Just Dial IPO - Better to give it a Miss(ed) Call

JustDial is an online Indian search engine. The company is coming out with an IPO with a price band of Rs 470 to Rs 543. To voo retail investors, it is offering a 10% discount and a safety net, which would be triggered in case share prices fall 20% below the issue price. At this juncture, promoters would be forced to buy back the shares from retail investors at issue price.

Just Dial IPO - Is it worth investing?

CRISIL believes that company's business model is great. It has gone ahead and assigned a rating of 5/5 to the issue. But with Google being one of the major competitors of JustDial, we don't agree with what CRISIL has to say. By the way, ratings should always be taken with a pinch of salt. ReliancePower's IPO was assigned a rating of 4/5. And we all know what happened. :-)

But there are a few other things which concern us...

• Sometime in 2012, company's CEO VSS Mani made a remark - "The IPO (initial public offering) next year will just be a liquidity event for our investors." Nothing wrong with that. Our only concern is that if we do invest in this IPO, we will be on the receiving end of this liquidity event :-)

• We are not sure that we would like to have Google as a competitor in the businesses we invest. Just a little effort by Google in Indian markets can cause a lot of trouble for JustDial.

• The online space has very low entry barriers. Anyone can come up with a better solution than JustDial. It is a fast changing landscape. And any adverse developments on the technology front can make this stock volatile in times to come.

• With EPS of around Rs 9, JustDial would be available at multiples of 52x to 60x. And that is damn expensive!! Something like a Google trades at 25x multiples. Just imagine the growth rate which the company would need to maintain to justify these multiples!! And if we are really interested in buying something at 50x multiples, why wouldn't some go for a much better and established businesses like HUL or an ITC?

• CRISIL's IPO grading only looks at company fundamentals relative to peers. It tells absolutely nothing about its valuations.

• Lets talk about the safety net which company has proposed.For this, there is a defined safety net period of 180 days from the date of listing. The safety net gets triggered if the weighted average market price of equity shares in the 60 days after the safety net period gets over is lower than the allotment price. If this happens then the safety net providers, in this case promoters of the company, will buy back shares from the original retail shareholders at the retail offer price. The point to note here is that company is not offering too many shares for the retail investors. So the benefits of overpricing this IPO far outweigh the possible losses in case of trigger of safety net option. So this is more of an eyewash by the company.

• Mr Amitabh Bachchan (who has done a few ads for the company) has received 67,000 plus shares of the company at just Rs 10. Not sure if this was part of the compensation or his investment acumen  :-) But he is getting an option to sell his shares in open market for 5000% profit. Same shares which he bought (or got) at Rs 10, is available to us for Rs 500 plus. We don't like this :-(

Lucky him Or Unlucky you?

Not sure what retail investor's response would be, but we are sure that we don't like this issue. It may go up in the short term because a rising tide lifts all the boats. And with current markets looking to move up, anything might be possible. But we might get interested in this business again when prices would have cooled down [substantially]. Reason for our interest would be the uniqueness of the business, which has a negative working capital cycle. The company collects 100% of the money from its customers upfront. But no point discussing these things till share prices go down (& profits go up).

Lets see how the issue pans out :-)

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How to use Recurring Deposits to make money in Stock Markets!!

Strange.... isn't it?

You must be thinking that how a boring recurring deposit (RD) can help make money in stock markets?

Though it may seem a bit strange, the fact is that it can be done easily. All it requires is some common sense and a little patience.

Accumulating funds using RD

Now lets reason out as to why this can be done and why it makes sense.

So, according to you, when is the best time to buy stocks?

You will say that when they are cheap. You can have your own meanings of cheap. We think that markets are cheap when they are trading in lower parts of PE range of 12 to 24, i.e., closer the index's PE is to 12, cheaper it is. And we have a valid reason to believe that markets are cheap at such valuations. You can read more at Do Indian markets bounce off PE levels of 12 and 24? & A PE analysis of Indian markets. You can also check the current state of markets to know about market'a current valuations.

Once we are able to sensibly judge when the markets are cheap, it makes sense to buy stocks of great companies at cheap levels. It is the concept of buying low and selling high (though we personally prefer not to sell if we have bought a stock really cheap).

So, now you want to buy stocks. But how do you fund it? Either you have a stash of extra cash which is waiting to be deployed. Or you can just crib over the missed opportunity. You know markets are cheap and you have the courage to go out and buy stocks. But you don't have the cash. How much unluckier can a long term investor get. :-(

But this fate is avoidable.

Its a given fact that markets will move up and down. So suppose markets today are trading at expensive valuations. Knowing that markets are supreme and you are just an average investor, you have opted for systematic investments in mutual funds. But you also know that a time will come, when stocks would be available at really cheap valuations. This thought should act as a trigger for you to start a simple recurring deposit. This RD would keep accumulating money, month after month. And don't forget, this RD earns interest too.

Now suppose after 2-3 years, there is a market crash and stocks are available at really low prices. This is the time when you can use the money accumulated in RD to buy large quantities of great stocks, at really cheap prices.

It is as simple as that.

How to use RDs to make money in Stock Markets

Personal Example - The author still regrets that in mid 2009, with stocks available at throwaway prices, he could not purchase them in big numbers and wasted a good crisis.

Out of the trio of three Cs : CASH & COURAGE in CRISIS, the author desperately missed the first one.

Moral of the story

You cannot control the CRISIS.

COURAGE is also optional and situational. You will only know you are courageous when crisis is round the corner. So, in a way, even courage cannot be controlled.

But as far as CASH is concerned, if you plan well, you can accumulate cash to create a war chest to be deployed when markets crash. You then have the ability to buy stocks which you were waiting to buy in the next market crash.

What do you think?

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Unique way of investing in NSC (National Savings Certificate)

If you belong to the same generation as me (born in mid-late 80s), then chances are that you would have heard about NSCs, but would not have invested in them. But if you are of a generation prior to me, then chances are high that some of your money might be invested in this instrument.

NSC stands for National Savings Certificates. These are reliable, tax efficient (tax exempt under section 80C) and guaranteed by the govt. You can read more about it here.

National Savings Certificate

So why is it that my generation is neglecting this instrument? 

The main reason behind this is instrument's so called 'lower returns'. Lower when compared to more glamorous returns claimed by riskier ones like equities, mutual funds and ULIPs. Returns offered by NSC are between 8.5% and 8.8% depending on the flavour (5 year or 10 year) you chose. But since interest is calculated six monthly, the effective rate ranges between 8.78% and 9.00%. And that is not all. Investment in NSC can be claimed as a deduction under Section 80C. Also, the interest income is tax-exempted. So returns are much higher than what it seems at first glance. And these are assured returns with almost no risk, unless the govt. decides to default. :-)

But there is another problem with NSCs. These instruments have a lock-in of 5 years and 10 years. Now this is an extremely long period for our impatient generation. But there is a way in which this lock-in can be managed in a way that an investor receives some money at the end of every year. The approach which I'll discuss increases the liquidity of NSCs, with a little help from Fixed Deposits. This approach reduces the return a little. But that is a price we need to pay for increased liquidity. :-)

I'll refer to this approach as the NSC-LADDER. We use NSCs and Bank Fixed Deposits (for initial period of the strategy) in this approach. So here it goes...

Suppose at the start of time (Year 0), you have Rupees One Lac (Rs 1,00,000) to invest. Though you are ready to invest for long term, you are not very comfortable with the lock-in of 5 years (or 10 years) and want to invest (safely) in some (reliable) instruments which have some amount of liquidity. The interest rates on NSC & FDs of different tenures is as follows - 

Interest Rates - NSC & Fixed Deposits

You start by dividing this one lac into five parts of Rs 20,000 each. You invest first in a bank FD with maturity period of One Year. Invest the second in a FD of 2 Years, third for 3 years, fourth for 4 years and finally fifth for 5 years.

After this, what happens is that you receive maturity amounts from respective FDs at the end of first, second, third, fourth and fifth year. The maturity proceeds are in turn invested in 5 year NSCs starting from start of Year 2, 3, 4, 5 and 6. 

NSC Ladder : Click to enlarge

This is what exactly happens -

• 1st Tranche: Invested Rs 20,000 in FD for One Year - Received Rs 21,600 at end of Year 1 - This sum is invested in NSC for 5 Years - Received Rs 32,750 at end of Year 6.

• 2nd Tranche: Invested Rs 20,000 in FD for Two Years - Received Rs 23,545 at end of Year 2 - This sum is invested in NSC for 5 Years - Received Rs 35,699 at end of Year 7.

• 3rd Tranche: Invested Rs 20,000 in FD for Three Years - Received Rs 25,901 at end of Year 3 - This sum is invested in NSC for 5 Years - Received Rs 39,271 at end of Year 8.

• 4th Tranche: Invested Rs 20,000 in FD for Four Years - Received Rs 28,232 at end of Year 4 - This sum is invested in NSC for 5 Years - Received Rs 42,805 at end of Year 9.

• 5th Tranche: Invested Rs 20,000 in FD for Five Years - Received Rs 30,073 at end of Year 5 - This sum is invested in NSC for 5 Years - Received Rs 45,597 at end of Year 10.

As illustrated above, you keep receiving maturity proceeds at the end of year 6, 7, 8, 9 and 10. These proceeds in turn can be reinvested in further NSCs of five years, maturing at end of year 11, 12, 13, 14 and 15. This system creates a Ladder-like System, where every year there is a payout. Our initial concern was that NSCs have a long maturity period with long lock-ins. This results in money getting stuck and reduction in liquidity. But this LADDER approach addresses this concern and generates cash (maturity proceeds) at the end of each year.

Money available at end of each year : Click to enlarge

Now, you can continue this ladder for as long as you like and see the magic of compounding take shape. I know it is tough to plan for 10-15 years. But here, the best part is that once you have invested Rs 1,00,000 in first year, it keeps on rolling without any further investments. Also, interest earned by NSC in first 4 years is tax exempt as it is reinvested and paid out only once at maturity. So tax benefits are immense.

So, is this product for everyone?

No. It is for those who believe in long term wealth building using stable, reliable and risk free instruments. NSC can be one of the instruments if you want to diversify your portfolio.

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