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MSTC IPO: Should You Bet on This State-Run E-Commerce Player? (Subscriber Feature)

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State-run e-commerce company MSTC Limited is set to launch its initial public offer (IPO) in the price band of Rs 121 to Rs 128 per share.... [Read More]

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The Jet Airways Crisis in 6 Charts

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Do you remember the troubled days at Kingfisher Airlines 6 years ago?

Jet Airways recent crisis reminds you of Kingfisher, doesn't it?

Vijay Mallya's Kingfisher stopped flying in 2012. The airline posted losses, struggled to pay salaries, and had a huge debt pile. This led to its complete closure.

Now, compare that to Jet Airways. Is history repeating itself?

Let's have a closer look at what's exactly going on with Jet Airways. It was once among India's top 3 airlines.

First, its background. Jet Airways was founded by ticketing agent turned entrepreneur Naresh Goyal in the early 1990s after India ended its state monopoly on aviation.

The ownership structure currently remains unclear. But as per reports, chairman Naresh Goyal has agreed to step down.

His shareholding will fall below 20% from 51%. State Bank of India owns 24% and 12% is held by Etihad.

The airline has been losing market share for several years to IndiGo, that is now the clear leader in the domestic market.

Jet Airways Market Share - Then & Now
Jet Airways Market Share - Then & Now

Once a Frontrunner, What Went Wrong?

First was the challenge from the entry of budget carriers. This led to dropping of fares by Jet Airways. Some tickets were sold even below the breakeven cost.

Second, provincial taxes of as much as 30% on jet fuel were added to its expenses.

Price-conscious Indian travelers refused to pay a premium for on-board meals and entertainment.

On a consolidated level, the company has bled in nine of the last eleven fiscals. In other words, it has kept its bottomline in the black in only two out of the last eleven years.

Jet Airways: Bleeding Red
Jet Airways: Bleeding Red

Third, aviation is a tough business.

Despite rapid passenger growth, the cost structures and high competition make it very difficult for airlines to turn a decent profit.

Lastly, the rise in oil prices was a death blow to their earnings.

There is a sense of urgency to rescue Jet Airways given the looming general elections.

With 23,000 jobs at stake, the failure of the bailout plan would send airfares spiraling.

What's the Bailout Plan?

Jet Airways has been in a financial crisis since August 2018, when it began delaying salary payments to its employees.

Jet Airways has been grappling with financial woes and is looking to rejig debt as well as raise funds.

Last week, the airline's proposal to let lenders convert debt into equity was approved by over 97% shareholders.

The bailout plan led by banks and approved by the board of Jet Airways on 21 February, proposed a restructuring plan, under RBI guidelines, to meet a funding gap of nearly Rs 85 billion.

The gap is to be filled through a mix of equity infusion, debt restructuring, SLB (sale and lease back), and refinancing of aircraft, among others.

This complicated arrangement, represents the rescue of one of the country's most visible companies at a sensitive time, with India's general election just weeks away.

High on Debt

Jet Airways defaulted on loan repayments to its banks, casting fresh doubt over the future of India's largest international airline.

The company said it had failed to make repayments to a banking consortium, led by State Bank of India, that were due on 31 December.

It is evident from the chart below that the company is borrowing more to fund its operations.

Thus, its liquidity situation is stressed. The networth of the company is negative since liabilities have exceeded assets.

Its interest costs have been the highest in the December 2018 quarter.

Jet Airways Increased Borrowing & Rising Interest Costs

For now, a Rs 85-billion lifeboat is being readied, but will it end the crisis? Hardly. A more long-term solution will be needed.

How's the Stock's Performance?

At the start of 2018, the stock price of Jet Airways hit a multi-year high.

But as crude oil prices kept rising higher and the overall bull market lost its steam, the stock crashed as much as 80% by the start of October.

Failing to Take Off

The airline posted a loss of Rs 13 billion in the quarter ended September 2018, with liabilities rising further.

This is not to say that the company hasn't created any wealth at all. Here's what co-head of research, Rahul Shah opined on its share price performance:

  • "Those lucky to get into the stock when it was making its multi-year lows have certainly been rewarded with strong gains over the next few months.

    But this is where the problem is. The highs have come just as fast as the lows. There are hardly any 2-3 year stretches where the stock has given positive returns.

    Therefore, for a long-term investor, whose minimum time horizon is two years or more, investing in the counter has been a painful exercise."

So, is it just Jet Airways causing trouble for the sector?

A Look at How Jet's Competitors Are Faring...

Jet Airways' rivals are not faring much better.

The entire aviation sector has been hit by fuel prices woes, depreciating rupee, and debt to fund aircraft purchases.

Their troubles are further worsened by rising pilot shortages.

State-run Air India Ltd is surviving on government bailouts worth billions of dollars.

Spicejet and Go Air are also grappling with their own issues.

Other Indian airlines are struggling too. This includes market leader Indigo, which recently joined the sorry parade reporting a 75% fall in its net profit last quarter.

Hence, it is important to note that certain industries have poor economics compared to others.

Investors would do well to keep this in mind, particularly in the case of aviation.

Investors need to understand the industry dynamics before buying up aviation stocks.

Now coming back to Jet Airways crisis, do you think this bailout package will be able to steer the Jet ship forward? Or will it go the Kingfisher way?

Let us know what you think.

Until next time...

Best Regards,
Rini Mehta

This article (The Jet Airways Crisis in 6 Charts) is authored by Equitymaster.

Equitymaster is a leading 'independent' equity research initiative focused on providing well-researched and unbiased opinions on stocks listed on the Bombay Stock Exchange.

Click here to Read full Details Sources @

Look for Promoter Pledging in Companies Before You Invest

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Over past few months, you would've come across headlines like these:

Reliance Group shares rise up to 13% after lenders agree not to sell pledged shares till September.

Essel Group pledged Zee's shares to raise funds.

In recent weeks, stock market investors have been hit by sharp swings in prices after news of high promoter pledging, sale of pledged shares by lending institutions, and agreements between the lenders and promoters to go slow on such sales.

Shares of the Zee group have plunged between 15-60%, while Reliance group stocks have dipped 60-80% on such incidents.

Reliance Group & Zee Group Shares' Underperformance

A large number of India Inc promoters have been forced to draw loans by pledging their holdings.

Last week, non-banking finance companies, especially L&T Finance and certain entities of Edelweiss Group, sold 318.1 million pledged shares worth Rs 5.5 billion of Reliance Group, leading to a loss in investor wealth of Rs 130 billion.

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Reliance Communications failed to take necessary approvals from its lenders and the Department of Telecommunications (DoT) to conclude its deal with Reliance Jio. It then opted for insolvency proceedings on 1 February 2019. It's lenders resorted to panic selling of shares in four Anil Ambani-led companies, including Reliance Capital, Reliance Communications, Reliance Infrastructure, and Reliance Power.

As a result, the promoter's stake in Reliance Communications and Reliance Capital slipped below 50%.

What is Share Pledging? And Why Should Investors be Bothered?

Would you ever lend money to a person neck deep in debt? A person who has even mortgaged his house and personal belongings?

Most likely, the answer to this question will be 'No'!

Now consider this situation: Promoters of a company have taken debt by keeping as collateral their controlling stake of the very company they own.

Will you invest in such a company whose promoters have 'pledged their shares'?

No? Well, many investors actually do invest in such companies.

Simply put, pledging of shares is taking a loan against the shares one holds.

Post the Satyam scandal, share pledging is seen as a critical factor in picking up stocks.

What's more, there has been a rise in the value of pledged shares. You can see in the trend below:

Promoter Pledging on the Rise

Now, let us dig into the reasons for pledging...

Promoters, to raise funds for either personal or company needs, pledge their holding shares to a financial institution.

In short, pledging by itself is not illegal or bad. The motive is wide ranging and the intention could be either noble or questionable.

We believe, high promoter pledging can lead to high volatility in the stock price.

Why? Let's explain this through an example.

Let's assume the promoter of a hypothetical company A, decides to pledge 10% of his shares. Let's also assume that when this happens, the price of A's stock is Rs 100 per share.

The bank may set a level, say Rs 80, to which if the price falls, the promoter would need to repay the loan or pledge more shares.

In a few months' time, the price of A dips to Rs 80. At this point, the bank could ask the promoter to repay some loan or pledge more shares.

If the promoter is unable to repay, he could be compelled to increase the pledging to 20% of his total shares. This process could go on till the pledging reaches 100% or the promoter repays the loan.

This is where the catch lies!

If the promoter is unable to pay the loan or pledge any more shares, then the bank has the right to sell the shares in the open market to recover the loan.

A bulk sale of this sort could send the stock price crashing.

Think of how that would affect the shareholding of ordinary investors. Such an event reflects poorly on the promoter as well as on the company because it questions their ability to repay their loans.

Following are the top 10 companies with very high level of promoter pledging.

Top 10 Companies with Highest Promoter Pledging

Here's what Research Analyst & Editor of Hidden Treasure, Richa Agarwal, thinks about promoter pledging:

  • "The promoter using pledged shares as a way of raising capital is okay. However, from a small retail shareholder's standpoint, a high amount of pledging with bad financials could lead to the banks or financial institutions (who hold these shares as a collateral) to dump them to recover their dues. This would then have a cascading effect on the stock price as well, resulting in a huge loss for the shareholder."

What Next?

This makes it clear that promoter pledging can turn out to be a major investment risk. Investors would do well to check this before considering any stock for investment.

We at Equitymaster have developed a stock screener for investors to screen companies which have high level of promoter pledging.

Note that, share pledging is not an illegal activity. However, you must keep an eye out for such data points especially for companies with questionable managements.

For those looking to delve into stocks in beaten down sectors, it makes sense to check promoter pledging before making their decisions.

No matter how attractive a stock may seem, investors must keep away from companies where the debt overhang situation become difficult to assess.

It is better to be safe than sorry. Over leveraged firms with high percentage of pledged shares could very well turn out to be value traps.

Best Regards,
Rini Mehta

This article (Look for Promoter Pledging in Companies Before You Invest) is authored by Equitymaster.

Equitymaster is a leading 'independent' equity research initiative focused on providing well-researched and unbiased opinions on stocks listed on the Bombay Stock Exchange.

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Chalet Hotels IPO: Should You Bet on This High-End Hotel Chain Owner? (Subscriber Feature)

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K Raheja Group-promoted Chalet Hotels is set to launch its initial public offer (IPO) in the price band of Rs 275 to Rs 280 per share.... [Read More]

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Does Maruti Suzuki's Poor Performance Indicate a Rough Ride for the Automobile Industry?

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With electrification of vehicles catching up fast, the world's economy may change from being oil-driven to dependent on lithium, cobalt, etc.

The introduction of electric vehicles is going to transform the automobile industry in a big way.

In times like these, everyone wants to know 'what's up with automobile stocks?'

Especially looking at the current scenario, nothing seems to be going well in automobile stocks and even the beginning of 2019 is adding more woes to this sector.

Market participants were jolted out of their seats after Maruti Suzuki reported a sharp narrowing of operating profit margin to under 10%. The company's weakening sales volume data have given the impression that the company has hit a rough patch. It looks like it will be a rocky road to recovery.

So, is it only Maruti Suzuki or all automobile stocks?

Both benchmark indices are on a negative trend. One of the reasons for the bloodbath in these two indices can be attributed to the beating automobile stocks have been facing.

All Automobile Stocks in Red
All Automobile Stocks in Red

To investors' horror, the S&P BSE Auto has plunged by nearly 25.3% in past one year. Almost every stock in this sector is on a hotbed.

As you can see in the table above, all the components of BSE Auto index have fallen. Tata Motors and Motherson Sumi Systems have plunged over 40% in past one year. While, Bharat Forge, Ashok Leyland and Maruti Suzuki fell over 30% during the same period.

Underperformance of BSE Auto Index
Underperformance of BSE Auto Index

What exactly happened to the ever-growing automobile sector?

Road Block & Road Ahead...

Year 2018 turned out to be a mixed bag for the domestic automobile industry.

Just like many other sectors, the automobile sector too, was caught up in the tide of the major macroeconomic woes this year.

The year started off with a bang. The industry was motoring along well having digested the cramps of demonetisation and the partial disruption due to the roll-out of GST.

In fact, the passenger vehicle industry grew in the beginning of the year. The sale of passenger vehicles (PV) grew by 7.9% in April-March 2018 over the same period last year. Also, the overall commercial vehicles (CV) segment grew by 19.9% in April-March 2018.

Things went awry thereafter as adverse macroeconomic factors such as rising fuel prices and interest rates took a toll.

Talk of electric mobility also gathered steam during the year with the government and industry deliberating at length on the way forward for India.

Then from taxing conventional vehicles more, banning diesel vehicles in its entirety, to incentivizing only vehicles for fleet or battery technologies, a number of options were debated.

While PV showed growth in the first part of the year, the challenge arose in keeping the trend on account of a high base in 2018. The speed of growth slowed down towards the end of the calendar year across segment with the fuel price increase, domino effect due to non-banking financial companies (NBFC) issues and high interest rates.

The festival season also disappointed the segment with tepid sales of PV's.

However, by the end of the year, there were some early visible green shoots of recovery. Oil prices have softened. Interest rates have also been capped with the RBI maintaining status quo in its quarterly review in early December.

So, Should You Invest or Stay Away?

So, coming down to the final and most important question in your mind, should you invest or stay away from automobile stocks?

One thing we must keep in mind is that not all auto companies will make money over time. And also, you shouldn't stay away from auto stocks altogether.

Even Tanushree Banerjee, Co-head of research at Equitymaster believes that there are businesses in this sector that you cannot ignore. She is particularly talking about the blue-chip auto stocks.

Here's Tanushree:

  • One out of every three household in India is a buyer of their products. They own some of the cult brands in Indian automobile space. They have formidable R&D teams. They have been through several economic cycles over decades. Few have even visited near-bankruptcy in the past and come out successful.

    Yet, some of the biggest passenger car, commercial vehicle, and two-wheeler companies in India have seen a huge dent in valuations in recent times.

    This could be the opportunity long term investors were waiting for.
Bluechip Auto Are Stocks Way Off Their Valuation Peaks

Going forward, while the demand of passenger vehicles has kept growing, there will be challenges like new safety norms and the transition from BS-IV to BS-VI fuel in 2020 that may act as speed breakers.

In preparation for the new regulations, manufacturers may also hold back some new product introductions.

Now while the pessimism surrounding auto stocks keep most of us wary, you must look at the sector with the long-term perspective.

In the long run, India's growing working-age population will keep the demand for private vehicles high.

As far as macro trends are concerned, what you must keep in mind is that what happens in the stock markets is often not in sync with the business realities.

India's automobile firms will do well in the long-term. However, you need to be selective in picking stocks from this space.

Best Regards,
Rini Mehta

This article (Does Maruti Suzuki's Poor Performance Indicate a Rough Ride for the Automobile Industry?) is authored by Equitymaster.

Equitymaster is a leading 'independent' equity research initiative focused on providing well-researched and unbiased opinions on stocks listed on the Bombay Stock Exchange.

Click here to Read full Details Sources @

Is it the Time to Buy Aviation Stocks as Fuel Costs Fall?

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The past one month was fantastic for Indian aviation stocks like Indigo and SpiceJet, which rose 9% and 8%, respectively. It was only Jet Airways, that declined during the month.

But Jet Airways has been facing another set of issues altogether.

Jet Airways' woes got much worse last week, with the cash-strapped airline defaulting on its loan repayments to a consortium of Indian banks led by the State Bank of India.

This debt default, the airline's first, marks a serious deterioration in its troubled state of affairs that has seen it delaying salaries and aircraft lease payments.

But that's a topic for another day.

Coming back to surge in share prices of airline stocks last month. What was the reason for this industry-wide jump?

Two words: Oil Prices.

High Crude Prices Ground Aviation Stocks

Fuel is the largest expense for airlines. Fluctuations in fuel prices have the single biggest impact on an airline's bottom line in the short term.

Because the cost of jet fuel corresponds tightly to crude oil prices, movements in the price of crude oil affect how much airlines pay for Aviation Turbine Fuel (ATF).

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So, when oil prices go up, airline stocks feel the pinch. When oil prices drop, airlines can make hay while the sun shines and their share prices usually increase.

Best example is 2014 when oil prices dropped by more than 50%. Aviation stocks were flying high that year.

As you can see in the chart below, lower ATF prices resulted in the industry reporting positive operating profit margins since 2015.

With 2016 reportedly being the best year of profitability in over a decade. The ATF prices stayed at multi year lows of Rs 30-40 per litre.

Falling ATF Prices During 2014 Boosted Airlines' Profit Margins

Of course, the opposite is also true.

When oil prices climb, as they did in the second half of 2017, airline stocks tend to underperform the broader market.

That is exactly what has been happening until now.

The sector got an apt New Year present of lower ATF prices.

According to Indian Oil Corp. Ltd, average ATF prices for domestic airlines, at the four metros, have declined by nearly 20% compared to the average for the December quarter. These are the lowest monthly prices in this fiscal year.

In a relief to India's aviation industry, oil marketing companies slashed jet fuel prices by around 15%.

This is the second consecutive reduction in the prices of ATF after around 10% cut in December.

ATF costs has been the major reason to why airlines posted lackluster earnings in Q2FY19. Indigo's fuel cost rose by a whopping 84% in Q2FY19.

The chart below shows how with an increase in oil prices, the net profits of the companies fell during the September quarter in 2018.

Rising Fuel Costs of the Airline Stocks
Poor Q2 Performance as Fuel Costs Rise

However, important to note here is that, its not only oil prices that drive the shares of airline companies. A case in point is Jet Airways and Air India.

Broader economic indicators can also have a big impact.

On top of that, OPEC and Russia recently announced a production cut, which caused oil prices to rise. However, that bump was short-lived.

So, while it seems that lower fuel prices may be likely to stick around through the year after all, it's important to know that the lower fuel price environment is not necessarily a permanent feature.

There is always the risk that prices will inch higher.

Over the past one year, all the listed airline companies in India have underperformed the benchmark index.

It can of course be argued that the very fact that these stocks have underperformed could now turn them into potential future winners. After all, stocks revert to the mean, don't they?

Of course, they do.

But let's first see what co-head of research at Equitymaster, Rahul Shah has to say about it:

  • "But the principle is applicable to companies that are efficiently run, have strong balance sheets and are only victims of an economic downturn or the downturn in the industry. But when companies have negative networth like both Jet and SpiceJet do and also have balance sheets loaded with debt, it is usually a good idea to stay away from such companies rather than invest in the hope that things will indeed turn around one day.

    If they haven't all these years, there's a very small possibility that they will in the future. And one shouldn't bet too much money on a scenario that with little or no upside and the downside that can go all the way to possible bankruptcy."

So, what can we conclude here?

No doubt the capacity has been growing at a brisk pace, the important question whether lower fuel prices will ensure that load factors remain high.

Load factor measures the capacity utilisation of public transport services like airlines. It is used to assess how efficiently a transport provider fills seats and generates revenue.

So, while the trends on demand and load factors are yet to play out, the positive factor right now is that ATF prices have come back to levels where low-cost airlines can generate decent profits.

Also remember, although air travel is becoming the new normal, investors need to understand the industry dynamics before buying any aviation stock.

Best Regards,
Rini Mehta

This article (Is it the Time to Buy Aviation Stocks as Fuel Costs Fall?) is authored by Equitymaster.

Equitymaster is a leading 'independent' equity research initiative focused on providing well-researched and unbiased opinions on stocks listed on the Bombay Stock Exchange.

Click here to Read full Details Sources @

Airtel, Vodafone-Idea or RJio - Who Will Win the Telecom Race?

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The giants that ruled a couple of years back went extinction when a new baby was born in this country.

India's richest man Mukesh Ambani's telecom baby, Reliance Jio, was born in September 2016.

With the launch of Jio, India's telecom story was re-written. India's biggest operators, Bharti Airtel, Vodafone India, and Idea Cellular were caught by surprise, and they were yet to gauge what was in store for them in the coming times.

In a matter of just 12 months, the 12 telecom operators in the country, suddenly shrunk to 4.

Small players vanished from the market. Others who survived, started counting days that are left, unless they do something new. They are forced to revisit their strategies, and in most cases, follow the newcomer.

Market Share: Then & Now

The entry of Reliance Jio resulted in a tariff war, which forced even a large corporate house like the Tata Group to exit the industry (In October 2017, Tata group decided to sell its consumer mobile business segment to Bharti Airtel virtually for free).

Following a year-long consolidation, the current stage where the incumbent players, Bharti Airtel, Idea+Vodafone and BSNL+MTNL (Public sector) are hemorrhaging has possibly reached the last lap.

The last lap is running to the pace of RJio.

With the market share divided among several players in 2016, the top 3 players have captured most of the market.

See the chart below.

In terms of subscriber market share, Vodafone Idea has the highest market share of 38%, followed by Bharti Airtel at 29.8%. Reliance Jio stands third with 18.4% market share.

What About the Financials?

Here again, the incumbents have been badly impacted.

In the June 2016 quarter, before new entrant Reliance Jio Infocomm Ltd started steering the ship, Bharti Airtel's India wireless unit boasted annualized revenue of more than Rs 600 billion.

Notably, revenues and profits have fallen almost every quarter since then.

However, in the September 2018 quarter, revenues are showing the signs of growth. Will these players will now go on the path to recovery?

As our research analyst Taha Merchant believes the situation is unlikely to change soon. Here's an excerpt of what he wrote:

  • "Speaking of difficult businesses, the whole telecom business has been an underwhelming story so far. While the telecom subscriber base has increased from 300 million in 2008 to 1.2 billion in 2017, investors have little to cheer. The BSE Sensex has gone up 3.25 times in nine years, but the BSE Telecom Index has not moved an inch from its levels of 2008.

    Telecom companies are straddled with high debt, intense competition, and lack of pricing power. High spectrum costs and regulatory issues have hampered the sector. While consumers have benefited from low costs and new players fighting for their share, investors have suffered."

Subscriber Base Versus Revenues

Among the three leading players, Vodafone Idea has added over 444 million subscribers as on June 2018.

Interestingly, Reliance Jio, which had 215 million subscribers compared with Vodafone Idea's 444 million as of end-September, made a profit of Rs 6.8 billion in the same period.

The third player, Bharti Airtel lost around 64 million users between June 2017 to June 2018 whereas Reliance Jio added 92 million during the same period.

Reliance Jio Surpasses Bharti Airtel in Terms of AGR

Reliance Jio has surpassed Bharti Airtel to become the second largest telecom operator in terms of adjusted gross revenue (AGR) in the quarter ended June.

In India, AGR has specifically become important for telecom companies since the payment made to the government is based on the AGR.

As per the data released by TRAI, Jio recorded an AGR from access services or revenue derived from licensed services of Rs 71.3 billion for the June quarter, while Airtel's AGR stood at Rs 67.2 billion.

The development highlights strong growth of the new entrant and declining strength of the former market leader. RJio had surpassed Vodafone and Idea Cellular individually in the March quarter but lags them now since the two merged to form Vodafone Idea at the end of August.

Rising Debt...

Meanwhile, as Reliance Jio inched closer to Bharti Airtel in terms of revenue market share, Jio's net liabilities have risen at a fast pace.

Meanwhile, debt-to-equity ratio of the incumbents have also remained high. This simply shows the considerable cash burn at the two firms because of the cut-throat pricing in the industry.

Hence, leverage for the sector seems to remain elevated on relentless competition, which in turn is hurting the profitability. Cash flow generation is constrained because of continued capital spending.

Although the dust in the telecom battleground has settled largely, the sector is at the point wherein no clear market leader emerging on key growth metrics and no distinct industry hierarchy in sight.

In the run-up to 5G, the next stage will mark a qualitative transformation and bring stability to the telecom sector.

But that is still some distance away. In the meantime, incumbents will have to dig in and pour more investment to hold their market share.

Best Regards,
Rini Mehta

This article (Airtel, Vodafone-Idea or RJio - Who Will Win the Telecom Race?) is authored by Equitymaster.

Equitymaster is a leading 'independent' equity research initiative focused on providing well-researched and unbiased opinions on stocks listed on the Bombay Stock Exchange.

Click here to Read full Details Sources @

Why the Realty Sector's Recovery Has Been Delayed

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What happens when you throw a pebble in a pond? The impact of the stone breaking the equilibrium of the surface of the water causes ripples to spread outwards.

Think of it in this way... stock markets are like the pond and Infrastructure Leasing and Financial Services (IL&FS) represents the pebble.

You may have been hearing about it frequently these days, 'IL&FS crisis is at the heart of the problems in the economy and stock markets.'

I suppose, lot of you are even feeling the pinch of it. But, what exactly happened? How did this IL&FS crisis start? What triggered the crisis in last few months?

What began as a singular event with IL&FS, failing to repay its dues has blown up into a liquidity crisis for the entire non-banking financial companies (NBFC) sector. As an immediate aftermath, NBFC stocks witnessed a free fall.

To put it simply, IL&FS defaulted on a few payments and failed to service its commercial papers (CP) on due date, which means the company started facing a liquidity crunch.

The company piled up too much debt to be paid back in the short-term while revenues from its assets were skewed towards the longer term.

IL&FS has a huge outstanding debt of Rs 910 billion out of which Rs 570 billion is due to Public Sector Banks.

Further, in July this year, IL&FS' subsidiary IL&FS Transport delayed Rs 4.5 billion of repayment to SIDBI. This is when the IL&FS crisis started.

Owing to the several payment defaults, ICRA and CARE started downgrading the company's ratings. As Tanushree Banerjee, co-head of Research at Equitymaster, rightly pointed out in The 5 Minute WrapUp, that rating agencies were late to ring the alarm bells this time as well.

Rising NPAs and Debt - Early Indicators of IL&FS' Liquidity Crisis

Rising NPAs and Debt - Early Indicators of IL&FS' Liquidity Crisis

Here's what Tanushree wrote:

IL&FS was a designated systemically important NBFC which borrowed money from the banks, public at large and other NBFCs. With its problems out in the open, the element of trust stands shaken.

The current NBFC crisis has had a cascading effect on the real estate sector.

Post the banking system's freeze on real estate funding due to rising NPAs, The NBFCs & housing finance companies were a major source of funds for developers.

Now, the NBFCs themselves are struggling and their loan disbursals to the real estate developers have slowed down significantly.

Two years ago, demonetisation caused upheaval in many sectors and the real estate sector also had to bear the brunt.

Coupled with slow pace in home sales, the roll-out of goods and services tax (GST), and the introduction of new real estate regulations (RERA), had severely impacted new launches and expansion plans of several developers.

When it seemed that the pain reduced with these measures being in place and real estate prices getting rationalised, the recent NBFC crisis caused a stir in the residential markets.

Consequently, realty stocks have been hurt the most among sectoral indices, since the correction in the Indian stock market started in late August.

The change of stance on interest rates and liquidity concerns for NBFCs hit the sector, which had just started seeing a recovery.

BSE Realty Index has Fallen 18% Since August

While the BSE Sensex dropped 6% since 1 August 2018, the BSE Realty Index eroded 18% of its value. In fact, all the 10 components of the BSE Realty Index have lost value since then.

Indiabulls Real Estate fell the most, declining 39%. Sunteck Realty, Prestige Estate, and Mahindra Lifespace fell 21%, 30% & 24% respectively during the same period.

All BSE Realty Stocks Under Pressure Since August 2018

In the recent development, the home buyers and realty developers are facing severe cash crisis despite Reserve Bank of India's (RBI) increasing bank credit to NBFCs and HFCs.

The scale of problem is so huge that the even the sanctioned home loans are not being disbursed. The cash crunch has also pushed up home loan interest rates.

So, what can we make of this scenario? What lies ahead?

A source of broad-spectrum disappointment and despair, the NBFC crisis needs to be resolved as soon as possible or the real estate sector's much-anticipated recovery will be postponed further.

Further, the real estate sector is going through a consolidation i.e. weaker people (with bad ethics practise) are going out of business after RERA.

Now with this liquidity crunch, companies with weaker balance sheets will be under pressure and hence will result in further consolidation.

In the long run, companies with strong balance sheets and ethical managements, with long track records, will win and do well with much less competition.

Happy Investing!

Best Regards,
Rini Mehta

This article (Why the Realty Sector's Recovery Has Been Delayed) is authored by Equitymaster.

Equitymaster is a leading 'independent' equity research initiative focused on providing well-researched and unbiased opinions on stocks listed on the Bombay Stock Exchange.

Click here to Read full Details Sources @

IPO Market Feels the Heat of the Market Crash

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A robust IPO market needs two things: favorable stock market conditions and companies that want to sell shares.

Both are absent in the current market conditions.

The sentiment has deteriorated rapidly in the secondary market in the last couple of weeks.

The BSE Sensex is already off its record high levels, and given the global trade war, sharp drop in the rupee, deterioration of the current account deficit, and the uncertainty of the upcoming state elections and general election, volatility has been on a rise.

It all started with the liquidity fears from mid-September and the consequent downturn in the benchmark indices. This has made market participants extremely cautious, leading to Initial Public Offerings (IPOs) receiving a muted response in the primary market.

We could see in the latest offerings this month. The IPO of Dinesh Engineers was withdrawn after it received muted response on the first day of bidding.

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The IPO of Garden Reach Shipbuilders & Engineers also drew a weak response. The company was forced to extend its IPO by three days and also cut the price band to Rs 114-Rs 118 against the original price band of Rs 115-Rs 118 per share.

Also, if you look at the S&P BSE IPO Index, it has fallen nearly 18% this year as compared to the Sensex, which is flat for the year.

How has IPO Benchmark Performed So Far?

Among the IPOs listed so far, 14 are trading below their issue price. The market crash has taken a toll on their share prices.

Apollo Microsystems, ICICI Securities, and Indostar Capital Finance are down by over 50% since its listing. While, CreditAccess Grameen, Hindustan Aeronautics, and Bharat Dynamics are trading 30% below their listing prices.

IPOs/Public Offering: Performance snapshot

Moreover, those that had enjoyed high listing premiums have now seen huge price erosion. The worst hit includes HDFC Asset Management Company. It is down from Rs 1,970, its all-time high price, to Rs 1,268, after touching a 52-week low of Rs 1,248.

The HDFC AMC public offer was allotted at Rs 1,100 per share and had listed at 58% premium to the issue price.

Similarly, Bandhan Bank which had hit an all-time high of Rs 742, is down to Rs 485, below its listing price of Rs 499. Bandhan Bank had listed at a huge premium of 33% over its issue price of Rs 375.

The chart below indicates the top 5 gainers and 5 losers during the year so far. Fine organics stands as the best performer among all the listed IPOs in 2018. While, Apollo Microsystems leads the pack of losers, falling over 61% since its listing.

Top IPO Overperformers & Underperformers in the Market Crash

The lull in the IPO market would also hinder the government's disinvestment target and upset its fiscal math. The government has set its FY19 disinvestment target at Rs 800 billion. The ongoing volatility in the domestic equity market may force the government to postpone its planned stake sales and of some the IPOs.

While the recent market crash and the macro uncertainty is a big cause of worry for investors, it must be recalled that Indian stocks were driven to unsustainably expensive valuations on the back of a flood of domestic liquidity.

Ankit Shah, editor of Equitymaster Insider, believes the ongoing market crash has brought valuations down to reasonable levels. This may be a good time to scoop up great long-term investing opportunities.

Yes, that's right.

Here's a snippet of what he wrote in The 5 Minute WrapUp recently:

  • "Of course, this doesn't mean that stocks couldn't crash further if things get worse.

    The correction could last longer.

    But looking at the history of equity returns, I can tell you that this would be just a passing correction phase.

    Despite all the volatility and periodic crashes, equities are still one of the most rewarding and safe asset classes over the long run."

Here's the bottom-line: The short-term performance of the secondary market and the second quarter earnings season would largely decide the course for the primary market.

Can the subdued IPO space offer investors an opportunity to acquire shares at reasonable valuations in the remaining part of the year? That will be something to watch out for.

Honestly, it is hard to decide whether to apply for an IPO or ignore it when the masses are thronging to buy them.

How can you decide which IPO is the right one? We have good news.

To help you approach IPOs in the right way, we have prepared a special report on IPO Investing.

To know how to safely profit from the ongoing IPO rush, download this FREE report now and discover... How to Get Rich with IPOs.

Moreover, at Equitymaster, we also release detailed notes on the upcoming IPOs. Keep an eye out for them.

Until next time...

Best Regards,
Rini Mehta

This article (IPO Market Feels the Heat of the Market Crash) is authored by Equitymaster.

Equitymaster is a leading 'independent' equity research initiative focused on providing well-researched and unbiased opinions on stocks listed on the Bombay Stock Exchange.

Click here to Read full Details Sources @

Aavas Financiers IPO: Should You Bet on This Affordable Housing Finance Company? (Subscriber Feature)

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Aavas Financiers Limited is registered with the National Housing Bank (NHB) as a Housing Finance Company (HFC).... [Read More]

Free Resources on AAVAS FINANCIERS: Latest Stock Quote | Related Views

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