Disruption at the door

Disruption at the door

A constant threat of becoming redundant is forcing companies to exit their commoditised businesses and look for growth opportunities

 

It takes a lot of courage to sell an existing business and walk away from it. And yet, many companies are doing precisely this because it is becoming hard to generate profits sustainably from commoditised businesses. By getting out of legacy businesses, these companies are freeing capital and management time to focus on innovation and new opportunities. Call it disruption, if you will, but companies are taking bold calls and morphing so that they remain relevant to their stakeholders. In time, this trend will become more pronounced and companies that fail to take these tough decisions will atrophy. This trend, which has been precipitated by large activist investors, has a profound message for others because businesses have to be viewed/evaluated differently.



Last December, ABB announced that it was selling its power-grid business, which was the least profitable anyway, to Hitachi at an enterprise value of $11 billion. Back in 2014, the global power and technologies major had announced its Next Level strategy, which sought a 'shift in centre of gravity driving profitable organic growth, strengthening competitiveness and lowering risk.' The company is now focused on new-age technologies like automation, robotics and IoT. Cash proceeds ($7.8 billion) from the sale of the power division will be returned to shareholders. Some of the largest investors in ABB have supported the move. The company will invest a part of the proceeds to cut costs and become more efficient. Another company to undertake such a transaction was Johnson Controls, the world's largest manufacturer of auto batteries. The company sold its batteries business to private-equity players in late 2018. The batteries business accounted for $8 billion in its global sales of $31.4 billion. When the world's largest manufacturer of auto batteries sells its entire business, it merits some inspection. Closer home, Barings Private Equity Asia announced in April that it was acquiring a 30 per cent stake in NIIT Technologies from the promoters. Sanjay Jalona, CEO of L&T Infotech, had told me back in 2017 that they were the right size to pivot into a digital-services company from a pure-play IT services company. Pivoting is not everybody's cup of tea and those who cannot are smart to sell.



These developments carry a rather profound message for investors because there's nothing usual about business anymore. In my view, investors don't always read the writing on the wall when dramatic shifts occur. Almost a decade ago, when IT behemoth Infosys started missing its own growth forecasts, most sell-side analysts came out with even higher targets after every quarterly miss. After several such mishaps, Nimish Joshi of CLSA wrote a stinging open letter in April 2012 to the then CEO of Infosys, D Shibulal, questioning the company's ability to forecast its own future. It took investors and analysts a fairly long time to figure out that cloud services, social media, mobile and digitisation were disrupting the traditional business model of Indian IT. It is my guess that similar things are playing out across other industries, too. Even as consumer behaviour and technologies are shifting rapidly, investors are willing to pay a premium for legacy and past performance. Take for instance, some consumer companies that command very rich valuations even though they are losing market share to challengers.



Launching a product today is relatively easier than it was in the brick-and-mortar days. Challengers today can disrupt a business sitting anywhere and that too in a very short span of time. For instance, Juul, an e-cigarette manufacturer, has smoked out the biggies from the electric-cigarette market in less than two years after it was launched in 2015. Juul has a cult following in the USA. It had a market share of 13.7 per cent in the USA, which went up to 75 per cent by 2018. Juul Labs had a valuation of $15 billion in 2018, after it was spun out from Pax Labs in 2015. In December 2018, Altria, one of the world's largest manufacturers of cigarettes bought a 35 per cent stake in Juul for $12.8 billion cash. The deal will give Juul the distribution and marketing muscle it needs to go global. After its tremendous success with the young folk in America, the company is already talking of launching in Asian countries like India.



Last year, Elara Capital came out with an extensive report on large consumer companies in India acquiring or investing in start-ups. Clearly the behemoths see the writing on the wall. Mint newspaper reported in August 2018 that eight of India's top 12 brands had ceded nearly 40 basis points to two percentage points of either volume or value market share to newer entrants in home care, packaged foods and beverages categories between 2012 and 2017. The data was compiled by Euromonitor but many companies challenged the data. It is a similar story in women's personal hygiene, too, with several new challenger brands chipping away the market shares of Whisper and Stayfree. In the face of such disruption, can behemoths continue to command a premium of 60-70 times their earnings?



If we consider consumer companies, automobiles as a sector is staring at some big shifts. Given that 10 out of the world's most polluted cities are in India and the oil import bill is $50 billion a year, it makes immense sense for India to march towards electrification. Among some strategists and investors, this conversation has already started. But it isn't mainstream yet. Goldman Sachs, for instance, believes that 2025 will be an inflection point for cars in India. This will be supported by a drop in prices of lithium batteries, government push, India specific product development, improved battery efficiency and new technology. The global investment bank said that electric two-wheelers would be viable by 2019 itself. These sharp shifts will have major implications for investors and businesses because disruption is at the door.

 

Happy Investing

Source : Valueresearchonline.com

New India In Making : The people with the flag and their future ahead

New India In Making : The people with the flag and their future ahead

The people of India have liked the results of the experiment they tried in 2014. Now, the real story begins

The last time a Prime Minister of India served a full term and was returned with an increased majority was in 1962, some 57 years ago. I don't know anything much about that time. However, this is a different kind of an election. 2014 was an experiment by the electorate, and at least partly a reaction to the ten years before that. But in 2019 the story has moved far ahead. In scientific terms, it was as if in the 2014 experiment, the electorate was testing a hypothesis. Now, it has declared the experiment a success and has moved forward.

 

In a way, the real work for Prime Minister Narendra Modi starts now. Till now, what Modi has demonstrated is intent, the beginning of action, and a strong start to delivery in many areas. From here onwards, the game gets tougher in some ways, and easier in others. A short distance from the Value Research building in Noida, there's a small tea and snacks shop on a pavement, of a kind of which there are probably a few lakh in the country. An entire family runs it, and lives in it as well. As the Lok Sabha results are coming in, they've planted a wooden stick outside their shop with a somewhat ragged national flag on it. This flag probably carries more meaning than the grand one that Prime Ministers have always unfurled at Red Fort. The Red Fort ceremony has been happening for decades, but this little one is a new phenomena. This samosa shop flag is like a stake driven into the ground, a claim on a piece of the future. And make no mistake, those who have put it up know very well who they expect to deliver that future.



Early in this election campaign, some of the usual suspects had floated a theory that this was a low-key, waveless election. Maybe it was, for those of us who are jaded with one thing or another. However, it was nothing of the kind for a majority of the electorate. Once the voting began, the polling rates made it clear that these elections were quite the opposite.



For those of us who are professionally or otherwise involved in business, or investments, or generally think of the economy in formal terms, it's easy to look ahead and feel a little overwhelmed. We were stumbling along, without too much hope and too much expectations but now the vast sea of humanity that has driven the flag into the ground and that may be a frightening prospect for many.



However, the thing about long journeys is that often, it's better to periodically look back and note how far we have come along, rather than look ahead and get overwhelmed by how far one has to go. It's a common experience when people start investing with a big financial goal in mind. Once you start heading for your goal, then, after a while, a look back shows how far one has come.



The last five years are that backward glance that gives confidence. Five years ago, I would hardly have believed possible how much would get done in terms of cleaning up the past laying the foundation of future growth. From GST to the NPA cleanup to the bankruptcy laws, to the tax-theft cleanup and so many other things, each pain point of the economy is like a bitter medicine that'll go towards curing the disease.



Now, the icing on the cake is the enormous mandate that Narendra Modi has been handed by the people. Sometimes, I see people write that India should ideally have a coalition government. Frankly, that's one of the foolishest things that anyone can say about India. With this mandate, and a proven track record of being a doer, everyone with a flag has a future to look forward to.

 

Happy Investing

Source : Valueresearchonline.com

A quick analysis of popular 80C options

A quick analysis of popular 80C options

Here is an overview of tax-saving options to help you plan the financial year ahead

A new financial year has just begun. And if you are looking for an overview of all the popular 80C options, here it is.

Equity-linked savings scheme (ELSS)

Equity-linked savings schemes are specially notified tax-saving schemes from mutual funds which carry a three-year lock-in and are eligible for 80C benefits. Unlike other SEBI-approved categories of equity funds, ELSS funds are allowed to be managed as go-anywhere and do-anything funds. The flexible mandate makes the multi-cap ELSS a good choice for an investor's core portfolio.

Pros	Cons
Open-end structure	As with all equity investments, they carry risks to capital
Monthly portfolio disclosures (making it among the most transparent of 80C options)	Depends on stock-market performance during the holding period for reasonable returns at the end of 3 years.
Mark-to-market daily NAV	SIP investments in ELSS extend the lock-in period as each instalment needs to complete the three-year lock-in.

 

Employees Provident Fund (EPF)

If you are salaried, every month 12 per cent of your basic pay plus DA (dearness allowance, if any) is deducted towards your EPF contribution, which can be withdrawn as a lump sum at retirement. You can also voluntarily step up this contribution to a limit of 100 per cent of your basic salary plus DA.

Pros	Cons
High fixed return with a completely tax-free status, which tends to beat most comparable fixed-income options. The EPF interest rate for FY19 has been proposed at 8.65 per cent, while the PPF offers 8 per cent.	Returns are declared from year to year based on an unpredictable surplus.
A part of the EPF corpus (15 per cent of the incremental corpus) is invested in the stock market via ETFs.	Illiquid
Puts your 80C investing on autopilot and forces you to save before you spend.	Carries complicated early withdrawal rules if you want to pull out money before you retire.

Public Provident Fund (PPF)
Offered by India Post and the leading banks, the PPF, being a Government of India borrowing, is an ultra-safe retirement vehicle suitable for both the salaried and self-employed.

Pros	Cons
Completely tax-free	Variable returns
Returns are announced by the Centre at the beginning of each quarter and apply to your entire outstanding balance.	Long lock-in of 15 years.
The rate for April-June 2019 is 8 per cent and beats returns from most other fixed-income avenues.	Early withdrawals (allowed after seven years) are subject to a cap of 50 per cent of the balance at the end of the fourth year.
Premature closure after five years is only permitted for specific end-use.

National Pension System (NPS)

The NPS is a market-linked scheme regulated by the PFRDA for the accumulation phase of your retirement money. It allows subscribers to choose their private pension-fund manager from seven options and set their own asset allocation between equities, corporate bonds and government securities.

Pros	Cons
Allows you to earn market-linked returns from a professionally managed portfolio for an ultra-low management fee of 0.01 per cent.	You have to use 40 per cent of your final maturity proceeds to buy an annuity, which leads to taxable income.
The only investment where apart from the Rs 1.5 lakh under 80C, you can claim tax breaks of an additional Rs 50,000 invested each year under Section 80CCD(1B).	Complicated early-withdrawal rules in case of an emergency.
Flexible. Allows you to vary your annual as well as monthly investments each year subject to a minimum of Rs 1,000.
Allows for switches between managers and assets.

Life insurance

Insurance premiums on all the policies that cover your life and the lives of your spouse and children are eligible for 80C exemption. While all kinds of insurance plans which carry a life component are eligible for this deduction - traditional plans, ULIPs and pure term plans - note that the premium amount qualifying for the tax benefit is capped at 10 per cent of the sum assured in the plan.

Pros	Cons
	(in the case of traditional plans and ULIPs)
Tax breaks are a plus, considering pure term covers are bought primarily to protect dependents.	Make for poor investment choices as they lock you into large multi-year premium commitments that reduce your financial flexibility for an uncertain return.
	Illiquid
Opaque operations.

Deferred or immediate annuity plans

Annuity plans promise you regular monthly payouts from an insurer in return for an upfront lump-sum premium payment, which is exempt under 80C. While deferred annuity plans invest your money until retirement and pay you annuities at a future date, immediate annuities help you set up a pension immediately.

Pros	Cons
Guarantees you a fixed monthly cash flow for life	Offers very low returns (lower than bank FDs) that do not rise with inflation.
Frees you of the need to actively manage your portfolio.	Forces you to lock in a lump sum with one insurer for perpetuity.
Annuity income is taxable in your hands at the slab rate.

National Savings Certificate (NSC)

Offered by India Post, NSC is a five-year ultra-safe savings bond as it represents a Government of India borrowing. The interest (announced every quarter but applicable until maturity for the investor) is reinvested every year and paid out at maturity. The interest reinvested is eligible for 80C benefits, too. Investing now, you can lock into 8 per cent for the next five years.

Pros	Cons
An uncomplicated scheme	Investments are locked in for five years.
Offers a competitive return when compared to bank deposits or other fixed-income options.	Interest rates are typically lower than those from the EPF or the Senior Citizens Savings Scheme.

Tax-saving bank deposits
These are specially notified five-year plus fixed deposits offered by scheduled banks and come with an 80C benefit on your initial deposit. Minimum deposits usually start from Rs 1,000 and terms range from five to 10 years.

Pros	Cons
A simple product where one can make one-off investments.	Unattractive interest rates. Current rates from leading banks hover at 6.5-7 per cent a year, far lower than rates on other fixed-income options.
Offers monthly, quarterly and annual interest-payout options	Early withdrawal by breaking the deposit is barred.

Senior Citizens Savings Scheme (SCSS)

Offered by India Post and by leading banks, SCSS is open only to citizens over 60 years of age or those above 55 who have taken voluntary retirement. On opening an SCSS account, you can deposit up to Rs 15 lakh in total. The scheme has a five-year term extendible by three years. The interest rate is announced by the Centre at the beginning of each quarter.

Pros	Cons
You can lock into the return at the time of entry until maturity. The current rate is 8.7 per cent (taxable).	Rs 15 lakh cap on investments per individual.
Good liquidity. Premature withdrawals are allowed one year after account opening with a penalty on interest rates, and require you to give up tax benefits.
Returns that are much higher than those from other small-savings schemes as well as bank options.
Safety is a given as it's a Government of India borrowing.

Sukanya Samriddhi Yojana (SSY)

A scheme meant specifically for the parents of girl children to fund their education and wedding expenses, SSY is a post-office scheme that has to be opened in the name of your girl child within the first 10 years of her birth, with annual deposits (minimum Rs 1,000 a year) for the next 14 years.The account matures when your daughter turns 21. Fifty per cent withdrawal is allowed for 'marriage' when your daughter turns 18.

Pros	Cons
Offers fixed interest and is fully tax-free from investment to withdrawal. Currently, the interest rate is 8.5 per cent.	Illiquid
Flexibility to vary annual deposits.	Account has to be opened before your daughter turns 10.

 

 

 

Happy Investing

Source: Valueresearchonline.com

Are you financially ready to buy your first house?

Are you financially ready to buy your first house?


Before buying your first house, assess the affordability and future serviceability of any loan you take


Ravi, a software engineer from Hyderabad got married 5 years back to Swathi, a banker. Ravi and Swathi are now 34 and 31 years old, respectively. Two years into their marriage, they decided to buy a house which cost them Rs 54 lakh, funded by a joint home loan of Rs 45 lakh. At the time their combined salary was Rs 1.1 lakh (Rs 65,000 and Rs 45,000, respectively).


Fast forward to the present and the couple is expecting their first child in a few months. Swathi has decided to be a stay-at-home parent to take care of the child, but it is not going to be an easy road ahead. As they transition from a double income no kids household to a single income household with a child, they are worried about servicing the EMI which is about Rs 42,500.


"At the time of buying the house, we did not think about such a situation arising. We exhausted all our savings in the down payment while buying the house," said Ravi. This couple is not an aberration; owning real estate is considered a proud purchase by many households and is normally funded through loans.


While a house is one of the biggest investments you make, it may not always be the best investment. You need to assess this asset class on the metric of affordability and future serviceability of any loan you take. Here are a few factors that should help you decide if you are ready.


Your finances


Unlike financial assets that are liquid – you can redeem your mutual fund units and realize the money in a few days – real estate is not liquid. It can take days to months to find a buyer and the ensuing hassle to sell off the property really makes it a sticky asset. Any financial plan starts with ensuring a solid emergency corpus is in place that will take care of any unforeseen events. "One should have at least 6-9 months of emergency funding in liquid options," said Varun Girilal, Co-founder and Executive Director, Mitraz Investment Advisors.


Next, you have to think about your short-term goals and how these may impact your EMI payments. Reshuffling your priorities can affect the income of the household if for instance, an earning member puts their career on hold. At the same time home loan EMIs will continue to accrue. It is best to think about this now rather than later. "The first thing one needs to do is to estimate the liquidity, contingency and funds for near-term goals," said Suresh Sadagopan, Founder, Ladder7 Financial advisories, a financial planning firm.


Start by making a list of your expenses – both monthly and annual. Also, note down any near-term (up to 3-5 years) goals and the funds needed for these goals.


Affordability



Whether you can afford a loan is a serious question you need to ponder upon. Without touching your emergency corpus or disrupting your other financial goals (both short- and long-term), you should be in a financial position to make a decent down payment. "One needs to see whether they have 25% of the amount upfront. The higher this amount, the better," said Sadagopan. If you can afford to contribute 40% to 50% of the property value as down payment, you will certainly be more comfortable paying off the loan.


Then comes the EMIs. A good thumb rule is to ensure that your EMI does not make up more than 40% of your take home salary. You need to figure out how you will service the loan in case of an emergency like loss of income or unexpected increase in expenses. "You could push this to 50% of your post-tax monthly income for the first few years, provided you work on building liquid financial assets in later years," said Girilal.


Besides taking a larger loan than they could afford, the other mistake Ravi and Swathi made was making pre-payments of the loan as and when they had additional funds. This prevented them from building assets that would have now come in handy.


To live in or rent out


Then comes the question of whether you will actually live in the house you buy. "This is important as people these days are mobile and they go to other locations nationally or internationally in pursuance of their careers," said Sadagopan. If you are uncertain about where you will live, it may not make much sense buying a house when you will also have to pay rent in another city, added Sadagopan.


If you are not planning to live in the same city for at least another 5-7 years, it is better to stay on rent. "If you feel that there is a strong chance of relocating , then factor in how you will bear the rental cost in the new location and EMI servicing together," said Girilal. Selling the house and buying another house in the new city is not feasible as it involves a lot of effort. The transaction cost—stamp duty, registration fee and brokerage—is also very high.


If on the other hand you decide to let out the house, you may not necessarily get a tenant immediately. “Most housing complexes have high maintenance costs and one should factor that into monthly cash flow planning," said Girilal. It can also be very time-consuming to maintain a house in another city.


Finally, buying a house should not come at the cost of other important goals like your child's education and your own retirement, neither should it impact your lifestyle significantly. “A home loan EMI often comes in the way of goals like travel, entrepreneurship and other interests. It can also set off your time to retirement by a large number of years," said Girilal.


So, besides servicing the home loan EMI, one should have enough savings to invest for other goals and expenses. Taking a loan to buy a home is indeed a huge decision, one that should be made after careful consideration of your monies, your goals, and where you will be in the next few years.

 Happy Investing
Source: Valueresearchonline.com