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A Brief Outline of Dixon Technologies (India) Ltd - vrk100 - 30Mar2023

A Brief Outline of Dixon Technologies (India) Ltd

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(This is just for information purpose only; this should not be construed as investment advice though the author is a CFA Charterholder. Readers should consult their own investment advisor before making any investment decisions.)

A Brief Sketch of Dixon Technologies (India) Limited:

stock was listed in Sep2017 in Indian stock exchanges

its issue price was Rs 1,766 (the stock's face value was changed from Rs 10 to Rs 2 per share in Mar2021)

the stock provided phenomenal returns from its listing till the end of 2021

the company belongs to Electronic Manufacturing Services (EMS) sector

other comparables in the EMS sector include Amber Enterprises India

new entrants to EMS sector include Kaynes Technology India, Syrma SGS Technology Ltd and DCX Systems Ltd

Dixon Technologies is one of the largest beneficiaries of Indian government's PLI (production-linked incentive) scheme

the company manufactures consumer electronics, mobile phones and lighting products as an OEM (original equipment manufacturer)

the company's other products include home appliances

its customers include, Motorala, Bosch India, Lloyd, Croma, TCL, Nokia, Bharti Airtel and Sharp

the company had done wonders in scaling up its sales in the last seven years

return on capital employed (ROCE) numbers in Screener.in seem to be incorrect (as per company's annual report, return on equity ROE and ROCE ratios are lower for 2020-21 & 2021-22)

sales growth is much higher than fixed assets growth (because of outsourcing of manufacturing?)

Oct-Dec2022 quarter results were weak for Dixon Technologies; stock promptly got sold off

latest available promoter holding is 34 percent (so-so) -- diluted from 38 percent in 2019

foreign portfolio investors (FPIs) and domestic institutional investors (DIIs) hold 36 percent in the stock's equity, which is decent

because of low profitability and high capital expenditure, company does not give much dividends

EMS sector in India has great potential provided India attracts companies, like, Foxconn and others to shift manufacturing from China and Vietnam to India

the company's debt-equity ratio is 0.37, which is manageable for a high-growth firm

the stock's valuation ratios are: price-earnings ratio at 70; price-book at 15 and price-sales at 1.40 (you could compare them with other comparable firms mentioned above)

as on 29Mar2023, the stock's market price is Rs 2,830 per share, with a market cap of Rs 16,850 crore

as at close of 29Mar2023, the stock indices levels are as follows: Sensex at 57,960; BSE 200 at 7,279; Nifty 50 at 17,081; India VIX at 13.63; USD-INR at 82.20 and India 10-year G-Sec yield at 7.30 percent

Finally

Reasons for scepticism on the potential of the stock:

hard to make long-term money in companies betting on government's doles / incentives

(investors made huge money in the stock in the past cycle is a different issue)

low promoter holding

the optimism on the stock and in the EMS sector are already reflected in the price in my opinion

valuations are rich, because of scarcity premium and investor over-enthusiasm

even if you're attracted to the stock by the potential in the EMS sector, you may buy smaller quantities and test the waters in your experimental portfolio

low gross profit margins (GPM), operating profits (OPM) & net profits (NPM), especially in the last two years

long-term sustainability of a firm is questionable when profitability ratios are low

as value investing guru Benjamin Graham quipped: "Obvious potential may not lead to obvious profits."

if the company scales up its original design manufacturing (ODM) capability for multi-national corporations, then the stock may get re-rated higher

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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

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General Market Chatter - vrk100 - 30Mar2023

General Market Chatter

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Views on the current stock market scenario in India:

we need to have an overall portfolio approach, while building a stock portfolio

if you hold a mix of stocks exposed to a variety of risks (positive as well as negative), the overall portfolio would do well in the long term

it takes time to construct a portfolio of stocks -- a simple approach is better than a complex process

now, individual speculators are going out of the market (India as well as in other global markets) due to a variety of reasons

the lack of individual interest in market is showing in negative market breadth and mid- and small-cap indices doing worse versus large-cap indices

as you are aware, the relative attraction of stocks (price versus value) changes dynamically

one stock may be attractive today, but its valuation could change in the next one or two quarters

another stock may be cheap today; but may become expensive in the next five to six months

with some luck, we may try to buy quality stocks at reasonable valuations and hold them for longer term of five to seven years

so, it's better to stagger our investments over a period of time, rather than thinking too much about market timing

interest rates across the world might come down in the next six months; we might see the same trend in India too

interest rate (the price of money) is one of the big factors for stock market outlook

how Indian rupee moves versus the US dollar or Euro matters a lot for Indian stocks

though India is not immune from global events, India is relatively better placed to show decent GDP growth in the next two to three years

India will have hiccups here and there; but overall growth trajectory will be good in my opinion

spending may go up in the next one year ahead of Indian Parliamentary polls due in May 2024

foreign portfolio investors (FPIs), domestic institutional investors (DIIs) and individual investors are of the opinion that PM Modi government will return to power next year

as such, political risk appears to be low to moderate to Indian stock market

a caveat: political predictions could go wrong as Indian voters are capable of springing up a surprise

well-established Indian companies have been able to weather all political, economic and global risks as my three-decade experience with the market shows

among emerging market basket, select Indian companies have been doing much better than, say, firms in Brazil, Turkey, Mexico or other EMs

this optimism on Indian listed firms is reflected in Indian stock valuations; that's why Indian stocks appear to be more expensive than stocks in other EMs

as we've seen, return on equity (ROEs) of Indian companies are superior to their global peers

due to attractive valuations and other reasons, some companies are resorting to buyback offers to shore up their stock prices, improve return ratios and distribute cash to shareholders

in general, if there is any sign of trouble in Indian stock market; the first people to sell Indian stocks are Indians (not foreign portfolio investors)

nothing is permanent in markets; but select Indian companies have been resilient to all kinds of events and troubles

the structure of Indian economy is changing; a few new-age companies with technology may disrupt established companies

but there's no crystal ball to tell us which new-age firms will show decent profitability, high growth path and long term sustainability

some slowdown is visible in India's GDP growth in the past three to four months; but some firms may buck the trend

the growth slowdown is reflected in Oct-Dec2022 quarter results; and recent fall in Indian stock prices

investors, however, need not be deterred by current troubles in the global economy -- with critical thinking and sound judgment, they may find opportunities in the market

due to lengthy court cases in Insolvency and Bankruptcy Code (IBC) and slow National Company Law Tribunals (NCLT) resolutions, a lot of capital in India is still locked up unproductively which is negative for India

things to watch for India are high fiscal and current account deficits

as individual investors, our effort is to ignore constant market noise; stay calm and catch good signals to make decent long-term money in markets

as at close of 29Mar2023, the indices levels are as follows: Sensex at 57,960; BSE 200 at 7,279; Nifty 50 at 17,081; India VIX at 13.63; USD-INR at 82.20 and India 10-year G-Sec yield at 7.30 percent

you may check this blog for a variety of articles on markets

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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

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CFA Badge

He blogs at:

Saturday 25 March 2023

Negative Impact of Debt Mutual Fund Tax Changes - vrk100 - 25Mar2023

Negative Impact of Debt Mutual Fund Tax Changes

Follow @vrk100

(The author is a CFA Charterholder from CFA Institute, USA. This is just for information purposes only. This should not be construed as tax advice. Safe to assume the author has a vested interest in financial products discussed here. Investors should consult their own investment / tax advisor before making any investment decisions.)

(please see updates 04Oct2023 and 03Apr2023 at the end of the article)

On 24Mar2023, PM Modi government brought some last-minute amendments to Finance Bill, 2023 in the Indian Parliament. One of the negative surprise from the amendments is the removal of tax benefit that debt mutual funds (debt MFs) currently enjoy with regard to long term capital gains (LTCG) tax.

It may be mentioned the Finance Bill, 2023 was originally presented to parliament on 01Feb2023. And the tax amendments proposed on 24Mar2023 were not in the original bill presented on 01Feb2023, but subsequently added at the last minute.

2. Existing capital gains tax on debt mutual funds:

If you buy and hold a debt MF scheme for a minimum period of three years, and any gains you make by selling it after three years is considered as LTCG. And such LTCG is taxed at 20 percent with indexation benefits (indexation benefit means the acquisition cost of a debt MF scheme will be adjusted taking into account the cost of inflation -- to give relief to investors from the adverse impact of rising prices).

The existing LTCG tax is applicable only till 31Mar2023.

If you sell such a debt fund within three years of buying; any gains you make will be considered at short term capital gains (STCG). Such STCG will be taxed at your slab rate (investor's marginal tax) -- meaning if you fall under 20-percent tax bracket, such STCG on debt MF will be taxed at 20 percent and if you fall under 30-percent slab, the tax will be at 30 percent.

3. Proposed STCG / LTCG on debt mutual funds:

As per the amendments to Finance Bill, 2023 on 24Mar2023, effective from 01Apr2023 (from financial year 2023-24), there will be no distinction between short term capital gains (STCG) tax and long term capital gains (LTCG) tax of debt mutual funds.

From 01Apr2023, any capital gains investors make from debt mutual funds will be taxed at the slab rate (marginal tax rate) of the investor, irrespective of the holding period of the investment.

Suppose, if you buy a debt fund on 01Apr2023 and sell it the next day; any gain you make on the investment will be added to your income and taxed according to your tax bracket next year.

And if you sell such a debt fund after 10 years of holding, the tax treatment will be the same -- meaning any gains you make after 10 years will be taxed as per your tax bracket 10 years later (your tax bracket may change after 10 years -- which is a different issue).

The tax amendments made to Finance Bill on 24Mar2023 apply prospectively to debt MF investments made on or after 01Apr2023.

Debt MF investments made till 31Mar2023 will be grandfathered, meaning such investments will continue to enjoy LTCG tax as is being applicable now -- that is, such investments made till 31Mar2023 will continue to enjoy tax benefits mentioned in section 2 above.

4. Current status on the proposed tax amendments:

The proposed tax amendments to debt MFs, among other things, were approved in Lok Sabha (lower house of Indian Parliament) on 24Mar2023. It will be presented to Rajya Sabha (upper house) later. Once it is approved by Rajya Sabha and notified in Indian Gazette, the Finance Bill, 2023 will become a law.

5. Impact of the Tax Amendments on various mutual fund schemes:

One important caveat before you read this section 5: I have no tax expertise. This is based on my previous knowledge and various documents -- my information presented here may be wrong though I've taken reasonable care to avoid any mistakes.

The following four tables A, B, C and D will explain the impact of tax amendments: (it's better if you look at all the four tables comprehensively rather than piecemeal):

Table A: Equity MFs holding 65 percent or more of their total assets in domestic stocks: There is no impact on such funds from the new tax changes:

Examples: As you know, equity mutual funds are like, flexi cap funds, large-cap funds, mid-cap funds, thematic equity funds, sector-based funds, small-cap funds, tax savings schemes (ELSS), value funds and focused funds. Other funds that are included in Table A above are: aggressive hybrid funds, arbitrage funds and equity savings funds.

Table B: Mutual fund plans holding between 35 percent to less than 65 percent of their assets in domestic stocks: There is no impact on such funds from the new tax changes:

Examples: Funds included in Table B above are: Balanced Hybrid Funds and others.

Table C: Mutual funds that hold less than 35 percent of their assets in domestic stocks: such funds will be negatively impacted wef 01Apr2023 from the new tax changes:

Examples: Funds included in Table C above are: most categories of debt funds (like, liquid funds, money market funds, overnight funds, corporate bond, dynamic bond, credit risk funds, floater, gilt, conservative hybrid funds, etc.), gold funds, fund of funds (FOFs) and international funds.

Table D: Other debt funds like Balanced Advantage Funds (or, Dynamic Asset Allocation funds) and Multi Asset Allocation funds may fall in one of the three buckets mentioned in Table A, B and C above:

Examples: Funds included in Table D above are: Dynamic asset allocation funds (or, Balanced Advantage Funds), and multi-asset allocation funds.

6. Quixotic Changes by PM Modi Government Burdening Individual Taxpayers:

Some of the onerous changes made by the government in the past nine years in addition to the latest removal of tax benefit to debt mutual funds:

1. Indian government has been imposing, for the past five years, both long term capital gains tax of 10 percent on equities, in addition to securities transaction tax (STT) -- which has been quite unfair.

Many government supporters in 2017 / 2018 supported imposition of LTCG tax on equities. But ultimately in Feb2018, they had to eat beef when the government introduced LTCG tax of 10 percent on equities, while retaining STT.

Back then, one television-anchor-cum-banking expert argued in this article (before 2018 Budget) that both STT and tax on LTCG should co-exist because "investors allowed to set-off the STT against their capital gains."

2. Effective from financial year 2016-17, 10-percent dividend tax was introduced for dividend received in excess of Rs 10 lakh in a year (which was subsequently stood removed when dividends were made taxable, from financial year 2020-21, in the hands of individuals as per their tax slab)

3. Effective from financial year 2020-21, dividends received are made taxable in the hands of individuals as per their tax slab. This has pushed up the tax slabs of many taxpayers, negatively impacting their after-tax incomes (concomitantly, dividend distribution tax or DDT was removed).

And to make things worse for taxpayers, a 10 percent tax deduction at source (TDS) has been imposed since FY 2020-21.

4. Effective from July 2019, buyback tax of 20 percent has been imposed on companies, that distribute their cash surplus to shareholders through buyback of equity shares. And effective buyback tax is 23.30 percent (including 12 percent surcharge and 4 percent health & education cess).

5. There has been no change in the PPF (public provident fund) interest rate for the past 12 quarters. In April 2020, PPF interest rate was slashed, in a blow to senior citizens, from 7.90 percent to 7.10 percent per year. Ever since then, PPF interest has been kept at 7.10 percent, doing a huge dis-service to savers that too in the backdrop of stubbornly high inflation since October 2019.

The government has been violating its own policy of "market-determined" interest rates on the small savings schemes, including PPF. Nothing the government does is market-determined, much depends on political expediency and giving special support to their picky supporters. (PIB press release dated 16Feb2016 on "market-determined" interest rates on small savings schemes)

6. Instead of making individual income tax simpler, a new tax regime runs in parallel to the existing tax regime for the past three years -- making taxpayers confused and confounded. If you opt for the new tax regime, you have to forego all the tax exemptions provided in the Income Tax Act, 1961.

With two tax regimes, we've more than 13 or 14 tax slabs to deal with, which is almost a world record of sorts!

That the government was forced to make the new tax regime "more attractive" in the Union Budget presented on 01Feb2023 is an indirect admission that the new tax regime has been a spectacularly failure (because not many were opting for new regime, the government had no choice but to increase some incentives).

Is it the objective of the government to discourage savings in India by removing tax incentives for various savings schemes and other items in the new tax regime? If it is so, the government has been doing a dis-service to savings rate.

Since 2013-14, India's savings rate has been falling precipitously. Savings rate and investment rate (GFCF or gross fixed capital formation) are inter-linked. Higher savings are required for higher investment rate.

The point is everything is linked to everything else in an economy. Unless governments take a comprehensive view on economic matters, it's hard to achieve all-round progress.

7. Till financial year 2017-18, we were paying education cess of 3 percent. Since 2018-19, we have paying 4 percent cess as health & education cess. Nobody is asking how much has been spent on improving health and education of citizens.

8. Effective 01Apr2016, the Government arbitrarily changed the half-yearly compounding to yearly compounding on NSC small savings, whereby investors would be losing 20 to 25 basis points of interest every year--amounting to substantial loss in five years. (NSC - National Savings Certificates)

9. It's fair to say the government in the past three to four years has brought in some relief via small changes. But it's not my job to recount them, because there are several people who do such a job more enthusiastically.

7. Finally...

Governments are in the habit of making tax changes capriciously. The current government at the helm is no different -- maybe, this government has got higher propensity to do erratic changes more effectively and efficiently (meaning without any murmur from citizens).

As has been highlighted for several years, the government has got huge appetite for imposing taxes and cesses on citizens.

What is sad is there has been no discussion or debate about how various tax amendments that have been made over the years have been impacting savings rate in India. India has no social security on the lines of the USA or Europe (except some piffling schemes here and there).

In the absence of a social security net, individuals have to resort to take some risks via market-linked financial products. Maybe, it is the wish of the government to nudge individual taxpayers toward embracing bigger risk in order to achieve their financial and retirement goals?

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P.S.: The following are added after the above blog was published on 25Mar2023:

Update 04Oct2023: Specified Mutual Fund:

After the approval of parliament, the above changes to debt mutual funds taxation became effective from financial year 2023-24 and the relevant section is Section 50AA of Income Tax Act, 1961.

As per Section 50AA: "Specified Mutual Fund" means a Mutual Fund by whatever name called, where not more than thirty five per cent of its total proceeds is invested in the equity shares of domestic companies.

It may be recalled debt MF investments made till 31Mar2023 will be grandfathered, meaning such investments will continue to enjoy LTCG tax as is being applicable now -- that is, such investments made till 31Mar2023 will continue to enjoy tax benefits mentioned in section 2 above.

So, the definition of "Specified Mutual Fund" is applicable to debt fund investments, where not more than 35% of total assets invested in equity shares of domestic companies, and which are made on or after 01Apr2023.

Applicable sections for mutual funds are available at this TaxGuru article dated 17Sep2023.

Update 03Apr2023: After the above tax changes by the Government of India, investors poured in money, between 27Mar2023 and 31Mar2023, into bond mutual funds to lock in tax advantages that were available only till 31Mar2023 (for bond fund investments on or after 01Apr2023, bond investors would lose the favourable capital gains as explained in the above article).

Value Research article dated 03Apr2023 reported record net inflows of about Rs 39,325 crore (image below) into debt funds during the last week of March 2023.

The biggest beneficiaries of MF categories of net inflows are: Target maturity funds, corporate bond funds and Banking & PSU funds.

References:

SEBI definition of mutual funds:

SEBI Categorization and Rationalization of MFs: SEBI definition of all mutual fund plans, including debt mutual funds:

SEBI circular dated 06Oct2017 and SEBI circular dated 04Dec2017

Tweet 04Oct2023 - "specified mutual funds" - debt mutual funds taxation - Section 50AA of IT Act

Tweet thread 19Feb2024 - MF tax rates / mutual fund tax rates

Bandhan MF tax reckonery FY 2023-24

Tweet 02Jul2018 - MF tax rates for FY 2018-19

HDFC MF tax reckoner FY 2018-19

Tweet 15Apr2018 - SEBI Categorization and Rationalization

Why Are Equity Mutual Fund Investors Selling Out?

Dhirendra Kumar of Value Research Online on unfair tax on debt funds

Monika Halan on hasty removal of debt fund tax benefits

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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

CFA Charter credentials - CFA Member Profile

CFA Badge

He blogs at: