Buybacks, open offers, delisting very often in the case of many global MNC, what does that constitute and how does an investor take a studied call on whether or not they should tender or exit as the case maybe or actually stay invested? In an interview with CNBC-TV18's Mitali Mukherjee, Yogesh Radke, head-quantitative research, Edelweiss Securities and SP Tulsian, sptulsian.com, answer those questions.
Below is the transcript of the interview. Also watch the accompanying videos.
Q: A buyback by a company. What does it constitute and what is the intent behind doing that?
Tulsian: Buyback by the company is generally made with three objectives; first, to increase the shareholder value, two, to increase the promoter shareholding and third, to make use of the surplus cash lying with the company. This is made by the company with a view to ultimately extinguish the shares, which the company has purchased, resulting into the reduction in the share capital. So, if the paid up capital of the company gets reduced, obviously the earning per share (EPS), book value and the other return on share parameters get improved. Often, this method is largely used by the company more as a gimmick to mop-up the share prices.
Q: A lot of time it's seen and called as a confidence building mechanism. How exactly does that happen for someone who is holding share in that particular company?
Tulsian: Generally, this window remains open for about one year. One needs to carefully watch whether this results into a fruitful or a positive or a constructive exercise or not. There have been many instances where the window has remained opened for one year, the share was ruling below the price at which company intent to buy in spite of not a single share has been bought.
Obviously, you cannot paint all with the same brush. But, if a company is sincere, the promoters are sincere and if it results into the positive move on those lines, definitely that results into the accretion in the value of the shareholders.
Q: Let's take a couple of examples over here and try and understand how you should gauge whether or not you should be participating in that buyback. Reliance Infra is a largecap company which is a case in point, there is Piramal as well. How do you go about gauging the value of the business, the future value of the business and whether this is a good price to be giving back at?
Radke: You have to bifurcate buyback into two types of buybacks; one, the buyback which the company does by buying the shares from the market and second, is a tender offer. Recently, Piramal announced a buyback which was a tender offer, where shareholders can tender their shares and on a proportionate basis they get accepted. So that is something which an investor can play to get the benefit of a buyback.
In the other one, the company buys from the market. So, in this, the shareholder does not know at what time, at what price the company is going to buy because this is something which has been mentioned before that it is one year process, two year process and across the prices the company buys it. So, the benefit for a shareholder who wants to participate in a buyback is only when the company announces a tender offer, buyback via tender offer.
Historically, we have seen few instances where the buyback is via tender offer. Normally, all the buybacks are done via market which does not directly benefit the investor or trader, but company's equity base, performance base parameters get improved. So, whenever there is a buyback via tender offer that is something where traders can make money or trade on those opportunities.
Q: Walk us through a couple of key things to do then. Over the next month or so for buybacks that are currently open for companies, just lineout a few of them and how you would go about approaching the process?
Radke: As I mentioned that if the buyback is via tender offer then we can play for something again. But currently there is no buyback which is a tender offer. All the buybacks are via market. That means you cannot tender your shares and get the price at which the company is buying. The company will buy through the market. So, you cannot take the benefit of a normal buyback. You need a tender offer, which I just explained, Piramal Healthcare where the buyback was at Rs 600, when the share price was trading at Rs 450. At that time, you can buy the shares and tender into the buyback. So, you get a benefit of that. All the buybacks which are going on, running in the market don't provide you an opportunity to make money or trade in the market. These are only for the performance improvement of the companies.
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Three paper gold options in India Gold ETFs - are passively managed mutual funds that invest in standard gold bullion (99.5% purity). Investment in gold ETFs requires opening a demat account with a broker registered with the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). The expense structure for gold ETFs is in the range of 0.5-0.75%. Check out the performance of Gold ETFs Gold mutual funds - are fund of funds (FoFs) that invest the corpus in either their own gold ETFs or a foreign gold fund which is the mother fund. Gold mutual funds provide investors the facility of systematic investment plans (SIP) wherein they may invest in gold regularly and avail benefits of rupee cost averaging, i.e. buying more units when prices are low and less units when prices are high. The expense structure for gold FoFs is in the range of 1.5-2.25%. E-gold - is a product launched by the National Spot Exchange Limited (NSEL wherein gold can be purchased in the electronic form in denominations as small as 1 gram and can also be converted into physical gold Why is gold popular? Hedge against inflation - Gold has demonstrated its ability to generate returns higher than inflation and thereby acting as a strong hedge Safe haven investment - Gold is considered as a safe haven asset to invest in times of uncertainty on two counts, one, it has given positive year-on-year returns in the past 11 years and two, other asset classes have been more volatile with equity, debt even giving negative returns in some years . | Table 1 Performance of gold, equity and debt | | | | | | | Asset Class | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | | Gold | 4.82 | 23.27 | 15.77 | 0 | 21.41 | 21.77 | 17.15 | 28.04 | 20.99 | 23.44 | 32.53 | | Equity | -16.18 | 3.25 | 71.9 | 10.68 | 36.34 | 39.83 | 54.77 | -51.79 | 75.76 | 17.95 | -24.62 | | Debt | 25.25 | 21.66 | 11.54 | -2.87 | 5.71 | 5.01 | 6.8 | 23.22 | -6.37 | 6.18 | 5.05 | Calendar year point to point returns Gold returns calculated from LBMA (London Bullion Market Association) prices converted to Indian Rupees Equity returns calculated for S&P CNX Nifty index, Debt returns calculated for CRISIL Gilt index Years marked in red indicates bearish phase in equity market Diversification - Gold as an asset class offers twin benefits: diversifies an investor's portfolio and limits the downside risk in times of uncertainty. As reflected in Table 1, gold has provided the highest returns in four out of the five years in the bear phase indicating the superiority of the asset class in times of equity market turmoil. Further, Table 2 shows seven scenarios of investing across asset classes - equity, debt, gold over a 10-year period. While a singular investment in gold (Portfolio F) has given the highest returns of 19%, it goes against the thumb rule of portfolio diversification. In the composite portfolios, the highest returns of 18% were delivered by quity and gold (Portfolio D). Further, the most diversified Portfolio C (equity + debt + gold) performed better than Portfolio E (equity + debt), which shows adding gold helps earn better returns and reduce downside risks. | Portfolio | Asset class | Investment in 2002 | 10-year Returns | Profit earned | Value in 2012 | | A | Debt | 30,000 | 7% | 27,704 | 57,704 | | Total | 30,000 | 7% | 27,704 | 57,704 | | B | Debt | 15,000 | 7% | 13,852 | 28,852 | | Gold | 15,000 | 19% | 67,731 | 82,731 | | | | | | | | Total | 30,000 | 14% | 81,583 | 1,11,583 | | C | Equity | 10,000 | 17% | 36,890 | 46,890 | | Debt | 10,000 | 7% | 9,235 | 19,235 | | Gold | 10,000 | 19% | 45,154 | 55,154 | | Total | 30,000 | 15% | 91,279 | 1,21,279 | | D | Equity | 15,000 | 17% | 55,335 | 70,335 | | Gold | 15,000 | 19% | 67,731 | 82,731 | | | | | | | | Total | 30,000 | 18% | 1,23,066 | 1,53,066 | | E | Equity | 15,000 | 17% | 55,335 | 70,335 | | Debt | 15,000 | 7% | 13,852 | 28,852 | | Total | 30,000 | 13% | 69,187 | 99,187 | | F | Gold | 30,000 | 19% | 1,41,416 | 1,71,416 | | Total | 30,000 | 19% | 1,41,416 | 1,71,416 | | G | Equity | 30,000 | 17% | 1,10,670 | 1,40,670 | | Total | 30,000 | 17% | 1,10,670 | 1,40,670 | |
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Tax implication on various forms of gold investment Gold ETFs and gold FoFs are subject to long-term capital gain (LTCG) tax of 10% without indexation and 20% with indexation if held for more than a year and taxed as per individual income tax slabs for short-term capital gains (STCG) if held for less than one year. LTCG is taxed at 20% in case of physical gold and E-gold and investors need to hold them for more than three years to qualify for the same. STCG is taxed as per the individual tax slabs if sold within three years. In addition to this, wealth tax of 1% of the market value of the assets exceeding Rs 30 lakh is charged on investment of physical gold and E-gold. Conclusion Gold as an asset class plays a very important role in an investor's portfolio as it not only provides stability to returns but also gives an opportunity to maximise wealth over a longer time frame. Further, moving from purchasing physical gold to buying gold in paper form through mutual funds has its own advantages of transparency in pricing, purity, convenience as well as no storage risk. However, in the short term, gold prices can be volatile due to demand-supply concerns and economic conditions owing to which investors need to adopt SIPs over longer time frames of five years and beyond. The percentage allocation to gold will depend on an investor's risk and return objectives.
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Overall, the short interest moves in troubled retail companies were mixed again during the latter weeks of June. Avon Products (NYSE: RAD) saw the number of their shares sold short decrease by more than 10 percent. Short sellers also shied away from Barnes & Noble (NYSE: SVU) between the June 14 and June 28 settlement dates. But the short interest in J.C. Penney (NYSE: JCP), Office Depot (NYSE: ODP), Pacific Sunwear (NASDAQ: PSUN) and RadioShack (NYSE: RSH) was essentially flat compared to the previous period. And the number of shares sold short in Bebe Stores (NASDAQ: BEBE), OfficeMax (NYSE: OMX) and Sears Holdings (NASDAQ: SHLD) increased somewhat in that time. Here is a quick look at how Avon Products, GameStop and Rite Aid have fared and what analysts expect from them. Avon Products This beauty and personal care products purveyor saw short interest decline about 10 percent in the latter weeks of the month to around 8.80 million shares. The number of shares sold short was about two percent of the total float, and days to cover fell to less than two for the first time since April. Avon has a market capitalization of more than $9 billion and a dividend yield near 1.1 percent. The consensus forecast for the current quarter calls for year-over-year growth in earnings per share (EPS) but flat revenues. The long-term EPS growth forecast is more than 24 percent, but the return on equity is in negative territory. Of the 16 analysts who follow the stock that were surveyed by Thomson/First Call, just six recommend buying shares; the rest recommend holding them. Their mean price target, or where they expect the share price to go, is about 12 higher than the current share price. That target would be a new 52-week high. The share price pulled back about eight percent during the period, but it is now up about 50 percent year-to-date. The stock has outperformed competitor Procter & Gamble (NYSE: PG) and the S&P 500 over the past six ! months, but it underperformed Revlon (NYSE: REV). GameStop Short interest in this Grapevine, Texas-based specialty retailer dropped more than 17 percent to more than 28.95 million shares, the lowest number of shares sold short in it the past year. It represented more than 25 percent of the float. Days to cover rose to about eight. GameStop rallied after Microsoft (NASDAQ: MSFT) capitulated on the rental of Xbox One games. The video game retailer has a market cap of about $5 billion and a dividend yield near 2.6 percent. The long-term EPS growth forecast is more than 13 percent, but the return on equity is in the red. The consensus recommendation of the analysts surveyed is to buy GameStop shares, and it has been for at least three months. But the share price has overrun their mean price target, though the most optimistic individual price target suggests there is about 21 percent potential upside. The share price is up about 15 percent from a month ago, after reaching a multiyear high last week. Over the past six months, the stock has outperformed the likes of Amazon.com (NASDAQ: AMZN) and Wal-Mart (NYSE: WMT), as well as the broader markets. Rite Aid Shares sold short in this drugstore operator fell about 15 percent in the period to around 36.73 million, on the highest average daily volume so far this year. Shares sold short represented more than four percent of the float, but the days to cover is only one. Rite Aid has more the 4,600 stores, and a new CEO was appointed in June. The company's market cap is more than $2.0 billion. Its long-term EPS growth forecast is about eight percent, and its price-to-earnings (P/E) ratio is less than the industry average. Here too the return on equity is in the red. Half of the eight analysts polled recommend buying shares, and the other four recommend holding them. Analysts see little upside potential, as their mean price is only marginally higher than the current share price. However, the street-high ta! rget sugg! ests there is about 20 percent potential upside. The share price has retreated about 11 percent in the past month. But it is still about 100 percent higher than at the beginning of the year. The stock has outperformed competitors CVS Caremark (NYSE: CVS) and Walgreen (NYSE: WAG), as well as the S&P 500, over the past six months. (c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
In an effort to expand its international business, U.S. health insurer Aetna Inc. (AET) has formed a partnership with Swiss Life, Headquartered in Zurich, Swiss Life is a leading life and pension insurer. Via the partnership, Aetna will offer its international and domestic health care benefits and services to Swiss Life's multinational customers. The service will be effective from Sep 1. Aetna will offer its services in the U.S. via Swiss Life Network. It is a network which has 60 insurance companies and business partners operating in 70 countries around the world. Through Swiss Life Network, the company offers international and local employee benefit packages. Aetna and Swiss Life are making all efforts possible to better serve their customers. In this view they will also tailor their services to suit the needs of their customers. Both the companies, Swiss Life as well as Aetna, are a great fit for each other with their niche presence in their domestic market that is Europe and U.S respectively. Swiss Life is also optimistic about expanding the services from Aetna going forward. It intends to make use of Aetna's health management analytics, technology and wellness solutions. The partnership also benefits Aetna's WorldTraveler - a short-term international health coverage meant for business travelers. Now Swiss Life will offer the product to its customers worldwide. Aetna is aggressively expanding its international business by entering into new regions as well as developing new products and services. Its international business is expected to be a solid contributor to the company's growth over the long term. Aetna carries a Zacks Rank #2 (Buy). Another stock Molina Healthcare Inc. (MOH) with Zacks Rank#1 (Strong Buy) and UnitedHealth group Inc. (UNH) and WellPoint Inc. (WLP) with Zacks Rank#2 (Buy! ) is worth considering.
Investors are usually unsure how to decipher news flow and how to translate that into their investments. They also wonder whether this kind of investment planning is even advisable for equities. Tulsian explains, "In the stock market, we always say, try to catch the news, which is expected to happen. Generally, whenever we see the news coming in, an amateur investor or maybe a first timer tries to play on that news. But the seasoned investor will try to buy on the rumour and sell on the news. I will advise all amateur investors to never play on the news the day it is broken because generally that is the time you will find that stock has matured, allow the stock to react either on the lower side or on the upper side." If the stock has moved beyond maybe 5% or 10%, Tulsian advises to leave it and find other ideas. However, in his view, if it has corrected and if the news is investment worthy, which will have a long-term impact on the stock price and look to enter at that price. "Never get disheartened that the stock has corrected after the news. This means probably that news may not be worth going for investments, in fact, it can be used as an opportunity once the stock gets corrected." Everyone wants to save and invest money because of certain social responsibilities and dreams in lifeAccording to Gaurav Mashruwala, financial planning is all about channelising one's resources towards these financial goals. Pooja Pahuja Dhote, Ideas The Prop Shop: I have been a very risky investor. When I used to drive down from my work, I used to see a hoarding of mutual fund and would invest money in it. It has worked for me because I felt I have made all these through my investments and savings from the last eight years. Now as I am ageing, I am a bit jittery. How do I invest and how do I follow the funds? Tulsian: If you generally see the historic trend, three asset classes have really given us very good returns. First equity, second real estate, and third, I put it loosely as jewelry, not gold and silver. So, you have been very smart in making investments in jewelry. But if I focus purely on equity and real estate, I will put 60% of my investible fund into these two asset classes. If you really want to make some allocation for jewelry or may be in the bullions, that may be 15%. 25% of your investible fund should be into fixed return instruments like fixed deposits, tax saving instruments or may be bank fixed deposits, recurring deposits. In the Indian context, in the last two decades, inflation has been eating away your fixed returns. So, I don't think that on a real term basis, you will get any kind of returns if you are not invested into equities and real estate. Among mutual funds, go with the diversified mutual funds; don't stick to any kind of thematic funds like IT, like pharma, like MNCs. Radhika Khanna, Lotus Blossoms: I have been an entrepreneur for almost 20 years now. Since I started from home it wasn't looked at too seriously, but when I became successful, everybody encouraged me to become more commercial, and so, I did. Money came in along with all that success. It was all money for jam because I was living with my in-laws. My husband had a job and this was like lovely pocket money coming in. I did put it into mutual funds by way of SIPs but they were all very small amounts. Jewelry was one of the places where I did put some money in. Now I feel unsatisfied with all that. I would like my money to be a little more productive. So, how do I consolidate? I have a 14-year-old daughter and I will need funds for her higher education and marriage after about 10 years. How should I plan for that? Mashruwala: To begin with, you should plan your finances along with your spouse. A common mistake, which we have noticed is that with women entrepreneurs, the husband would be mentally prepared that he needs to get his daughter educated and he could be setting aside for the goal. Simultaneously, the wife could be doing it, and they would duplicate their efforts. It probably makes sense if one of them takes care of marriage expenditure while the other takes care of education expenditure. That's the first step. Once you do that, start looking at all the investments that have been made till date. First, compile all the documents, then, find out whether the fund is good enough or whether you should take money out and invest elsewhere. Another problem is that people don't review their investments. Normally from a planning perspective, I encourage to review investments once every quarter. Sonam Modi, fashion designer, Sonam M: I deal into ethnic Indian wear and my main forte being bridal wear. I started my business four years back, one of my main starting points of my career was my launch at the Lakme Fashion Week in 2009. I would like to have my own flagship stores in the metros and mini metros of India. I have set myself a goal of 5-6 years for me to have this entire setup done. How should I use my profits to invest to realize my dream? Mashruwala: One thing that you need to do is to take the money out of business and deploy it in a manner where it keeps growing. Invariably what we have seen with entrepreneurs is they keep deploying it back again in business. Business grows and they feel great but when they have to do something beyond business, there is no liquidity because all the money is ploughed back. Since you are looking at about 5-6 years kind of horizon, if we are talking about large amount of money, you can start buying real estate slowly because that's what you want to do. But if you are not talking about a corpus, which can help you buy, then look into equity and gold as asset classes because these asset classes will grow at a rate which is higher than inflation. Now, where would you deploy? If you are unsure to deal in equity market or gold directly, then go for a mutual fund. If you can keep parking money on a regular basis, if you can do it on quarterly or even six monthly basis, start creating a corpus. At a point of time when you want to buy it, liquidating mutual fund is fairly easy; you get your money back within three to five working days on a higher side. Liquidate that money and use it. Tulsian: You may find me contradicting Gaurav. Since she has a dream of expanding in metros and mini metros in the next four to five years, my advice will be that she will be forced to plough back whatever she earns from her business into her business again because you can really plan your requirements for maybe 15 years down the line after five years. You have a very short span of five to six years and you have a target of at least starting 10 stores. For that, I will give you a combination, maybe one store should be owned while three stores should be on lease. Since you need to grow your income, you need to increase your asset's investment also. So, for five years, I will advise you to deploy your entire money into your business. Look for creating wealth in other asset classes like mutual funds or in gold, maybe in stocks five years down the line because you have a goal and a timeline of only five years to expand. Five years down the line, you may have competition; you may not be able to continue with the same pace, with the same margin. So I will advise you to focus for the first five years totally on your own business. Shibani Jain, Baaya Design: What is your view against other investments vis-à-vis investment in art? Mashruwala: Personally, I am not into investing in art. From an investment perspective, there isn't enough amount of transparency in terms of pricing. Liquidity, at a future date, could also be an issue; also there could be storage issues. So there are a lot of concerns with art which doesn't fit into an ideal kind of investment. Even regulation perspectives, if it's an equity, you have SEBI regulates it, if you pick up a fixed deposit, RBI regulates it, art still isn't well regulated. So, I am not too much in favour of art from investment perspective. Aprajita Toor, We Desi: I am a manufacturer so I do regular amount of investment in my work. At the same time, I have a toddler who requires future investments. With zero knowledge in investments, I still want to understand how do I do investment, have it for my work at the same time do it for my daughter? Mashruwala: It's very tempting to keep ploughing money back in the business, but then, I tell people that if you are going to keep ploughing it back in business, three things shouldn't happen. You shouldn't fall ill, you shouldn't retire and you shouldn't die because if any of those things happen, will your family be able to take that money out and take care of themselves? So, in that case, keep taking it out on regular basis so that your business can grow at a very good rate; you could be making a lot of profit, but is it really useful when those responsibilities come up? I would recommend to do an SIP because on a regular basis. You don't have to spend lot of time analyzing it; only thing you should be be careful is when you make that investment, do it investment in your own name and mentally say it's for my daughter. There are times where people start doing it in their child's name. But you may not want to give the control of the money to them at the age of 18. I feel that equity is the best investment in your case because your daughter is very young. But the only caution or rider, which I will add with the equity is to go for the blue chip stocks and avoid the service industry stocks. You don't know maybe a company, which is engaged into the services tomorrow may not be able to perform. So, I have always advocated for the brick-and-mortar kind of business. Pinky Saraf, Pinky Saraf.com: In the current market scenario, which are the best sectors to invest in? Tulsian: I will advise you two sectors. One is banking finance and second is automobiles. Banking finance is always taken as the backbone of the economy and automobiles is always taken as the wheels of the economy. We all know that India will progress for the next 20 years. I I am not saying that after 20 years, we will not grow but probably we will taper off after that. So these are two sectors, which require a must presence for all investors. Q: How does a lay investor find companies with a sector; should they go for large caps or blue chips or should they be adventurous enough and try something in the broader markets? Tulsian: Always go with the best. Suppose if I am say automobiles, it has to be Maruti; if I say housing finance company, it has to be HDFC. If I am saying public sector bank, go with SBI. If I say private sector bank, go with ICICI Bank. The step is to choose the outperformer. For an initial investor or those who want to go with the safe stocks, go with the leader. Anita Sawhney, Girish Kidarnath Opticals: Can you brief us on whom we should nominate and how we should go about it? Mashruwala: In case of death, our assets would go to someone. Now, there are two prominent ways one is that we could have written a will, and in a will, we have clearly mentioned who should get it. If will is not there then there is Indian Succession Act and Hindu law or Mohammedan law, whatever is applicable, but there is a step prior. What is nomination? It means in case of one's death, one can nominate who can get the money. Now that doesn't mean the person can own it, ownership will happen. Sometime distinguish between the two and it will be a little complicated, I will simplify that with an example. Assume a husband nominates his mother in a life insurance policy saying that upon my death, this should go to her. Death happens, husband has not made a will, money goes to the mother. But wife can sue saying that being a legitimate wife, she has a right under the Indian Succession Act. So, either will shall prevail. But prior to that, we do nomination so that immediately somebody gets money. So whatever investments that you do, ensure there is nomination. It is fairly easy. Nomination is a sure shot way that upon your death, there is somebody in the family who doesn't have to go to court to get that asset, which you have created.
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