Power Grid FPO and Tax free bond have been in news last week. We look in detail about these and reason why they are hitting financial pages and try to get a 360 degree view on them.
Table of Contents
Power Grid FPO
Power Grid FPO was subscribed 6.7 times. Of the shares offered in the FPO, the retail investors portion was subscribed 2.17 times, the qualified institutional buyers bid for 9.09 times and non-institutional buyers bid for 9.70 times the shares on offer. The price band for the FPO was Rs 85-90 apiece. The government fixed the issue price for the sale of Power Grid Corporation of India shares at Rs 90 apiece, the upper end of the band. Retail investors and eligible employees get a discount of Rs 4.50 a share on the issue price. So effective price for retail investor was Rs 85.50 .The government is selling 18.51 crore shares, while the company is issuing fresh 60.18 crore shares through the offer.So far in the current fiscal, the government has raised over Rs 1,300 crore through minority stake sale in PSUs. It has set a target of Rs 40,000 crore from disinvestment in the current fiscal.
Power Grid Corporation of India Limited (PGCIL), a Navratna PSU, is in the business of transmission of electric power. The money raised through FPO will be utilised to fund PGCIL’s 27 identified transmission projects and for general corporate purposes, according to the prospectus issued by the company. India has always been a power-deficient country, the demand for power has always been greater than its supply.The company has been continuously expanding its transmission network leading to rise in sales and subsequent rise in profits.Over the past 5 years, net sales and EPS have shown good growth, clocking CAGRs of 21% and 16%, respectively.The company requires huge funds for the expansion of its network, and hence the debt on its books is high. As a result, debt to Cash Flow from Operations has been high in the range of 5 to 8 and is a concern. Debt to equity ratio has also been very high.
This was the second follow-on offering from Power Grid, which sold a 10 per cent stake along with a similar stake divested by the government in November 2010 at an issue price of Rs 90 a share. The company had hit the capital market with an initial public offering in October 2007 at Rs 52. After a couple of months( the good days maybe till January 2008) the stock hit more than Rs 160 but then from Rs 160 its today at around Rs 90.So the stock has not given any return. The stock price over the years (from moneycontrol) has been shown below
Power Grid Stock Price
Readers check out Moneyworks for me Analysis on PowerGrid FPO which advises the retail investors to go for long term and SP Tulsian analysis of Power Grid FPO on Money Control who advises to sell allotted shares in January (you will pay short term gain tax )
If you purely play as an arbitrage play, I am only giving this strategy for the retail category, apply for 2,100 shares, pay Rs 1,80,000 and it is expected that the retail category is likely to get the full allotment of about 2,100 shares. Suppose even if you get 1,800-1,900 shares, doesn’t make any difference. Go short in the January series at Rs 92.50. You are going to get the share at Rs 85.50. So Rs 7 difference on 2,000 shares, you get Rs 14,000 by making an investment of Rs 1,80,000 because that is only for one month strategy and for the retail investors. But if you ask the fundamental view, I am not convinced
Note : We have presented you with both the scenarios. Investment in stocks is risky, consult your financial advisor before investing. I shall not be liable to any risk in case of any losses.
Tax Free Bonds
Tax free bonds is the investing mantra this season. It is being lapped up Indian investors. Economic Times reported Hundreds of investors are breaking their bank fixed deposits due to mouth-watering yields offered by the tax-free bonds from state-run companies. Many investors are pulling out money from their public provident fund (PPF) and even from EPF in order to invest in the tax-free bonds that are available in the market for subscription and offering an annual interest of up to 9 per cent.
Overview of the bonds : These are bonds issued by public sector undertakings, offer annual interest, are for tenures of 10,15 and 20 years and are also listed on the stock exchanges where they can be traded(though liquidity is low). The bonds are benchmarked to the GSec yields hence the interest rate offered by these bonds is more this year than the last year(EPF,PPF, Post office interest rate are all linked to Government’s 10 year bonds). Retail investors can invest up to Rs 10 lakh in such bond issuances. Our article Understanding Tax Free Bonds explains these tax free bonds in detail. Our article Tax Free Bonds of FY 2011-12, FY 2012-13, Tax free Bonds of FY 2013-14 cover the tax free bonds of the various financial years.
While the interest rates being offered by banks may seem comparable, the difference comes on the fact that the bonds are tax free, where as the interest income on the fixed deposits with banks attract tax Therefore a pre-tax equivalent for an investor in the highest tax bracket(30%) on a bond offering 8.66 per cent will stand at 12.37 per cent whereas that on 9.01 per cent bond will stand at 12.87 per cent. Alternatively, a post-tax return on a 9 per cent FD will be 6.3 per cent (at the 30 per cent tax rate) whereas the bond offers you up to 9.01 per cent tax free. So there is a clear gap in the income generation from the two options. But these bonds come with their own risks.
- Though these bonds are listed in stock exchanges, the trading is thin and holder may not be able to convert into cash at the face value.
- The tax free interest is paid every year, there is no cumulative option so at the end of the selected tenure one gets only principal. One needs to invest this interest to grow money.
If you have a surplus or investment amount that you will not need over the next ten years or so then it makes a good case to invest. Also if you can invest the interest every year. This is more suited for individuals in the 30% or 20% tax bracket i,e those who are earning income of 5 lakh and more. Our article Investing:Think about Liquidity,Safety,Returns,Risk,Tax explains about what factors to consider while investing. Prof Pattu of Freefincal have written Tax-free Bonds: Do not invest if your retirement is a long way off! (Please go through comment section)
So have you invested in tax free bonds this year? Why or Why not?
Google Online Shopping Festival
The second edition of GOSF has resulted in record sales for several e-tailers such as Myntra, Jabong and Snapdeal. Even real estate companies like Tata Housing sold 22 value homes after they announced on GOSF that a flat can be booked at just Rs 20,000. GOSF was started as a concept to bring all the online players under one common platform and help them in getting more visibility as well as sales. GOSF’s first editon last year(on 12 Dec 2012) witnessed over a million people visiting the site, but this time the target is over 3.2 million people, of which a majority of them are likely to be the first time online shoppers. Over 200 players are participating in the fest this year.Several online players said that they have had 10x kind of growth in just 24 hours as against any average day. This, they said was due to lot of campaign by both Google and the players themselves besides growing popularity of ecommerce in India. Our post Online shopping talks about online shopping , who shops online, popular websites, how to make most of the Online shopping?
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IS GOSF India’s answer to a shopping extravaganza in the US called Cyber Monday, or Singles Day in China? Did you shop in Google Online Shopping Festival (GOSF)? Were the discounts genuine? Do sale make you shop for more?
Indian Market Euphoria and Nose Dive
The Indian markets have nosedived after hitting all-time highs on Monday, reacting to state assembly elections results. The BSE Sensex has slipped over 670 points and the Nifty has lost 165 points from all-time highs early this week. Was that euphoria over expectations of the BJP coming to power in the general elections, has ran up discounting various factors like inflationary pressure, domestic economic growth, QE tapering in the US and general elections.
