Falling Interest Rates, Higher Taxes...Are Bank FDs Worth It?

Banks fixed deposits are among the most popular instruments among Indians as they provide fixed-guaranteed return. Though safety of capital and guaranteed returns are the two virtues of bank fixed deposits, tax inefficiency takes the charm away from them. The interest earned on fixed deposits is fully taxable.

Currently, banks are offering an interest of 7 per cent on five-to-ten-year deposits. But with inflation hovering around six per cent, the post-inflation and post-tax return for a person in the highest tax bracket is almost negligible.

So for those looking for better tax-efficient alternatives, here are some of the options:
1) Debt mutual funds: These are mutual funds which invest in debt papers like corporate debt, and government securities of various maturities and have the potential to deliver better returns than fixed deposits. "Banks deposits go through cycles and won't be able to offer higher returns in a falling interest rate scenario but as debt funds invest in a variety of instruments, they can deliver better returns, said Vidya Bala, head of mutual fund research at FundsIndia.

In a falling interest rate scenario, while new fixed deposits will give lower returns, debt funds actually tend to benefit and can even give double-digit returns, she added.

Apart from this, debt funds are more tax efficient than bank fixed deposits. Returns from debt funds after three years are subjected to 20 per cent tax but they can be adjusted against cost of inflation, thus reducing the tax impact to negligible levels. Short-term gains on debt funds are added to the income of the investor and taxed as per the slab, just like fixed deposits.

2) Arbitrage funds: An arbitrage fund is a type of equity mutual fund that tries to take advantage of the price differential (of the same asset) between the cash and derivatives (future) markets. The entire equity portfolio is hedged as they buy the same stock in cash and derivative markets. Their returns are comparable to that of debt funds. The biggest advantage they have is that they enjoy the same tax status as that of equity funds. Therefore, capital gains after one year as well as dividend received from arbitrage funds are tax free.

"The main attraction of arbitrage funds is taxation of returns but investors should keep in mind that unlike bank fixed deposits, returns from arbitrage funds is not fixed," says Jitendra Solanki, a certified financial planner.

However, it is the complexity of the product that keeps many investors away from these funds, say experts.

3) Tax-free bonds: As the name suggests, the interest income earned from these bonds are tax free. As they are issued by government entities, they are as safe as fixed deposits. This financial year, however, there would not be fresh issues of tax-free bonds. Since tax-free bonds are traded on exchanges, investors looking to put money in these bonds can buy them from secondary markets.

However, investors investing tax-free bonds should keep the liquidity factor in mind. As these bonds are thinly traded on exchanges, they may not be able to sell them whenever they would want to. Also, investors should consider the price at which the bonds are available in the secondary market.

"Investor should understand if they are buying at a right price and if the yields will continue to be attractive for them. The yield of a bond is the coupon rate divided by the market price of the bond," Ms Bala said.

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HDFC, Max Financial In Spotlight After Merger Of Life Insurance Business

Shares of HDFC and Max Financial Services were in spotlight today. HDFC's live insurance arm HDFC Standard Life Insurance reached agreement on Monday to take over smaller rival Max Life Insurance in an all-stock deal to create the nation's top private life insurer valued at nearly $10 billion.
 
HDFC Life shareholders would own 69 per cent of the new company and Max Life shareholders 31 per cent.
 
As part of the deal, Max Life is to be merged into parent Max Financial Services, which in turn will combine its life insurance business with HDFC Life, making it a publicly traded company.
Based on the current share price of Max Financial, the combined entity will be valued at about Rs 65,000 crore, said HDFC Life Chief Executive Amitabh Chaudhry.
 
In the first stage of the transaction, Max Life shareholders will get one share of Max Financial Services for every 4.98 shares of Max Life. In the deal to combine their life insurance businesses, Max Financial Services' shareholders will get 2.33 shares of HDFC Life for every Max Financial share held.
 
As of 9:49 a.m., shares of Max Financial Services traded 0.2 per cent higher at Rs 546.80 while HDFC was down 0.64 per cent at Rs 1,358.65.


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Idea Cellular Tumbles To 52-Week Low On Q1 Profit Slump

Idea Cellular shares slumped 6 per cent to their 52-week low on Tuesday, after the mobile carrier posted a 74 per cent drop in its June quarter net profit. India's third largest telecom company posted a net profit of Rs 220 crore in Q1, missing a consensus forecast of Rs 435 crore, according to Thomson Reuters data.

Idea Cellular attributed the profit slump to one-time finance cost for spectrum and lower voice revenues. Idea Cellular's voice volumes declined 1 per cent sequentially, while growth in the data segment also moderated.

Idea, along with India's biggest telecom company Bharti Airtel Ltd and Vodafone's India unit, have been investing heavily and slashing rates for their 3G and 4G services to retain customers as an impending launch of Reliance Industries telecom service launch expected to happen this year.
Idea said almost 1.8 million customers are now on Idea's 4G network while Reliance has a subscriber base of 1.5 million, according to its latest annual report.
Brokerage CLSA downgraded Idea Cellular to "sell" from "outperform" and cut the target price on the stock to Rs 94, citing high burden of spectrum. Idea's margins declined on higher network operating costs, it said.

As of 10 a.m., Idea Cellular shares traded 5.14 per cent lower at Rs 97.80, underperforming the broader Sensex that was down 0.10 per cent.

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Rupee Edges Lower Ahead Of RBI Monetary Policy Review

Mumbai: The rupee edged lower by 3 paise to 66.87 against the dollar in early trade on Tuesday on fresh buying of the American currency by importers ahead of RBI policy.

Forex dealers said strength in the dollar against some other currencies overseas and a weak trend in the domestic equity market in early trade also weighed on the rupee.

On Monday, the local currency ended seven paise lower at 66.84 on fresh dollar demand form banks and importers on the back of strong dollar in overseas markets.
Meanwhile, the benchmark BSE Sensex was trading 55.20 points, or 0.20 per cent, down at 28,127.37 in early trade.

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Essar Oil To Invest Rs 1,600 Crore To Upgrade Refinery, Boost GRM

Jamnagar: The country's second largest private sector refiner Essar Oil has chalked out plans to invest Rs 1,600 crore to upgrade its Vadinar refinery in Gujarat and boost gross refining margins over the next two-three years.

"Our 20 MMTPA Vadinar refinery is looking at earning an additional $1.50 (per barrel of crude) on its Gross Refining Margin (GRM) on the back of Rs 1,600 crore of investments.

"We have already invested Rs 400 crore during a 28-day planned shutdown of the refinery in September-October last year," Essar Oil Managing Director and CEO Lalit Kumar Gupta told PTI here.

"A further Rs 1,200 crore will be invested to make additional upgrades in the various refinery units over the next 2-3 years," he said.

The project will be funded through internal accruals only as company generates $1 billion EBIDTA and saves good amount of money every year, Mr Gupta said.

The shutdown or turnaround activity involved not just routine inspection and maintenance, but also entailed the conversion of the VGO-HT unit into a mild hydrocracker (MHC) unit and the setting up of facilities to process High Acid (TAN) crudes.

Ever since, the refinery has been able to convert its entire VGO (vacuum gas oil) production into higher margin products, he said.

Over the next 2-3 years, Essar Oil will invest Rs 1,200 crore to upgrade its naphtha hydro treater (NHT), isomerisation unit, continuous catalytic reformer (CCR) units and also facilities for further recovery of sulphur to improve its margins.

According to C Manoharan, Director-Refinery, Essar Oil, "Post the shutdown, we have been able to modify our crude blend to process higher quantities of ultra-heavy and high TAN crudes, and increase the production of high value distillates.

This has enabled Essar Oil to improve its crude and product mix significantly, which is reflected in our financial performance." Mr Gupta said, "We are committed to making our refinery among the best in the world through efficient deployment of resources. We will take a path of safety and sustainability in reaching our goals. We believe in setting new benchmarks for the industry with our efforts."

"With the shutdown having been successfully completed, EBITDA and PAT in the current financial year is expected to be significantly higher because of the full availability of the refinery, stable crude oil prices," added Mr Manoharan.

Refinery margins at Essar Oil have remained continuously above the industry benchmarks. In the quarter ended June 30, 2016, the CP-GRM of $10.29/bbl (unaudited) bettered the IEA margin for Singapore complex refineries by around $6/bbl.

The shutdown and subsequent investment decisions were taken with an eye on the surging demand for petro products in the country over the medium and long term.

The Vadinar refinery currently produces about 9 per cent of India's refining capacity and is also among the world's most complex refineries.

It has processed 91 types of crudes, including the dirtiest crudes available. The refinery is capable of producing high quality Euro IV and V grade products.

Commenting on retail operations, Gupta said the company runs a network of 2,470 operating retail outlets, while 2,850 additional outlets are in various stages of implementation.

"Essar Oil has a target of reaching 4,300 operational outlets by the end of FY17. The total capital investment in these outlets would be about Rs 2,100 crore, which will be mostly infused by franchisees. Once completed, the retail operations will have 5,000 outlets and generate employment for about 20,000 people," he said.

Essar Oil is also in talks to sell 49 per cent stake to OAO Rosneft of Russia and about 23.5 per cent to other oil trading companies.

With reference to the stake sale, Mr Gupta said, "Russians have not taken equity. As and when they buy, we will see about buying oil from Russia."

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Union Bank Shares Tumble After Q1 Profit Fall

Mumbai: Shares in Union Bank of India fell as much as 7.3 per cent on Monday in their biggest single-day fall in nearly seven months, after the state-run lender reported its first-quarter profit plunged 68 per cent on higher bad loans.

Union Bank said on Saturday net profit fell to Rs 167 crore for the three months to June 30, from Rs 519 crore a year earlier.

Gross bad loans as a percentage of total loans rose to 10.16 per cent as of end-June from 8.7 per cent at end-March, and compared with 5.53 per cent as of June 2015.
As of 10.02 a.m., Union Bank shares were trading at Rs 129, down 5.91 per cent as against a 0.2 per cent gain in the broader NSE Nifty.

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InterGlobe Aviation Shares Slump On Q1 Profit Drop

Shares of InterGlobe Aviation, the company that runs low-cost carrier IndiGo Airlines, slumped 7 per cent on Tuesday. Traders attributed the selloff in the stock to weak quarterly numbers.

InterGlobe had on Monday reported a 7 per cent fall in net profit for the fiscal first quarter on account of competitive air fares. InterGlobe's average yield (measure of average fare paid per mile, per passenger) dropped 8 per cent during the quarter because of fall in average ticket prices.

"We have posted yet another profitable quarter. However, profitability was lower than last year primarily because of competitive fare pressures," said InterGlobe president Aditya Ghosh.

Net profit for the April-June quarter fell to Rs 592 crore, from Rs 639 crore a year ago, while total income from operations rose 8.7 per cent to Rs 4,579 crore.

Market expert Hemindra Hazari said InterGlobe Aviation had run ahead of its fundamentals, so the correction was around the corner.

Technical analyst Ashish Chaturmohta said IndiGo has corrected sharply from Rs 1,150 - Rs 1,100 levels to around Rs 900, so a big fall in unlikely.

"Some amount of base is being formed in this stock and buying interest could emerge around Rs 880 to Rs 900 in IndiGo," he added.

IndiGo is India's largest airline, flying about one in three passengers in the country's booming air travel market, and it increased its fleet size to 109 during the quarter.

The airline said it is slowing down deliveries of Airbus' A320neo narrow-body planes to allow engine  supplier Pratt & Whitney to catch up on the production of upgraded engines.

"The A320neo operations continue to be a challenge," InterGlobe said in its statement.

Pratt & Whitney, a unit of United Technologies Corp, has encountered problems with slow engine start-up times and erroneous engine software messages in the new engine, already causing a delay in the delivery of planes to Indigo.

IndiGo has ordered a total of 430 A320neo aircraft, making it one of the European plane maker Airbus' largest customers.

The company also reduced its debt by Rs 459 crore to Rs 2,786 crore by retiring debt related to three aircraft taken on a finance lease.

As of 09.45 a.m., InterGlobe Aviation shares traded 5 per cent lower at Rs 924, underperforming the broader Nifty that was up 0.4 per cent.

Shares of other carriers - Jet Airways and SpiceJet - also fell 1-3 per cent, reflecting bearish sentiments around the aviation sector, post IndiGo's weak numbers.

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