Happiest Minds IPO – Ride the Digital Wave

  • Date 05th Sept 2020; IPO Opens 7-9th Sept at 165-166/share
  • Valuations: P/E 34 times FY20, P/B 7.6 times (Post IPO)
  • Small Cap: ₹ 2,438 Mkt cap
  • Sector – IT Services
  • Advice: SUBSCRIBE

Here is a note on Indian Happiest Minds Technologies Ltd (HMT) IPO. jainmatrix investments, happiest minds

Summary

  • Key Strengths: HMT is a small but fast growing IT services firm with a focus on digital services.
  • HMT concentrates on new and emerging technologies, platforms and ecosystems, which have a greater impact on customers and help HMT stand out in a crowded industry.
  • The promoter Ashok Soota, is a successful executive and serial entrepreneur.
  • The Covid pandemic has accelerated outsourcing, offshoring and demand for digital services.
  • In FY20 the Revenues, EBITDA and Profits of HMT were ₹ 698 crore, ₹ 101.9 cr. and ₹ 71.7 cr. resp. In just 9 years the firm has gone from startup to $100 million of revenues, and Rs 100 crores of EBITDA, it is a good achievement.
  • Risks: 1) Valuations at PE of 34 times and PB of 7.6 times (TTM) are expensive. 2) Intense competition 3) Covid induced challenges – demand from customers as well as employee health 4) Rupee strengthening against USD
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2-3 year perspective.

IPO highlights

  • The IPO opens from 7 – 9th Sept 2020 in a Price Band of ₹ 165 – 166 per share
  • The IPO includes a Fresh issue of ₹ 110 cr. and an Offer for Sale of 3.56 cr. shares. So the Total IPO size is max 702 cr. of about 4.2 cr. shares.
  • This will be about 28% of the equity share capital of HM.
  • The lot size is 90 shares and Face Value ₹ 2 per share
  • The IPO share quotas for QIBs: Non-Institutional Investors: Retail is 75:15:10%.
  • The promoter & promoter group owns 61.8% in HMT which will fall to 53.3% post-IPO. Th other seller is CMDB-ll (JP Morgan Asset Management).
  • The unofficial/ grey market premium is ₹ 115-125 /share over IPO price. This is a positive.

Introduction

  • Happiest Minds Technologies provides end-to-end solutions in digital business, product engineering, infrastructure management and security services. It was incorporated in 2011.
  • The FY20 Revenues, EBITDA and Profits of HMT were ₹ 698 crore, ₹ 101.9 cr. and ₹ 71.7 cr. resp.
  • It offers solutions across the spectrum of digital technologies such as Robotic Process Automation (RPA), Software-Defined Networking/Network Function Virtualization (SDN/NFV), Big Data and advanced analytics, Internet of Things (IoT), cloud, BPM and security.
  • There are 3 key divisions: the Product Engineering Services (PES) unit helps by transforming the potential of digital by making the product secure and smart. The Infra Management (IMSS) provides an end to end monitoring and management capability for applications and infrastructure. The Digital Business (DBS) is focused on digital content management, connected retail and other customised offerings for clients.
  • In FY20, 96.9% of revenues were from digital services, one of the highest among Indian IT companies. See Fig 1 a, b and c for details of revenue by Service Lines, Industry and Geography. d) gives us the trends in onsite: offshore employee deployments.

jainmatrix investments, happiest minds

Fig 1 – HMT FY20 Revenues by (a) Service Lines (b) Industry Vertical and (c) Geography      (d) Onsite share (clickable)

  • HMT has 79% USA based business, higher than most Indian IT firms where it is 65-70%.
  • The HMT philosophy is quite simple – that the happiest people make happiest customers. Thus there is a focus in the company to keep employees motivated, engaged and happy.
  • The business units of the company are assisted by the 3 Centers of Excellence which are Internet of Things, Analytics / Artificial Intelligence, and Digital Process Automation.
  • As of FY20, the company had 157 active customers with average revenue per customer at USD 614,675. Its repeat business (revenue from existing customers) has steadily grown and contributes a significant portion of revenues.  There is a high degree of customer stickiness.
  • It has 2,439 employees.
  • Happiest Minds delivers services across industry sectors such as Retail, Edutech, Industrial, BFSI, Hi-Tech, Engineering R&D, Manufacturing, Travel, Media and Entertainment.
  • Key leaders: Ashok Soota (77, Promoter, Exec. Chairman-Dir.), V. Narayanan (ED-CFO) J. Anantharaju (V. Chairman, President-CEO PES), Rajiv Shah (Pres-CEO DBS) and C. Ramamohan (Pres-CEO IMSS).

News, Updates and Strategies

  • Deep Tech can Enable Business Growth: Per a news report, HMT has Deep Tech capabilities like AI, 5G, Blockchain, drone-tech, 3D printing, advanced material, quantum computing, biotechnology, etc. These emerging technologies are powerful and can solve specific business problems, and enable growth for clients. The adoption has accelerated post Covid.
  • Happiest Minds is India’s Top 25 Best Workplaces in IT & IT-BPM – Nov 2019.
  • However attrition was high at 19 %, higher than industry levels of 17-18%.
  • Happiest Minds has positioned itself as “Born Digital, Born Agile”.
  • The IPO share quotas indicate a tilt towards QIB, with smaller quotas to NII and Retail.
  • The Digital Content Monetization is a software as a service platform from HMT that helps firms digitize and monetize their content, delivering it to their customers, partners, and users. DCM comes with consumption-based pricing, and is powered by IBM Cloud.
  • Post Covid, the Indian IT services firms are seeing a surge in offshoring biz. This may be due to cost pressures from clients, or even a change in attitude caused by Work from Home (WFH) as firms allow employees to WFH to stay safe and productive during the pandemic.
  • The Covid pandemic has accelerated investments in technology infra as corporates have upgraded to allow WFH and also redesigned the customer and employee interactions.
  • HMT works with partners like Microsoft, Amazon Web Services, McAfee, IBM, PTC, etc.
  • On Sept 4 HMT raised ₹ 315.9 cr. from 25 anchor investors, ahead of its IPO. Anchor investors included Govt. of Singapore, Pacific Horizon Investment Trust, Integrated Core Strategies Asia Pte, Aditya Birla Sun Life MF, Axis MF, Goldman Sachs India Fund, HDFC Life Insurance, Franklin Templeton MF, ICICI Prudential MF, Kuwait Investment Fund, Fidelity Asian Values Plc and SBI MF.

IT Services Industry Outlook in India

  • The global sourcing market in India continues to grow at a higher pace compared to the IT & BPM industry. India is the leading sourcing destination globally, accounting for 55% market share of the US$ 200-250 billion services sourcing business in 2019-20. Indian IT & BPM firms have set up over 1,000 global delivery centers in 80 countries across the world. (IBEF)
  • IT & BPM industry global revenue was US$ 191 billion in FY20, growing at 7.7% y-o-y. It is estimated to reach US$ 350 billion by 2025. Moreover, revenue from the digital segment is expected to form 38% of the total industry revenue by 2025. (IBEF).
  • The Covid pandemic has sharply accelerated the adoption of digital solutions and automation across corporates and personal consumers. The safety and isolation requirements for employees in factories and offices and individual consumers has resulted in high demand for eCommerce based purchasing, employee WFH solutions, video call services and demand for contact free work and customer interaction solutions.
  • While the pandemic has accelerated the demand for digital, it is unlikely that the trend will reverse, as it has benefited productivity and efficiency. For example WFH may partially reverse in time but it may emerge as a permanent option as it has been widely accepted.

Financials of HMT

  • HMT’s revenues, EBITDA and PAT over the years are in Fig 2. The firm moved from losses in FY18 to good profits by Q1FY21. EBITDA and PAT margins have improved from FY18-20.
  • EPS too is sharply up, from losses in FY18 to an excellent result in Q1FY21.
  • In Fiscal 2018, HMT had restated loss for the year of ₹22.5 cr. This was due to relatively lower revenue from contracts with customers and higher employee benefit expense and finance costs. Further, to write off accumulated losses, the Company reduced the Securities Premium Account of HMT by ₹159.5 cr., after approval from the NCLT, Bengaluru bench through its order to the scheme of reduction of capital filed by HMT.
  • RoCE was 28.9% and RoE was 27.1% in FY20, a positive.

jainmatrix investments, happiest minds

Fig 2 – HMT Financials (clickable)

Benchmarking

We benchmark HMT against listed small IT service firms and the leader TCS. See Fig 3.

jainmatrix investments, happiest minds

Fig 3 – Benchmarking (clickable)

While the other firms are larger than HMT, we can draw some parallels:

  • The valuations of HMT are higher than all the others.
  • Sales growth has been good a leader in HMT. Profits cant be measure as HMT was loss making to years ago.
  • D/E ratio is highest here. One of the objects of the fresh issue in IPO is to reduce debt.
  • Margins are still on the lower side as HMT is building scale for its operations.
  • Return ratios are high while not being highest.
  • The Revenue per employee is low, indicating that HMT is investing in employees for growth.

Positives for HMT and the IPO

  • Ashok Soota is the promoter, he has a great track record as a software executive at Wipro, and serial successful entrepreneur who started (and created great value with) Mindtree and now Happiest Minds. He has built great teams in these firms. He is well known also due to several books he has written on entrepreneurship. Many investors will be drawn in by him, to buy into this, his next firm. However at 77, he may be unlikely to be able to take an active / executive role in the firm.
  • However there is a solid next line of management team in place at HMT.
  • HMT says it is “Born Digital, Born Agile” and has over 90% of revenues from digital services, quite higher than most other Indian services firms. There is no doubt that digital services are a high demand, cutting edge space with better growth prospects.
  • The Indian IT services firms are generally debt free, high cash and RoE generating firms once they stabilize operations. HMT should be able to do this in 1-2 years post IPO.
  • The philosophy at Happiest Minds is simple yet powerful – that happy employees ensure happy customers. While this is well known, there appears a special focus on this at HMT.
  • In just 9 years the firm has gone from startup to $100 million of revenues, and Rs 100 crores of EBITDA, is a good achievement.
  • The covid pandemic offers an opportunity to grow faster as customers are forced to work remotely and need more solutions and support.

Risks and Negatives for HMT and the IPO

  • Valuations at PE of ~34 times and PB of ~7.6 times (FY20 trailing basis) are expensive. However a premium is usually demanded by good quality firms in their IPOs.
  • While HMT may present a digital focus, and a large percentage of business from digital, most Indian software services firms have a digital business segment, and their significant legacy businesses may actually offer an opportunity to add a digital layer. So competition is intense for HMT and the key in IT services has always been to adopt and absorb new technologies fast and roll these out to clients.
  • HMT appears to be just another vanilla 1st generation IT services firm, when we are already seeing the 2nd generation services firms focused on Engineering R&D, Pharma R&D, legal, etc.
  • The 79% tilt to USA of business can be a constraint if visa availability declines there.
  • The financial performance of HMT has been uneven, and there’s no certainty that the solid FY19 and FY20 will be followed by a good FY21 post IPO.
  • While Covid offers some opportunities, there is no doubt that many economies are entering a recession and corporate spending for the most part may reduce over the next 1-2 years.
  • IT services are facing competition from 1) the enterprise Product firms 2) the large application and product firms dedicated to Google Android, Apple and Microsoft platforms and 3) the Social Media firms.
  • The INR:USD is at 73.3 today. After many years of 5% a year average weakening of INR against USD, in the last few months the trend appears to have reversed. Indian economic factors such as lower crude prices, lower gold imports, international trade surplus, large forex reserves, falling fiscal deficits and USA Fed policies all point to a stable or strengthening of INR against USD. We expect INR to be in a 70-75 range against USD over the next year.

Overall Opinion and Recommendation

  • IT services are always going to be needed to stitch together solutions for their clients, and to help them navigate, evaluate and deploy the complex IT landscapes and technology options. Indian IT services companies have time and again proven their mettle and have the skilled resources and project management skills to deliver successfully.
  • Happiest Minds as a small-cap firm has many of the quality ingredients required to succeed including great management, new digital tech focus and good employee policies.
  • If HMT continues its growth story over 5 years, this IPO entry price will look quite reasonable.
  • Risks: 1) Valuations at PE of 34 times and PB of 7.6 times (TTM) are expensive. 2) Intense competition 3) Covid induced challenges – demand from customers as well as employee health 4) Rupee strengthening against USD
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2-3 year perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or financial interests in HMT or any group company. Punit Jain intends to apply for this IPO in the Retail category. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

 

 

 

Rossari Biotech IPO – Growth and Good Chemistry

  • Date 11th July; IPO Opens 13-15th July at ₹423-425/share
  • Small Cap: 2,200 Mkt cap
  • Sector – Specialty Chemicals
  • Valuations: P/E 30.7 times TTM, P/B 6.9 times (Post IPO)
  • Advice: SUBSCRIBE

jainmatrix investments, rossari

Summary

  • Overview: Rossari Biotech is a leading Indian textile and specialty chemical firm. Revenues, EBITDA and profit for FY20 were ₹ 603.8 cr., ₹ 105 cr. and ₹ 65 cr. resp., and grew at 32.3%, 67.6% and 66 % resp. over the last 3 years. Rossari has seen a rapid growth in recent times, and has a balanced product portfolio and a large number of domestic customers. Growth plans look promising with the planned Dahej plant. The debt is low, and balance sheet looks healthy with good return ratios. Expansion plans have been funded mostly from internal cash generation. The firm is small but looks nimble in terms of product formulations, R&D, new export markets, etc. At a P/E of 30.7 times FY20 earnings, the valuation is expensive. However the current growth rates justify this valuation.
  • Risks: 1) Valuations look expensive 2) delay in new Dahej plant could affect growth 3) Covid19 infection can affect Revenues. It can also affect manufacturing operations.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Here is a note on Indian Rossari Biotech (Rossari) IPO.

IPO highlights

  • The IPO opens: 13-15th July 2020 with the Price band ₹423-425 per share.
  • There is a Fresh issue of ₹ 50 crore, and an Offer for Sale of 10,500,000 shares by promoters. The FV is ₹ 2. The IPO in total will collect ₹ 500 cr.
  • The IPO share quotas for QIB, NII and retail are in ratio of 50:15:35.
  • The unofficial, grey market premium is ₹125-130 /share, indicating a 30% upside. This is a positive.

Introduction

  • Rossari Biotech is a leading Indian textile and specialty chemical firm with over a decade history of innovative, agile, and rapid growth. They provide customized solutions to industrial and production requirements of customers through a diversified chemical products portfolio. Building upon expertise in textiles sector, they have successfully diversified into the home, personal care, animal health and nutrition and performance chemicals markets.
  • Revenues, EBITDA and profit for FY20 were ₹ 603.8 cr., ₹ 105 cr. and ₹ 65 cr. resp.
  • It has 3,783 employees. The Silvassa (in UT of Dadra & Nagar Haveli) mfg. facility has a capacity of 120,000 MTPA. They have a dedicated team of 22 employees in R&D facilities situated at Silvassa mfg. facility and another one in Mumbai.
  • Rossari relevant market includes following Segments – Home Care, Personal Care, Textile Chemicals, Construction Chemicals, Paints & Coatings, and Water Treatment Chemicals.
  • Promoters of the company are Edward Menezes, 59, and Sunil Chari, 54. They started together in 2003, and are career technocrats having 45 years of experience cumulatively in specialty chemicals industry.
  • The two Promoters hold about 82% pre IPO and 62% shares post IPO and are the primary sellers.
  • On 10th July, Rossari raised Rs 149 cr. from anchor investors, with top 3 MFs as key investors.

Financials of Rossari

jainmatrix investments, rossari biotech IPOFig 1 – Financials

  • The 4 years financials shows rapid revenue growth, and improving EBITDA and profit margins. The Revenues, EBITDA and Profits grew at 32.3%, 67.6% and 66 % resp. See Fig 1.
  • The firm has grown Operating Profits sharply, but the working capital has grown in FY20, reducing the final Cash from Operations, see Fig 2. The firm is also making significant investments into a new manufacturing facility at Dahej, so the Free Cash Flow has turned negative in FY20.

jainmatrix investments, rossari biotech IPOFig 2 – Free Cash Flows

  • The firm has in recent years grown its offering in the Home, personal care and performance chemicals (HPPC) segment and this is 47% of its revenues, see Fig 3.
  • Per news reports, Rossari seized the opportunity after Covid19 to make Hand Sanitizers and Disinfectants, which saw a massive demand spurt in recent months.

jainmatrix investments, rossari biotech IPOFig 3 – Key Product Segments

  • The firm has also grown its exports pie and now exports to 18 countries including Vietnam, Bangladesh and Mauritius. It plans to grow the international business in future. See Fig 4.

jainmatrix investments, rossari biotech IPOFig 4 – Exports

  • The firm has grown its manufacturing capacity steadily at the Silvassa plant, see Fig 5.
  • The Capacity utilization has been over 80% for the last 2 years.
  • Rossari is setting up a new plant at Dahej (Gujarat) of 1,32,000 MTPA. This is expected to go on stream in FY21. There is no expansion planned at Silvassa, as the plant area is saturated.
  • Funding for this plant has been from internal cash generation as well as loans.
  • The rapid revenue growth has come at the cost of slightly lower average realizations from products.

jainmatrix investments, rossari biotech IPOFig 5 – Manufacturing

Chemicals Industry Outlook in India

  • The outlook can be seen in Indian Specialty Chemicals Sector – A Spotlight. Do read this.
  • In brief, we are positive on Chemicals and particularly Specialty Chemicals sector. There are good opportunities around replacement of Chinese supply for domestic and global demand.

Benchmarking

We compare Rossari to Chemical industry peers in India. See Fig 6.

jainmatrix investments, rossari biotech IPOFig 6 – Benchmarking

  • It’s the smallest firm by revenues in this group. In terms of valuations, ie P/E and P/B, it is on the higher side. The margins are also on the lower side, both Operating and Profit.
  • Growth numbers are leading, both Sales and Profits, indicating a good burst of recent success.
  • In terms of ROE it’s a leader, and on RoCE above average. Post IPO there is some 5% dilution to equity, so the number may be reduced to that extent.
  • The D/E looks healthy, even though the company is in expansion mode. This is good.
  • In a growth phase, one does not expect dividends from small cap firms, so its not an issue.
  • Plans are afoot around growing exports, and this should help Rossari improve revenues and realization.

Risks and Negatives for Rossari and the IPO

  • Valuations at PE 30.7 times of FY20 earnings looks expensive. However the PEG is 0.46, indicating undervalued levels.
  • Any delay in the Dahej plant in terms of commissioning and a start of production in FY21 will slow the revenue momentum at Rossari as the current plant is running close to capacity.
  • The IPO is primarily an offer to sell by promoters, so the firm gains only by Rs 50 crores of capital raised by fresh issue of shares. Conversely the equity capital will not be much diluted.
  • In FY20 domestic sales were 86% of revenues, a low ratio, so exports is an opportunity.
  • When we see a sharp burst of growth in financials in 2-3 years before an IPO, we worry that such growth may not be sustained in the next 5-10 years after a successful listing.
  • The promoter owned firm has not benefited from the oversight, partnership and approval of Private Equity or other investors, so future success of Rossari is highly dependent on them.
  • This is the first IPO after a pause of several months. It’s possible that demand from hurt investors for this IPO may be low. But this may be to the benefit of investors in this IPO.
  • Covid19 epidemic is still gathering momentum in India, and till we see a fall in infection numbers, both investors and overall demand in the economy may be subdued. However the firm has grabbed the opportunity by making Covid safety products such as d Sanitizers and Disinfectant liquids.
  • This is a B2B space, so verification and confirmation of customers, brands and quality is difficult.

Overall Opinion and Recommendation

  • Specialty Chemicals sector is a high potential growth sector.
  • Rossari Biotech has seen a rapid growth in recent times, and has a balanced product portfolio and a large number of domestic customers. Growth plans look promising with the planned Dahej plant.
  • The debt is low, and balance sheet looks healthy with good return ratios. Expansion plans have been funded mostly from internal cash generation.
  • The firm is small but looks nimble in terms of product formulations, R&D, new export markets, etc.
  • At a P/E of 30.7 times FY20 earnings, the valuation is expensive. However the current growth rates justify this valuation.
  • Risks: 1) Valuations look expensive 2) delay in new Dahej plant could affect growth 3) Covid19 infection can affect Revenues. It can also affect manufacturing operations.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain discloses that he has no stake ownership or known financial interests in Rossari Biotech or any group company. Punit Jain intends to apply for this IPO. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

SBI Cards – IPO is an Easy Transaction

  • IPO Opens 2-5th Mar at 750-755/share 
  • Large Cap: 71,000 cr. Mkt cap
  • Sector – BFSI, Credit Cards
  • Valuations: P/E 51.4 times TTM, P/B 14.6 times (Post IPO)
  • Advice: SUBSCRIBE

Summary

  • Overview: SBIC offers credit cards to individual cardholders and corporate clients for a range of lifestyle, rewards, travel and fuel and shopping needs. SBIC is the 2nd largest CC issuer in India, with a 18% market share. Revenues, EBITDA and profit for FY19 were ₹6,999 cr., ₹2,430 cr. and ₹863 cr. resp. PAT for H1 FY20 is ₹725 cr. Revenues, EBITDA & PAT have grown at a CAGR of 44.6%, 48.3% and 52.1% resp. from FY17-FY19. SBIC’s financials are robust. SBIC has generated high RoE, NIM; while also maintaining sufficient capital buffer through high CAR & low D/E. SBIC is a well-managed firm financially. Credit cards are an underpenetrated segment and should see high growth for many years. In this industry, larger players enjoy network advantages.
  • Risks: 1) Valuations at PE of 51 times and PB of 14.6 times (TTM) are expensive. 2) Cyber-attacks or other security breaches could affect business 3) their loans portfolio is largely unsecured.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Here is a note on Indian SBI Cards and Payment Services (SBIC) IPO.

IPO highlights

  • The IPO opens: 2-5th Mar 2020 with the Price band: ₹750-755 per share.
  • Shares offered to public number 13.86 cr. The FV is ₹ 10 and market Lot is 19. The IPO in total will collect ₹10,355 cr. while selling 14.6% of equity.
  • The promoter group owns 74% in SBIC which will fall to 69% post-IPO. SBIC is a subsidiary of SBI, a PSB and India’s largest commercial bank in terms of deposits, advances and branches.
  • The IPO offer includes a fresh issue of shares and sale by current shareholder (OFS). The fresh issue proceeds would be ₹500 cr. and the OFS proceeds would be ₹9,855 cr. at UMP.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.
  • CA Rover Holdings (Non Promoter – Non Public shareholder) owns the remaining 26% Pre-IPO in SBIC. CA Rover is controlled by Carlyle Group, a global investment firm with $222 bn. of AUM (FY19).
  • The unofficial/ grey market premium for this IPO is ₹350/share. This is a positive.

Introduction

  • SBI Cards offers credit cards (CC) to individual cardholders and corporate clients in segments – lifestyle, rewards, travel and fuel, shopping, banking partnership cards and corporate cards. These cover all major cardholder segments in terms of income profiles and lifestyles.
  • Revenues, EBITDA and profit for FY19 were ₹6,999 cr., ₹2,430 cr. and ₹863 cr. resp. PAT for H1 FY20 is ₹725 cr. It has 3,783 employees (Sep 2019).
  • SBIC is the 2nd largest CC issuer in India, with 18.1% share in terms of cards and a 17.9% share by spends (per RBI). SBIC has grown faster than the market over last 3 years both in numbers and spends. From FY17-19, SBIC’s total CC spends grew at a 54.2% CAGR (35.6% CAGR for the CC industry) and the number of cards grew at a 34.5% CAGR (25.6% CAGR for the overall CC industry).
  • SBIC has a broad CC portfolio that includes SBI as well as co-branded CCs. See Exhibit 2. They offer 4 primary SBI branded CCs: SimplySave, SimplyClick, Prime and Elite, each catering to different needs. SBIC is also the largest co-brand CC issuer in India and has partnerships with several major players in the travel, fuel, fashion, healthcare and mobility industries. SBIC issues its CC in partnership with the Visa, MasterCard and RuPay payment networks.
  • SBIC acquires customers using multiple channels. They have deployed a sales force of 32,677 outsourced personnel in 145 cities to engage prospects through physical PoS in bank branches, retail stores, malls, fuel stations, railway stations, airports, corporate parks and offices, as well as through tele-sales, online channels, email, SMS marketing and mobile apps. SBIC has a presence in 3,190 open market points of sale. In addition, the partnership with SBI provides them with access to their network of 21,961 branches, and enables them to market CCs to their customer base of 44.5 cr.
  • SBI earns its revenues from (a) Interest Income (b) Fee base income. For breakup, see Fig 1(a).

jainmatrix investmentsjainmatrix investments, sbi cards IPOFig 1(a) SBIC FY19 Operating Revenue and Fig 1(b) Revenue over FY17-19, and Fig 1(c) Fees & Services Details

  • SBIC has a diversified revenue model whereby they generate both non-interest income (fee based income such as interchange fees, late fees and annual fees) as well as interest income on CC receivables. SBIC’s operating model is focused on the cardholder’s 2 main financial needs: transactional needs and short term credit.
  • Interest income is earned when cardholders roll over their dues. SBIC earns interest income on its assets (receivables) when card holders don’t make payment in full when they are due.
  • Fee based income is earned by levying fees and charges to its cardholders. These are categorized as (a) Subscription-based fees: consist of CC membership fees and annual CC fees charged to cardholders. (b) Spend-based income: is interchange fees that the co. earns as consideration for the transactions on using the CCs. In addition, they also earn forex markup income on international transactions (c) Instance-based fees: instance-based fees include late fees, reward redemption fees, cash withdrawal fees, overlimit fees, payment dishonour fees, processing fees or service charges for cross-sell or value added products, statement retrieval charges, among others. See Fig 1(c).

jainmatrix investments, sbi cards ipoFig 2 – SBIC personal CC portfolio details

    • As of 9M FY20, the personal cards portfolio (Fig 2) had 9.99 m. cards. In addition to personal cards SBIC offers corporate cards and white label ATM cards. White label CCs are partner-branded CCs that carry the brand partner’s logo only. They also offer 1 white label CC with partner Tata Sons.
    • Leadership is Rajnish Kumar (C’man), Hardayal Prasad MD-CEO, Richhpal Singh COO, Nalin Negi CFO

News, Updates and Strategies

  • The IPO of SBIC got delayed from Dec 2019 to Mar 2020 as there was an investigation by SEBI of SBI MF over share trading allegations of Manappuram Finance. The ok for IPO was finally given by SEBI.
  • cost of share acquisition by CA Rover Holdings was Rs 81. The partial exit is at a 9.25X gain.
  • SBIC launched a co-branded CC with Vistara in Nov 2019 with variants Club Vistara and PRIME.
  • SBIC in Dec 2019 has made an application to list CPs for an issue size of ₹400 cr. to the BSE.
  • SBIC’s business strategy is:
    • To expand its customer acquisition capabilities and grow the cardholder base. SBIC will increase the number of open market physical points of sale that they operate. They are focused on increasing presence in tier II and tier III cities where their cardholder base has been low so far.
    • To tap into new cardholder segments by broadening the portfolio of CC products.
    • To stimulate growth in CC transaction volumes.
    • To enhance cardholder experience.
    • To continue leveraging technology across their operations.

Digital Payments and CC Industry Outlook in India

  • In CY17, the penetration of CCs in India was 2.2% as compared to 320% in the US, 42% in China and 73% in Brazil, and CC spends as a percentage of GDP stood at 3% as compared to 17% in the US, 25% in Hong Kong and 12% in Brazil. Hence Indian CC market is highly underpenetrated with long runway for growth. SBIC would benefit from the fast evolving youth and spend dynamics.
  • The payments space has seen rapid innovation in the past few years, led by govt. and regulatory initiatives as well as changing consumer preferences. Jan Dhan, Aadhaar and Mobile (JAM), the demonetization of high value currency notes in Nov 2016, implementation of GST and the unveiling of the Unified Payments Interface (UPI) are some of the notable regulatory initiatives that have spurred growth in the digital payments space. New Small Finance Banks and Payment Banks have also brought new innovation, platforms and infra here. Digital payment volumes (including RTGS, but excluding interbank clearing, ECS, NEFT, IMPS, NACH, cards and prepaid instruments) have quadrupled in the last 3 years ending FY19.
  •  In terms of volume, digital payments transactions logged a 5 year CAGR of 49% from FY14-19, owing to factors such as a younger population, rising smartphone penetration, an increase in mobile internet users, increasing convenience of transacting digitally, and a booming ecommerce sector.
  •  The digital payments value in India is expected to more than double to ₹4,055 tn. in FY24 from ₹1,630 tn. in FY19, translating into a 5 year CAGR of 20%.
  • The Indian e-commerce industry has nearly doubled since FY16. CC accounts for 30-35% of ecommerce payment value while cash on delivery accounts for around 50-60%. CC usage has improved by introducing card on delivery/ portable payment options.

jainmatrix investments, sbi cards ipoExhibit 3 – Key metrics of CC players in India

  • Growth in CC volumes has risen up over the years, while annual spending has grown moderately. The no. of CCs issued is 4.7 cr. in FY19, having grown at 20% CAGR over the last 5 years, and is expected to grow by 25% from FY19-FY20, while annual spends per card is expected to grow by 1%.
  • CC spends have registered a robust growth, growing at a CAGR of 32% from FY15-19 to reach ₹6 tn. in FY19, and is expected to reach ₹15 tn. by FY24.
  • There are a total of 74 players offering CCs in India, with the top 3 private banks (HDFC Bank, Axis Bank and ICICI Bank) and SBI Card – as the leading pure-play CC issuer, dominating with a 72% market share by number of CCs as of FY19 and 66% market share by CC spends. See Exhibit 3.

Financials of SBIC

jainmatrix investments, sbi cards ipoFig 4 – SBIC Financials

  • Revenues, EBITDA & PAT have grown at a CAGR of 44.6%, 48.3% and 52.1% resp. from FY17-FY19. The 3 year no’s. are solid with rapid growth, see Fig 4.
  • SBIC for 9M FY20 reported at PAT of ₹1,161 cr., an 89% growth YoY over the same period last year.
  • PBT for 9M FY20 ₹1,619 cr. has grown by 71% YoY over 9M FY19. This is very strong operational performance despite higher provisions for bad debt.
  • EBITDA and PAT margins for SBIC are high and have improved from FY17-19.
  • SBIC had a RoE of 24%. The 3 year average RoE is 24.6%. This is an excellent return ratio.
  • SBIC has paid tax at 35% of PBT in the last 3 years. There can be a substantial profit and RoE increase in FY20 with the reduction to 25% corporate tax.

Benchmarking

We benchmark SBIC against listed private sector banks which have a CC business, a top NBFCs and a top microfinance Bank, as there is no other listed pure play CC player today. See Exhibit 5.

jainmatrix investments, sbi cards IPO

Fig 5 – Benchmarking    Note: 1) Sales & PAT growth for SBI Cards is over FY17-19, so it is 2 year CAGR growth. 2) Market share, avg loan per card o/s & avg spend per card are metrics for only the CC parts of the businesses.

  • PE and PB of SBIC are among the highest in the peer group, only Bajaj Finance, an NBFC leader is higher. Basis these valuations SBIC looks very expensive.
  • The sales and PAT growth for SBIC are also among the highest with only microfinance leader Bandhan doing better. They are growing fast as India’s CC market is highly underpenetrated.
  • SBIC’s NIM’s at 15.5% (FY19) is the highest amongst its peer group. This is a clear stand out which makes SBIC a candidate for high valuation multiples.
  • SBIC has a low D/E indicating that there is headroom for more leverage.
  • The RoE of SBIC for FY19 is the highest amongst the comparables. The 3 year average is high as well and RoE is likely to remain elevated. Dividend yield for SBIC at 1.19% is good.
  • HDFC Bank has the highest market share and SBIC is next. The market is under-penetrated and there is enough headroom for all players to grow. SBIC leads in the avg. spend per card.

Positives for SBIC and the IPO

  • The listing of SBIC will provide investors access to the second largest CC issuer in India and provide the first listed pure-play CC issuer with a 20 year operating history. The high performing BFSI sector in India has another unique and high quality offering with SBIC.
  • SBIC’s financials are robust. SBIC has generated high RoE and NIM, while also maintaining sufficient capital buffer through high CAR & low D/E. This is good financial management by the company.
  • It has the leading revenue and sales growth of the top 4 players, with growing market share.
  • SBIC has diversified customer acquisition capabilities. SBIC is a leading player in open market customer acquisitions in India. They have deployed a large outsourced sales team. When a point of sale is not directly managed by them, they work with their 11 non-bank co-brand partners and 7 co-brand bank partners using their distribution network (including their co-brand partner’s retail outlets), communication channels and customer interactions to market CCs to their customers.
  • The major competitors are more focused on internal marketing of CCs to banking customers.
  • SBIC gets supported by a strong brand and pre-eminent promoter. The relationship with SBI extends to joint promotions, sharing of office space, etc. In fiscals FY19, 18, and 17, new accounts acquired from SBI’s customer base accounted for 55.2%, 45.5% and 35.2%, resp., of SBIC total new accounts.
  • The industry characteristics suggest that the credit cards business has a network effect, so larger players have an advantage over smaller ones of sharing of infrastructure and management costs, easier marketing and benefits deals for customers, etc. Here SBIC has a #2 player advantage.
  • With just 3,783 of its own employees, SBIC has outsourced many activities, improving productivity.
  • SBIC has a good and and diversified portfolio of CC products offering.
  • SBIC has ample potential to tap SBI’s large customer base, for growth.
  • SBIC has an experienced and professional management team. The MD & CEO, Mr. Hardayal Prasad, has over 36 years of experience in the financial services industry. A large number of the senior management personnel have worked with SBIC for a significant period of time, resulting in effective operational coordination and continuity of business strategies.

Risks and Negatives for SBIC and the IPO

  • Valuations at PE 51 times and PB 14.6 times (TTM) are very expensive. On a relative basis, SBIC has valuations just less than Bajaj Finance which has an outstanding 15 year growth and track record.
  • SBIC derives substantial benefits from their existing relationship with their promoter SBI, and a loss or reduction in the level of support they receive from them could adversely affect SBIC.
  • SBIC does not own the ’SBI’ trademark and currently uses it pursuant to a non-exclusive licensing agreement. SBIC pays royalty fees of 2% of their net profit or 0.2% of income, whichever is higher. The licensing agreement may be terminated by SBI on occurrence of events: SBI’s shareholding in SBIC falls below 26%, if they undergo a change of control event, or if they fail to pay royalty to SBI.
  • Several senior officers in SBIC are on deputation from SBI and may return there causing a skills loss.
  • The CC portfolio is of unsecured loans and not supported by collateral. 98.6% of it is unsecured.
  • With 74 players, the sector looks crowded. Competition can rise also if any player decides to commit heavily to the business, with fresh investments. However so far SBIC has handled the pressures well.
  • Cyber-attacks or other security breaches can have a material adverse effect on their business. Cards cloning, phishing, etc. are threats to the business. Coronavirus too can impact consumer sentiment.

Overall Opinion and Recommendation

  • Credit cards are a mid and premium lifestyle product, and are quite habit forming, both in terms of purchases, new services experiences as well as convenience of bill payments. We expect growth to continue for many years.
  • SBIC is a well-managed firm financially. The growth, return ratios and operating metrics are robust.
  • At a 9M FY20 P/B of 14.6 times, the valuation is expensive. However this retail focused fast growing company has good return metrics and should get a premium valuation in the market.
  • Risks: 1) Valuations at PE of 51 times and PB of 14.6 times (TTM) are expensive. 2) Cyber-attacks or other security breaches could affect business 3) their loans portfolio is largely unsecured.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain discloses that he has been a retail customer of SBIC since 5 years. Other than this JM has no stake ownership or known financial interests in SBIC or any group company. Punit Jain intends to apply for this IPO in the Retail category. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

IRCTC IPO – A Matter of Convenience – Pre Listing Note – Premium

  • Date: 11th Oct, 2019
  • Mid Cap – 5,120 cr. Mkt cap
  • Industry: Railway PSU
  • IPO Price – ₹320 /share

jainmatrix investments, IRCTC IPO

  • We had published an investment report  IRCTC IPO – A matter of convenience.
  • The response to the offer was excellent, with an 112 times subscription.
  • The IRCTC IPO lists on Mon 14th Oct.

Jainmatrix Investments has just published a Premium report – A Pre-Listing Note on IRCTC IPO that guides serious investors on this opportunity.

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DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or known financial interests in IRCTC or any group company. Punit Jain intends to apply for this IPO in line with the BUY recommendation. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

IRCTC IPO – A Matter of Convenience

  • Date 29th Sep 2019
  • IPO opens 30th Sep -3rd Oct at price range 315-320/share
  • Industry – Railways PSU
  • Mid Cap: 5,120 cr. Mkt cap
  • Valuations: P/E 18.8 times TTM
  • Advice: SUBSCRIBE with a 2 year perspective 

jainmatrix investments, IRCTC IPO

Summary

  • Overview: Railways are undergoing a dramatic transformation to improve service levels, technology, outsource and grow faster. Subsidiaries like IRCTC are executing on the new initiatives. IRCTC is an Indian Railways owned PSU. It is the only entity authorized to provide catering services to railways, online railway tickets and packaged drinking water at stations and trains. It is financially well-managed and the return ratios and operating cash flows are robust. There is ample scope for growth in almost all business segments. Profits are expected to improve in FY20 given earnings tailwinds including restoration of Convenience fees, lower corporate tax and lower bad debt provisions YoY.
  • Risks: 1) removal of exclusivity for its business divisions 2) reduction in price of services, higher haulage or a removal of convenience charge for tickets portal 3) In the water business, a ban on single use plastic 4) Any adverse news flow on catering services or Ticket booking scams 5) GoI may list RailTel and IRFC soon, both are PSU railway firms. This can impact valuations.
  • Opinion: At a P/E of 18.8 times, the valuation are attractive. Investors can SUBSCRIBE to this IPO with a 2 year perspective.
  • Download a PDF version of this report JainMatrix Investments_IRCTC IPO_Sep2019

Here is a note on Indian Railway Catering and Tourism Corporation (IRCTC) IPO.

IPO highlights

  • The IPO opens: 30th Sep -3rd Oct 2019 with the Price band: ₹315-320 per share.
  • Shares offered to public number 2.01 cr. The FV of each is ₹ 10 and market Lot is 40.
  • The IPO in total will collect ₹645 cr. while selling 12.6% of equity. The promoter group of Indian Railways (IR) owns 100% in IRCTC which will fall to 87.4% post-IPO.
  • The IPO is an Offer for Sale (OFS) by IR, and will raise ₹645 cr. at UMP. The IPO share quotas for QIB, NIB and retail are 50:15:35. Retail and employees will get a ₹ 10 discount to listing price.
  • The unofficial/ grey market premium for this IPO is ₹140-150/share. This is a positive.

Introduction

  • IRCTC was conferred the status of Mini – Ratna (Category-I PSE) by the GoI, on May 1, 2008.
  • IRCTC is a CPSE owned by the GoI under the Ministry of Railways. It is the only entity authorized by IR to provide 1) catering services to railways 2) online railway tickets and 3) packaged drinking water at railway stations and trains in India. IRCTC was incorporated with the objective to upgrade, modernize and professionalize catering and hospitality services, manage services at railway stations and on trains and to promote international and domestic tourism in India through PPP model.
  • Revenues, EBITDA and profit for FY19 were ₹1,957 cr., ₹461 cr. and ₹273 cr. resp. It has 1,384 employees (Aug 2019). IRCTC has been profitable and debt free since incorporation in 1999.
  • 55% of revenue was from catering services; internet ticketing was 13%, etc. See Fig 1(a)

jainmatrix investments, IRCTC IPOFig 1(a) – Revenue by Segments and Fig 1(b) Margins jainmatrix investments, IRCTC IPO

  • IRCTC operates in 4 business segments of Catering, Internet Ticketing, Tourism, State Teertha (travel packages) and packaged drinking water under the “Rail Neer” brand.
  • Internet Ticketing: IRCTC is the only entity authorized by IR to offer railway tickets online. As of Aug 2019, more than 14 lakh passengers travel on IR on a daily basis, of which 72.6% are booked online. As a result, there are more than 8.4L tickets booked through http://www.irctc.co.in and “Rail Connect” on a daily basis. IRCTC operates one of the most transacted websites, http://www.irctc.co.in, in the APAC region with volumes averaging 25-28 m. transactions/month.
  • Catering: IRCTC provides food catering services to IR passengers on trains (mobile catering) and and at stations (static catering). IRCTC provides catering services for 350 pre-paid and post-paid trains and 530 static units. They provide catering services through mobile catering units, base kitchens, cell kitchens, refreshment rooms, food plazas, food courts, train side vending, and Jan Ahaars over the IR network. All other catering units, such as refreshments rooms at stations categorized at B or below, AVMs, milk stalls, and trolleys are managed by zonal railways. IRCTC offers catering services to passengers through a mobile app “Food on Track” and a website, ecatering.irctc.co.in. They also operate executive lounges, budget hotels, and retiring rooms for railway passengers.
  • Packaged Drinking Water (Rail Neer): IRCTC is the only entity authorized by Ministry of Railways to make and distribute packaged drinking water at all railway stations and on trains. They have a packaged drinking water brand ‘Rail Neer’. Currently IRCTC operates ten Rail Neer plants located at Nangloi, Danapur, Palur, Ambernath, Amethi, Parassala, Bilaspur, Hapur, Ahmedabad and Bhopal, with an installed production capacity of 1.09 m. liters/day, which caters to 45% of demand for packaged drinking water at railway premises and in trains.
  • Travel and Tourism: IRCTC have been mandated by IR to provide tourism and travel related services. IRCTC has footprints in across all major tourism segments such as hotel bookings, rail, land, cruise and air tour packages and air ticket bookings. Additionally, it has a service the SBI IRCTC Credit Card.
  • Leadership is Mahendra Mall (CMD), Narendra (Dir. Finance), Rajni Hasija (Dir. Tourism & Marketing)

News, Updates and Strategies

  • IRCTC will launch 2 new Tejas Express trains, where the train services will be managed by them rather than IR. It will offer upgraded services including food, have advertising rights to on these trains but will pay a lease to IR. The Delhi-Lucknow Tejas will begin services in Oct 2019 and the Mumbai-Ahmedabad train is expected to start in Dec 2019.
  • With effect from 1st Sept 2019, IRCTC will charge a convenience fee of ₹ 15 and ₹ 30 for booking railway tickets online for non-AC and AC classes, resp. This is expected to boost revenues; it had witnessed a revenue loss due to withdrawal of service charges after demonetisation, impacting top line over the past two years. The new fee is 25% lower than the earlier service charge, but it would help bump up revenues in the current fiscal itself. IRCTC earned ₹ 362 cr. service charges in FY17, prior to GoI withdrawing the same from Nov 23, 2016, in a bid to drive digital transactions. In place of this, the Ministry of Finance had reimbursed IRCTC ₹ 80 cr. and ₹ 88 cr. for FY18 and FY19 resp. for operational costs such as cost of server, IT staff and other IT costs. This may stop now.
  • IRCTC’s business strategy is – To diversify and offer new services to the passengers of IR, etc.
    • To develop their IRCTC iMudra wallet to promote digital payment options to customers/users. This is a prepaid card which allows users to book train tickets, shop online and transfer money.
    • To offer better services as a private train operator.
    • To continue to leverage the Government’s policy relating to their business; To strengthen products and services offering online and To strengthen operational efficiencies.

Railways Sector, Industry & Market Outlook in India

  • The GoI announced a planned outlay of ₹ 1.59 tn. for IR in the Interim Union Budget 2020, 14% higher than last year’s revised estimate of ₹ 1.39 tn., thus driving investment in the sector.
  • Total railway passenger traffic has remained nearly flat over the past four years, going from 8,397 mn. passengers in FY14 to 8,286 mn. passengers in FY18. Passenger traffic, after falling by 1-2% between fiscals 2014 to 2016, witnessed a revival in 2018, driven by non-suburban traffic.
  • As per a study conducted by Asian Institute of Transport Development (AITD) titled Environmental and Social Sustainability of Transport – Comparative Study of Rail and Road (2000), rail consumes 75% to 90% less energy for freight traffic; and 5% to 21% less energy for passenger traffic when compared to road. The social cost therefore, in terms of environmental damage or degradation is significantly lower in rail transportation.
  • IR is going through a massive revival and improvement program that includes additional lines, massive electrification, going green, technology improvement, outsourcing and efficiency.
  • A New Catering Policy 2017 will empower IRCTC and help improve coverage of catering services due to addition of base kitchens. Consequently, IRCTC’s catering revenues is expected to grow at 7.5-8.5% CAGR between fiscals 2019 and 2024 to reach ₹ 14.5-15.5 billion in fiscal 2024. IRCTC plans to expand its base kitchen network, with 15-20 greenfield base kitchens to be set up along with conversion of some Jan Ahar outlets on railway stations into base kitchens. IRCTC also plans to add pantry cars to some trains not having them.
  • IRCTC has less than 2% of the airline ticketing market share in India so there is big room to grow. The Indian Travel Agent / Booking industry was estimated at ₹1,370-1,390 bn. in FY14. On account of strong growth in domestic and inbound tourism, the industry grew at 11-12% CAGR to reach ₹2,335-2,355 bn. in FY19, including airline, hotels and railway bookings.
  • The organized packaged drinking water market has been estimated to have grown from ₹ 30-35 bn. (at retail price) in FY14 to ₹80-85 bn. in FY19 at 19.5% CAGR. Going forward, the market is expected to further grow by 16-17% CAGR and reach ₹ 180-185 bn. in FY24.

 Financials of IRCTC

  • IRCTC’s revenues, EBITDA and PAT over the years are in Fig 3. Revenues, EBITDA & PAT have grown at a CAGR of 10.4%, 10.1% and 9% resp. from FY17-19. The 3 year nos. may look average.
  • The PAT growth for FY19 was 23.5% from ₹221 cr. to ₹273 cr. IRCTC wrote off bad debts of ₹46.1 cr. in FY19. Adjusting for this the PAT growth would have been 37% for FY19.
  • IRCTC had a RoE of 26.1% and RoCE 38.8% for FY19, and 3 yr avg. RoE is 25%, this is  excellent.

jainmatrix investments, IRCTC IPOFig 2 – IRCTC Financials / Fig 3 – IRCTC Cash Flow jainmatrix investments, IRCTC IPO

jainmatrix Investments, IRCTC IPOFig 4 – IRCTC Corporate Income Tax Rate

  • IRCTC had an EBITDA margin of 23.5% and PAT margin of 13.9% for FY19. These are high margins and marginal sales growth can drive high profit growth.
  • IRCTC has strong operating cash flows and the firm is FCFE positive. See Fig 3.
  • IRCTC derives ~75% of its operating profits (EBIT) from its catering and internet ticketing business. Both the business segments have witnessed sharp rise in margins over the years. Tourism business margins have turned from loss making to high single digit margin. Rail Neer and State Teertha business segment margins have marginally declined. Overall the margin trajectory is robust.
  • Fig 4 we can see that IRCTC has paid an effective corporate IT rate of 36.6% for FY19. IT rates have been lowered from the current fiscal year to 25%. This will lead to higher earnings growth.
  • IRCTC FY20 PAT outlook is robust given (a) Tax Savings of 32% (b) Convenience fee restoration by Ministry of Railways which should double segment revenues (c) Low/No expected doubtful bad debts compared to FY19 (d) Organic growth across catering, water, ticketing and travel.

Benchmarking

jainmatrix investments, irctc ipoFig 5 – Benchmarking

We benchmark IRCTC against peers, See Fig 5. Note: For IRCTC, only 2 year CAGR sales and PAT growth have been presented, per RHP data.

  • PE and PB of IRCTC is the highest in the peer group. However the valuations are attractive given the monopoly status, sector growth, B2C nature, high earnings, high return ratios and debt free status.
  • The sales and PAT growth look low. However the reasons for the same have been explained above. From FY20 the growth numbers should accelerate.
  • The EBITDA and PAT margins are in the high range amongst this group. RoE and RoCE are the highest. This is a positive. Dividend yield is average but high considering it is a state owned unit.

Positives for IRCTC and the IPO

  • Railways are much more environmentally friendly, consuming less fuel than road and air.
  • The GoI has planned a massive investment in IR to improve operations, and it has high potential to grow usage and volumes. IRCTC is dealing with essential and cutting edge initiatives, which can grow very rapidly. IRCTC enjoys a monopoly position in several niches with the IR – online ticketing, catering and branded water – which lower risks and ensure business stability and profits.
  • The restoration of Convenience Fee from Sept 2019 will allow IRCTC to sharply improve revenues from internet ticketing in FY20 itself. These had fallen in FY18 and FY19 post demon.
  • The Catering Policy 2017 envisages a bigger role for IRCTC and takeover of many catering activities.
  • The B2C nature of Business with large number of transactions is more stable and allows IRCTC to build a brand with consumers. IRCTC also has a vast amount of data on customers through online portal which can be used more effectively to upsell and cross sell other services.
  • With the IPO and listing, IRCTC is well organized and employees better incentivized to take advantage of the emerging opportunities in the defined and new sectors.
  • High cash and bank balances and debt free status are clear positives.
  • Valuation at PE 19 times is attractive given monopoly nature of its businesses and growth prospects.

Risks and Negatives for IRCTC and the IPO

  • If GoI were to allow competition in future in business areas of IRCTC, it will quickly affect valuations.
  • IRCTC might be unable to implement the directives of Catering Policy 2017 in a timely manner, which may result in penalties. Totally 159 observations were made by commercial inspectors during 2013-2016 relating to issues of hygiene, tariff, cooking, kitchen, food and service in IR.
  • Security, hacking and phishing are key concerns as IRCTC relies on tech to operate its ticketing and tourism business. Currently all servers, IT and storage systems are at a single location.
  • IRCTC has a JV, Royale Indian Rail Tours Ltd. (RIRTL) with Cox & Kings India which is under litigation. They have not been able to consolidate the financials of RIRTL since FY11.
  • IRCTC’s business can be negatively affected if they are unable to maintain quality standards. Any adverse claims, media speculation or bad publicity could quickly affect their reputation and image.
  • Ticket booking scams/frauds – many have been discovered on the IRCTC platform over the last few years. The fraud typically pertains to booking Tatkal (last minute travel) tickets. Action is usually taken quickly by authorities. In the high revenue area, good vigilance is needed to detect frauds.
  • Change in haulage by Ministry of Railways on the trains IRCTC operates could adversely affect business. Under haulage concept, IR takes fixed charges for hauling the rake of the train from one destination to another; charges are calculated and informed by IR to IRCTC.
  • While IRCTC has been asked to unbundle catering services by creating a distinction between food preparation and food distribution, the timelines are not clearly defined and are currently under discussions. Any failure on part of IRCTC to adhere to the mandate may result in penalties.
  • While IRCTC has several monopolies, it however does not have pricing controls over the services due to price regulation by IR; they do not hedge risks of market fluctuations in commodities market.
  • IRCTC uses PET bottles and other plastic items for their packaged drinking water, which is subject to various regulatory requirements and increasing public scrutiny.
  • There are whispers of overcharging in paid mobile catering and lack of transparency / bills.
  • In the past IRCTC was affected when Lalu Prasad Yadav (former Railway Minister) was accused of misusing his official position in 2004 and conniving with officials of IRCTC to grant sub-lease rights of 2 IRCTC owned hotels in Puri and Ranchi to a private party. Such scams can tarnish IRCTC’s image.
  • The GoI has pressured PSUs for dividends and is targeting massive revenue from disinvestment. In general this is an overhang and causes PSUs to lose valuation premiums.

Overall Opinion and Recommendation

  • The Indian Railways is undergoing a dramatic transformation to improve service levels, better technology, outsource and grow fast. Subsidiaries like IRCTC are executing on the new plans.
  • The Railway industrial complex is getting unbundled. 2 of 3 recently listed railway IPOs have performed well, RVNL (read IPO report) and RITES gained but IRCON lost value since listing.
  • IRCTC has performed well in the last 20 years, using its lean structure, good technology and conservative financials to record growth and profits and good return ratios and operating cash
  • There is ample scope for growth in all business segments. IRCTC enjoys several monopoly niches. Profits are expected to improve in FY20 given earnings tailwinds including restoration of Convenience fees, lower corporate tax and lower bad debt provisions YoY. Margins are flat or improving. This makes IRCTC attractive for investors. It looks poised for a good listing and future gains.
  • The key risks are 1) In the packaged drinking water business, a ban on single use plastic 2) removal of exclusivity for its business divisions 3) reduction in price of services, higher haulage or a removal of Convenience charge for tickets portal 4) Any adverse news flow on catering services 5) GoI may list RailTel and IRFC soon, both are PSU railway firms which can impact valuations.
  • At a P/E of ~19 times, the valuation are attractive.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Agree ? Disagree? Like the report? Any thoughts here? We welcome your comments below….

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or known financial interests in IRCTC or any group company. Punit Jain intends to apply for this IPO in line with the BUY recommendation. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Spandana Sphoorty Financial IPO – A Spunky Player

  • Date 06th Aug; IPO Opens 5-7th Aug at Rs. 853-856
  • Valuations: P/E 17.6 times TTM, P/B 2.4 times (Post IPO)
  • Mid Cap: Rs. 5,505 cr. Mkt cap
  • Industry – NBFC MFI
  • Advice: SUBSCRIBE
  • Overview: Spandana is a rural focused NBFC-MFI with a geographically diversified presence in India. It offers income generation loans under the joint liability group model, predominantly to women from low-income households in rural areas. They are the 4th largest NBFC-MFI and the 6th largest amongst NBFC-MFIs and SFBs in India, in terms of AUM. Revenues, NII and profit for FY19 were ₹1,049 cr., ₹640 cr. and ₹312 cr. resp. Capital adequacy is 39.6% which is very safe. Spandana exited from CDR in March 2017 and the operations are stable now. At a P/B of 2.4 times & PE of 17.6 times (post IPO), the valuation look attractive.
  • Risks: 1) Economically and politically sensitive sector 2) Significant exposure to unsecured loans.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Here is a note on Spandana Sphoorty Financial (Spandana) IPO.

IPO highlights

  • The IPO opens: 5-7th Aug 2019 with the Price band: Rs. 853-856 per share.
  • Shares offered to public number 1.40 cr. The FV of each is Rs. 10 and market Lot is 17.
  • The IPO in total will collect ₹1,200 cr. while selling 21.8% of equity. IPO is both an Offer for Sale by current shareholders (OFS) and a fresh issue of shares. The OFS proceeds would be ₹800 cr. at UMP and fresh issue size is ₹400 cr.
  • The Promoters are Padmaja Gangireddy, VSR Reddy Vendidandi and Kangchenjunga Ltd. that own 81.22% in Spandana which will fall to 62.58% post-IPO. The major selling shareholders are Kangchenjunga, VSR and Padmaja Gangireddy, see Exhibit 1(a). The IPO is being launched to provide partial exit to existing promoters as well as for Spandana to augment the capital base (Fresh Issue).

jainmatrix investments, spandana IPO

Exhibit 1(a) – IPO Selling Shareholders; Exhibit 1(b) – Shareholding pattern

  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.
  • The promoter Kangchenjunga Ltd is a holding co. incorporated in Mauritius. It is a private company with limited liability, which holds a Category 1 Global Business License to carry out activities as an investment holding company and to acquire, invest in and hold securities of Spandana. The Class A shareholders of promoter Kangchenjunga are seen in Exhibit 1(b).

The unofficial/ grey market premium for this IPO is Rs. 18-20/share. This is small.

Introduction

  • Spandana is a rural focused NBFC-MFI with a geographically diversified presence in India. It offers income generation loans under the joint liability group model, predominantly to women from low-income households in rural Areas. As of FY19, they were the 4th largest NBFC-MFI and the 6th largest amongst NBFC-MFIs and SFBs in India, in terms of AUM. See Exhibit 2(a).
  • Revenues, NII and profit for FY19 were ₹1,049 cr., ₹640 cr. and ₹312 cr. resp. It has 7,062 employees (June 2019). 85% of their gross loans were Abhilasha loans, and 86% of the loan book is unsecured.

jainmatrix investments, spandana IPO

jainmatrix investments, spandana IPO

Fig 2a – Loan products (above) and Fig 2b AUM Spread

  • Spandana was incorporated as a public company in 2003 and registered as an NBFC with the RBI in 2004. Soon they registered as an NBFC-MFI in 2015. In October 2010, the MFI industry (including Spandana) was severely impacted as the govt. of AP promulgated the AP Microfinance Ordinance 2010, which enforced several restrictions on the operations of MFIs. This impacted Spandana collections, cash-flow, its ability to service debt, and so their growth and profitability.
  • Spandana’s lenders referred them to the corporate debt restructuring (CDR) mechanism of RBI to restructure borrowings and revive business. The CDR plan allowed them to get cash-flow relaxations to continue their portfolio diversification, process improvement and cost rationalization. Their operations turned profitable from FY14.
  • Spandana exited CDR in March 2017, which enabled it increase lender base, diversify its borrowings to new banks and NBFCs and also issue NCDs in the capital markets. As a result, during FY18, with increasing flow of capital, they expanded their operations and were able to utilize the existing branch network and employees (earlier underutilized due to lack of capital). Prior to their exit from CDR in 2017, they had limited access to capital, due to which they had to offer loans in lower ticket sizes than the demand from clients.
  • Distribution is strong as in 2019 they cover 16 states and 1 UT across India through 929 branches.
  • Leadership – Padmaja Gangireddy (MD), Sudhesh Chandrasekar (CFO), Abdul Khan (Strategy Officer).

News, Updates and Strategies of Bandhan

  • Prior to 2010 Andhra Pradesh MFI crisis, 51% of Spandana loan book was concentrated in AP. Post the debacle they have tightened internal controls to manage risk better by restricting (a) loan book exposure to a max of 22.5% for 1 state (b) loan book exposure to a max of 2.5% for each district (c) loan book exposure to a max of 0.3% for each branch.
  • Spandana’s business strategy is as follows:
  • To leverage their popular income generation loan products to derive organic business growth.
  • To leverage existing branch network by increasing loan portfolio and employee productivity.
  • To increase its presence in under-penetrated states and districts.
  • To further diversify their borrowing profile; and reduce their cost of borrowings.

Various shareholders invested in Spandana over the years. The average cost of acquisition per share for those shareholders is as follows:

jainmatrix investments, spandana IPO

Exhibit 3 – Cost of shares by investors

  • In Jun 2018 20.3L shares were allotted to Padmaja Gangireddy and 72K shares to Abdul Feroz Khan by private placement at Rs. 235.4/share. In IPO this has grown by 3.6 times in just over a year.
  • Spandana has raised Rs 360.28 cr. from 18 anchor investors by allotting 42,08,886 shares at a price of Rs 856, the upper band of its IPO. Among the 18 anchor investors, Wells Fargo Emerging Markets Equity Fund, Goldman Sachs India Ltd, ICICI Prudential Life Insurance Company and Bajaj Allianz Life Insurance Company have been allotted about 4.40 lakh shares each.
  • Spandana IPO was subscribed 6% on the first day of bidding on Monday (5th Aug).

Micro Finance and Banking Industry Outlook in India

  • Financing needs in India have risen along with economic growth over the past decade. By complementing banks and other financial institutions, NBFCs help meet this need.
  • MFI is a volatile sector that can be badly affected by economic and political events. Spandana’s operations were also affected post AP ordinance in 2010. It went into CDR however later came out of it in Mar 2017. In Nov 2016, the Indian government announced the demonetization of currency notes of ₹500 and ₹1,000 denominations. Though demonetisation affected the retail sector’s credit performance in FY17, which dropped 300 bps from FY16, growth remained higher than industrial and agricultural credit growth in FY17. The retail segment was negatively impacted by the demonetization driven slump in the real estate sector. Retail credit grew 16% YoY, while industrial credit contracted YoY by 2%. Such events have affected collection efficiencies which could happen in the future as well.
  • Spandana has a 2.6% market share basis its GLP. See Exhibit 4

jainmatrix investments, spandana IPO

Exhibit 4 – Market share and AUM growth for MFI players over the years

  • The share of adults with a bank account in India has more than doubled to approximately 80% since 2011, largely supported by the Pradhan Mantri Jan Dhan Yojana (PMJDY) a scheme of the GOI, which led to account growth and traction in savings. However, while significant traction is present on the deposit side, India is still among the Top 3 nations with unbanked people in the world, reflecting the strong need for an enhancement of the financial inclusion agenda.
  • The microfinance sector in India has grown at a CAGR of 23.1% over the past 10 years to reach ₹2,633 bn. as of FY19, despite some setbacks that have impacted the industry’s growth. The industry has evolved over time, starting with the Self-Help Group (SHG) Bank Linkage program and not-for-profit organisations (NGOs) being the key participants in the sector, to the scaling of NBFCs, the conversion of Bandhan Financial Services into a universal commercial bank and the launch of the Small Finance Banks. Presently, the demand for micro credit is primarily being serviced by industry participants such as MFIs, NBFC-MFIs, SHG, Banks, SFBs, NGOs, and other informal lenders.
  • The MFI sector has potential to grow the client base as well as ticket size per borrower. The micro-credit opportunity is about ₹5-6 tn. supported, considering the addressable market of low-income households in India. The traction in disbursements is expected to sustain and the industry is projected to witness a portfolio growth in the range of 20-24% p.a. over the medium term. Within this, the pace of growth of the non-SHG portfolio is expected to be higher at 25-30% p.a. Further, the ticket sizes are likely to go up in the states where the penetration levels are high. Overall client growth may be 8-10% and loan outstanding per borrower may increase by 12-15%.
  • Current challenges in the Indian BFSI sector include the collapse of IL&FS, a liquidity shortage in the BFSI sector, an NPA crisis in PSBs, real estate loans troubles and weakness in DHFL and Yes Bank.
  • Per management, MFI customers are unaffected by these industry events and are doing better.

Financials of Spandana

jainmatrix investments, spandana IPO

Fig 5 – Spandana Financials

Note: 1) Data for FY15-FY16 are per Indian GAAP, FY17-FY19 is basis IND AS with FY18-FY19 are consolidated 2) NIM or Net Interest Margin = Net Interest Income / Annual Average Gross AUM (%)* 3) NIM-R is net interest margin computed as Average Interest Charged less Average Cost of Borrowing. 4) Diluted EPS has been calculated after considering fresh shares to issued post IPO.

  • Spandana’s revenues, NII and PAT over the years are in Fig 5. Revenues, NII & PAT have grown at 33.9%, 34.5% and 31.2% resp. from FY15-FY19. These are good growth numbers.
  • Spandana had a RoE of 16.51% and RoA of 8.2% in FY19. This is moderate and sustainable as the business operations have stabilized now. NIM and NIM-R have stabilized for Spandana over the last 3 years. NIM at 16.39% for FY19 is the highest in the industry.
  • The PAT for FY17 surged 82.3% as it took a deferred tax credit of ₹421 cr. PBT for FY17 was ₹35 cr.
  • Spandana has the best asset quality in the industry. The NNPA as of FY19 stood at 0.02%. The NPA’s have largely come from unsecured personal loans, agri loans as well as MSME loans.
  • NBFCs are required to maintain a CRAR consisting of Tier I and Tier II capital which should not be less than 15% of its aggregate risk weighted assets on-balance sheet and of risk adjusted value of off-balance sheet items. The Tier-I capital was required to not be less than 8.5% by FY16 and 10% by FY17. Spandana has an aggregate CRAR of 48.96% and Tier 1 capital to the extent of 48.52%. This is much higher than what RBI has prescribed which is a positive.

Benchmarking

We benchmark Spandana against peers, See Fig 6.

jainmatrix investments, spandana IPo

Fig 6 – Benchmarking

  • PE of Spandana is the lowest in the peer group. This makes the offering attractive on relative basis.
  • In terms of PB, the valuations are average. This is on an adjusted basis post dilution.
  • The 3 year sales and PAT growth is robust. However Bandhan continues to be the sector leader. The Cost/Income ratio too is low. The PAT margin (PAT/Income) as well as the NIM is highest amongst the peer group. This is a positive. The RoE is average among peer group.
  • GNPA is very high while NNPA is fine. The reason for this is loans outstanding from the AP crisis of 2010. However these are provided for by Spandana.
  • Overall we see Spandana as a MFI rapidly emerging from CDR and stabilizing operations well.

Positives for Spandana and the IPO

  • Spandana has suffered heavily and learnt its lessons in the 2010 AP MFI debacle. It emerged from CDR in 2017 after repairing its books. It now has geographically diversified operations which help in risk containment and business resilience. It also will target 25% CAR to ensure safety of operations.
  • They have a good branch network, with a current AUM of Rs 5 cr. /branch. Per management the focus now will on assets growth to Rs 10 cr. / branch.
  • Spandana’s growth has been achieved despite difficult conditions in MFI industry. After the AP crisis in 2010, there was demonetisation in 2016 and many farm loan waivers. But Spandana did well.
  • The asset quality of Spandana is robust with NNPA at 0.02% for FY19. Financially the firm is well managed with moderate return ratios, superior margins and has high growth rates. The IPO valuations at PE of 17.6 times and PB 2.4 times are also attractive.
  • Spandana has an experienced management team. Ms. Padmaja Gangireddy has 24 years of experience in Indian MFI.

Risks and Negatives for Spandana and the IPO

  • Spandana’s MFI loan portfolio is unsecured, and in the event of non-payment by a borrower, they may be unable to collect the unpaid balance.
  • The operations are still concentrated in the states of Karnataka, MP, Orissa, Maharashtra and Chhattisgarh. Any adverse developments in these states could affect business.
  • The promoters and certain directors have entered into ventures that may lead to potential conflicts of interest with their business. For instance, their Individual Promoter, Padmaja Gangireddy, owns 68.3% shareholding in Abhiram Marketing, a group company engaged in consumer goods, whose retail products are sold at their branches (and from whom they receive a sales commission). There is no assurance that the interests of Abhiram Marketing will align with Spandana’s business interests.
  • Any downgrade of Spandana’s credit ratings may increase their borrowing costs and constrain their access to capital and debt markets and, as a result, may adversely affect their results of operations.
  • MFI industry has enjoyed high growth and margins for the last few years. However the market may be getting crowded with several Private Banks acquiring or setting up MFI subsidiaries, Bandhan Bank getting a universal license and many MFIs getting SFB license.

Overall Opinion and Recommendation

  • The microfinance sector promises to extend credit to the underbanked and informal sector people for financial services penetration into rural India. The potential is immense and is barely tapped.
  • Spandana has a decent size, strong financial performance, recent recovery, good asset quality and an experienced management.
  • It is now the 4th largest NBFC-MFI with AUM, and post CDR has grown rapidly. It has a different DNA and may remain sharply focused on a national presence in only MFI loans for the next few years.
  • The management appears conservative and should able to target growth with lower risk taking.
  • At a P/B of 2.4 times & PE of 17.6 times (post IPO), the valuation look attractive.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Download Report:

The entire report can be downloaded, Click JainMatrix Investments_Spandana IPO_Aug2019

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or known financial interests in Spandana or any group company. Punit Jain intends to apply for this IPO in the Retail category. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

RVNL IPO – Railways’ Growth Engine

  • Industry – Railway Transportation PSU in PMC space
  • Mid Cap of Rs. 4,000 crore
  • IPO Opens 29th Mar – 03rd Apr 2019; Price range Rs. 17-19/share
  • Valuations: P/E 6.9 times TTM; with a discount for Retail investors
  • Advice: SUBSCRIBE for listing gains

Summary

  • Transportation Infrastructure is a crying need in India. With Airlines, Roads and Ports sectors making good progress, the final frontier is the Indian Railways. The sleeping giant of IR appears to be getting up in the last few years.
  • IPO Overview: RVNL is a Delhi based PSU into PMC of Railway projects like track laying, electrification, bridges etc. Its FY18 revenue, EBITDA and PAT were Rs. 7,822 cr., Rs. 614 cr. and Rs. 570 cr. resp. Revenue has grown at an impressive 33.7% and PAT at 19.2% over the last 3 years. Valuations are attractively low with a FY18 PE of 6.9x for the IPO. It has an asset light model. A good kicker should come from Q4FY19 results and listing gains in a positive market. Governance appears good and transparent within the PSU limitations.
  • Key Risks: 1) Change in Central Govt. 2) De-emphasis on infra and railways by govt. 3) Issue of a contingent liability 4) Weak infra funding environment.
  • Opinion: Investors can SUBSCRIBE to this IPO with a listing gains and a 2 year perspective.

Here is a note on RVNL IPO.

IPO highlights

  • The IPO opens: 29th Mar-03rd Apr 2019 with the Price band: Rs. 17-19 per share. A discount of ₹0.50 per share on the offer price has been offered to retail and employee bidders.
  • Shares offered to public number 25.34 crore of FV Rs. 10 and each market lot is 780 shares.
  • The IPO will raise Rs. 482 cr. for 12% equity by current promoter i.e. Govt. of India with no dilution. The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.
  • The unofficial/ grey market premium for this IPO is Rs. 1-1.5/share. This is a positive.

Introduction

  • RVNL – Rail Vikas Nigam Ltd – is a Delhi based PSU into PMC of Railway projects like track laying, electrification, bridges etc.
  • Its FY18 revenue, EBITDA and PAT were Rs. 7,822 cr., Rs. 614 cr. and Rs. 570 cr. resp. Revenue has grown at an impressive 33.7% and PAT at 19.2% over the last 3 years.
  • RVNL is a Miniratna (Category – I) firm incorporated by the Ministry of Railways (MoR) in 2003, as a project executing agency for MoR to undertake rail project development, mobilization of financial resources and implementation of rail projects for golden quadrilateral, port connectivity and project execution. RVNL mobilizes finances and forms project specific SPVs with private participation.
  • The railway projects include new lines, doubling, gauge conversion, railway electrification, metro projects, workshops, major bridges, cable stayed bridges, institution buildings etc.
  • Since 2003, RVNL has got 179 projects of which 174 are sanctioned for execution. Out of these, 72 have been fully completed for ₹20,567 cr. outlay and the balance are ongoing. They have an order book of ₹77,504 cr. as on Dec 2018 for 102 ongoing projects.
  • During FY18, they completed 885 RKm (Route kilometre) of project length which included 315 RKm of track doubling and 425 RKm of rail electrification.
  • RVNL earnings are from a management fee on the annual expenditure incurred for the execution of projects, of 9.25% for metro projects, 8.5% for other plan heads and 10% for national projects.
  • Their activities under the various plan heads can be classified as under:
    1. New lines: is augmenting the rail network by laying new lines to achieving seamless multi-modal transportation network across the country and connecting remote areas.
    2. Doubling: Doubling involves the provision of additional lines by way of doubling the existing routes to enable the Indian Railways to ease out traffic constraints of single line or construction of 3rd/4th line to increase the capacity. RVNL is a significant contributor to the doubling projects and has been contributing to a third of the total doubling being completed / commissioned on Indian Railways for the last three years. (Source: CARE)
    3. Gauge conversion: includes conversion of meter gauge lines to broad gauge railway lines.
    4. Railway electrification: This includes electrification of current un-electrified rail network and electrification on the new rail network, generally from diesel run trains.
    5. Metro projects: This includes setting up of metro lines and suburban network in larger cities.
    6. Workshops: This includes mfg. facilities, and workshops for repairing and mfg. rolling stock.
    7. Others: This includes but is not limited to construction of traffic facilities, railway safety works (building of sub-ways in lieu of crossings), other electrification works, training works, surveys, construction of bridges including rail over bridges, etc.
  • As a PMC (Project Management Consultant) firm, its services comprise of: (i) project development and execution of works related to creation of rail infrastructure; (ii) creating project-specific SPVs for encouraging private participation in the funding of railway projects; (iii) undertaking execution of railway projects under specific financial arrangement for the MoR and other Govt. departments; (iv) and other ancillary services like bankability studies for projects and preparation of detailed project reports.
  • It has an asset light model where the contractor identified for project execution brings in all the people resources and machinery required.
  • RVNL has a lean organization with only 541 employees of which 150 are regular and 391 are on deputation and may return to their home employer over time.
  • Leadership in RVNL is Pradeep Gaur (53) is CMD, Ajay Kumar (56) is Director (Personnel), Vijay Anand (59) is Director (Projects) and Arun Kumar (59) is Director (Operations). They are all professionals with experience in Indian Railways and Metro corporations.

Financials and Segments

  • We can see a solid growth of financials. FY19 so far does not look good, but we typically see H2 and Q4 as better than H1. See 4 year financials of RVNL in Fig 1.
  • The emphasis in RVNL is on new lines, lines doubling and Metro projects. See business segments as reflected by the Order Book as on 31st Dec 2018 in Fig 2.

jainmatrix investments, RVNL IPO

Fig 1- RVNL FY18 Financials
jainmatrix investments, RVNL IPO
Fig 2 – RVNL Order Book Segments

Industry thoughts:

  • Over the last few decades, the Indian Railways (IR) has not developed as fast as Roads, Ports and Airline sectors. It has struggled with its public service role as the dominant transporter of passengers. Most of the passenger services are priced at a discount and profits are from the goods services.
  • However capacity constraints like tracks have forced IR to de-emphasize goods services.
  • Productivity improvements have suffered in IR due to large and ageing workforce, legacy organization issues, weak governance in the past and slow decision making. Corruption has been an issue in IR in recruitment, private contracts and public services.
  • Computerization has helped improve the Reservation system in IR. However there is still a long way to go in passenger capacity utilization, flexible pricing and ease of access.
  • In recent times we have seen a dramatic improvement on many of these parameters in IR.
  • In 2016, IR announced a capex plan of Rs 8,60,000 cr. over 5 years i.e. 2016-20. The capex plan is 90% more than the capital outlay in the previous 15 years.
  • IR may be a critical element of India’s future growth story if it improves productivity, technology upgrades, goods transportation focus, financial sensitivity and improves services.
  • RVNL is a key growth arm of IR and may have a good role to play in the transformation of IR in terms of capacity increase, new tech initiatives, metro projects, high speed train lines, etc.
  • RVNL is also one of the second generation PSU firms that are lean in terms of employees, have a sharp business focus and outsource routine tasks to firms and have high productivity.
  • MoR has under it group firms Indian Railways, Concor, RITES Ltd., IRCON, IRFC and RVNL.
    • IR is the monopoly operator of rail based passenger and goods transportation services.
    • Concor is a listed container focused transport firm running multi modal services.
    • IRCON is a multi national consultancy firm active in transportation and infra, listed recently.
    • RITES is a turnkey construction firm active in Rail and non-rail infra areas, listed recently.
    • Indian Railway Finance Corporation (IRFC) is the dedicated financing arm of the Indian Railways for mobilizing funds from domestic as well as overseas Capital Markets.
    • In this comparison it is clear that RVNL has a focus on India based Railways related work as a PMC consultant. There is little overlap with group firms.

Benchmarking

We benchmark RVNL against other comparable Indian Railway firms, and also KEC which is a private sector infra EPC firm. See Exhibit 3.

jainmatrix investments, RVNL IPO

Exhibit 3 – Benchmarking

  • The PE post IPO is low. This provides a safety net for IPO investors.
  • Return ratios are good among the PSU pack.
  • Debt is high but this is expected from an infra projects firm. Also it is a pass through debt, with IR making the payments as per schedule.
  • 3 year growth of revenues and PAT is excellent.

Positives for RVNL and the IPO

  • We have seen a flurry of new initiatives in IR and a slew of new projects and technology initiatives. The GoI is serious about change. So RVNL may see acceleration in business.
  • Many private sector suppliers to IR have reported good growth in orders booked and revenues, across parts supply, and projects related to track laying and electrification. Many of these initiatives may be run by RVNL. Also it is notable that GoI is procuring from reputed private sector firms and taking their help to ramp up its operations.
  • RVNL is a lean and productive firm, and with this listing, may be allowed to chart an Indian Railways independent part to growth and impact. Infra development is a high potential sector.
  • It has attractive valuations with low PE and PB, moderate return ratios and a high 3 year revenue and PAT growth. The over 4%+ dividend yield is good.
  • An order book of Rs. 77,500 cr. gives business visibility of 10 years.
  • BV of Rs. 4,062 cr., and BVPS of Rs. 19.4/share is close to IPO price.

Risks and Negatives for RVNL and the IPO

  • Typically infra projects have issues like land acquisition and govt. clearances which delay execution. This is true for railway projects too with suburban and metro projects.
  • Funding of infra projects is underdeveloped in India. Long term funds from insurance and pension firms do not flow smoothly to infra, so projects become riskier with shorter term and more expensive funding. It is also exposed to financial variations like the current NBFC liquidity issue.
  • On many parameters IR is weak when compared internationally, such as speed of trains, passenger services in trains and at stations, etc. Conversely many improvements are possible.
  • The MoR and IR have been slow to grow in the Metro segment in India. As a specialized suburban train, the Metro is seen as an essential urban solution in Tier 1, 2 and 3 towns.
  • As a MoR firm, with IR as the key group firm, RVNL may be constrained by their slow approvals and permissions. There are worries around political compulsions in MoR.
  • Also RVNL has got projects by default from IR in the past due to relationship and structure. However in future and after RVNL listing, the flow of new projects is not assured.
  • There is a contingent liability of Rs. 3774 cr. This is due to a demand from a contractor. However RVNL feels that the demand is not as per agreement, also if the charge is enforced, it will add to the project cost and be reimbursed by respective clients.
  • H1 FY19 performance indicates no growth over FY18, however financials for PSU could be skewed towards H2 and Q4 which is usually the best quarter for infra/ GoI firms.
  • Of the 10 IPOs made by PSUs in the last 2 years, only 2 have generated positive returns. Balance 8 are down 30% on average. IRCON is down 16% since listing.
  • Political risk: With elections due in 1-2 months, we note that RVNL has accelerated performance in the current term of GoI. A change in leadership or party in power at MoR may affect future growth.

Overall Opinion and Recommendation

  • Infrastructure is a crying need in India. With Airlines, Roads and Ports sectors making good progress, the final frontier is the Indian Railways. The sleeping giant of IR appears to be getting up in the last few years.
  • RVNL represents the new initiatives, new technologies and expansion projects for IR. The current path is of acceleration, ambitious growth and standardization across India. The challenge is to get IR to grow in double digits, improve productivity, cover the country better and lower costs.
  • Valuations are attractively low with a FY18 PE of 6.9x for the IPO. A good kicker should come from Q4FY19 results and listing gains in a positive market.
  • Governance appears good and transparent within the PSU limitations.
  • Key risks are 1) Change in Central Govt. 2) De-emphasis on infra and railways by govt. 3) Issue of contingent liability 4) Weak infra funding environment.
  • Opinion: Investors can SUBSCRIBE to this IPO with a listing gains and 2 year perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake, ownership or known financial interests in RVNL or any group company. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.