With the increase in globalization and ease with which investors can borrow money in one market and invest in another new forms of arbitrage are coming up every day.
The Yen Carry Trade is one such example of a form of arbitrage where investors are borrowing cheap yen and then investing it in US Treasury bills to generate a higher rate of return.
Following is an example of how this would work:
Suppose an investor borrows USD 900 worth of yen at 0.5% rate of interest from Tokyo and converts them into USD at an exchange rate of 120 yen per dollar. The investor adds his own 100 dollars and then buys US T-Bills which give a return of 4.5%. So on an investment of 1000 USD or 120,000 yen the investors get an interest of 45 dollars. On the amount that they have borrowed in yen they have to pay an interest of 4.5 dollars so effectively they stand to make $40.50 on $100 worth of their own money. This is a really cool 40% return on their initial investment.
However this is not completely risk free because of exchange rate fluctuations. This is because the interest on the loan and the actual repayment has to be made in yen and not dollars, so if the exchange rate changes from 1 USD = 120 yen to 1 USD = 100 yen, at the end of the year the investor would get back 1040 dollars, but in yen terms they would amount to just 104,000. So while the investor at the beginning of the transaction started off with 120,000 yen at the end of it despite the interest ends up with a smaller amount.
This is what is known as Yen Carry Trade and the reason why this has become noticeable in the recent times is that the price of they Yen has moved up thereby making a few such transactions unprofitable which in turn have triggered a cycle wherein more and more people are selling off their dollar assets and buying back yen which in turn in again causing the price of the yen to go up and cause more unwinding of positions.
What is the tax exemption that I get on the payment of EMI’s for home loans?
EMI’s consist of 2 parts: The principal amount of loan & the second one being the interest on that.
A. Treatment of Principal Amount
According to the provisions of Income tax Act repayment of principal amount of loan can be claimed as exemption from total income of the assessee under section 80C. This means that total amount of EMI’s paid during the year will be bifurcated into these 2 parts i.e. principal amount & interest. The total of principal amount can be claimed as exemption. One thing to be noted here is that since the section 80C also covers other exemptions relating to LIC premiums, PPF, NSC’s etc & the maximum amount of exemption that one can claim is upto Rs.1,00,000/-. However there is no limit on amount of principal amount of loan, however the total of exemptions to be claimed under this section should not exceed Rs. 1 lakh. Assessee can claim any of the expenditure as exemption i.e. repayment of principal amount / LIC premium / PPF etc.
In other words, the assessee can claim either full amount of Rs.1 lakh from only investments in LIC / PPF etc or can claim full amount of Rs. 1 lakh from repayment of housing loan or can make any combination of investments & repayment of principal amount of loan but it is to be kept in mind that total should not exceed Rs. 1 lakh.
B. Treatment of Interest
As regards the interest part of EMI it is allowed as a deduction from a different head of income i.e. House property. Here again we will first calculate the total amount of interest paid in an year from the EMI’s paid. If the house property in respect of which loan is taken & EMI is paid is self occupied then maximum amount of deduction that one can claim (under section 24) is Rs.30,000/-. However if the assessee fulfills the following conditions then the maximum amount of deduction is Rs.1,50,000/-
- Loan is taken on or after 01/04/1999 for acquisition / construction of property.
- Property is completely acquired / constructed within 3 years of taking the loan.
It may be construed that
- Deduction in case of amount borrowed for reconstruction / repairs / renewals of house property will be Rs.30,000/-.
- Deduction in case of amount borrowed before 01/04/1999 for construction / reconstruction / repairs / renewals / purchase of house property will be Rs.30,000/-.
Note: It is to be kept in mind that above provisions will ONLY apply when the property in respect of which loan is taken or EMI is paid is SELF – OCCUPIED by the assessee & not let – out.
Note : EMI paid in respect of that house whose construction has not been commenced will still be taken for computing exemption of interest & principal amount. The amount of exemption in respect of interest will be limited to maximum of Rs.30,000/- only. In order to claim maximum deduction of Rs.1,50,000/- the house should be constructed within 3 years from the end of year in which loan was taken & such loan is taken after 01/04/1999.
Gurpreet Singh, CA
Treatment of HRA
Taxability of HRA depends on following two of factors : – Â Â Â Â Â
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- Rented house i.e. the assessee MUST be living in a rented house. Deduction of HRA cannot be claimed when one is residing in his own house or is not paying rent at all.
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- Place of residence i.e. in metro cities (Delhi, Bombay, Calcutta & Madras) or other cities.
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  CALCULATE THE FOLLOWING     Â
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- 50% of Salary* (if assessee is living in metro cities) OR 40% of Salary (if assessee is living in other cities)
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- Deduct 10% of salary* from rent paid by the assessee.
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  Now take the least of the above calculated amounts & compare it with the amount of HRA received by the assessee.   CASE 1   if calculated amount > HRA received then whole of HRA is exempt from tax   CASE 2   if calculated amount < HRA received then the amount chargeable to tax is (HRA   Calculated Amount).      Note - * means that salary includes the following  1.       Basic Salary  2.       Dearness Allowance 3.       Commission based on a fixed percentage of turnover (Sales) achieved by the employee as per terms of contract of employment. Gurpreet Singh, CA    Â
What is the tax that I have to pay if I sell off the house in which I live in and buy another one?
Say there is a case where you have purchased a house on 1-1-2005 and then purchased another one, 1 year before the purchase of the original one or two years after the purchase of the original one, in this case from 1-1-2004 to 1-1-2007 and have also sold off the original house.
In this case the capital gains that arise from the sale of your original property will not be charged directly but rather dealt with in a different manner which is as follows:
- Say the capital gains are greater than the cost of the new house. In this case the capital gains will only be computed on the difference. So if the profit from the sale of your original house is 20 lakhs and the new house is just for 10 lakhs then the tax that you have to pay will be on 10 lakhs. However if you buy a third house then the cost of the second house for the purpose of capital gains calculation will be 0.
- If the capital gain or profit that accrues from selling the original house is less than the cost of the new house then there will be no capital gains chargeable to tax at all.
- Now say you do not use the entire amount of capital gains towards building or buying a new house, in this case you will need to deposit the money in a specified account for getting exemption. There are rules applicable on when and how much you can withdraw from this account and these are to be followed after seeking legal counsel.
The above explanation is found from Section 54 of the Income Tax Act however this is just an indicative explanation of the act and serves to act as guidance when you are thinking about making such a transaction. Please seek legal counsel to get exact details on how the tax liability would be in your specific case from legal experts before engaging in any transaction of the above nature.
How is my LTA Taxed?
Leave Travel Assistance (LTA) has got a tax treatment which is quite different from all the other type of allowances and perquisites that you get. And that’s the primary reason it is the one that gets people confused more often than not.
The following points need to be kept in mind while taking the LTA or producing bills for it to get LTA Exemption:
Can We Claim LTA Every Year?
One of the most common questions about LTA is whether it can be claimed every year or not? The answer is Yes – you can claim LTA every year, but you will not be able to claim LTA exemption ever year.
Other Points About Tax On LTA
- If you do not wish to claim LTA in one particular year you can have your employer carry forward your LTA for the next year.
- For getting LTA tax exempt you will have to produce bills, but you can’t get your LTA exempt every year.
- You can get your LTA exempt twice in a block of four years. Right now the block that is relevant is 2006-2009. This block is decided by the Government so does not have a bearing on when you start your job and also these blocks are calendar years and not financial years.
- The bills can be air, rail or even a private rental company however the exemption is only for domestic travel so an international ticket won’t do.
- The bills have to be for a journey that has been undertaken when you are on leave and should be for you and your family that is spouse, children and dependant parents, brothers and sisters. Its obvious that your family can’t claim the exemption if you have not accompanied them.
- If you and your wife both get LTA – both of you can’t claim exemption for the same travel but you can avail exemption independently for different travels. So effectively between the two of you, you can claim exemptions four times in four years.
- If for some reason you fail to claim LTA exemption in the bucket of four years – you still have the option to claim exemption in the first year of the next block.
- Only travel bills can be used for LTA exemption, so a hotel bill can’t be produced for claiming LTA exemption even though you might have stayed in the hotel during your leave.
- The maximum LTA for the purposes of LTA tax exemption is Rs.20,000 so normally most organizations design the salary structure in such a manner that they don’t give the employees more than Rs. 20000 as LTA.
- In terms of proof for air travel – although there is no fixed rule as such, it might be a good idea to preserve the boarding pass along with the ticket to make sure there are no problems in claiming LTA exemption later on.
- LTA can only be claimed for the shortest distance between two places. So if you are planning to travel from Goa to Mumbai then you will be allowed exemption on tickets from Goa to Mumbai and back. You will not be allowed to produce tickets that are via some other place like Mumbai to Hyderabad and then from Hyderabad to Goa and so forth.
- LTA can only be claimed on tickets or rented private vehicles, you cannot show petrol or diesel vehicles for your own vehicles and then claim exemption on it.
The above are just some of the points that need to be kept in mind while discussing LTA exemptions. Because tax rules keep changing it is best to discuss with a professional before taking any decision.
We encourage you to ask questions related to LTA or any other tax or financial matter, and we would try our best to provide a solution to it.
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Page Industries Limited
Business of Page Industries Ltd.
The company was set up in 1995 to bring in the high end innerwear JOCKEY to the Indian market. While the promoters were associated with JOCKEY for the last 36 years as there sole licensees in the Philippines market with the opening up of the Indian markets in the early 1990s the promoters sought to fill a void in the Indian innerwear market by setting up shop in India and manufacturing, distributing and marketing JOCKEY products in the country. The company has been awarded “the best licensee of the year” for the year 2006 by JOCKEY and enjoys a relationship with the promoters which goes as back as 1959.
Strengths of Page Industries
While the market is being flooded with a host of IPOs following factors differentiate Page Industries with some of the other IPOs slated to enter the market:
- Long history which ensures that the promoters are not fly by night operators but rather experts in their chosen field of business having been successfully delivered for over 4 decades now.
- High product differentiation in terms of the brand loyalty enjoyed by JOCKEY which is a result of the existence of brand for over 130 years now.
- Integrated in house operations which ensure productivity and efficiency. Page Industries have eight adjacent factories in a single location which is engaged in everything that the company does right from cutting the fabric to packaging the finished product.
- The company exists in the retail and apparel segment which is expected to grow by leaps and bounds in the Indian market.
Financials
The company has grown steadily and at a decent rate in the last few years and the revenues have climbed up from Rs.377 million to Rs.1037 million from 2002 to the fiscal 2005, for the nine months ended 30.9.2006 the company clocked in revenues of Rs.741 million. The company also has a profitable record in the last few years and profits after tax have grown at a steady rate from Rs.17.56 million in 2002 to Rs.113.91 million in the last fiscal. The same is reflected in the EPS which for the last fiscal was Rs.467.75. On top of this the company also had a positive cash flow from operations in the last few years.
Objects of the Issue
Page Industries plans to raise funds for the following purposes:
1. Brand building
2. Expansion of garment manufacturing capacity in existing facility
3. Setting up of new garment manufacturing facility at Bommasandra, Bangalore
4. Expansion of elastic manufacturing facility
5. Expansion of Socks manufacturing facility
6. Corporate head office in the Central Business District
7. Implementation of new generation ERP software ( SAP)
8. Modernization of production process
9. General Corporate Purposes and
10. To meet the expenses of issue
Conclusion
In all one looks forward to this IPO with the hope that the company does not over price its issue and gives investors the chance to buy into this fairly stable and growing company at a decent issue price.
Puravankara Projects Limited
Business of Puravankara Projects Limited
Puruvankara is in the business of acquisition, development and marketing of real estate both residential and commercial properties. The promoters have over 31 years of experience in this field and the area of operations cover Bangalore, Kochi, Chennai, Coimbatore, Hyderabad, Mysore, Colombo and the United Arab Emirates (“U.A.E”).
The promoter group company has so far completed 12 residential projects and 1 commercial project covering approximately 3.18 million sq. feet of Saleable area and currently is engaged in 12 residential project and one commercial project covering 10.02 million square feet of saleable area.
The company has also entered into a partnership with Keppel Investment Mauritius Ltd. And is currently engaged in developing a residential venture in Kolkata.
Risks that Puravankara Faces
There are litigations that amount to Rs. 150 million as on December 2006 which Puruvankara faces and in the case that some of these proceedings are decided against the company the bottomline will be impacted by that amount of money.
Apart from the above risk the real estate market in India is hotting up and this would lead to an increase in the prices of land and can further dent the profitability of the company.
Financials
The company has shown phenomenal growth in top line with profits growing from just Rs.169.75 million in 2002 to Rs.2804.22 million in 2006. Similarly the profits have also grown from just about Rs.17.6 million to Rs.766.36 million in the last year. The EPS for the last fiscal has been Rs.2.71 however the company may not be justified in charging a very high P/E because the growth has really exploded rather than one that has been steady and can be expected in the future years as well. The reason for this is as the numbers keep growing and the base keeps increasing it s simply not possible to grow at past rates.
Conclusion
The real estate market is hotting up and expanding and even though there have been a slew of players intensifying the competition there may still be room for everyone. The RBI in recent times has also shown concern and is of the view that the real estate market runs the risk of over heating and may place controls via interest rate manipulations which will dent investor confidence and ability to raise loans.
All in all at decent valuations this may be a good stock to hold in one’s portfolio.
House of Pearls Limited
Business of House of Pearls Limited
The company is a multinational engaged in the business of manufacturing, marketing, distribution an sourcing of ready to wear apparel. The company started off in 1987 with one facility in Gurgaon and since then has expanded with sourcing from China and Bangladesh, marketing and distribution in UK, US, Canada and Spain and manufacturing facilities in Bangladesh and Indonesia. The company has a production capacity of 20 million pieces per annum and some of its well known customers include JC Penny, TESCO, ASDA Walmart, The GAP, NEXT, ESPRIT and has a total of 60 customers. In addition to this it also has developed two in house brands by the name of DCC and Kool Hearts in the US. The company employs a total of 6496 employees of which 4193 are based out of India.
The big difference between other Indian apparel manufacturers and House of Pearls is the global nature of the company and the fact that it has spread out its operations in different parts of the world and maximizes the efficiency by doing what is done best in that particular country.
Financials
The company has seen steady growth in its revenues over the last few years and has clocked revenues of Rs 4.48 billion in the six months ended September 2006, compared to a total revenue of Rs. 1.69 billion in 2006, 1.29 billion in 2005 and 1.04 billion in 2004. However the profit situation of the company has not been as stable as the revenue situation because of some extra ordinary expenses like loss on sale of a sweater division in the year 2005. Apart from this the operating profits have been healthy and growing every year.
The company is issuing its shares at a price band of Rs. 525 to 600 and the IPO starts from January 16 and closes on January 23rd. The EPS for the company for the year ended March 31st 2006 comes out to be Rs.4.63 and clearly the issue is quite aggressively priced at Rs.525.
Conclusion
The market is at all time highs and the issue price is quite aggressively priced. In such a situation the risk of the investors also increase quite a bit when subscribing to an IPO of this nature. Another important point to note is that since the company has been involved in a fair bit of restructuring of which the full financial impact will come out only in 2007 and is not fully reflected in the books in the year 2006.
Redington (India) Limited
Business of Redington (India) Limited
Redington is in the business of distribution of IT Products and providers of logistics, supply chain management, and other support services in India, Middle East and Africa. Apart from this Redington has recently commenced distribution of mobile handsets in parts of India and Nigeria.
The IT products that Redington deals in represents peripherals, printers, scanners, plotters, cartridges, PC components like monitors, hard drives, CD writers, CD ROMs, processors and motherboards. The company does not produce these things but sources it from vendors and then is engaged in the distribution of the same. The company also manages logistics and has 53 warehouses spread across 22 states in India as well as access to various markets in Africa and Middle East through its subsidiaries.
Financials
The company has been on the growth path as far as revenues are considered with revenues for the period ended September 30 2006 touching Rs. 41,313.82 million and Rs. 67955.46 million in the year 2006 and Rs. 40,542.77 million in the year before. While this represents strong growth the company operates in a highly competitive market and therefore the gross margins are quite low. The net profit after tax of the company for the corresponding periods have been Rs.397.19 million, 719.74 million and 436.54 million which hovers just around and under the 1% mark and makes it a risky bet.
The EPS for the company for fiscal 2006 is Rs.4.79 and the company is offering its share in a price band of Rs 95 – Rs. 113 which translates into a P/E of 19 times lower price and 23 times upper price.
Key Risks
Apart from the low margins that the company has there are other key risks that the company faces namely pending civil and criminal proceedings against it or the directors as well as outstanding contingent liabilities. These risks magnify because of the lower margins of the company and because if any of these do surface up Redington’s bottom line would suffer. Redington also depends on a few number of products to constitute majority of its revenues and the top 5 products contributed 77% of the revenues in the year 2005-06.
Conclusion
While the company is on the growth path and has showed phenomenal growth in its top-line the industry is inherently competitive and to manage its growth profitably would be challenging for Redington. Such an environment makes Redington a high risk stock.
Cinemax
Business of Cinemax India
Cinemax is part of the Kanakia real estate group and is a large multiplex operator with 33 screens and 9000 seats at 10 locations across Mumbai. Cinemax is largely concentrated in Mumbai which gives it an advantage in terms of Mumbai contributing to 15% of all box office sales across the country. Apart from multiplexes the company also has interest in gaming and mall development. The majority of the revenue however does come from film exhibition and for the year 2006 it stood at 62.7% of the total revenues.
Financials
The company has seen its average ticket price increase from Rs. 86 to Rs. 120 in the first half of FY 07 and expects the spend on food and beverages to increase as well. The spend on food and beverages has been lower at around 20% when compared to other multiplexes and the management has decided to take care of this by introducing non vegetarian food and therefore is expecting a jump in this segment as well.
The revenues for the year FY06 have ben Rs. 74.6 with profit after tax at Rs.7.7 crores and EPS at Rs.3.70. The IPO opens on January 18th and closes on the 24th with an offer price between Rs. 135 and Rs. 155. While the price band looks expensive if one considers the valuation of the year 2006 the analysts expect the P/E to be around 15 to 18 times estimated FY 07 earnings which may be a better figure to look at.
Expansion Plans
The company has got expansion plans to make it a pan India player and it plans to add 11 screens in the north region, 50 in the north-east region and 47 in the western region which means a corresponding increase in the seats of 2900, 12,200 and 11,000 over a period of the next three years. This expansion would help the company take advantage of the lifestyle boom across the country but it would also mean that the company would have to compete with other players like PVR, Adlabs and Inox which would be already present in some of those regions.
Conclusion
While the company is in a sector that is doing well and the Cinemax itself has got considerable experience in the industry to grow and manage that growth properly, going forward it will face more competition and also will have to operate in geographic regions in which it was not present earlier.
Another factor to keep in consideration while investing in the stock is that most of the investment has been chalked out for the next three years and the returns to that are likely to come in a more longer term horizon and therefore this stock is not suited for investors who take a shorter term view of less than an year or so of their investments.