Derivatives Part 1- The Introduction

Derivatives- The Introduction

Let's start the topic with understanding the Indian capital Market.

Indian Capital Market:

Capital market is a market where securities are bought and sold. This capital market provides many support services. There are two authorities in India named as:

1. Security Exchange Board of India (SEBI).
2. Reserve Bank of India (RBI).

The Security Exchange Board of India (SEBI) along with the Reserve Bank of India (RBI), the two regulatory authority for the Indian Security market, to protect the investors and to improve the structure of the capital market in India.

The capital market of India is divided into two market:

1. Primary Market:
• It is the market where the security are bought and sold for the very first time like IPO, etc.
2. Secondary Market:
• It is the market where the security are further bought and sold by the customers in the market Like FPO, etc.

Definition of Derivatives:

• Derivative is a Financial Instrument which derives its value from an Underlying Assets.

• Derivatives is itself is a contract between two or more parties and the price of it fluctuates according to its underlying assets.

In General or Simple word:

• It is something which is depended upon something. 

Breaking Down the Definition:

The Definition is divided into two parts to understand the Derivatives better.

Financial Instrument:

• A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

• A financial instrument is a monetary contract between parties.

• We can create, trade, or modify them.

• We can also settle them.

• A financial instrument may be evidence of ownership of part of something, as in stocks and shares.

• Bonds, which are contractual rights to receive cash, are financial instruments.

Underlying Asset:

Underlying assets means anything on which we can bet. Below are the underlying asset:

1. Shares
2. Debentures
3. Bonds
4. Gold
5. Silver
6. Other Commodity
7. Currency
8. Weather

Anything can be the underlying asset.

For the detailed discussion, it is recommended to view the Derivatives Introduction by Nayan Parihar through the following link:

https://www.youtube.com/watch?v=JVWk-j1mMWM

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Financial Modeling - Part 1

Financial Modeling

Financial Modeling is the most important tool for any guy in the field of Finance. It is used to deal with the various aspect of the company.

I must assume that you all heard about "MS Excel"? Right?

So basically Financial Modeling is done in MS Excel. They (financial analyst) use a different tool to build a financial model. It is basically a model which is used to forecast the performance of the company in various aspect of the company. It shows an overview of the company overall cost and revenues.

Financial Executive use a financial model to take basic decisions regarding the working of the company or various investment decision related to the expansion of the company.

Use of Financial Model:

Now you must be wondering what is the use of making a Financial Model? so, below are some of the uses of Financial Model in every company:

• Forecasting.
• Decision-Making Tool.
• Summary of Cost.
• Summary of Incomes.
• Valuation of the Company.
• Calculation of Unquoted Equity Shares.
• Equity Research.

This is some important and basic use of the financial model in any company.
This is the most important tool for Equity Research (for equity Research, visit my blog nayanparihar96.blogspot.com).

How Financial Model look like?

This below picture shows the basic financial model from scratch that I have made for a company:

Three Statement Financial Model by Nayan Parihar

Types of Financial Model

There are the different type of Financial Model made depending on the type of working. Some of the basic Financial models that I have heard are:

1. Three Statement Model.

2. Comp Analysis Model.

3. DCF Model.

4. Leveraged Buyout Models.

5. M&A Model (Merger and Aquisition Model).

6. IPO Model

7. Budget Model.

Financial Modeling is not only limited to this, but there are also various types of model in which company need to make for taking a decision.

Financial Analyst and Executive use various assumptions regarding various cost elements or revenue elements to be forecasted. This assumption needs to be taken on a logical basis. There are also various methods for an assumption. When I was making a financial model during my internship, I use Average method to assume or forecast different items. You can take an average of past 2 years and can assume that this average rate will be considered for next 5 years (Projection is basically done for 5 years) but it is only done when the company doesn't give us the projection for some items.

So it basically depends upon the Knowledge of the analyst or the executive regarding taking the logical assumption. But remember, Projection is not always right. There are different types of "Risk"

involve in it.

This is all about a basic of Financial Modeling.

I will also be posting more content on the financial model like:

• How to make?
• Assumptions?
• Valuation Working?

and many other aspects which I will be covering in my next blog.

For queries and suggestion, mail me at: nayanparihar96699@gmail.com

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Equity Research - A beginners module.

Equity Research- A beginners Module.

Points to be covered:

1. What is Equity Research?

2. The process of Equity Research? 
3. Role of Equity Researcher?

4. Hierarchy of Equity Research? 
5. Buy and Sell Side?

What is Equity Research? 

Equity research is the in-depth study of the companies financial data which is done by the equity researcher to analyze the company and give its view on "Buy/Sell" of the companies stock in the market. 

This includes:

1. Performing the valuation of the company.

2. Analysis of the business environment.

3. Projections of the companies revenue and expenses.

All the workings of the equity researcher are to be shown in his or her Equity Research Report.

This report Contains the view of the researcher for a particular company or on a stock of a particular company.

The process of Equity Research:

There is no such well-defined process of equity research. I tried to analyze one particular trend that every equity researcher use. Follow the following steps:

1. Economic Analysis: Do the proper economics analysis like GDP, industrial rates, etc.

2. Financial Statement Analysis: After doing the economic analysis, analyze the financial statement of the company.

3. Financial Projections: On the basis of your analysis of GDP, market size, trends, and growth, then do the financial projections of the company to help you in your financial modeling and finding the valuation of the company.

4. Methods: Use different Methods for the valuation of the company like DCF, Companalysis. (For valuation Basics read my blog "Valuation" "nayanparihar96.blogspot.com")

5. Calculate the Fair Value and the Market Value of the company.

6. Then go for the Final Check: if the Fair value < Market Value , then "Sell" the stock.

7. if the Fair value > Market Value , then "Buy" the stock.

After these basic steps, you will be able to draw your equity report stating the Buying and Selling of the Stock of the particular company.

Role of Equity Research:

1. There are buyers and sellers available in the market, so it helps both of them by filling the information gap.

2. It takes lots of time and energy in making an equity research report.

3. It shows the position of the company in the market. 

4. The main aim is to make a profit from the stock.

5. Help the investors or the company to understand the financials of the company or the stock of that company.

Hierarchy of Equity Research:

The typical hierarchy of equity research in any organization:

1. Head of Equity Research.

2. Senior Analyst.

3. Associates.

4. Junior Analyst.

Skills Set Required:

There are many skills that one should have if he or she wants to become an Equity researcher. Following are the skills which I have noticed are:

1. Writing Skills: To write the final Equity research Report.

2. Analysis Skills: To analyze the Financial Statement.

3. Projection Skills: To project the Financial Statement.

4. Excel Skills: A Pro excel skill is required.

5. Reading Skills: To read previous available reports and draw a conclusion from that.

6. Financial Modeling: This is the most important Skills that is required. One should be certified in Financial Modeling.

Sell Side and Buy Side:

Sell Side: It is generally known as the firm who continuously have an eye on the performance of a particular stock and who make the equity research report which is needed by the investors who need to take decisions regarding Buying, holding and Selling of the stock.

Includes:

1. Equity Research Firm

2. Investment Banking

3. Merchant Banking

4. Market Maker.

5. Equity Broker.

Buy Side: It is the Firm or an investor who generally buys the Research Report from the sell side firm to make the decision of investment in a particular firm or a particular stock of the company.

Includes:

1. Asset Management Company

2. Mutual Funds

3. Insurance Company

4. Retail Institutional Investors.

5. Qualified Institutional Investors.

(For QIB and RII please refer to my blog titled as "IPO's in India" for more information on QIB and RII)

Initial Public offering (IPO)

Initial Public offering (IPO) in India.

Meaning:

1.    Shares of the company sold to institutional investors as well as retail (individual) investors.

2.    It is process through which a private company becomes a publicly traded company.

3.    It is used to raise new equity capital for the company to become a publicly traded company.

4.    After the IPO, shares that is traded freely in the open market are known as Free Float.

5.    The Prospectus must be issued for the purpose of IPO.

6.    It is done through the Merchant banker or Investment banker who act as an underwriter and Issue manager.

7.    An IPO can be underwritten by more than one merchant banker.

IPO is a process through which an Unlisted company can be listed on the stock exchange by offering its securities to the public in the Primary market

Types of IPO:

There are two types of IPO:

·         Fixed price IPO

·     In this method, the price at which the issue is coming up is properly mentioned. The price is fixed i.e for example, Company A is coming up with an issue of 20000 equity share of 95 each, the face value of the share is 10 Rs. Premium of 85 Rs. On each share.

·     This is called fixed price method. Where the share price is fixed i.e 95 rs.

·      In Fixed Price offering, the prices of the share is already fixed. The investors know the prices of the share before the offering. They know what is the initial offering price of the share which company is offering. 

·         Book building IPO.

The price is decided by the “BID’ which is done by the investors. The final prices is decided after taking into consideration the bid that is done by the investors. There are generally three prices that come up in Book building:

                              i.        Cap Price: it is the highest price of the share.

                            ii.        Floor Price: it is the lowest price of the share and

                           iii.        Final share price: It is the final price that is decided through Investors bid. 

There are also 3 category of the IPO:

                              i.        Retail investors

                            ii.        Institutional Investors

                           iii.        Qualified institutional buyers.

• In this method the price of the issue is not fixed. It is first circulated and then the investor decide the price in between the range that is given by the company.

·         For example: Company A is coming up with an issue of 20000 equity share of 90 to 95 Rs each.

·         So the price range is decided and the investors will bid and then the final price will come up.

·         Company coming up with Book Building Public Issue decided a price band for the issue. The price band usually contains an upper level and a lower level.

·         Floor Price is the minimum price (lower level) at which bids can be made for an IPO. Investors can bid for the Book Build IPO at any price in the price band decided by the company. In Book Build process retail investors have an addition option to choose "Cut-Off" price for bidding.

Cut-off price means the investor is ready to pay whatever price is decided by the company at the end of the book building process. Retail investor has to pay the highest price while placing the bid at Cut-Off price. If company decides the final price lower then the highest price asked for IPO, the remaining amount is return to the retail investor.

Listing Platform

There are two listing platform in which a company can get listed:

1.    NSE (National Stock Exchange)

2.    BSE (Bombay Stock Exchange).

If a company want to list on main board, they can get listed through both but if a company want to come for SME (Small medium enterprise) IPO, then there are two platforms which is

1.    NSE Emerge.

2.    BSE SME.

In this above two platforms, SME can be listed.

1.    NSE Emerge.:

·         The SME platform of the Exchange is intended for small and medium sized companies with high growth potential. The SME platform of the Exchange shall be open for SMEs whose post issue paid up capital shall be less than or equal to Rs.25 crores. The platform is expected to offer a new and alternate asset class to informed investors having longer investment horizon. The platform shall allow new, early stage ventures and small quality companies to raise much needed growth capital as they grow, mature and transit to the Exchanges’ main board.

·         EMERGE is a credible and efficient market place to bring about convergence of sophisticated investors and emerging corporates in the country. It offers opportunities to informed investors to invest in emerging businesses with exciting growth plans, innovative business models and commitment towards good governance and investor interest.

·         Emerge will have customized processes and systems which will help prospective issuers in their journey of metamorphosing into listed public companies

2.    BSE SME.:

·         BSE Ltd has set up the BSE SME Platform as per the rules and regulations laid down by SEBI. BSE SME Platform offers an entrepreneur and investor friendly environment, which enables the listing of SMEs from the unorganized sector scattered throughout India, into a regulated and organized sector. 

·         The listed SMEs will step into the threshold of BSE SME Platform and foray in to the world of finance for further growth and development. BSE SME will assist these SMEs to raise equity capital for their growth and expansion and thus help them blossom into full-fledged companies. In due time enable them to migrate into the Main Board of BSE as per the existing rules and regulations. 

·         BSE SME will provide immense opportunities to the following market participants. 

§ Entrepreneurs: To raise equity capital for growth and expansion of SMEs in a cost effective manner. 

§ Investors: Opportunities to identify and invest in good companies at an early stage and Exit Route. 

Process Of IPO:

The detailed process of SME IPO is as follows:

1.    Conversion of company into the public company.

2.    Preparation and submission of the conversion documents to ROC.

3.    ROC approves the conversion.

4.    Appointment of RTA (Registrar and transfer agent)

5.    Appointment of MD, Independent Directors and company secretaries.

6.    Deciding their pay and the fees.

7.    Committee formation like Audit committee etc.

8.    Company website creation.

9.    Signing of Agreement with NSDL (National Securities Depositories limited) and CDSL (Central Depositories Services Limited).

10. Appointment of peer review auditor and the re-audit is done.

11. Appointment of Merchant Banker.

12. Preparation of Draft Red Herring Prospectus.

13.  Filing of DRHP with the stock exchange along with the permission of approval with stock exchange.

14. Clearing from stock exchange

15. Filing of prospectus with ROC and getting it clear from ROC.

16. Filing of final prospectus with SEBI

17. Opening of the Issue

18. Closing of the Issue.

19. Finalization of Basis of Allotment by RTA and submit to Stock exchange.

20. Filing of corporate action form with NSDL and CDSL.

21.  Filing of listing application with Stock exchange to give listing and trading permission.

22. Post issue advertisement in Newspaper.

23. Receipt of trading approval from Stock exchange.

This whole is the process of when a private company want to become a public company by coming up with IPO (Initial Public Offering).

This is a detailed process which is being used to come up with IPO.

SME IPO listing key requirements and Norms.

For Exchange:

S.No.	Eligibility Criteria	NSE Emerge Requirement.	BSE SME Requirement
1.	Post Issue Capital	·         Minimum: 3 Crore Rs. ·         Maximum: 25 Crore Rs.	·         Maximum: 25 Crore Rs.
2.	Track Record	·         Net Tangible Asset: 3 Cr ·         Net Worth: 3 Cr. ·         Distributable profit of at least 2 year out of preceding 3 year or net worth shall be at least 5 Cr.	·         Track record of at least 3 years. ·         The company should have positive EBDT for at least 2 financial years preceding the application
3.	Other Requirements	·         Mandatory facilitation of trading in Demat securities. ·         Certificate that no winding petition or reference to BIFR. ·         Mandatory corporate website ·         Promoters to attend to interview with Listing Advisory Committee ·         No change in promoter in preceding 1 year	·         The Company has not been referred to Board for Industrial and Financial Reconstruction (BIFR). ·         No petition for winding up is admitted by a Court of competent jurisdiction against the Applicant Company. ·         No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant.

Key SEBI Norms for listing:

S.No	Eligibility Criteria	Main Board	SME
1.	Public Shareholding	Minimum 25%	Minimum 25%
2.	Minimum Subscribers in IPO	1000 investors	50 investors
3.	Minimum application amount/trading lot	10000 Rs. - 15000 Rs.	₹1 Lakhs
4.	Underwriting	Not Mandatory	100% Mandatory (of which 15% to be done by MB in his own account)
5.	Market making	NA	Through exchange registered market makers for min 3 years
6.	Offer Document Vetting	To SEBI	To Exchange(NSE or BSE)

Parties Involved in the IPO:

·         Company Promoters,

·         Registrar of Companies (ROC),

·         Merchant Banker or Investment Banker,

·         Bankers Registrar and Transfer Agents (RTA),

·         Market Maker Depositories (CDLS, NSDL),

·         Stock Exchanges (BSE or NSE),

·         Auditors.

Main line IPO in FY. 2017-18:

No. of IPO's in FY 2017	38
Total Money Raised	75475.37 Crores

SME IPO in F.Y 2017-18:

No. of IPO's in FY 2017	133
Failed IPO:	2
Total Money Raised	1737.67 Crores

Current Top Performer in IPO:

Company Name	Issue Price	List Price	LTP (Last Trade Price)	Change (%)
Avenue Supermart Limited	299	604.4	1574.05	426.44
G G Engineering Limited	20	21	55.5	177.5
Salasar Techno Engineering Limited	108	259.15	280	159.26
Diksha Green Limited	30	36.2	74.2	147.23
Sun Retail Limited	23	36	52.5	128.26

Worst Performer in IPO:

Company Name	Issue Price	List Price	LTP (Last Trade Price)	Change (%)
Indian Energy Exchange Limited	1650	1500	161.55	-90.21
MRC Exim Limited	15	15	2.26	-84.93
Ashoka Metcast Limited	20	16	3.85	-80.75
New India Assurance Company limited	800	748.9	180.9	-77.39

For further query or any suggestions please mail me at: nayanparihar96699@gmail.co