Sensex Continues Downtrend; Bank Stocks Trade in Red

Thu, 15 Mar 11:30 am

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After opening the day marginally lower, share markets in India have continued the downtrend and are trading below the dotted line. Sectoral indices are trading on a mixed note with stocks in the energy sector and stocks in the banking sector leading the losses, while stocks in the pharma sector are trading in green.

The BSE Sensex is trading down by 75 points (down 0.2%), and the NSE Nifty is trading down by 30 points (down 0.3%). Meanwhile, the BSE Mid Cap index is trading up by 0.7%, while the BSE Small Cap index is trading up by 0.6%. The rupee is trading at 64.91 to the US$.

In news from the IPO space. Bandhan Bank's initial public offering (IPO) opens today. The bank plans to raise over Rs 44.7 billion from its share offering beginning on 15 March 2018.

The Kolkata-based bank and its shareholders will be selling up to 119.3 million shares, or about 10% of the post-issue share capital of the bank, in a price range of Rs 370-375 each in the IPO.

The bank will sell up to 97.7 million new shares in the IPO. International Finance Corp, part of the World Bank Group, and IFC FIG will sell 21.6 million shares.

Bandhan Bank's IPO will the largest by a local bank.

The bank is majority controlled by its holding company Bandhan Financial Holdings Ltd (BFHL) which owns 89.7% of the stake. IFC and IFC FIG together hold 4.9% stake while Caladium Investment an affiliate of Singapore's sovereign wealth fun GIC owns 4.99% stake.

The IPO will ensure that BFHL's stake falls to 40%. RBI timeline also stipulates that the holding company's shareholding is cut further to 20% and 15% within 10 years and 12 years respectively.

The Kolkata based Bandhan Bank along with IDFC Bank received the final nod to start banking operations by RBI in 2015. One of the conditions of the license was public listing within three year which the bank will fulfil now. It started operations on August 23, 2015 and converted its microfinance business into a bank. As of September 2017, it had 864 branches in 33 states across the country.

You can read about our view on the Bandhan Bank IPO, here (subscription required).

If you've been tracking the demand for IPOs, you would certainly think that 2017 was the year of IPOs. For one, IPO subscriptions were at sky high levels. But if the performance of recently listed IPOs are anything to go by, they have flattered to deceive.

Of the five recent high-profile IPOs which listed on the stock market, four have given negative returns soon after listing.

The IPO activity in FY17 is mainly driven by Offer for Sale (OFS) rather than fresh issues. An OFS is a route through which existing promoters and private equity investors offload their stake. Here, the money from the sale goes to the selling shareholder. Whereas, in a fresh issue, the money raised goes to the company who, normally, utilizes this money to repay debt, for capital expenditure, etc.

Also, the number of Private Equity (PE) investors exiting these companies raised a red flag. These PE investors had bought a stake in the IPO recently at a fraction of the listed price. Sensing the frenzy, they were able to offload their stake with multifold returns.

The only person left high-and-dry here was the retail investor. And, this is not a recent occurrence. The IPO euphoria is something similar to what was seen in 2007-08. More than 70% of the IPOs listed in 2007 and 2008 were in the red, even today when the Sensex is at an all-time high.

But it doesn't make sense to completely ignore this space. The IPO space has also given us names like Maruti, TCS, and Jubilant Foodworks Ltd (with returns over 4,000%, 1,000% and 500% respectively) that have created immense wealth for shareholders.

For the retail investor, it is very important to ignore the noise and focus on the fundamental and valuations on the table. And more often than not, this approach works much better than following the herd.

That's Ankit Shah's approach at Equitymaster Insider. He keeps an eagle-eye on the developments in the IPO space and updates his readers on the big-ticket IPOs.

Ankit and his team of researchers constantly reference this handbook on investing in IPOs. You can download a copy for yourself. It is free. Just click here.

Moving on to news from the goods and service tax (GST) space. According to a report by the World Bank, the GST implementation in India is one of the most complex with the second highest tax rate in the world among a sample of 115 countries which have a similar indirect tax system.

India's GST structure has five tax slabs of 0, 5%, 12%, 18%, and 28%. Further, there are several exempted sales and exports are zero rated, which allows exporters to claim refund for taxes paid on inputs.

Separately, gold is taxed at 3% rate, precious stones at 0.25%, while alcohol, petroleum products, stamp duties on real estate and electricity duties are excluded from the GST and continue to be taxed by the state governments at state-specific rates.

As many as 49 countries around the world have a single slab of GST, while 28 countries use two slabs, and only five countries, including India, use four non-zero slabs. The countries that use four or more slabs of GST include Italy, Luxembourg, Pakistan and Ghana.

Thus, India has among the highest number of different GST slabs in the world, adding to the complexity.

Despite this, GST has had the effect of formalizing the country's economy.

The chart illustrates the same.

A Large Increase in Registered Indirect and Direct Taxpayers

Since the launch of Goods and Services Tax (GST), there were 9.8 million unique GST registrants, an increase of 50% compared to the previous tax regime. There has also been a large increase in voluntary registrations, especially by small enterprises that buy from large enterprises wanting to avail themselves of input tax credits.

Similarly, after November 2016, 10.1 million tax filers were added compared to an average of 6.2 million in the preceding six years. Further analysis suggests that new filers reported an average income, in many cases, close to the income tax threshold of Rs. 2.5 lakh, limiting the early revenue impact. As income growth pushes many of the new tax filers in time over the threshold, the revenue dividends should increase robustly.

These changes can have profound effects on the Indian economy. With the increasing tax base, the government will have a significant amount of resources to spend on infrastructure, health and education, While the fiscal deficit will be stable.

As organized players gain market share, it will begin to reflect in corporate earnings and stock prices too.

Every coin has two sides. GST is no exception. It has had its fair share of chaos in the months immediately post its implementation from 1 July 2017. Many businesses reported depressed earnings due to the transition to GST.

Our colleague Vivek Kaul has studied the finer aspects of the GST and predicted what could go right and wrong.

Download his special report - The Good, the Sad and the Terrible (GST).

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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