In an IPO flurry, we all have heard that this stock is having an 80% GMP, the other stock has a GMP of only 15% and the likes.

But what does GMP actually mean and is it even legal?

Let’s take an example – People apply for a blockbuster IPO and know for sure that it’s going to have a super listing - but many of the times they don’t get an allotment, especially in such rockstar IPO’s.

So, what do they do to enjoy the listing gains of such IPO’s?

Here comes the answer. They deal in the Grey Market.

A Grey Market, also known as a parallel market, is one where trading takes place outside the realm of official trading channels. Since this is an unofficial market, there are no rules and regulations. Market regulators like SEBI are not involved in these transactions and they don’t endorse this either.

Now, Grey Market Premium is nothing but the price at which the shares are being traded in the grey market. For instance, let’s assume the issue price for stock XYZ is Rs. 150 and the GMP is Rs. 100, it means that people are ready to buy the shares of company XYZ for Rs. 250, which implies that they expect the IPO listing price to be even above Rs. 250 and hence they will make a gain out of this transaction.

Equitas Small Finance Bank is the largest SFB in India in terms of the number of banking outlets, and the second-largest SFB in India in terms of assets under management and total deposits in Fiscal 2019. They have a market share of 16% in terms of Assets Under Management in India. It is a subsidiary of Equitas Holding Limited (EHL).

IPO season continues with the 12th IPO post lockdown this year. IPO subscription starts from Oct 20, 2020, till Oct 22, 2020. The IPO price range is from Rs. 32 to Rs. 33 per share. The minimum market lot is 450 shares and in multiples thereof. At the upper price band, the subscription amount for 1 lot is Rs. 14,850. The shares are expected to list on Nov 2, 2020.

We already had a detailed discussion regarding the IPO in our video on YouTube. Here, are some additional points that we need to know about the bank.

SWOT Analysis of the bank:

Litigations against the bank:

Introduction:

If you check the financial statements of UTI Asset Management Company of Q1 of FY 2021 compared to Q1 of FY 2020, below is the position of the change in revenue. 

In the above table, you may notice the revenue has increased by 11.63% for Q1 YoY. Total Revenue from Operations includes gains/ losses from fair value changes. Now, let’s understand the meaning of “Fair Value”

Meaning of Fair Value: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as on date. In simple words, it can be substituted with the word, “current market price.” Fair Values are calculated according to IND AS 113. 

Now you might be wondering why are we discussing “Fair Value?”

Due to COVID-19, the equity and mutual fund markets were very volatile in Q1 of 2021 which resulted in a significant change in the fair values of such investment instruments. You might be aware of the “V shape recovery” which the market witnessed. Due to this, it’s probable that the company might have gained significantly on such investments. But since these gains are temporary but not permanent in nature, one should not consider these while analyzing the revenue from operations of the company for fundamental analysis and growth perspective along with the impact of the same on other parameters like PBT, PAT, etc. 

Let’s consider the following example. You have equity shares of Company A which you have purchased at Rs. 1000. The LTP as of 31st March is Rs. 1,800. As per Ind AS, you have to value it at the market value (LTP) in your balance sheet. So, for this, you will have to increase the asset value by Rs. 800. The 2nd impact of gain of this transaction will reflect in the profit or loss account. In IND AS terms, it’s not necessary that every such gain will reflect in profit or loss account only. Some assets are recorded through Other Comprehensive Income i.e. OCI Statement which is the second part of the statement of profit or loss which is placed after the Profit after tax element. So, a lot of such factors are determinable in such cases. 

Now let's assume a case that in the same company “Total Revenue from Operations” is Rs. 1,200 of which the gain due to “Fair Value changes” is Rs.800. In such a case, its “Revenue from core operations” will be Rs. 400 only. So, I hope you have understood that one should focus on “Revenue adjusted with Fair Value changes” rather than “Total Revenue from Operations.”

After ignoring one item of gain due to fair value changes, the position of revenue differs significantly.

Conclusion:

Based on the above, you must have understood the result of significant change in revenue pre and post consideration of the gain due to fair value changes in the case of UTI AMC on change in revenue from operations for Q1 of FY 2021 and FY 2020.

Note: We have not covered the technical perspectives like financial assets and relevant Ind AS which deals with this concept like IND AS 32, IND AS 109, and IND AS 113. The above blog writes up is only for the purpose of basic understanding about the gain or loss due to fair value changes. There are various other factors that can be considered and dependent ones, based on accounting policies and estimates followed by the companies.

In living life, everything that the person is worried about losing tries to ensure that by something. Insurance companies are the one who provides such risk management to individuals, businesses, and institutional clients. This is done through various types of insurance products that customers look for i.e. life insurance, health or medical insurance, car insurance, etc. The basic principle of all such products remains the same that the insurer guarantees payment or reimbursement in the event of losses for the insured. From an investor’s perspective, investing in certain kinds of insurance companies like life insurance may appear risky as these businesses consist of long-term products and services, and also require high initial acquisition cost. 

Therefore, while analyzing such companies’ certain business growth parameters need to be considered over the years and margins. We have covered in this blog such 3 parameters for the top 3 life insurance companies in India to take you through their short analysis to understand and compare these companies with each other. We have selected these top 3 companies based on the market capitalization as of 26th November 2020.

Embeded Value [EV]

This is the measure of the value of the life insurance company. This measure indicates the expected profitability from the current underwritten policies and current net worth. The embedded value of the company is calculated as the sum of adjusted net worth and the discounted value of profits from in-force policies.
Below is the comparison of the embedded value of the top 3 insurance companies:

As the name indicates, this is the value of premium acquired by the entity from new policies for a particular year. So, the premium earned from the new contracts in a given financial year is referred to as the new business premium for an insurance company. Very natural to understand, if the company is able to grow at a higher rate with NBP, the business perspectives seem to be on the high good side.

Below is the comparison of NBP for the top 3 life insurance companies:

• New Business Margin [NBM]  
  This is a measure of profit margin used by the insurance companies for the new business received during a particular financial year. NBM is the ratio of the value of the new business to the present value of premium income. It is calculated by dividing the profit on the new business by the present value of the new business or Embedded value.
  
  
  

Conclusion:

Since the COVID-19 pandemic and global meltdown in stock markets, the whole Indian banking sector has underperformed due to fear of NPA. Even, RBI mandated banks to make COVID-19 related provisions in their books and instructed them to not declare any dividend till the end of September month. Before investing in banks, investors need to watch out for some of the key ratios, we have taken the top 5 banks as our examples based on market capitalization. Below are some of the important parameters to watch out for:

1. On the basis of Liquidity of Banks - Capital Adequacy Ratio:

Capital Adequacy Ratio (CAR) is simply the core capital of the bank. CAR is measured based on Tier-1 capital and Tier 2 capital. Tier 1 capital is such a capital where a bank can absorb the losses without disturbing normal business operations. Thus, it provides a liquidity cushion to the bank and it also protects the depositors. Tier 2 capital is such a capital where the bank can absorb the losses in the event of bankruptcy of a bank, it provides lesser protection to the depositors. Banks are required to maintain a minimum CAR of 10.5% including a Capital Conservation Buffer of 2.5% as per Basel III norms.

2. On the basis of Asset Quality:

Bank’s asset quality matter’s the most, higher the NPA ratio, the worst the case, NPA’s ultimately wipe out the capital of the bank, thus impacting the CAR ratio.NPA means the default of interest and the principal amount by the borrower. As per RBI, banks classify a borrower’s account as NPA when the interest due on the loan is not paid within 90 days. Investors need to analyze both Gross and Net NPA ratios Gross Non-Performing Assets as a % of Gross Advances (GNPA): GNPA is the sum of all the types of unpaid loans by the borrowers.
Net Non-Performing Assets as a % of Net Advances (NNPA): NNPA is the sum of unpaid loans less the provision made for these bad loans.

3. On the basis of Profitability:

One of the key profitability ratios to watch out for is Net interest Margin- NIM. Since the bank’s business model is to raise funds from depositors and lend it to individuals and businesses, it receives interest on an amount lent and pays interest on the funds raised via various routes. Thus, the difference between interest earned and interest expended over its average earning assets is called net interest earned, it is popularly expressed in % form and is popularly known as NIM.

Options for investment in gold:

1. Physical Gold
1. Jewelry
2. Coins
3. Gold Savings Schemes
2. Paper Gold
1. Sovereign Gold Bonds [SGBs]
2. Gold Exchange Traded Funds [ETFs]
3. Digital Gold [Mobile wallet platforms like Paytm, GoldRush, etc.]

Gold Market Cycle:

Returns comparison with other investment options:

If one compares the returns on major investment options for retail investors i.e. Fixed Deposit, SENSEX, NIFTY, Gold at last 20 years CAGR, Gold has provided the highest rate of return at approx.. 13% of CAGR.[Refer https://www.rachanaranade.com/blog/investment-comparison]

What is Experience Timeline?

Experience Timeline is a visual presentation of a sequence of events, especially historical events which eventually indicates the experience of the entity.

Why Experience Timeline?

Since it indicates the experience of the entity based on which one understands how the company is growing operationally and strategically. Understanding of the entity’s operational and strategic movements is one of the important factors of consideration while performing fundamental analysis of the entity.

About Infosys Limited:

Infosys is a global leader in next-generation digital services and consulting. It enables clients in 46 countries to navigate their digital transformation.

With nearly four decades of experience in managing the systems and workings of global enterprises, it expertly steers their clients through their digital journey. They do it by enabling the enterprise with an AI-powered core that helps prioritize the execution of change. It also empowers the business with agile digital at scale to deliver unprecedented levels of performance and customer delight. Their always-on learning agenda drives their continuous improvement through building and transferring digital skills, expertise, and ideas from their innovation ecosystem.

Experience Timeline of Infosys:

Infosys was established in 1981 by Mr. Narayana Murthy and 6 engineers in Pune. It was listed on NSE and NASDAQ in 1995 and 1999 respectively. The major landmark of Revenue of US$ 1 Bn. achieved by the entity in 2004 – within 24 years of establishment. Along with such landmarks, the entity acquired many global entities in this industry to expand the entity at a global level.

Conclusion:

Understanding of operational and strategic experience is one of the important points in fundamental analysis of the entity along with other operational and financial review points.

Company Background:

• Reliance Retail Limited founded in 2006 is a subsidiary of Reliance Industries Limited.
• The fastest-growing retailer in the world.
• India’s largest cash and carry chain with 52 stores and more than 4 million registered B2B and B2C customers
• India’s largest consumer electronics retail chain with 8,249 stores
• India’s largest fashion destination with 777 stores of Reliance Trends

Business Segments:

The relation between contribution and market growth of the business segments:

Conclusion:

Understanding of business segments and its relation with the economic conditions is one of the most important things for consideration while investment decision.