meaning finding a buyer for your shares might be challenging.
    • You might be able to sell your shares on the Over the counter (OTC) market, which is essentially a network of dealers who trade securities outside of exchanges. However, OTC markets are less regulated and generally have wider bid-ask spreads than the stock exchange.
    • Shareholders might find it challenging to sell their shares as there may be limited buyers in the OTC market.
    • In case of voluntary delisting, the acquirer provides the buyback window. The shareholders can sell their holdings to the promoters before delisting.

    Read Also: ICICI Bank Case Study: Financials, KPIs, Growth Strategies, and SWOT Analysis

    Conclusion

    The delisting of ICICI Securities will mark a turning point for the company and ICICI Bank. While some retail investors expressed concerns, the goal is to create a more efficient financial institution. Only time will tell the impact of this strategic move. The company may be delisted, but the decision positions them for future growth as a part of a stronger financial entity.

    Additionally, the delisting will pave the way for a more streamlined and competitive financial giant. This could be a positive development for ICICI Bank and the Indian financial landscape. Also, SEBI is currently reviewing multiple complaints regarding the delisting. Upon the collection of substantiated evidence, the SEBI will initiate an investigation. The actions that SEBI may take remain uncertain.

    Frequently Asked Questions (FAQs)

    1. Why ICICI Securities is getting delisted?

      The purpose of delisting is to simplify ICICI Bank’s structure, and achieve better integration between the two entities.

    2. Did ICICI Bank take this decision because of the poor performance of ICICI Securities?

      No, it was a strategic decision to delist ICIC Securities, and not due to negative performance of the company.

    3. Did everyone agree with the delisting?

      The institutional investors favoured the delisting; however, a few retail investors opposed it.

    4. What will happen to the shareholders of ICICI Securities?

      The shareholders of ICICI securities will receive the ICICI Bank shares in exchange for their holdings.

    5. Will this delisting affect the stock price of ICICI Bank?

      The long-term impact remains to be seen, but the move overall aims to strengthen the banking operations.

  • What are Treasury Bills: Meaning, Benefits and How to Buy?

    What are Treasury Bills: Meaning, Benefits and How to Buy?

    What are T-bills? What are the benefits, risks, and investment strategies of T-bills? How are T-bills risk-free? We’ll uncover all such questions in this blog.

    What are T-bills?

    Treasury bills, also known as T-bills, are short-term instruments (maturity less than a year) issued by the government.

    It is one of the safest investments as it is backed by the financial stability of the government.

    T-bills don’t give any interest. So, how do investors make profits? These are zero coupon investments that are issued at a discount to fair value and have a maturity of a year or less.

    Example: Let’s consider a T-bill with a face value of INR 1,00,000 of maturity 3 months. The investor buys the T-bills at INR 99,000 (at a discount) and receives INR 1,00,000 after 3 months. In this case, the investors earn INR 1,000

    Issuers of T-bills

    T-bills are issued by the government to meet short-term needs and manage the liquidity. In India, T-bills are issued by the RBI (Reserve Bank of India) on behalf of the government. As of April 2024, we have three different types of T-bills based on the maturity: 91 days, 182 days, and 364 days.

    Did you know?

    In India, the Reserve Bank of India issued the first T-bills in 1917.

    How do T-bills work?

    How do T-bills Work
    • Issuance – T-bills are issued through auctions, including competitive and non-competitive auctions on behalf of the respective treasury departments or central bank, i.e. the RBI.
    • Competitive Auctions – Investors place bids for yield rates they are willing to accept. Until the authorities issue the required securities, the top bids are accepted first.
    • Non-competitive Auctions – Investors accept the yield that has been previously decided. Small institutions and individual investors usually prefer this kind of auction.
    • Maturity Period – T-bills are generally issued for 3 months, 6 months, and a year. Currently, in India, we have T-bills for 91 days, 182 days, and 364 days. Investors may choose the maturity according to their investment time horizon and liquidity needs.
    • Discount / Interest – Unlike other coupon-bearing bonds, T-bills don’t pay coupons or interest. Instead, the investor earns at the time of maturity when the government repays the face value of the T-bill.
    • Secondary Market Trading – T-bills can be traded in the secondary market before maturity, offering liquidity and flexibility to investors. Secondary market trading refers to the buying and selling T-bills between investors before the maturity date, which generally happens on exchanges, i.e., NSE and BSE in India. In the secondary market, the market price of T-bills fluctuates according to the market demand of the securities. Transacting in the secondary markets may incur fees or charges, including brokerage or commissions.

    A T-bill is said to be at a premium if its market price is greater than the face value. This means that there is more demand than supply in the secondary market. Conversely, if the T-bill has a market price lower than the face value that means it is trading at a discount.

    Benefits of Investing in T-bills

    • Safety – T-bills are safe havens for investors because they are backed by the government. They are preferred by investors who don’t want to take much risk and secure their capital.
    • Liquidity – T-bills are highly liquid investments offering flexibility to investors to rebalance or adjust portfolio easily.
    • Short-term Horizon – T-bills allow investors to invest for a short-term. They can park their funds temporarily in T-bills while awaiting other investment opportunities.
    • Predictable – T-bills offer a fixed rate structure, allowing investors to predict the rate of return with certainty, unlike other securities like equity, hedge funds, and many others.
    • Diversification – T-bills have a low correlation with other securities like equity and real estate. Including T-bills in the portfolio helps the investors to reduce overall portfolio risk and enhance risk-adjusted returns.

    Read Also: Why Debt Funds Are Better Than Fixed Deposits of Banks?

    Risks associated with T-bills

    • Interest Rate Risk: The market price of T-bills fluctuates in the secondary market according to the interest rate. When interest rates rise, T-bills are discounted at a high rate, leading to lower prices and capital loss for investors.
    • Inflation Risk: The real rate of return earned on a T-bill may be negative in case inflation exceeds the rate of return earned. This deteriorates the purchasing power of investors.
    • Call Risk – These risks are associated with only special types of T-bills that are callable T-bills. In callable T-bills, the government has the option to redeem them before their maturity date.
    • Regulatory or political risk: Political instability or any other regulatory changes may affect the returns.

    Investing in T-bills

    Investing in T-bills

    Investors can invest in T-bills through direct purchase from the treasury or from brokers or dealers. A Primary Dealer (PD) or a Scheduled Commercial Bank is authorized to deal in government securities, including T-bills, in India. Some of the major PDs in India include the State Bank of India (SBI), ICICI Bank, HDFC Bank and Axis Bank and many others.

    One can also buy T-bills via the RBI Retail Direct Platform. If you’re unaware of this platform, then checkout our blog on the same: Reserve Bank of India : Retail Direct Platform

    Further, T-bills trade on an exchange post issuance, which means you can also buy/sell them in the secondary market, i.e., the NSE and BSE.

    Read Also: What is TREPS & Why Mutual Funds Invest in it?

    Conclusion

    In today’s dynamic financial landscape, understanding the characteristics, benefits and risks of investing in T-Bills can allow investors to make informed decisions aligned with their investment objectives and financial goals. T-Bills offer straightforward and transparent investment opportunities, and their simplicity, safety and short-term nature make them a preferred choice for investors seeking liquidity, capital preservation, and predictable returns. But it also comes with risks that the investors should consider before making any decisions.

    Frequently Asked Questions (FAQs)

    1. What is the minimum investment amount for T-Bills?

      The minimum investment amount for T-Bills depends on the country and the specific auction. In India, it is INR 10,000 and multiples of INR 10,000 thereafter.

    2. Are T-bills adjusted for inflation?

      No, T-Bills are not inflation-adjusted securities. The interest earned on T-Bills is fixed and does not change with inflation.

    3. Can the investors reinvest the proceeds from T-Bills automatically after maturity?

      Some platforms or financial institutions offer automatic reinvestment options for matured T-bills, which allow investors to reinvest the amount in new T-bills without manual intervention.

    4. Are T-bills and T-bonds different?

      T-Bills are short-term securities with maturity periods of up to one year or less, while T-Bonds and T-Notes refer to longer-term securities with maturity periods ranging from 2 to 30 years.

    5. How does a change in credit rating affect returns on T-bills?

      T-Bills are backed by the government’s creditworthiness, making them less sensitive to credit rating changes than corporate bonds or other debt securities. However, significant changes in a country’s economic or fiscal health may impact investor confidence and T-Bill prices.

    Disclaimer: The securities, funds, and strategies mentioned in this blog are purely for informational purposes and are not recommendations.

  • Strategies To Boost Your IPO Allotment Chances

    Strategies To Boost Your IPO Allotment Chances

    Have you ever dreamed of getting in on the ground floor of a new company? IPOs, or Initial Public Offerings, allow you to do just that. But snagging shares can feel like winning the lottery.

    This blog uncovers the secrets of the IPO allotment process. We will also explore the quota system, ensuring you understand how your chances stack up against other investors.

    But before delving deep, let’s take an overview of IPO – An IPO, which stands for Initial Public Offering, is the first time a private company offers its shares to the public for investment. It’s an essential event in the life journey of a company that marks its transition from being privately owned to a public entity listed on a stock exchange, i.e., the NSE and BSE in India.

    Objectives of IPO

    Objectives of IPO

    Companies pursue IPOs for several vital objectives. Some of them are listed below:

    • The primary objective is raising capital. Companies gain access to a large pool of funds by selling shares to the public. This capital can be used for various purposes, such as funding expansion plans, developing new products or services, paying off debt, or acquiring other businesses.
    • Going public can enhance a company’s reputation and visibility. Publicly traded companies are subject to regulations and reporting requirements, which can help gain investor’s confidence.

    Read Also: What is the IPO Allotment Process?

    What is Quota in an IPO?

    In an IPO allotment, quotas refer to the pre-determined percentage of shares reserved for different investor categories.

    Retail Individual Investors

    These are regular investors applying for a maximum of INR 2 lakh. They are generally allocated at least 35% of the total offering, but it can be as high as 50% depending on the IPO.

    Non-Institutional Investors (NIIs)

    These are high-net-worth individuals (HNIs) applying for more than INR 2 lakh. They do not have a fixed quota, and their allotment depends on the remaining shares after retail and QIB allocations.

    Qualified Institutional Investors (QIBs)

    These are institutional investors such as banks, mutual funds, and insurance companies. They are allocated a minimum quota, which can range from 10% to 60%, depending on the regulator’s approval and the type of IPO. (Book building or Fixed price)

    Knowing the quota systems helps you understand your chances of allotment. Your chances might be lower if the retail quota is small and the IPO is heavily subscribed.

    Procedure of Allotment

    Procedure of Allotment

    From here, we’ll focus on the Retail Investors applying for the IPO. The allotment procedure for an IPO can be broken down into three stages, i.e., Application, Allotment, and Notification.

    Application

    Investors submit their applications to invest in the IPO through their demat or bank accounts and specify the number of lots they wish to buy and the price they are willing to pay. As per the regulator, i.e., the SEBI, the application window for an IPO shall be kept open for at least three working days. Further, for mainboard IPOs, the minimum application value must be within the range of INR 10,000 to 15,000.

    Allotment

    • Once the application window closes, the registrar reviews the subscriptions received.
    • If the IPO is undersubscribed, which means there are fewer applications than shares offered, investors will likely get all or most of the shares they applied for.
    • On the other hand, if the IPO is over-subscribed, which means there are more applications than the shares offered, a computerised process determines how shares are allotted.
    • In a minor oversubscription, investors receive a proportionate share of their application.
    • In a large oversubscription, a lottery system is used for allotment of shares.

    Post Allotment Notification

    • Within a few days of the allotment process, investors are notified about the status of their applications via text message or email.
    • This information is also available at the investor’s trading account or the registrar’s website.
    • Successful applicants will have the allotted shares credited to their demat accounts, and the funds will be debited accordingly.
    • Unsuccessful applicants will have their application money refunded, or in case of ASBA (Application Supported by Blocked Amount), the amount will be unblocked by the Bank.

    Read Also: What is the IPO Cycle – Meaning, Processes and Different Stages

    How to increase the chances of Allotment?

    The thrill of a successful IPO investment is undeniable. However, with popular offerings often experiencing massive oversubscription, many hopeful applicants end up empty-handed. While there is no guaranteed method, some strategic steps can improve your chances of allotment.

    • Be picky about your IPO
      Do not get swept away by the IPO hype. Research the company thoroughly. Look for a solid business model, strong financials, and promising growth prospects. Less-hyped offerings with strong fundamentals might present a better chance of allotment than trendy companies with sky-high demand.
    • Apply from multiple Accounts and avoid large-size applications
      A single large application might seem like a power move, but it is counterproductive in an oversubscribed scenario. The Registrar of the IPO issue will treat all retail investors equally, and in case of oversubscription, the first priority is to give at least one lot to all the applicants. So, a hefty application from one account will not give you an edge. Additionally, it is suggested to consider spreading your IPO investment across multiple applications using different demat accounts for example, of family members, or friends. This increases your chances of getting at least one lot in case of massive oversubscription. Further, never apply multiple times from the same demat account or PAN number; it will be a case of clear rejection.
    • Do not play the Bidding Game
      There is a common misconception that bidding at the lower or upper end of the price range improves your chances of allotment. The reality is that it does not increase any chances. IPO allotment is a computerised process, and bids are irrelevant. Focus on applying at the cut-off price to increase your chances of allotment.
    • Timing is the Key
      Technical glitches at the last minute can dash your hopes. Ensure you submit your application well before the deadline. Consider applying early at the opening window in case you’re applying on the last day, especially for highly anticipated offerings.
    • Buy Parent Company shares
      Generally, if a subsidiary is planning an IPO, there is a Shareholder quota for those who own shares of the parent company. So, if you’re applying for the subsidiary company’s IPO, then consider buying at least one share of the parent company before the cut-off date to be eligible for the Shareholder’s quota.

    Read Also: Apeejay Surendra Park Hotels Limited: IPO Analysis

    Conclusion

    IPO allotment might seem complex, but with the proper knowledge and strategy, you can increase your chances of success. Apply early, understand the quota system, and consider applying multiple applications via different PAN numbers. By following these suggestions and conducting deep research on the specific IPO, you will be well-equipped to navigate the world of IPO investing.

    Frequently Asked Questions (FAQs)

    1. What is ASBA?

      ASBA stands for Application Supported by Blocked Amount. It is an initiative of the SEBI, where the bank blocks an investor’s amount for subscribing to an IPO instead of upfront debit.

    2. Is getting shares in an IPO guaranteed?

      No, the allotment of shares entirely depends on application volume and quota systems.

    3. How can I improve my chances of allotment?

      Apply early and consider applying through multiple eligible accounts.

    4. What happens after the application window closes?

      The company and registrar analyse the subscriptions received, and allotment is done accordingly.

    5. Can I sell IPO shares before they are listed on the stock exchange?

      No, you can only sell shares once the IPO is listed on the stock exchange.

  • What Is Bowie Bond (Music Bonds) : History, Features, Advantages & Disadvantages

    What Is Bowie Bond (Music Bonds) : History, Features, Advantages & Disadvantages

    Easy Explainer of Music Bonds

    Have you ever heard of an investment that lets you earn money from your favorite songs? Buckle up, music lovers, because that is exactly what Music bonds are all about.

    In this blog, we will delve into the fascinating history of Music bonds, from their birth with Bowie’s ingenious move in the 90s to their recent comeback fueled by the streaming revolution.

    Bowie Bond Overview

    Music Bonds, also known as Celebrity Bonds or Bowie Bonds, are a financial instrument linked to the music industry.

    Investors purchase bonds that are backed by the future royalty earnings of an artist’s catalogue. Artists can access a lump sum money upfront by selling these bonds, without giving ownership of their music.

    Royalty income, in the context of music bonds, is the stream of payments an artist earns when their music is used in several ways. Different sources of Royalty income are as follows:

    • Mechanical Royalty – This is paid whenever a physical or digital copy of a song is reproduced, such as CD sales, downloads, or streaming services.
    • Performance Royalty – Whenever a song is publicly performed whether in live concerts or through broadcasts (radio, TV), performance royalties are generated.
    • Synchronization Royalty – This is paid when a song is used in combination with visual media such as movies, TV shows, commercials, or video games.
    • Print Music Royalty – If sheet music or printed lyric books are created for the song, these royalties are triggered by their sale.

    Investors get a return on their investment in the form of interest payments derived from the royalties generated by the artist’s music.

    Essentially, it is a way for musicians to turn their music into a tradable asset and for investors to profit from the songs with a proven track record.

    Furthermore, when you invest in a music bond, you are essentially buying a share of the future income stream generated by the royalties that we discussed above.

    History of Music Bonds

    History of Music Bonds

    Their history is not quite as old as you might think.

    The concept of Music Bonds is relatively new, with David Bowie being credited as a frontrunner in the late 1990s. In 1997, Bowie sold bonds tied to his extensive music catalogue, raising $55 million. This act brought the idea of music bonds into the spotlight.

    After the Bowie bonds proved successful, David Pullman, a boutique investment bank, established comparable bonds based on the potential earnings stream of artists including James Brown, Ashford & Simpson, the Isley Brothers, and Holland-Dozier-Holland books.

    The use of music bonds seems to have gained traction again in recent years. This might be because of factors like the rise of streaming services which provide a more predictable stream of royalty income.
    The rise of streaming services like Spotify and Apple Music has transformed the music industry. Streaming provides a more predictable and higher stream of royalty income compared to traditional album sales. This renewed viability has sparked a resurgence in music bonds.

    The mid-2000s saw a sharp decline in music sales, impacting the revenues generated by the music bonds. This, coupled with the complex financial structuring of these bonds, led to a period of decreased popularity. The original Bowie Bonds were even downgraded to ‘junk status’ due to declining income.

    Features of Music Bonds

    • The continuous success of the artist and their music is crucial to the investment’s success. A decline in popularity may result in fewer royalties and lesser profits.
    • Unlike traditional bonds, Bowie Bonds were not transferable. This limited the liquidity for investors who might have wanted to sell their bonds before maturity.
    • These bonds are often not accessible to retail investors due to high minimum investment amounts.
    • Music bonds fall outside traditional asset classes like stocks and bonds. They are considered higher-risk and higher-reward investment options.
    • Music Bonds are backed by the future royalty earnings of the artist’s music catalogue. These royalties come from several sources like streaming services, radio play, and merchandise sales.
    • Some music bonds offer fixed interest payments, while others may have variable payouts depending on the royalty income.
    • Music Bonds function like debt instruments, but instead of relying on a company’s performance, their success depends on the artist’s ability to maintain a steady stream of royalty income over the bond’s life.

    Read Also: NFO Alert: PGIM India Large & Mid Cap Fund

    Advantages of Music Bonds

    • Upfront Capital – For artists, it provides a lump sum of cash without selling the ownership of the music catalogue, which can be useful for funding their recordings or other ventures.
    • Monetization – It allows artists to capitalize on the value of their existing music, especially established artists with a strong back catalogue.
    • Hedge against Inflation – Royalty payments tend to rise with inflation, offering some protection against its effects.

    Disadvantages of Music Bonds

    • Availability – Music bonds are not widely offered to the public and may require high minimum investments.
    • Complexity – These bonds can involve complex financial structures and may be challenging for beginners to understand.
    • Suitability – They might be suitable for accredited investors with a high-risk tolerance but are not for everyone

    Future Outlook

    The future of music bonds remains uncertain as fluctuating royalty rates pose challenges.

    New technologies like blockchain and Decentralized Finance (DeFi) offer exciting possibilities. The tokenisation of music catalogues could allow for more artist-driven and transparent investment models.

    Read Also: What are Bond Yields?

    Conclusion

    The evolution of music bonds is a testament to the ever-changing music industry. From David Bowie’s groundbreaking deal to blockchain technology, this financial instrument has continuously adapted to find its place.

    As the music industry evolves, it will be fascinating to see how music bonds transform alongside it. Will they become a mainstream investment option? Only time will tell, but the world of music bonds is an exciting space to watch.

    Frequently Asked Questions (FAQs)

    1. What are music bonds?

      An investment option backed by future royalty earnings of an artist’s music catalogue. Artists get money upfront; investors get a return based on the song’s performance.

    2. Are music bonds a good investment?

      It depends; streaming makes income more predictable, but success relies on the artist’s popularity and platform dominance.

    3. Are music bonds risky?

      Yes, music bonds are considered riskier than traditional investment options,s as the success depends on the artist’s continued popularity and streaming trends.

    4. Where can I learn more about music bonds?

      You can research about the music industry news and financial websites for in-depth insights.

    5. Who introduced Music Bonds?

      David Bowie is the founder of Music Bonds.

  • Intrinsic Value vs Book Value

    Intrinsic Value vs Book Value

    Intrinsic Value vs Book value

    Have you ever wondered if a company is worth more or less than its price tag?

    Book value gives a snapshot of a company’s financial health based on accounting records, but it does not tell the whole story. That is where intrinsic value comes in. It is like looking into a crystal ball, trying to estimate a company’s true worth based on its future potential.

    In this blog, we will deep dive into book value and intrinsic value, uncovering the key differences, and why they are important for investors.

    Read Also: How to find and identify undervalued stocks

    Intrinsic Value

    The term intrinsic value gets thrown around a lot in finance, especially when talking about stocks and businesses. It refers to an asset’s inherent worth, independent of what the market is currently willing to pay for it.

    There are two primary approaches to understand the intrinsic value.

    1. Present Value of Future Cash Flows

    This is a common approach for stocks. The idea is that a company’s true value is based on the amount of cash it is expected to generate in the future, discounted back to the present day.

    The most common method for stocks is the discounted cash flow (DCF) analysis. This approach involves estimating a company’s future cash flows, and then discounting them back to their present value. The idea is that a company’s intrinsic value is essentially the sum of all its future cash flows.

    The DCF approach can be summarized as follows:

    • Estimating future cash flows by analysing the company’s financial statements, and industry trends to forecast its future earnings and cash flow generation.
    • Choose a discount rate that reflects the time value of money and the riskiness of the investment. A higher-risk company would require a higher discount rate.
    • Discount each year’s cash flows to present value using the chosen discount rate.
    • The sum of the discounted cash flows represents the company’s intrinsic value.

    2. Underlying Value of the asset

    This is more general and can apply to anything you own, not just stocks. It is the value of the parts that make up the whole.

    Furthermore, the market price of an asset can deviate significantly from its intrinsic value due to factors like market sentiment, psychology, and short-term fluctuations.

    Also, the significance of intrinsic value was underscored by legendary investor, Warren Buffet in his investment strategy. To buy companies at a discount and hold them for the long run, he looks to invest in businesses that, in his opinion, are trading below their fundamental value.

    Book Value

    Book value refers to the accounting value of a company’s net assets on its balance sheet. In other words, it reflects what a company would be worth if it liquidated all its assets and paid off all its debts. It essentially represents the shareholder’s equity in the company.

    A high book value can indicate a financially stable company with a significant amount of assets.
    However, book value does not necessarily reflect the current market value of a company or its future growth potential. This is because value relies on the historical costs of assets, which might not reflect their current fair market value.

    Calculation of Book Value

    Book Value = Total Assets – Total Liabilities

    Where Total Assets include all the company’s valuable possessions such as property, inventory, cash, and investments.

    Total liabilities include all the money the company owes, such as loans, accounts payable, and accrued expenses.

    Book Value per share is derived by dividing the book value of the company by the number of outstanding shares.

    Book Value per share = Book Value / Number of Outstanding Shares

    Additionally, book value is an important metric for investors as it provides insight into the underlying value of a company’s assets.

    Investors often compare a company’s stock price to its book value per share to analyse whether the stock is undervalued or overvalued relative to its asset base. However, keep in mind that most of the growth companies trade well above their Book value.

    Book Value vs. Intrinsic Value

    BasisBook ValueIntrinsic Value
    BasisBook ValueIntrinsic Value
    DefinitionRepresents the net value of a company’s assets after subtracting its liabilitiesRepresents the true worth of an asset based on fundamental analysis.
    CalculationBV = Total Assets – Total LiabilitiesIntrinsic Value is often estimated using various methods such as DCF analysis.
    PerspectiveFocuses on the balance sheet and tangible assets.Considers future earnings, growth prospects, and risk factors.
    LimitationsIt does not account for intangible assets like goodwill or intellectual propertyIt is subjective and is dependent on the analyst’s assumptions and methodology.
    Market RelationshipIt can serve as a floor for a company’s stock priceA stock trading below intrinsic value may be considered undervalued, while one trading above it may be considered overvalued.

    Read Also: The Art of Value Investing: Meaning and Strategies

    Conclusion

    Book value offers a reliable, historical perspective on a company’s financial standing. Intrinsic value, on the other hand, takes you on a journey into the future, estimating a company’s future growth. By wielding book value and intrinsic value analysis, you become a more well-rounded investor, equipped to make informed decisions and uncover hidden gems in the stock market.

    Remember, successful investing is all about peering beyond the surface and understanding the underlying value of a company.

    Frequently Asked Questions (FAQs)

    1. What is Book Value?

      Think of it as a company’s net worth on paper, i.e., what shareholders would get if the company shut down and sold everything.

    2. Is a high book value good?

      Not necessarily. A company with a lot of assets might not be using them well if its stock price is low.

    3. Which one is more important, Book value or Intrinsic Value?

      They both play an essential role in the investment world. Book value can show potential bargains, while intrinsic value helps identify long-term growth prospects.

    4. Is a high intrinsic value good?

      Generally, yes. But keep in mind that it is an estimate. Thus, take into account any risks that can have an impact on future profits.

    5. Can intrinsic value ever be negative?

      Yes, if a company is expected to lose money in the future, its intrinsic value could be negative.

  • P2P Lending: Definition, Benefits, And Limitations

    P2P Lending: Definition, Benefits, And Limitations

    Ever feel stuck between the rock-bottom interest rates on savings accounts and the sky-high rates on traditional loans? P2P lending might be the answer you have been looking for. This innovative financial tool is shaking things up by connecting borrowers directly with lenders, offering a win-win for both sides.

    In this blog post, we will explore the details of P2P lending, how it works, and its benefits.

    P2P lending, or peer-to-peer lending, is a way for people to borrow and lend money directly to each other, bypassing traditional banks. It happens through online platforms that connect borrowers and lenders.

    How it Works

    • P2P lending eliminates the intermediaries and banks to connect borrowers directly with lenders through online platforms. The process is as follows:
    • The borrower creates an account on a P2P lending platform and submits a loan application specifying the amount and purpose of the loan.
    • The platform analyses creditworthiness through various checks, including credit score, income verification, and sometimes social media activity.
    • Based on this assessment, the platform assigns the borrower a credit rating and sets an appropriate interest rate.
    • The platform lists the borrower’s loan profile and details such as loan amount, interest rate, credit rating, and purpose.
    • Investors browse these listings and choose loans to fund based on their risk tolerance and desired returns.
    • Once the lender funds the loan, the platform disburses the money to the borrower, who makes fixed repayments, including principal and interest.
    • The P2P platforms generally handle all the administrative tasks linked with loan servicing, including collecting repayments, and chasing late payments. Generally, they take a cut from both the lender and the borrower for their services.

    P2P Platforms in India

    P2P Platforms in India

    There are plenty of P2P lending platforms operating in India. The most popular P2P platforms in India are mentioned below:

    • Faircent is India’s first P2P lending platform to receive an NBFC P2P license from the RBI. It offers various investment options across multiple tenures, with interest rates ranging from 8.5% to 12%.
    • Lenden Club – It is one of India’s largest P2P lending platforms. It offers loans for several purposes with interest rates starting from 6.5% per annum. Founded in 2015, the platform has over 20 lakh investors and offers several lending options.
    • Lendbox is a popular P2P lending app with flexible liquidity options. It was founded in 2015 and is regulated by the Reserve Bank of India.
    • India P2P – India’s other well-regarded platform offering investors the opportunity to earn up to 18% per annum by investing in retail loans.

    When choosing the P2P platforms, one should keep these things in mind:

    • The interest rates offered by the P2P platform.
    • The fees charged by the platform for providing its services.
    • The types of loans offered and the repayment terms.
    • Platform’s history and track record.

    Regulation in India

    The Reserve Bank of India (RBI) regulates P2P lending in India. In 2017, the RBI issued guidelines for P2P lending, known as the Master Directions for NBFC Peer-to-Peer Lending Platform. These guidelines aim to ensure the orderly development of the P2P lending sector and protect the interests of both the borrowers and the lenders.

    Some key points about P2P lender regulation are as follows:

    • Only registered NBFCs with a specific license for P2P lending can operate as P2P platforms.
    • Platforms must meet specific requirements, such as sound technological structure, and proper KYC procedures for borrowers and lenders.
    • Platforms cannot accept deposits from lenders or provide any credit enhancement or guarantee on loans.

    Benefits of P2P Platforms

    Benefits of P2P platforms

    For Borrowers

    • P2P platforms often eliminate bank overhead costs, leading to lower interest rates for borrowers than traditional loans offered by scheduled banks.
    • P2P platforms leverage technology to streamline loan applications, leading to faster approvals than banks.
    • Borrowers with limited credit history or those who would not qualify for a traditional loan may find success with P2P lenders.
    • Some P2P platforms offer more flexibility regarding loan amounts and repayment options than banks.

    For Lenders

    • P2P loans can offer higher returns on investment than traditional savings accounts interest, fixed deposits, or bonds.
    • Lenders can spread their investments across multiple loans to mitigate risk.
    • These platforms provide detailed borrower information, giving lenders more control over their investments.

    Limitations of P2P Platform

    For Borrowers

    • P2P platforms often cater to smaller loan sizes compared to traditional banks. They might not be suitable for borrowers needing significant funding.
    • The P2P platform may charge borrowers several fees, such as processing and admin fees, which can increase the overall rate offered by the lenders.

    For Lenders

    • P2P investments are less liquid than traditional assets like stocks or bonds. You may have to wait for the loan term to end to access your funds.
    • There is no 100% guarantee that Borrowers will repay the loan, regardless of their credit score. Things can go wrong, and borrowers may default on their loans. Further, P2P platforms may not have the same safeguards as banks in such situations.

    Read Also: Top 10 personal finance lessons for self-learning

    Conclusion

    P2P lending offers a compelling alternative to traditional finance, providing lower borrowing rates and higher returns. Whether you are a borrower seeking a better deal or a lender looking to maximise returns, P2P lending offers a chance to rethink how your money works for you.

    However, it is essential to carefully consider your risk tolerance and conduct thorough research before diving in, as there is always a risk of default, even with the platform assessment. The success of P2P investment hinges on the reliability of the chosen platform. Research their track record and security measures.

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    Frequently Asked Questions (FAQs)

    1. What is P2P lending?

      It is borrowing and lending money directly between individuals, bypassing traditional banks.

    2. Is P2P lending safe?

      Though reputable platforms assess the borrower’s risk profile, there is always a risk of default.

    3. How can I become a borrower on a P2P platform?

      Apply online, undergo a credit check, and receive an interest rate based on your creditworthiness.

    4. How much can I borrow or lend through the P2P platform?

      Limits vary by platform, but they often cater to smaller loan amounts.

    5. What will happen if a borrower defaults?

      Platforms may have processes for debt collection, but you may not recover your money in full as a lender.

  • Top Real Estate Stocks In India

    Top Real Estate Stocks In India

    Top real Estate Stocks in India

    The Indian real estate market is a booming industry, and with that comes a fortune of investment opportunities. Are you looking to diversify your investments and capitalize on India’s growing real estate sector?

    In this blog, we will explore the top real estate stocks of India and provide valuable insights.

    Industry Overview

    India’s real estate industry contributes immensely to the country. The industry is expected to grow at a CAGR of 25.60% in the coming years, showing a positive trajectory.

    The market is fragmented, with multiple players ranging from large, pan-India developers like DLF and Prestige Group to local developers catering to different regions of the country. Residential real estate forms the larger segment, accounting for roughly 80% of the market share. This is driven by factors like rising disposable income, population growth, urbanisation etc. On the other hand, commercial real estate holds the remaining 20%, catering to office and retail spaces.

    The COVID-19 pandemic affected the real estate industry, with the residential sector being the worst hit due to lockdowns. However, the government is carrying out several reforms to improve transparency and attract investments, such as initiatives like REITs.

    Overall, the real estate industry in India is dynamic and evolving, and it plays a vital role in the country’s economic development.

    Top Real Estate Stocks

    Top Real Estate Stocks

    DLF Limited

    DLF stands for Delhi Land & Finance. The company was founded in the year 1946 by Chaudhry Raghvendra Singh. It started with the creation of 22 urban colonies in Delhi and currently is one of the largest real estate companies in India.

    Business Model

    DLF’s business model has two main components:

    1. Development Business – This involves the entire lifecycle of real estate projects. The company identifies and acquires land, plans, and executes the construction. It then sells the completed properties to various clients. This could be anything from luxury apartments to commercial office spaces.
    2. Annuity Business – DLF also focuses on generating recurring income streams from its existing assets. This involves leasing out commercial properties like office buildings or retail spaces to businesses for a fixed rental income over a period.

    The company also offers IT Parks, shopping & entertainment spaces, and leases developed offices. It also manages two hotels, the Lodhi and Hilton Garden Inn and holds properties in several states.

    Read Also: List Of Best Paper Stocks in India

    Balance Sheet (In INR crore)

    Key MetricsFY 2023FY 2022
    Non-current Assets28,157.2928,412.51
    Current Assets25,242.5023,818.36
    Non-current Liabilities5,051.335,717.79
    Current Liabilities10,927.0710,382.29

    Income Statement (In INR crore)

    Key MetricsFY 2023FY 2022
    Total Revenue6,012.146,137.84
    Total Expenses4,509.724,748.81
    Profit for the year2,033.941,500.31

    Godrej Properties

    Established in the year 1990, the Godrej Properties is one of the first real estate companies in India to achieve the ISO certification. It is known for innovation, excellence, and sustainability in the real estate industry.

    It is headquartered in Mumbai, and is present in 10 cities including Delhi, Bengaluru, Pune, Kolkata, Ahmedabad, etc. The company has a workforce of 2,391 employees as of March 2023. In recent years, Godrej Properties has received over 400 awards.

    Business Model

    Here is an overview of Godrej Properties business model:

    1. Development of Residential Projects – The company specialises in developing residential properties including apartments, villas, and townships. The projects cater to different income groups ranging from affordable housing to luxury residences.
    2. Land Acquisition – It acquires land in prime locations across India, focusing on areas with high growth potential and favourable market dynamics.
    3. Joint Ventures and Collaborations – The company often enters into joint ventures and collaborations with landowners, other developers and investors to develop projects. These partnerships enable the company to access additional resources and expertise for the development of various projects. 

    The company prioritizes client engagement and satisfaction by using a customer-centric strategy. To guarantee that homebuyers have a great experience, it offers individualized services, open communication, and after-sales assistance.

    Balance Sheet (In INR crore)

    Key MetricsFY 2023FY 2022
    Non-Current Assets3,827.373,207.36
    Current Assets16,112.7412,894.51
    Current Liabilities9,969.035,711.83
    Non-Current Liabilities25.951,105.68

    Income Statement (In INR crore)

    Key MetricsFY 2023FY 2022
    Total Revenue2,100.052,331.93
    Total Expenses1,269.511,618.38         
    Profit for the Year655.67525.98

    Oberoi Realty

    Established in the year 1998, the company is a prominent real estate development company headquartered in Mumbai, India. They focus on creating premium living, office, retail, hospitality, and social infrastructure projects.

    Oberoi Realty is known for its exceptional design aesthetics, top-notch construction quality, and adherence to international standards. They target the luxury segment, crafting aspirational developments that cater to discerning clients.

    Oberoi Realty’s revenue likely stems from selling luxury apartments, villas, and commercial spaces to individual buyers or companies. The company also offers leasing options for businesses seeking premium office space.

    The company partners with specialised brokers who cater to luxury property sales and rentals and utilise exclusive events, high-end publications, or digital marketing strategies focused on showcasing the luxurious lifestyle linked to their properties.

    Balance Sheet (In INR crore)

    Key MetricsFY 2023FY 2022
    Non-current Assets6,184.616,781.50
    Current Assets12,456.398,909.07
    Current Liabilities3,287.842,844
    Non-Current Liabilities3,143.042,430.43

    Income Statement (In INR crore)

    Key MetricsFY 2023FY 2022
    Total Revenue4,293.202,752.42
    Total Expenses2,289.731,638.44
    Profit for the Year1,904.541,047.10

    Prestige Estate Projects

    Prestige Estate is a leading real estate developer in India. It was founded in 1986 as a partnership firm and has presence in over 12 cities across India. The company has completed more than 281 projects as of April 2024.

    The company witnessed a transformation in the 1990s. They restructured the partnership in 1997 and adopted the name Prestige Estates Projects (PEP).

    Throughout the 2000s, PEP diversified its holdings. With the opening of Forum Mall in 2004 and Cessna Business Park, a Special Economic Zone (SEZ), in 2006, they made their foray into the retail sector. The decade also witnessed the completion of Prestige Shantiniketan, a prominent integrated township, in 2010.

    Business Model

    The business model for the company is more or less similar to many real estate developers, with a twist considering their inclusion of property management and hospitality ventures.

    The company identifies and acquires land for residential, commercial, and hospitality projects. Additionally, it manages, plans, and executes construction. The company generates revenue by selling the completed residential units and commercial spaces.

    Prestige also earns rental income by leasing commercial properties to businesses for long-term periods. This could be office spaces, retail stores, or within their shopping mall.

    The company likely caters to various segments, offering luxury, mid-range, or affordable housing options. Their office spaces and retail areas target businesses looking for professional workspace or storefront locations.

    Balance Sheet (In INR crore)

    Key MetricsFY 2023FY 2022
    Non-current Assets12,624.710,872.8
    Current Assets36,582.930,444.1
    Non-current Liabilities4,857.15,018.9
    Current Liabilities21,467.315,878.3

    Income Statement (In INR crore)

    Key MetricsFY 2023FY 2022
    Total Revenue8,7726,600
    Total Expenses7,682.45,882.3
    Profit for the year1,066.81,214.8

    Read Also: Top Alcohol Stocks In India

    Macrotech Developers

    Macrotech Developers, formerly known as Lodha Developers, is a major player in the Indian real estate market. The company was founded in the year 1980 by Mangal Prabhat Lodha. Initially, the company focused primarily on residential real estate development, with an emphasis on affordable and mid-income housing.

    Business Model

    The company functions primarily as a developer, acquiring land, and planning and executing the construction of residential & commercial places. It strategically targets different buyer groups through a variety of brands.

    The company also forayed into the development of digital infrastructure parks in 2019, and has also entered into a joint venture with funds managed by Bain Capital, Ivanhoe Cambridge, and global investment firms to develop a pan-India green digital infrastructure platform.

    Balance Sheet (In INR crore)

    Key MetricsFY 2023FY 2022
    Non-current Assets3,405.24,716
    Current Assets35,749.733,762.8
    Non-current Liabilities2,573.93,292
    Current Liabilities23,858.823,024.9

    Income Statement (In INR crore)

    Key MetricsFY 2023FY 2022
    Total Revenue9,611.29,525.3
    Total Expenses7,976.17,809.7
    Profit for the year489.51,208.5

    Comparative Analysis of Top 5 Real Estate Companies

    CompanyPE RatioReturn on Equity (5 years, in %)Current Market Price (INR)Market Cap (INR Cr.)
    Godrej Properties101.4232,54270,678
    Oberoi Realty34.63111,44452,504
    DLF93.3048862,19,387
    Prestige Estate31.0671,29451,869
    Macrotech Developers66.89151,2021,19,534
    (Data as of 25 April 2024)

    Read Also: List Of Best Battery Stocks in India

    Conclusion

    The Indian realty sector is on a promising trajectory, driven by rising demand for housing, growing commercial activity, and government initiatives. This Indian sector caters to various segments including commercial, residential, retail, and hospitality. However, remember, conducting thorough research is important before investing in any theme.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1List Of Best Jewelry Stocks in India
    2List Of Best Ethanol Stocks in India
    3List of Best Chemical Stocks in India
    4List Of Best PSU Stocks in India
    5List Of Best Pharma Stocks in India

    Frequently Asked Questions (FAQs)

    1. What factors should I consider before investing in real-estate stocks?

      The company’s financial performance, the pipeline of projects, the calibre of management, market dynamics, the regulatory environment, and macroeconomic developments are all factors to take into account.

    2. Are real estate stocks affected by interest rates?

      As interest rates impact buyer affordability and developer financing costs, it can have an impact on real estate stocks.

    3. What segments of real estate do above mentioned companies operate in?

      They work in several market sectors, such as integrated townships, retail, commercial, residential, and hotel.

    4. Which is the largest infrastructure company in India based on market capitalisation?

      As of April 2024, DLF is the largest Infra company in India with a market cap of INR 219,387 crore.

    5. What are the growth prospects of Infra companies in India?

      The growth prospects of Infra companies depend on multiple factors, such as urbanization, infrastructural development, demand for real estate, etc.

  • What is Securitization? Methodology, Types, Advantages, and Disadvantages

    What is Securitization? Methodology, Types, Advantages, and Disadvantages

    Ever thought about how a car loan can be turned into an investment? Securitization makes it possible for you! This financial process turns loans into tradable securities and offers various opportunities with risks.

    In today’s blog, we will explore the merits, demerits, techniques, and process of securitization.

    What is Securitization?

    In securitization, financial institutions bundle a group of loans or other income-generating assets together and transform them into a security that investors can trade.

    Imagine a bank with a ton of issued car loans. Securitization allows the bank to sell these loans as a bundled security to investors. Investors then earn a return on their investment depending on the interest and principal payments made on the underlying car loans.

    securitization overview

    How Does Securitization Work?

    Origination

    Banks or other institutions originate loans, such as mortgages, car loans, or student loans. These are assets that will be securitized and serve as underlying collateral for the securities to be created.

    Pooling

    Financial institutions group similar loans together into a pool. This diversification spreads the risk in case some borrowers default.

    Transfer of Assets to Special Purpose Vehicle (SPV)

    The selected assets are transferred to a separate legal entity known as a Special Purpose Vehicle (SPV) or Special Purpose Entity (SPE).

    The SPV is generally a bankruptcy-remote entity, which means that the financial health of the originating institution does not affect the assets held within the SPV.

    Creation of Tranches

    The SPV issues securities backed by the cash flows generated from the underlying assets. These securities are then categorized into different tranches, each with different levels of risk and return.

    Tranches are the categorized portions of the overall pool of assets being securitized. They essentially represent different risk-return profiles for investors. Below-mentioned is a breakdown of tranches.

    • Senior Tranches – these tranches have the highest credit ratings, such as AAA or AA, from agencies like CRISIL. This indicates a very low chance of failure. Additionally, senior tranches receive priority on the cash flow from the underlying asset. They receive interest and principal repayments from borrowers before any other tranche.
    • Mezzanine Tranches – these tranches hold a middle ground regarding credit rating, such as A and BBB. They absorb some of the risks after senior tranches are paid. Investors in mezzanine tranches are partially protected in default situations because junior tranches are impacted first. Because of their increased risk profile, mezzanine tranches offer a higher return than senior tranches.
    • Junior Tranches – these tranches have the lowest credit ratings, for example, BB, B, or even unrated. They represent the riskiest portion of the securitization. Junior tranche investors receive payouts only after senior and mezzanine tranches are paid in full. They offer the highest return on investment because of the highest risk borne.

    Credit Enhancement

    To attract investors, especially for lower-rated tranches, credit enhancement mechanisms may be employed to mitigate risks. These mechanisms can include over-collateralization or adding additional assets to the pool, cash reserves or third-party guarantees.

    Issuance and Sale of securities

    The securities, representing claims to the cash flows from the underlying assets, are then sold to investors in the capital markets. Investors buy these securities based on their desired risk-return profile.

    Servicing

    Servicing the underlying assets continues after securitization. A servicer, often the originating institution or a third-party specialist, is responsible for managing the assets on behalf of the investors and handling the day-to-day tasks of collecting principal and interest payments from the original borrowers. The collected funds are then distributed to the tranche holders as per the pre-defined structure. Senior tranches receive payments first, followed by the subordinate tranches.

    Risk Management and Reporting of Securitization

    Throughout the life of securitization, risk management practices are employed to monitor the performance of the underlying assets and ensure compliance with regulatory needs. Regular reporting to investors regarding the performance of the securities and underlying assets is also essential.

    Methodology of securitization

    Types of Securitized Securities

    Some common types of securitized securities include:

    Asset-backed Securities (ABS)

    This is a broad category that includes most securitized securities. A pool of underlying assets backs ABS, typically consisting of cash-generating assets like auto loans, credit card receivables, and student loans. Further sub-categorisation of ABS is possible based on the underlying assets.

    • Mortgage-backed Securities – These are ABS-backed by pools of residential or commercial mortgage loans. Cash flows from the underlying mortgage payments are passed through MBS investors who receive interest and principal payouts.
    • Auto Loan-Backed Securities – a pool of car loans backs these.

    Collateralized Debt Obligations (CDOs)

    CDO is a complex type of security that can bundle together different types of collateralized debt. This creates a layered structure with varying risk-return profiles.

    Credit Linked Notes (CLNs) 

    These are structured debt securities that allow investors to gain exposure to credit risk linked with varied underlying assets such as corporate bonds, loans or other structured finance products.

    Also Read: Collateral

    Credit Enhancement Techniques

    Two main categories of credit enhancement are listed below,

    Internal credit enhancement

    These techniques rely on features built into the structure of the securitization deal itself to improve creditworthiness.

    • Overcollateralization – this involves structuring the deal so that the value of the assets backing the securities is greater than the total value of the securities issued. This excess collateral acts as a buffer in case of defaults, thus protecting senior tranches.
    • Excess Spread – this refers to the difference between the interest earned on the underlying assets and the interest paid to investors on the securities. This excess cash flow can be used to cover shortfalls in principal or interest payments if some borrowers default.
    • Subordination – The securitization structure is divided into multiple classes with varying payment priorities. Senior tranches receive principal and interest payments first, whereas junior tranches get payouts only after senior tranches are fully paid. This hierarchy absorbs losses from defaults.
    • Cash Reserves – these are the funds set aside from the proceeds of the securitization to cover any shortfalls in cash flows from the underlying assets. These reserves provide a buffer to support payments to investors during periods of financial stress

    External Credit Enhancement

    These techniques involve bringing in external guarantees or insurance from third parties to increase the creditworthiness of the securitization.

    1. Letters of credit – Banks or other financial institutions can issue letters of credit assuring repayment of principal and interest on the securities in case of issuer default.
    2. Surety Bonds – insurance companies can act as sureties, guaranteeing to cover losses if there are defaults on the underlying assets.
    3. Third-party Guarantees – Guarantees can be provided by corporations or government entities, strengthening the creditworthiness of the securitization.

    The choice of credit enhancement techniques depends on various factors, like the type of assets being securitized, the desired credit rating for different tranches, and the overall risk profile of the deal.

    advantages of securitization

    Advantages and Disadvantages of Securitization

    Securitization offers various advantages and disadvantages to both financial institutions and investors.

    Advantages

    • Reduces Risk: It allows originators to transfer credit risk linked with the underlying assets to investors. This can improve their overall capital adequacy ratios, making them more attractive to lenders.
    • Diversification: Securitization offers investors access to a wider range of investment opportunities. They can invest in tranches depending on their risk tolerance and desired return.
    • Increased Liquidity: Securitised assets are generally tradable on the secondary market, offering investors greater liquidity compared to some traditional securities like private loans.
    • Frees up capital: By selling off assets like loans, banks can free up capital on their balance sheets. This allows them to originate new loans, stimulating economic activity.

    Disadvantages

    Some significant drawbacks of securitization are as follows

    • Complexity: The process of securitization can be complex and involves multiple parties, intricate legal structures, and complex risk assessments. This complexity can make it difficult for investors to understand the underlying assets and the risks involved fully.
    • Transparency: In some cases, the underlying assets in securitization may need to be fully transparent. This can be because several loans from different borrowers are pooled, making it challenging to analyze the creditworthiness of each loan. This lack of transparency can lead to the mispricing of risk.
    • Increased Costs: The securitization process involves multiple fees linked to legal structuring, credit rating agencies, and investment baking placement. These costs can ultimately reduce investors’ returns.
    • Reduced Accountability: Securitisation involves numerous parties, making it difficult to identify accountability if something goes wrong, which can pose challenges in addressing problems.
    • Systemic Risk: If a large number of borrowers default on the underlying loans in securitization, it can trigger a domino effect. The value of the securitized securities can fall, causing losses for investors. This happened in the 2008 global financial crisis when many mortgage-backed securities (MBS) went bad.

    Conclusion

    Securitization can be a complex financial tool that enables institutions to convert illiquid assets into tradable securities. It plays an important role in modern financial markets by facilitating the efficient allocation of capital, enabling risk transfer and providing investors with a diverse range of investment opportunities. As financial innovation continues, securitization is likely to remain an integral part of the global financial system, albeit with ongoing refinements and regulatory adaptations to address emerging challenges and promote market integrity.

    Frequently Asked Questions (FAQs)

    1. Who benefits from securitization?

      Securitization benefits financial institutions by providing access to capital and reducing risk exposure. It also benefits investors by offering diversified investment opportunities.

    2. How are securitized securities rated?

      Credit rating agencies rate securitized securities based on the credit quality of underlying assets, structural features, and credit enhancement techniques.

    3. What is the role of Special Purpose Vehicle SPV in securitization?

      An SPV is a separate legal entity used to hold and manage the assets being securitized.

    4. What are some drawbacks of securitization?

      The drawbacks of securitization include complexity, lack of transparency, and risk of crisis if mismanaged.

    5. Is securitization good for the economy?

      It depends. It can boost the economy if used well, but poorly structured deals can lead to instability.

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