Five stocks for retirement planning

Retirement planning is a challenging task. In a country like India where social security is almost found missing, retirement planning is an immensely important activity to create cushion for old age.

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Vivek Sharma, Financial Planner and Trainer

Retirement planning is a challenging task. In a country like India where social security is almost found missing, retirement planning is an immensely important activity to create cushion for old age. What makes retirement planning cumbersome is identifying the right corpus required for retirement. The challenge comes from the fact that it is not easy to predict inflation and hence it is very difficult to calculate inflation adjusted retirement corpus. Also changing consumption patterns and emerging new requirements of individuals from time to time make this job even more difficult. Even if the retirement corpus is identified, it is difficult to identify the right asset class where investments need to be done in order to achieve the goal. So the most important challenge is how can an investor identify the right asset class for creation of a healthy retirement kitty?

There is no denying the fact that equity is a must for creation of retirement corpus in which investment can be either made directly or through mutual funds. Selecting right stocks for retirement planning is very important. On an average, a time horizon of 15 to 20 years, need to be considered for retirement planning. So how will an investor decide which stocks will qualify for such a long time horizon? Certain basic things need to be considered for selecting stocks for such a long time horizon. One is of course the past performance or history. The next important factor is to look at the business that company is in because for a stock to perform for 15 to 20 years, the business or the sector needs to perform as well. An important aspect to look at here is that rather than selecting a mid or small cap which may bring unexpected return, it is better to try an existing stock which is a type of blue chip. Also the corporate governance practice and the approach of top management cannot be overlooked. Based on these broad parameters, here are five stocks that can help an investor build sizeable retirement corpus:

ITC  : Though the business carried out by ITC is not very ethical ,as far as value addition for shareholders is concerned, the stock has performed very well during last fifteen years and has got attractive prospect for future business growth. ITC has delivered  25.7% growth in shareholders return over a period of 16 years from 1996-2012 which is too good to be part of any investment decision. Whether past performance can be continued in future is always debatable, but the fact remains that considering the increasing diversification of products and a vibrant management, this growth potential can be continued in future as well. ITC is anyways the most defensive bet for the market as a whole.

State Bank of India  : This,’Sarkari’ (government) stock has not performed well during last few years due to NPA related issues. But the stock holds a great future. There is no match for SBI in terms of branch reach, customer base and product profile. The bank is bound to grow. In Jan,2001 the stock commanded a price of Rs. 182 which has gone up around 14 times now. This price does not consider other form of returns such as dividend and other corporate action that the company has announced from time to time. The most important fact to consider while investing in SBI as a stock is that financial sector is bound to see a robust growth in the years to come. As the income level of people increases, reach of banks in terms of deposits and lending products is bound to grow. SBI is going to be a major beneficiary of this. SBI carries the prospect of long term value creation for investors and hence should be part of retirement portfolio.

CRISIL  : CRISIL story is linked to India growth story. Credit rating in India has grown with the liberalization. CRISIL has a credit rating institution has shown tremendous growth over a period of time. The income from business has been growing consistently and so has been the cash operating profit of the business. If India growth story has to continue, credit rating institution like CRISIL has an important role to play. As more and more businesses get established in the country and as more and more financial instruments are issues, CRISIL will continue to show good growth. As an investor, one can believe in a stock like CRISIL for long term consistent return.

Dr Reddys : Pharma has been one sector where India has done extremely well. There are many potential contender in this space which classify as a stock that can feature as a part of retirement planning stocks. Dr. Reddy is one stock . It has shown consistently good performance in terms of revenue, EBITDA and ROCE. Also considering the fact that India is likely to be global hub for pharma, Dr. Reddy is a safe bet for long term investment.

HDFC  :  HDFC as a stock has been all seasons stock in India. It’s performance over a period of time has shown that it is almost insulated from the crisis that real estate industry in India has faced. The growth of the company has been good and the return to the shareholders has been extremely attractive. In a country of more than 125 crore population and ever rising housing need, there cannot be a better bet than HDFC for long term investment.

There is a comprehensive list of stocks that can feature as a part of stocks that can be used for retirement planning. There are many upcoming companies which may probably give better returns than these stocks. But what has been the most important factor in selection of these stocks is the fact whether the stocks will continue to perform consistently over a long period of time. After all, retirement planning is a long term planning. In case of retirement planning, it is always better to go with known stocks rather than venturing into unknown entities.

Equity is a really long term game

Equity is a really long term game, unfortunately public memories are short, so many people are exiting equities now because they are seeing a chance to get out without a loss after five years of poor performance.

But this is a mistake in my view as our internal studies show  that  if one stay invested in Indian equities for at least half a generation viz. 15 years one is highly likely to create real wealth and generate real returns. Also we must remember equity is the only way most non-entrepreneurs can participate and share in the upside from wealth created by businesses. uti amc

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th global growth looking up in 2013 and outlook for inflation benign, we can expect more portfolio flows into India

Nirmal Jain / Feb 04, 2013, 00:40 IST

The revived fortunes of the Indian stock market since September 2012 is likely to witness an extended run. Already, 2013 has commenced on a high with $4 billion net foreign institutional investor (FII) investments in January. A couple of surprises have added to the cheer. One, Infosys has marked a festive start to the corporate results season with robust Q3 numbers. And the other, the Reserve Bank of India ( RBI) governor pleasantly surprised with a 25 basis points (bps) cut in cash reserve ratio along with the widely expected 25 bps cut in repo rate.

The Nifty, however, consolidated for the major part of the month with continuous unwinding pressure around 6,100. This was largely expected, given the spectacular run since the last few months. Probably, domestic institutions would have triggered the supply in anticipation of the forthcoming government issues or for better opportunity as retail participants have not yet made their presence felt.
With global growth looking up in 2013 and outlook for inflation benign, we can expect more portfolio flows into India. While the rupee carry trade favours FII investment, the nod for foreign direct investment in select sectors makes the scenario even more conducive. The upcoming Budget in all probability will be balanced. The finance minister will have to focus on controlling revenue expenditure and subsidies on one hand, while emphasising on reforms on the other. Disinvestment is likely to remain the focal point. Exports may get a boost with extended sops. I believe, the Budget will steer clear of ambiguous provisions to safeguard positive investor sentiment and emerge as a key trigger for markets.
On the interest rate front, I expect a 100 bps repo rate cut in 2013. The RBI governor has already made a beginning. Some optimists even hint at a 150 bps drop, but that would depend on a structural fall in inflation. We could see a steeper rate downcycle if the monsoon is supportive and crude prices drop $20 per barrel in 2013 on multi-year high gas production in the US.
The market is readying itself for another leg up. We expect the government policy action to continue, given the looming risk of country downgrade on the high twin deficits.
Market valuations seem supportive at 14.5 times FY14 estimated earnings. One can estimate EPS for Nifty with reasonable surety given the waning earnings downgrade cycle and FY13 projections already trimmed by 18-odd per cent. The recent carnage in mid- and small-cap stocks only reinforces the on-going sectoral shift back in favour of index heavyweights ahead of the Budget. I expect Nifty to trade in a broad range of 5,750-6,350 in the next couple of months.
Selective equity allocation at current levels should prove rewarding. Investors should focus on fundamentally strong scrips in promising sectors, including pharma, banking, info tech and cement. Besides, upstream PSU oil and gas companies as well as refining and marketing companies should do well as reduction in subsidies on diesel and gas will ease their cash flow and improve profitability. The PSU oil and gas sector valuation is also very attractive. A prudent, bottom-up approach to investments will open a credible window to equities.

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Properties will be our fastest growing business: Adi Godrej

Q&A with chairman, Godrej Group

Shyamal Majumdar & Abhineet Kumar / Mumbai Feb 03, 2013, 14:32 IST

Adi Godrej, 70, is enjoying his role as the patriarch of the Godrej Group, travelling non-stop and restricting himself to providing strategic advice to his three children and group CEOs. The Chairman of the Rs 13,500 crore group talks about how his group has kept its reputation intact by following a prudent financial strategy. Excerpts from an interview with Shyamal Majumdar & Abhineet Kumar.

The 10x10 vision sounds great. But is it achievable?
The vision requires a 26 per cent CAGR (compound annual growth rate) and we have grown by more than 30 per cent over the last two years. So we are ahead of the curve.

Do you agree that the Godrej group was extra conservative in the past?
If you look at the older family-owned groups, we are one of the fastest-growing. Over 500 million consumers use our products every day. That’s more than any other group in India. I agree some others have overtaken us on size, but we are still among the top 5 to 10 per cent of growth-oriented groups in the country.  And if you talk in terms of financial leverage, we have been and will continue to be conservative. The debt-equity for Godrej Consumer Products Ltd (GCPL) has gone down to 0.5:1; for Godrej Properties, it’s 1:1. We do not want to get into high borrowings; we do not want to go to banks saying we want to renegotiate our loans. Our reputation is important for us.

Your biggest bet for future growth is Godrej Properties? What’s the thinking behind this?
We feel Godrej Properties will be the fastest growing part of our business – we have already been growing by 50-100 per cent. That’s because unlike our other businesses, we do not have to be concerned about competition, market share or size in properties, as no company even has a 5 per cent market share. GCPL is growing fast, but there is a limitation. It can’t suddenly double its sales as there is huge competition. It has to sacrifice a lot of its profit if it wants to grow rapidly. There is no such problem with Godrej Properties. 

So the share of GCPL in the total business will come down?
Godrej Properties will see the maximum growth, but the share of GCPL will continue to be 25-27 per cent of our total business. That’s because, some other businesses like chemicals may not grow as fast.. 

The group has been buying companies only in niche areas. Are you planning any big bang move?
Some of the companies we have acquired are very big. For instance, our per capita FMCG sales in Indonesia, South Africa, Argentina, Uruguay or even the UK are higher than our per capita sales in India. The size of our Indonesian business is going to be over Rs 1000 crore this year.

Are there any gaps in your consumer portfolio that you would like to fill?
We are open to acquisitions in India even in categories where we have no presence -- for instance, oral care, powder detergents etc.
Are you happy with the performance of your children?

My oldest daughter Tanya joined the business about 20 years ago; my second daughter Nisa and son Pirjosha have also been in the business for many years now. They are very passionate about the business, have brought in good people and have strategised very strongly. They are taking the business forward.

What would be the family’s role in the group going forward?
Almost all our businesses are led by non-family professionals. Family may be in an active role for a short period of time, to gain experience etc. But the family mainly is going to be at the board, strategy level and into innovation and new ideas etc. That is also broadly the trend now.

In the early part of the last decade, the group started diversifying into businesses such as retail, chicken, confectionary etc. But in the last three years, you have exited a lot of these businesses. How do you explain the shift in the strategy?
Despite the divestments, we have grown at 30 per cent.  We are clearly focused on core now. We divested what we thought is not core to our business. We do not want to be in retail, except for Nature’s Basket which is premium gourmet food. That is why we divested stake in Aadhaar, our rural retail business. We also do not want to be in the food business in a major way. So we divested our stake in Godrej Hershey and recently announced divestment of our non-core food business in Indonesia which came along with the acquisition of Megasari for their big personal and house care business. We are just strategizing the focus on our core business. Our food businesses, especially the confectionary and edible oil part, have not been doing too well because we didn’t have scale and size. Our personal and house care business has been doing extremely well. We decided to focus on things which can grow well and de-focus on the food business.
Godrej Properties follows a joint venture model with landowners, which is workable on a small scale. As you grow, at some point would the company also start buying land?
Well, our main model will be joint venture, but we have formed a company with European investors which can invest in land where we have a certain share holding. And that company, when it buys land, can do a joint venture with Godrej Properties. Godrej Properties will not buy land. But we are developing a lot of land which Godrej group owns -- for instance in Vikhroli in Mumbai. That is also a joint venture with other group companies that owns the land.

We follow this model as this makes our dealings with the government minimal as the land owners get the permissions. We do not want to get into businesses such as infrastructure, mining where dealing with the government is more.

Is consumer business getting difficult because of competition from MNC and their money power in terms of R&D and access?
That’s not true. We have done very well. Look at the last 11 years since GCPL was formed. We have had the highest market cap growth. We are very successfully competing with MNCs. We have always been a very R&D-conscious company. We have also invested heavily in advertising. Our whole group is run on an important financial metric called Economic Value Added (EVA), which means profit after the cost of capital is deducted. We have a very strong variable remuneration for a large number of employees which is based on EVA improvement.  And that closely aligns with the interest of our employees with that of our shareholders. This has been a very successful endeavour leading to a lot of value creation.

What is your M&A philosophy in the light of the growth you are seeking?

We will continue to look for inorganic growth. Our ambition is to have 26 per cent growth. We think 15 to 20 per cent of this will come organically and the rest inorganically.  But inorganic growth must be profitable and the value creation must be strategic. We formed an international team headed by Shashank Sinha. In the past he worked with Sara Lee and prior to that with Reckitt Benckiser. He has worked in South Africa, Latin America so he knows these geographies. Ever since we started acquiring these international companies, our profits have grown, market capitalization has grown and share holders have benefited. I think we have strategically worked well.
Godrej Agrovet is a turnaround story. What efforts have gone behind this?
We put it in a very strong team. We brought in Mark Kahn from global agri-business giant Syngenta to head the strategy for Agrovet. The company has been very successful in the last few years. Singapore’s sovereign fund Temasek took 20 per cent stake in the company last year. We are also looking at leveraging their large R&D centre in the University of Singapore. They will be on our board.  And we hope to leverage further growth through this relationship.

How satisfied are you with the performance of the strategy team?

Our strategy team led by Vivek Gambhir has done an excellent job. In Godrej Consumer Products, our market capitalisation has grown by 75 per cent in the last year. Across the board our companies have done very well, although the economy has not done well. I attribute a lot of success to our strategy team.

You have brought new people in key positions in recent years. A lot of old timers are feeling left out.

If you compare with other groups, exits from our groups are very few.  A lot of our employees have been life timer through their career. There are people who leave because they get opportunities outside. Also as you go up in the triangle, there is less and less space at the top. So people will leave. But our general attrition level is low.

Does Godrej plan to enter any new business?

No, we are in too many businesses already. We have good growth opportunity in the existing business, so we will stick to them. We started a
BPO business but got out of it. Same with foods business.  So we want to stick to businesses where we are doing extremely well and invest more in those businesses.

What’s your capital-raising plan?

In the near future, we do not expect to raise any equity capital. Last year, we have raised equity capital in different tranches. We are the only group that has followed the SEBI guidelines for paring the promoter holding to 75 per cent. We have raised capital in Godrej Consumer Products and Godrej Agrovet from Temasek. We don’t need to raise any further equity capital in the near future.

What is the synergy with Godrej and Boyce?

We are one group, of course we are in different businesses but we work together. For example Godrej and Boyce owns all the land in Vikhroli, but it is being developed in a joint venture with Godrej Properties. So we are always working together. Five years ago, we launched a new Godrej branding exercise for the entire group. We have a family board and we meet once a year. We also have a family council comprising all family shareholders who are above 16 years old. The council meets once, sometimes twice a year.

an Economist article rightly says, “Investors rushing into India today are relying on a kind of greater-fool theory, in which everyone bets on an economic recovery but no one provides the capital to help make it happen.”

Examine paperwork to verify the date of sale of an asset

Sat, Feb 02 2013. 01 13 AM IST

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If asset is held for less than 36 months from date of purchase, gains from sale is termed as STCG.

Shyamal Banerjee/Mint

My wife and I have booked a flat in Pune with my wife as the primary owner. Its registration was done on 19 June 2010, the agreement is dated 14 May 2010 and the booking amount date was 28 January 2010. While the flat is ready for possession, I am yet to take possession. If I sell it in January or February 2013, what will be the tax implications? Are there any saving avenues? If I sell the property after three years from the agreement date (without taking possession till that date) then will long-term capital gains be applicable?

—Anil Bilawala

Determining the date of purchase of an under-construction property has been a matter of debate, particularly in the light of various real estate arrangements prevalent in the market. There are conflicting views on the subject. One view possible is that the date of purchase of property shall be the date of issue of letter of allotment (presumably 28 January 2010 in your case) for the under-construction property. But this would happen only if the said letter specifies the details about allotment of flat in the proposed building, which means if the said letter in a way irrevocably binds you as the purchaser of the property or gives you an unconditional right to dispose the property.

However, there are contrary judicial precedents, which have held that the date of executing the purchase agreement with the builder (in your case, 14 May 2010) could be construed from the date of execution of the said agreement and subsequent date of registration or possession is not relevant.

Even if your wife is the primary owner, if the apartment has been entirely funded by you, then the gains, if any, shall be taxable in your hands. However, if the apartment was funded by both of you, then the gains would be considered as income in your and your wife’s hand proportionately.

The actual paperwork needs to be examined to verify if the sale of the asset is that of the “flat” or “the right to secure a flat”. A crystallized right to receive an asset is also an asset for the purpose of calculating capital gains tax. Accordingly, the period of holding has to be calculated.

If the asset is held by you for less than 36 months from the date of acquisition, the same shall be termed as short-term capital asset and gains arising from the sale of the asset shall be termed as short-term capital gains (STCG). Since there is no mechanism whereby an exemption from STCG could be availed, the entire STCG shall be taxable as per the applicable tax slab rate.

If the asset is held for more than 36 months from the date of acquisition, it shall be classified as a long-term capital asset and the gains shall be termed as long-term capital gains (LTCG). Exemption from LTCG tax could be availed by reinvesting LTGC into a new residential apartment as per section 54 of the Income-tax Act (in case the asset transferred is a flat).

The investment in a new apartment should be made either within one year prior to the sale date or two years from the sale date or within three years for an under-construction property. If you propose to invest the entire LTCG in a new residential apartment for tax exemption but are unable to invest before the due date (31 July) of filing tax returns, you could deposit the unutilized LTCG amount into the Capital Gains Account Scheme (CGAS) as per the provisions of the Act and claim exemption in the year of the asset’s sale. However, you should invest the amount deposited into CGAS towards purchase or construction of a new residential apartment within the aforesaid investment time frames (within two years if the new property is acquired or within three years if the property is constructed).

If the asset transferred is a “right to secure a flat”, then the exemption from LTCG tax could be availed by re-investing the net sales proceeds into a new residential apartment as per provisions of section 54F of the Act subject to prescribed conditions. One of the condition categorically requires that at the time of claiming an exemption under section 54F, you should not own more than one house (other than the new house/apartment) on the date of sale. Further, the aforesaid time frames in respect of re-investment shall also be applicable.

Alternatively, you could invest the LTCG arising from sale of asset in specified bonds issued by the National Highways Authority of India or Rural Electric Corp. Ltd within a period of six months from the date of transfer of old asset up to Rs.50 lakh per fiscal.

Please note that if the new apartment purchased/constructed as per the provisions of section 54 or 54F is sold or the investment in bonds made as per section 54EC are converted into cash within three years, the exemption claimed from LTCG in respect of the old asset (the flat or right to secure a flat) shall be revoked.

The amount invested in a new residential apartment or specified bonds as per the aforesaid provisions of the Act shall be claimed as exempt from tax and the balance amount, if any, should be offered to tax at 20.6% (including education cess). While calculating the LTCG, the cost of acquisition and improvement, if any, should be inflated/adjusted by applying the cost inflation index notified by the tax authorities.

In case you own more than two residential properties, the income-tax and wealth tax implications will need to be separately examined.

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