Varroc Engineering IPO – An Auto-matic BUY

  • 25th June 2018
  • Mid Cap of Rs. 13,000 cr.
  • Industry – Auto Ancillary; IPO Opens 26-28th June at Rs. 965-967
  • Valuations: P/E 28.9 times TTM
  • Advice: SUBSCRIBE

JainMatrix Investments, Varroc IPOSummary of Report

  • Overview: Varroc Engineering is a global tier-1 auto component firm. They design, make and supply exterior lighting systems, plastic and polymer, electricals-electronics and precision metallic components to passenger car, CV, 2W, 3W and off highway vehicle OEMs directly worldwide.
  • India and global revenues are split 35:65 so they have good international presence.
  • Varroc’s FY18 revenue, EBITDA and PAT were Rs. 10,417 cr., Rs. 985 cr. and Rs. 451 cr. resp., and they grew at 13.1%, 12.9% and 18.2% CAGR in 4 years.
  • At a FY18 PE of 28.9x, valuations appear fair. It has a healthy balance sheet with conservative financials. It has good Indian and global presence.
  • Key Risks: 1) High Competition 2) Currency Risks 3) Downturn in macro-economic environment.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Other Auto Sector reports from JainMatrix Investments

Here is a note on Varroc Engineering (Varroc) IPO. You may also Download the PDF file – JainMatrix Investments_Varroc Engineering IPO_June2018

IPO highlights

  • The IPO opens: 26-28th June 2018 with the Price band: Rs. 965-967 per share.
  • Shares offered to public number 2.01 cr. The FV of each is Re. 1 and market lot is 15 numbers.
  • The IPO will raise Rs. 1,955 cr. while selling 15% of equity. The offer will be completed via an Offer for Sale (OFS) by existing shareholders of Rs. 1,955 cr. and there is no fresh issue of shares.
  • The promoter (Tarang Jain) owns 86.3% of Varroc which will fall to 85% post-IPO. The other investors 1) Omega TC Holdings (a PE firm) and 2) Tata Capital Fin. Serv. are fully exiting their 13.7%.
  • The selling shareholders are both Tata group firms that invested in Varroc in Mar 2014. The cost of acquisition was Rs. 162.4/share, so they are getting ~5x returns in 3+ years.
  • The IPO share quotas for QIB, Non Institutional Buyer (NIB) and Retail are in ratio of 50:15:35.
  • The unofficial/ grey market premium for this IPO is Rs. 55-60/share. This is a positive.

Introduction

  • Varroc is a global T1 (tier-1 companies directly supply to OEMs) automotive component group. It’s FY18 revenue, EBITDA and PAT were Rs. 10,417 cr., Rs. 985 cr. and Rs. 451 cr. resp.
  • They design, mfg. and supply exterior lighting systems, plastic-polymer, electricals-electronics, and precision metal components for PVs, CVs, 2W, 3W and off highway vehicle OEMs worldwide.
  • They are the 2nd largest Indian autocomp. group and a leading T1 mfg. and supplier to Indian 2-3W. It is also the 6th largest global auto lighting firm with 4% market share and $1 billion in sales and one of the top 3 independent exterior lighting players (by market share in 2016). Source: News reports.
  • Varroc started with the polymer business in 1990, and grew organically by adding business lines, like electrical and metallic and diversified products. Inorganic expansions – in 2012 Varroc acquired Visteon’s global lighting business, now known as Varroc Lighting Systems (VLS). In 2013, they acquired Visteon’s holding in a 50/50 JV with Beste Motor Co. Ltd. for auto lighting in China, Varroc TYC (China JV). They acquired 70% in auto accessories firm Team Concepts in 2018.
  • Varroc has 2 primary business lines, namely (i) VLS with the design, mfg. and supply of exterior lighting systems to passenger car OEMs worldwide. VLS has a portfolio of lighting products including Halogen, Xenon/high-intensity discharge, LED, OLED, Flex LED and LED pixel headlamp, catering to 5 segments in external automotive lighting. (ii) India Business with the design, mfg. and supply of auto components in India, to 2W and 3W OEMs, including exports. This offers products across 2 product lines, polymers/plastics, electrical/ electronics and metallic components. See Fig 1.

Fig 1- Varroc’s FY18 Segment Revenue/ Fig 2 – Varroc Geographic Revenue

  • Varroc has a global footprint of 36 mfg. facilities spread in 7 countries, with 6 facilities for the VLS, 25 for their India Business and 5 for others. In FY18, their largest customer contributed 18.6% of their revenue and their top 5 customers contributed 59.9% of revenue.
  • VLS has relationships with auto OEMs across the premium, mid-range and mass market pricing spectrum, like Ford, Jaguar Land Rover, Volkswagen, Renault-Nissan-Mitsubishi, Groupe PSA, FCA, a European car and an American electric car maker. The global lighting business has 185 patents.
  • Within India the 25 mfg. and 5 R&D centers form a footprint in the auto hubs, close to customers. Varroc has supplied to Bajaj Auto for 28 years across product lines, it is the largest customer contributing 18.6% and the top 6 are 50%. Other 2W customers are Honda, Royal Enfield, Yamaha, Suzuki and Hero. Export are to global 2W makers namely KTM and Volvo.
  • Leadership is Tarang Jain (MD age 56), Naresh Chandra (Chairman, 83), Ashwani Maheshwari (CEO India), T.R. Srinivasan (CFO) and Arjun Jain (head, electricals, 28). Tarang, Naresh and Arjun are related as Promoter, father and son. Stephane Vedie is the CEO of Varroc lighting, based out of USA.

Endurance Technologies – Snapshot and Varroc connection

  • Endurance Technologies is an India-based company, which makes aluminum casting (including alloy wheels), suspension, transmission and braking products. Endurance is connected with Varroc as Anurang Jain (MD Endurance) is the twin brother of Tarang Jain (Founder promoter of Varroc).
  • Income and PAT has grown at 11.6% and 17.5% CAGR resp. over 5 years. Endurance Tech had  its IPO in Oct 2016 at Rs. 472, the share has gained 176% since to Rs. 1,304.

JainMatrix Investments, Varroc IPO

  • Endurance Tech is perceived as a stable, fast growing and a high quality firm.
  • The Varroc promoters are related to the promoters of Bajaj Auto & Endurance. However even though Endurance Tech is owned by a brother, the two firms have separate businesses and different product offerings for the same customers, so they don’t compete directly. The two brothers had an amicable business split in 2002.

News, Business Notes and Strategies of Varroc

Varroc’s business strategies are:

  1. To focus on growth markets for VLS with new plants in Brazil and Morocco, to supply the South American, southern European and North African markets.
  2. To focus on increasing customer revenue for the India business.
  3. To invest in R&D, design, engineering and software capabilities and capitalize on future trends.
  4. Pursue strategic JV’s and inorganic growth opportunities.
  • In Feb 2018, Varroc entered into a JV in India with Dell’Orto S.p.A., a customer, for the development of electronic fuel injection control systems for 2W’s and 3W’s.
  • Varroc is setting up a mfg. facility in Brazil, one in Morocco and 2 in India.
  • Varroc in June 2018 opened an office in Tokyo to expand its global footprints. With this, they can now target Japanese OEMs for project management and engineering, lighting and electronics.
  • As per Tarang Jain, in the lighting business they want to be in the top 3 globally, while for the 2W business, they want to grow in India and also tap South-East Asia as they are the biggest markets. The revenue target is Rs. 20,000 cr. by FY21, double from FY18, through organic & inorganic growth.
  • Organic investments are going be about Rs 850 crore annually. Varroc has four successful acquisitions in the past, of the lighting business of US-based Visteon Corp, Tri OM for 2W lighting, IMES Poland & Italy for forging business and a small Indian firm which indicates their M&A success.
  • Varroc’s chief of Sales & Marketing Vikas Marwah quit in Apr 2018 after just 5 months. It appointed T R Srinivasan in Oct2017 as CFO taking over from B Padmanabhan, who retired after a 10-year stint.
  • Varroc is eyeing surface LEDs to drive future growth. Surface-LED technology uses thin layers of micro-optic filters and conventional LED light sources to achieve the homogeneous appearance generally associated with OLEDs. The metallic division is also targeting to grow 30% CAGR.

Automotive Exterior Lighting Industry Outlook

  • The global auto exterior lighting market had revenues of USD 17.8 bn. in 2016. Revenue grew 4.5% (FY11-16) CAGR and is expected to grow at 4.3% (FY16-21).
  • Globally, the market growth drivers are (a) increased LED penetration (b) technology innovation (c) design differentiation and (d) higher lighting content per vehicle.
  • The global auto exterior lighting industry comprises more than 20 players around the world. The main 8 players are Koito Mfg. Co., Magneti Marelli, Valeo, Stanley Electric Co., Hella KGAA Hueck & Co, Varroc Lighting Systems, SL Corporation and ZKW, which generated US$16.3 bn. in revenue, representing 91% of the total global auto exterior lighting revenue.
  • Varroc’s market share in the exterior lighting segment in India at present is reported to be 8%.

Financials of Varroc

  • Varroc’s revenues, EBITDA and PAT grew at 13.1%, 12.9% and 18.2% CAGR in 4 years, see Fig 4.
  • The 3 year PAT growth is modest. Varroc as a part of its strategy focuses on cost optimization.
  • Margins are in a range of 7.5-9.5% for EBITDA and 3-4.5% for PAT over the last 4 years. The margins are low, but at par with other OEM suppliers in the industry.

JainMatrix Investments, Varroc IPO

Fig 4 – Financials

  • Note: The FY15 figures are Indian GAAP, and FY16-18 are IND-AS numbers.
  • Varroc has a RoE of 15.9% for FY18 while the 3 year average RoE stood at 16.1% (FY16-18). The RoCE stands at 16.2% for FY18. These return ratios are moderate.
  • Varroc has been Operational Cash flow (CFO) positive in last few financial years. This is a positive. They have typically been investing available CFO for CAPEX i.e. funding expansion plans from internal accruals. It has generated FCFE in the last 3 years. See Fig 5.
  • The current D/E ratio is 0.42 which is moderate. There is ample room for the management to grow faster by raising debt. However Varroc has guided that they would not want a D/E of over 1.
  • The dividend payout ratio is low because of CAPEX needs, the FY18 ratio was 1.37%.

JainMatrix Investments, Varroc IPO

Fig 5 – Varroc’s Cash Flow  

Benchmarking

We benchmark Varroc against other comparable Indian auto ancillary companies. See Exhibit 6.

  • The PE post IPO is fair. PE ratio of Varroc is in the mid-range amongst its peers.
  • The 3 year sales and PAT growth are next to only Motherson indicating stability.
  • Margins in FY18 have improved and are also in the mid-range. The RoE for FY18 stood at 15.9% and RoCE at 16.3%. The return ratios are fair, not very low. The dividend yield at 0.05% is low.
  • In many ways, Varroc appears to be executing a strategy similar to Motherson, but are at about 1/5 the size in terms of revenue, PAT and target market cap.

JainMatrix Investments, Varroc IPO

Exhibit 6 – Benchmarking

Positives for Varroc and the IPO

  • IPO pricing and valuations are fair and at lower end of the peers.
  • Varroc has shown good financial performance and operating efficiency recently.
  • The MD appears to be hiring professionals at the next level / reporting to him, which should strengthen the firm and enable it to grow to the next level.
  • Varroc has a consistent track record of organic and inorganic growth. It has strong customer relationships with high quality OEMs in India, NorthAm and Europe.
  • Varroc has a proven business model and strategy, as seen with the success of Motherson Sumi. There is ample room to grow for Varroc in the sector globally.
  • Strong competitive position in attractive growing markets for VLS.
  • Low cost, strategically located mfg. and design footprint. Varroc has located its facilities primarily in low-cost countries but near major auto markets. They are making investments to expand into Brazil and Morocco, which would keep costs low yet deliver easily to their customers.
  • Robust in-house technology, innovation and R&D capabilities. The VLS business has 964 engineers located in 9 R&D centers, which are located in the Czech Republic, India, China, Mexico, Germany, the USA and Poland. Their R&D teams are focused on quick adoption of technology, enabling them to grow their product portfolio in line with customer expectations and industry developments.
  • Focus on expansion in auto electronics, an important trend in the industry.
  • The Varroc teams including the MD have good experience in the auto component sector.

Risks and Negatives for Varroc and the IPO

  • General economic conditions like the global trade war and protectionism.
  • Auto ancillary sector is considered a working capital and an asset heavy business. New orders involve big additions to working capital, so Varroc will need to manage growth and financial health.
  • Competition is high and Varroc may face pressure on price or margins in future.
  • Varroc is subject to environmental and safety regulations that it has to adhere to.
  • Their success depends on the success and survival of the auto models launched by OEMs. Thus several key success factors for Tier-1 suppliers are out of their control.
  • Varroc’s business is dependent on certain principal customers, especially Bajaj Auto in India. Sales to their top 3 customers for VLS were 50.7% of revenue for FY18, indicating client concentration. However this is a typical auto B2B situation.
  • Labour unrest is always a challenge in a firm with many employees. We came across news of strikes or unrest in Varroc factories in Aurangabad in 2009 and 2017. However these were quickly resolved.

Overall Opinion and Recommendation

  • The Indian auto ancillary mfg. is a high potential space with fair domestic size and growth; there are also significant global opportunities. India has many competitive & comparative advantages, so many global auto firms have set up here; there is also a vibrant two wheeler OEM sector here.
  • In this sector, Varroc has grown to a good size, has improving margins and marquee customers. It has a healthy balance sheet with conservative financials. It has both Indian and global presence.
  • Management quality is excellent with a global vision, eye for controlled growth and financial prudence and in sync with key global auto trends. Governance appears good and transparent.
  • At a FY18 PE of 28.9x, valuations appear fair, but are not cheap. We do not see a near term gain.
  • Key risks are 1) High Competition 2) Currency Risks 3) Downturn in macro-economic environment.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

DISCLAIMER AND DISCLOSURE

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 any other known financial interests in Varroc 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.

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Bandhan Bank IPO – The New MFI Leader

  • Date 14th Mar; IPO Opens 15-19th Mar at Rs. 370-375
  • Large Cap: Rs. 44,780 cr. Mkt cap
  • Industry – Commercial Bank
  • Valuations: P/E 40.2 times TTM, P/B 4.9 times (Post IPO)
  • Advice: SUBSCRIBE 
  • Overview: Bandhan is a commercial bank focused on serving underbanked and underpenetrated markets in India. Bandhan Bank has the largest microfinance loan portfolio, with Rs. 21,380 crores as of FY17. Bandhan bank has a great brand recall, strong financial performance, good asset quality and an experienced management. It is the new MFI loans leader. Presence in underbanked East and NE regions and universal bank structure are key strengths. At a P/B of 4.93 times (post IPO), the valuation look expensive. However Bandhan has a focus and a leadership position. It also operates in niche geographies.
  • 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.

Related Reports:

Here is a note on Bandhan Bank (Bandhan) IPO.

IPO highlights

  • The IPO opens: 15-19th Mar 2018 with the Price band: Rs. 370-375 per share.
  • Shares offered to public number 11.92 cr. The FV of each is Rs. 10 and market Lot is 40.
  • The IPO in total will collect Rs 4,473 cr. while selling 10% of equity.
  • The promoter & promoter group owns 89.6% in Bandhan which will fall to 82.2% post-IPO.
  • The offer will be both a sale by current shareholders (OFS) and also by issuing fresh shares. The OFS proceeds would be Rs. 810 cr. at UMP and fresh issue size is Rs. 3,662 cr.
  • The selling shareholders are IFC and IFC Investment Co. They are partly exiting through this IPO. The IPO is being launched as Bandhan needs to comply with the RBI’s direction of listing publicly and reducing promoter holding to 40% within the first 3 years of operations.

jainmatrix investments, bandhan bank ipo

Exhibit 1 – IPO Selling Shareholders

  • 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. 30-35/share. This is a positive.

Introduction

  • Bandhan is a commercial bank focused on serving underbanked and underpenetrated markets in India. They have a universal banking license that permits them to provide banking services pan-India across customer segments. They currently offer a variety of asset and liability services designed for microfinance (MFI) and general banking, as well as services to generate non-interest income.
  • Revenues, NII and profit for FY17 were Rs. 4,320 cr., Rs. 2,403 cr. and Rs. 1112 cr. resp. It has 27,176 employees. 88% of their gross loans were micro loans (FY17). 96% of their loan book is unsecured.

jainmatrix investments, bandhan bank ipo

Fig 2a – Loan products

jainmatrix investments, bandhan bank ipo

Fig 2b Gross Loans and Fig 2c Loans Segments

jainmatrix investments, bandhan bank ipo

Fig 3a Regions and Fig 3b Segments FY17

  • Bandhan Konnagar was formed in 2001 as a NGO providing microfinance services to socially and economically disadvantaged women in rural West Bengal. It later became Bandhan Financial Services Ltd and subsequently got the conditional banking license in 2014.
  • Bandhan operated across 33 States and UT’s through 887 branches, 2,633 doorstep service centres and 430 ATM’s. The gross loans of Bandhan are displayed in Fig 2b and 2c. 58% and 23% of the loans were from East and NE regions resp. for 9M FY18. Hence there is a geographic concentration risk.
  • Bandhan generates 87% of revenues from retail banking business. See Fig 3(b).
  • Total borrowings were Rs 1,330 cr. (9M FY18) and the cost of borrowings was 7.9% (FY17).
  • Leadership is Chandra Shekhar Ghosh (MD & CEO), Sunil Samdani (CFO) and Biswajit Das (CRO).

News, Updates and Strategies of Bandhan

  • IFC had invested in Bandhan Feb 2016 at Rs 42.93 so for their partial exit they will get 7.7X returns.
  • The bank’s loan book grew at 51% CAGR over past 17 years, which slowed to a still strong 33% by 9M FY18. As per mgmt., in next 2-3 years a 33-35% growth in advances can be achieved.
  • RBI’s guideline is to reduce the promoter’s stake to 40% within 3 years from the date of start of business as a bank. Bandhan received the nod in June 2015, so this timeline is quite close.
  • Bandhan’s business strategy is as follows:
  • To maintain focus on micro lending while expanding further into other retail and SME lending.
  • To strengthen their liability franchise in order to provide a stable, low-cost source of funding.
  • To enhance their digital platform to improve customer acquisition and retention and reduce costs.

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. The Bank structure is better to house MFI activities, as can be seen by Bharat Financial merger with IndusInd Bank, and SFB license to several players by RBI. Bandhan has a good advantage here.
  • Bandhan has the largest overall gross micro-banking asset portfolio, with Rs. 21,380 cr. as of FY17. Amongst the banks (private as well as public), the micro loans given by Bandhan are more than 3 times the next player, SBI.
  •  It has an estimated 15-20% share in MFI.
  • Penetration of Microfinance is low in NorthEast India, which can be to Bandhan’s benefit. See Fig 4.

jainmatrix investments, bandhan bank IPO

Fig 4 – Micro Finance Penetration (Source: The Bharat Microfinance Report 2017)

  • The gross loan portfolio (GLP) of MFIs grew at 51% CAGR from FY13 to FY17. This growth was fuelled largely by the growth in GLP of some large players, such as Janalakshmi Micro-finance, Bharat Financial Inclusion, Ujjivan Financial Services and Satin Creditcare Network.
  • Banking credit growth slumped in the previous 2 fiscal years owing to asset quality and capital adequacy issues. However, as per CRISIL Research bank credit will rise owing to improvements in working capital demand, marginal pick-up in private investment, increased govt. spending on the infra, improvements in commodity prices, and expectations of a good monsoon season.
  • 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 represents more than one-fifth (23% as of FY17) of overall banking credit, and in turn, derives a major share from housing finance, which accounts for 53% of retail credit by banks as of FY17. So the retail segment was negatively impacted by the demonetisation-driven slump in the real estate sector. Retail credit grew 16% YoY, while industrial credit contracted YoY by 2%.

Financials of Bandhan Bank

  • Bandhan’s revenues, NII and PAT over the years are in Fig 5.
  • Previous data is not shared as its business model changed from an NGO to NBFC to a bank.
  • Bandhan had a RoE of 25.01% and RoA of 4.5% in FY17. This is excellent as the return ratios are high and amongst the best in the industry. It has not declared any dividends in the last 5 years.

jainmatrix investments, bandhan bank

Fig 5 – Financials (FY18 is projected by extrapolating 9M results)

  • NIM’s for Bandhan have declined in the last few years, however the NIM’s were high at over 11% in FY16 which has gradually declined to 9.86% in 9M FY18. Currently, it earns a high yield on loans, however as the bank expands its loan portfolio to other segments and into general banking there could be significant drop in the NIM.
  • The gross loan and disbursement growth slowed in FY17 due to demonetization related issues.
  • Bandhan has a robust asset quality. The GNPA as on 9M FY18 stood at 1.67% whereas the NNPA’s stood at 0.8%. The NNPA’s for FY17 were as low as 0.4%. Priority Sector Loans constitute 31.6% of the total advances as of 9M FY18. 97.6% of the GNPA’s are from the PSL loans for Bandhan Bank.
  • As a universal bank, Bandhan has a CASA ratio of 33.22%. This is fair, and should grow in future.

Benchmarking

We benchmark Bandhan against peers, See Exhibit 6.

jainmatrix investments, bandhan bank ipo

Fig 6 – Benchmarking

  • Majority of the peers have reported losses in 2 of last 4 quarters. Prices have however kept up well.
  • PE of Bandhan is the lowest in the peer group. However it is low because the peer group companies have depressed earnings reported in the last 4 quarters.
  • In terms of PB, the valuations are in the mid-range at 4.93 times post IPO. The valuation looks expensive considering that 96% of Bandhan’s loan book is unsecured and they would be entering new categories which have lower margins.
  • The D/E ratio at 0.15 (diluted post IPO) is the best and lowest and hence gives Bandhan scope to aggressively lend. The CAR of Bandhan stood at 26.4% for FY17 as against RBI’s minimum requirement of 15%, which indicates that it is adequately capitalized.
  • The RoE is the highest at 25.01% and Bandhan has the lowest GNPA’s (9M FY18) amongst its peers. This is a positive. Bandhan also has the lowest cost to income ratio of 36.3%.

Positives for Bandhan bank and the IPO

  • As a universal bank, Bandhan has flexibility to operate across multiple product lines and with few restrictions. It is the leader in the MFI industry as other players are Small Finance Banks or NBFCs.
  • World Bank arm International Finance Corporation (IFC) is an investor/ promoter of Bandhan.
  • Bandhan has a strong presence in East & NE India, which are more agriculture and agro-commodity intensive regions. We feel it may have high scope to grow and penetrate deeper here.
  • Bandhan’s growth has been achieved despite difficult conditions in India’s MFI and banking industry. Events like the crisis in the southern state of AP in 2010, demonetisation in late 2016 and farm loan waivers, were challenges for the banking industry. But Bandhan did well.
  • In MFI, achieving volumes of loans is a powerful advantage as the costs of reach and distribution are shared across many loans. With a good marketshare and presence in East & NE, it has an advantage.
  • Bandhan has a large low cost distribution network. They operate in 33 States and UTs in India, reaching 1.2 crore customers. Bandhan’s distribution network is relatively low cost because of its ‘hub and spoke’ model of using DSCs and associate bank branches, and focus on tech initiatives, which reflects in their operating cost-to-income ratio of 35.4% & 36.3% for 9M FY18 & FY17, resp.
  • The asset quality of Bandhan is stable with NNPA’s at 0.80% for 9M FY18. Financially the firm is well managed with excellent return ratios, good margins and tight controls on costs. This is a positive.
  • Bandhan has a good management team. The founder, MD & CEO, Mr. Chandra Shekhar Ghosh, has 37 years of experience in Indian MFI. Members of their senior management have a track record that combines professional and entrepreneurial skills in microfinance and banking, with average 23.9 years of experience in finserv. 8 of 12 directors on the board are Independent Directors.

Risks and Negatives for Bandhan and the IPO

  • The valuations are on the higher side in terms of P/B at 4.93 times (adjusted post IPO).
  • Bandhan has a limited financial history and a rapidly evolving business which makes it difficult to evaluate their business and future operating results.
  • Bandhan’s micro finance loan portfolio is not supported by any collateral that could help ensure repayment of the loan, and in the event of non-payment by a borrower of one of these loans, they may be unable to collect the unpaid balance.
  • Bandhan handles cash in a high volume of transactions occurring through a dispersed network of branches and DSCs; as a result, they are exposed to operational risks, including fraud, petty theft and embezzlement, which could harm financial position.
  • Bandhan’s business relies significantly on their operations in the East and NE states, and any adverse changes in the conditions affecting these States can adversely impact their business. As of FY17, roughly 81% of Gross loans were located in such areas.
  • The microfinance sector is sensitive to economic, political and weather events

Overall Opinion and Recommendation

  • Microfinance sector carries out the critical role of financial services penetration into rural India. MFI’s have been operationally under stress since 2017 due to demonetization and GST rollout. The earnings were impacted due to a spike in defaults and business disruption. However the current signs are that this impact is over and the rural economy & demand is regaining strength.
  • Bandhan bank has a great brand recall, strong financial performance, good asset quality and an experienced management. It is the new MFI loans leader.
  • Presence in underbanked East and NE regions and universal bank structure are key strengths.
  • At a P/B of 4.93 times (post IPO), the valuation look expensive. However Bandhan has a focus and a leadership position. It also operates in niche geographies.
  • 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. JM has no stake ownership or known financial interests in Bandhan 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.

H.G. Infra IPO – An Exciting Road Ahead

  • Date 23rd Feb 
  • IPO Opens 26-28th Feb with price range Rs. 263-270
  • Small Cap: Rs. 1,760 cr. Mkt cap
  • Industry – Roads Construction
  • Valuations: P/E 32.9 times TTM, P/B 3.7 times (Post IPO)
  • Advice: SUBSCRIBE 

Summary

  • Overview: HGI is a Jaipur based infrastructure construction, development and management firm with a focus on road projects, including highways, bridges and flyovers.
  • Revenues and profit for FY17 were Rs. 1,059 cr. and Rs. 53 cr. HGI’s revenues, EBITDA and PAT grew at 34.3%, 27.5% and 37.0% CAGR in 5 years.
  • HGI has a good 5 years performance where it has emerged as a rising star. The healthy order book, roster of completed roads projects and fair financial controls are impressive.
  • At a P/E of 32.9 times (adjusted post IPO), the valuations of the IPO appear to be high. However earnings growth is likely to be at a faster pace due to reduced interest costs, better efficiencies and sectoral traction. Good track record, robust financial performance, sectoral tailwinds and an experienced management team makes this IPO attractive.
  • Key Risks: 1) Project execution delays 2) Labor unavailability 3) Intense competition.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 3 year perspective.

Here is a 5 minute video on HG. Infra Engineering IPO.

Here is a note on H.G. Infra Engineering (HGI) IPO.

IPO highlights

  • The IPO opens: 26-28th Feb 2018 with the Price band: Rs. 263-270 per share.
  • Shares offered to public number 1.71 cr. The FV of each is Rs. 10 and market lot is 55.
  • The IPO will raise Rs. 462 cr. by selling 26.26% of post IPO equity. The offer will be completed via an Offer for Sale (OFS) of Rs. 162 cr. and also by issuing fresh shares of Rs. 300 cr.
  • The promoter group owns 100% (no private equity ownership) which will fall to 73.7% post-IPO.
  • The selling shareholders are Hodal Singh, Harendra Singh, Vijendra Singh and Girish Singh of the Promoter family. They are selling 8.85% of their pre-IPO stake in HGI and are only part exiting.
  • The net proceeds from fresh issue of shares will be utilized as follows:

Exhibit 1 – IPO proceeds

  • The IPO share quotas for QIB, Non Institutional Buyer (NIB) and Retail are in ratio of 50:15:35.
  • The unofficial/ grey market premium for this IPO is Rs. 20-25/share. This is a positive.

Introduction

  • HGI is a Jaipur based infrastructure construction and development firm with a focus on road projects like highways, bridges and flyovers. Their main segments are (i) providing engineering, procurement and construction (EPC) services on a fixed-sum turnkey basis and (ii) EPC work for components of projects, primarily in the roads and highway sector.
  • HGI’s FY17 revenue, EBITDA and PAT were Rs. 1,059 cr., Rs. 124 cr. and Rs. 53 cr. resp.
  • HGI has also currently undertaking 2 water supply projects in Rajasthan on turnkey basis which includes the designing, construction, operation and maintenance of the project.
  • HGI is active across various states like Rajasthan, UP, Haryana, Uttarakhand, Maharashtra and AP. During the last 5 years, HGI has completed 13 projects above the contract value of Rs. 40 cr. in the roads and highways sector aggregating to a total contract value of Rs. 1,675 cr., which included construction, improving, widening, strengthening of 2 and 4 lane highways, construction of high level bridge and of earthen embankment, culverts and cart track underpasses.
  • As on Nov 30, 2017, HGI had 21 ongoing projects in roads & highways which includes construction, improving, widening, strengthening, upgradation and rehabilitation of 2, 4 and 6 lane highways, construction of high level bridge and construction of road network. This order book was Rs. 3,585 cr.
  • HGI is pre-qualified to bid independently on an annual basis for bids by NHAI (National Highways Authority of India) and MoRTH (Ministry of Road Transport and Highways) for contract values of up to Rs. 806 cr. based on HGI’s technical and financial capacity as on FY17.
  • HGI’s public sector clients include NHAI, PWD, MES and Jaipur Development Authority. They have also executed road construction contracts as a sub-contractor for private sector clients such as Tata Projects and IRB-Modern Road Makers.
  • HGI’s equipment base comprised of 1,064 construction equipment. Also HGI has employed 2,447 employees which includes 2,130 skilled workers like engineers and managers.
  • As of Nov 30, 2017, HGI had a total order book of Rs. 3,709 cr., consisting of 21 projects in the roads and highways sector, 4 civil construction projects and 2 water supply projects. See Fig 2.

jainmatrix investments, HG Infra IPO

Fig 2 – HGI’s order book by state and client type

  • Leadership is Harendra Singh (CMD), Vijendra Singh (Whole Time Director) and Rajeev Mishra (CFO).

News, Business Model and Strategies of HGI

  • Some impressive completed projects are 1) Yamuna Expressway in Noida, UP, 2) 4 laning of Jaipur-Tonk-Deoli project (Raj.) 3) Construction of Kuberpur to Fatehabad Road, Agra-Inner Ring Road (Phase-I) Agra, UP and ongoing 4) Rehabilitation and Up-gradation of Amravati-Nandgaon-Morshi-Warud-Pandhurna NH-53 (Mah.)
  • HGI’s business strategies are:
    • To focus on the EPC business in roads & highways sector and enhance execution efficiency.
    • Selectively expanding its geographical footprint in states such as Gujarat, Punjab and MP, which have favorable geographic and climatic conditions, other than Rajasthan and Mah.
    • Selectively explore hybrid annuity model (HAM) to grow its project portfolio.
  • Business Model: HGI follows a evaluation process during pre-bidding stage, which involves technical surveys, feasibility studies and analysing the technical and design parameters and the cost involved in undertaking the project. This approach enables them to bid at competitive prices and successfully win projects. Once they win a bid, their focus is to ensure high quality of construction during execution, as a result of which, they are able reduce maintenance and repair costs and realize higher margins during the operation & maintenance stage.

Roads Infrastructure Industry Outlook in India

  • India has the 2nd largest road network in the world, aggregating to 61 lakh kms. Roads are the most common mode of transportation and account for 86% of passenger traffic and 65% of freight traffic. In India, national highways with length of 1.04 lakh kms constitute a mere 1.7% of the road network, but carry about 40% of the total road traffic. On the other hand, state roads and major district roads at the next level carry another 60% of traffic and account for 98% of road length.
  • In FY16, the road transport sector contributed 3.2% to the Indian GDP.
  • Road transport is the most widely used mode of transport for freight and passengers. In Fiscal 2017, 64.5% of freight was carried by roads as compared to railways, from 56% in FY2010.

Key growth drivers for road sector are as follows:

  • Rise in GoI investments, reforms and higher budgetary support. CRISIL Research expects investment in road projects to double to Rs. 10.7 tn. over the next 5 years. Investment in state roads is expected to grow steadily, and rise at a faster pace in case of rural roads, on account of higher budgetary allocation to Pradhan Mantri Gram Sadak Yojana (PMGSY) since FY16. The GoI has approved the Bharatmala programme under which 53,000 kms of national highways have been identified to bridge critical infrastructure gaps. Bharatmala will give the country 50 national corridors as opposed to 6 at present and Phase I will be implemented from 2017-18 to 2021-22.
  • Policy changes to drive execution of national highway projects. Execution of national highway projects declined in the past two years on account of the private developers’ weak financials and unwillingness of lenders to provide further credit to infra companies. To clear this backlog, NHAI terminated projects and accordingly, work on 5,500 kilometers of length was stalled. To put execution back on track, the NHAI re-awarded almost 1,000 kilometers of the terminated projects.
  • New region-specific initiatives to drive growth in road network. The GoI has taken new initiatives to build state roads. MoRTH has set up the National Highways and Infra Development Corp which will award national highway projects in border areas and in the north-east states. Apart from these projects, the Bharat Mala programme has also been proposed to build new roads along the border.
  • Between FY18 and FY22, it is expected that an investment of Rs. 4.30 tn. would be made in the next 5 years for national highways, up 2.9 times compared with the past 5 years. Notably, the government will account for more than half of the investment.

Financials of HGI

  • HGI’s revenues, EBITDA and PAT grew at 34.3%, 27.5% and 37% CAGR in 5 years, see Fig 3.
  • The margins fell significantly in FY14-15 impacting profitability, because of rising commodity prices (for fixed-price contracts) and idling of capacities as execution could not begin on many new projects. The slowdown was common across the industry.

jainmatrix investments, HG Infra IPO

  • Fig 3 – Financials
  • HGI had a RoE of 30.3% in FY17 while the 3 year average RoE stood at 25.7% (FY15-17). The RoCE stands at 36.4%. These return ratios are high.
  • HGI has been Operational Cash flow positive in all the last 5 financial years from FY13-FY17. This is a positive. Over FY13-15, HGI repaid its borrowings and funded CAPEX from internal accruals. However since FY16, CAPEX rose sharply and were funded by borrowings. See Fig 4.
  • The current D/E ratio is 1.72:1 which is high which will fall to 0.70 post IPO.

jainmatrix investments, HG infra

  • Fig 4 – HGI Cash Flow  
  • Because of high Capex, HGI has not declared any dividends in the last 5 years.
  • Remuneration paid to the Key Management Personnel (KMP) +1 was Rs. 6.27 cr. for FY17, and 11.75% of PAT. Another Rs. 1.54 cr. was spent on insurance premiums for KMP. See Exhibit 5.

jainmatrix investments, HG infra

  • Exhibit 5 – Renumeration
  • HGI had an equity base of 5.4 cr. shares pre-IPO. Post the issue of fresh shares, the equity base will stand at 6.51 cr. (assuming fresh shares are issued at UMP of Rs. 270/share). This means the asking FY17 P/E is 27.4 (pre-IPO) and 32.9 (diluted post-IPO).

Benchmarking

We benchmark HGI against other listed infrastructure construction companies. See Exhibit 6.

jainmatrix investments, HG Infra IPO

  • Exhibit 6 – Benchmarking
  • The PE post IPO is high, so pricing appears aggressive, as seen with IPOs, a negative.
  • The sales growth is excellent, comparable to sector leader, Dilip Buildcon. Profit growth is good also, partly due to a recovery from a slowdown in 2014.
  • The post IPO D/E looks reasonable and is much better than a few of its other peer members. The IPO being partly fresh issue will help to reduce debt burden.
  • The RoE at 30.3% and RoCE at 36.4% is excellent, high in the industry. This is a positive.
  • HGI had the lowest EBITDA margin in the industry. However in H1 FY18, EBITDA margin is improving, due to better scale and efficiency in operations.
  • PAT margins may improve due to lower interest costs going forward.
  • Orders booked to Billings looks healthy and indicates over 3 years of revenue visibility.
  • Putting it together HGI looks like a firm at the start of a high growth phase that can be accelerated by this IPO.
  • Dilip Buildcon has done very well in last 2 years since IPO, and so is the sector leader. IRB looks undervalued and profitable. See our recent IRB report – In INVIT We Trust 
  • Also see our Roads Sector Note – THE ROADS SECTOR – IS IT A REVIVAL?

Positives for HGI and the IPO

  • HGI has strong project management and execution capabilities. It also owns its construction equipment needed for ongoing projects. This helps control costs, and improves reliability.
  • We can see a healthy order book; also HGI is pre-qualified to bid independently for project tenders by NHAI and MoRTH. This provides enough head room for faster growth.
  • HGI’s management team is qualified and experienced in the construction industry. The Promoters Girish Pal Singh, Vijendra Singh and Harendra Singh have 20 years of infra sector experience.
  • HGI has evolved from a sub-contractor to independent EPC firm, and subcontracting work has reduced to about 30% of revenues. Thus HGI is successfully moving up the value chain.

Risks and Negatives for HGI and the IPO

  • The valuations appear on the higher side among peers as P/E is 32.9 times (adjusted post IPO).
  • As HGI takes up projects on HAM in future compared to EPC, its working capital may increase.
  • With no private equity ownership, HGI will transition from a family owned firm suddenly to a public listed firm. This change will have to be handled carefully, including disclosures.
  • All firms in the sector face business risks like high working capital requirement, long project gestation periods, govt. clearances, local public opposition and PIL/ litigation issues.
  • Delays in the completion of construction of current and future projects is a risk. A significant part of business is with GoI and any change in govt. policies or delays in payment are a risk.
  • The firm has a business concentration in Raj. and Mah. with 96% of orders from there. But HGI is quite capable of growing a pan India footprint given good opportunities and projects.
  • Competition is intense in road projects, particularly in EPC projects rather than BOT.
  • HGI’s business is manpower intensive and any nonavailability of employees or labor issues can have an adverse impact on operations.

Overall Opinion and Recommendation

  • The GoI has over the last few years and in Budget 2018 emphasized the roads and infra push in terms of budgets and ministry focus. This long suffering Roads sector has seen a revival in last 2-3 years is now expected to be a significant beneficiary of govt. spending.
  • HGI has a good 5 years performance where it has emerged as a rising star. The healthy order book, roster of completed roads projects and fair financial controls are impressive.
  • At a P/E of 32.9 times (adjusted post IPO), the valuations of the IPO appear to be high. However earnings growth is likely to be at a faster pace due to reduced interest costs, better efficiencies and sectoral traction. Good track record, robust financial performance, sectoral tailwinds and an experienced management team makes this IPO attractive.
  • Key risks are 1) Project execution delays 2) Labor challenges 3) Intense competition.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 3 year perspective.

JainMatrix Knowledge Base:

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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 HGI 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.

Bharat22 ETF – A Balanced ETF – Post Listing Note

  • Date 29th Nov
  • Equity MF- ETF, Diversified
  • Allotment price: Rs. 35.97
  • CMP: Rs. 37.42
  • Advice: Buy with a 3 year perspective

Here is a post listing note on Bharat 22 ETF (BH22).

In this note, we continue from the 13th Nov Note – Bharat 22 ETF NFO Offer – A Balanced ETF 

jainmatrix investments, bharat 22 etf nfo

Subscription, Allotment Price and NFO details 

  • The BH22 is an open-ended index ETF which listed on 28th Nov, 2017. The investment objective is to provide returns like the S&P BSE Bharat 22 Index.
  • The NFO received the highest subscription for any new fund offer (NFO) in the history of Indian MF industry. The ETF was subscribed about 4 times as the amount to be raised was Rs. 8,000 cr. and it received applications for around Rs. 32,000 cr. The NFO attracted 3.35 lakh retail investor applications.
  • Due to the excellent response, the ETF issue size was raised to Rs. 14,500 cr. A NFO discount of 3% was offered to all investors including retail, retirement funds, QIBs and non-institutional investors.
  • Retail investors who applied with Rs. 2,00,000 (Retail cap) were allotted 5,560 units at Rs. 35.97/unit (including the 3% discount). Retail applicants appear to have received 100% allotment this time.
  • Currently the ETF is trading at Rs. 37.42 translating into a gain of 4.03%. This means any retail investor who applied for the max. allowable limit of Rs. 2,00,000 has notionally gained Rs. 8,060. This is because of the discount as well as rise in the S&P BSE Bharat 22 Index.
  • You can check the index value as well as the ETF value using the following link. Bharat 22 ETF Price – http://www.moneycontrol.com/india/stockpricequote/miscellaneous/iciciprudentialmutualfund/ICI15

Overall Opinion

  • This ETF is set to create good value for the investor as profit making PSUs, PSUs undergoing reforms and private sector firms have been bundled together. ETFs are also advantageous in terms of management costs & liquidity. Also with the discounts given in BH22, we feel that this is a good long term buy for low risk equity investor and is comparable to the Balanced MFs.
  • If you have missed out Bharat 22 ETF in the NFO, you can also BUY it from the open market.
  • Investors can BUY with a 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. Punit Jain discloses that he holds a position in BH22 ETF as a successful Retail applicant in NFO. He may also hold positions in some of the constituents of the ETF. Other than this JM has no known financial interests in BH22 ETF or constituent firms. 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 independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

Bharat 22 ETF New Fund Offer – A Balanced ETF

  • Date 13th Nov; ETF Opens 15-17th Nov
  • Product Type: Mutual Fund – ETF
  • Listing: Within 5 days post allotment
  • Raising Fund: Rs. 8,000 cr.
  • Sector: Diversified
  • Advice: Buy with a 3 year perspective 

jainmatrix investments, bharat 22 etf nfo

Summary

  • Overview: The BH22 is PSU heavy open-ended ETF scheme. The BH22 will cover 6 sectors and 22 firms including PSUs, PSBs and a few blue chip private firms. BH22 has a 20% cap on each sector and a 15% cap on each stock. The Rs 8,000 crore NFO is available at a discount of 3% on the Reference Bharat 22 Index. The BH22 appears better than CPSE on several counts like sector diversity, balance and higher mkt cap. firms.
  • Risks: 1) There is no strategic clarity on GoI shareholding in these firms – will they be fully divested, or a strategic sale, or as JVs, or retained with GoI majority holding in the long run.  2) There is Political risk as a surprise election result could affect PSU firms.
  • Opinion: Investors can SUBSCRIBE to this ETF offering with a 3 year perspective.

See our past coverage of CPSE ETF NFO in Mar 2014, review in Sept 2015, the CPSE ETF FFO in Jan 2017 and a Video, and finally the CPSE ETF FFO 2 in Mar 2017.

Here is a note on Bharat 22 ETF (BH22)

Introduction  

  • The BH22 is an open-ended index ETF which is going to be listed on the Exchanges. The investment objective is to provide returns like the S&P BSE Bharat 22 Index. The amount to be raised is Rs. 8,000 cr.
  • The BH22 consists of 22 blue chip Govt. of India (GoI) holdings including PSUs, Public Sector Banks and the strategic holdings of GoI through SUUTI (Specified Undertaking of Unit Trust of India). BH22 is the 2nd ETF from GoI after CPSE ETF launched in 2014. Both these will speed up GoI’s disinvestment plans.
  • The BH22 will cover 6 sectors of basic materials, energy, finance, FMCG, industrials and utilities. The SUUTI firms (L&T, ITC and Axis Bank) have a 40% weight on the index. Other big names include SBI, Power Grid, NTPC and ONGC (5-9% each). The ones which would have a lower weight include NALCO, Indian Oil, Coal India, Bharat Electronics, Bank of Baroda, NBCC, Indian Bank and SJVN.
  • The mechanism of the ETF at launch would be as follows:

jainmatrix investments, bharat 22 etf nfo

Fig 1 – Bharat 22 ETF Mechanism

  • NFO price: The NFO Units being offered will have a FV of Rs. 10/- each and a premium of the difference between NFO Allotment Price and the FV. The NFO Allotment Price would be equal to 1/100th of S&P BSE Bharat 22 Index less discount.
  • In this offer 25% each is reserved for 1) Retail 2) Retirement Funds 3) QIB / NII and 4) anchor investors.
  • Discount: A discount of 3% on the NFO Reference Market Price of the underlying shares of S&P BSE Bharat 22 Index shall be offered to NFO of the Scheme by GOI.
  • The scheme is being managed by ICICI Prudential Asset Management Company Ltd. Asia Index will be the index provider and the index will be rebalanced annually.

Investment Details of BH22

  • The Scheme will invest at least 95% of assets in stocks of the Bharat 22 Index. It may invest in safe Money Market Instruments upto a max. of 5% of assets.
  • The AMC will use a passive or indexing approach to achieve the Scheme’s investment objective.
  • Here are Sectoral Asset Allocation, Historic Returns and Analysis of the 22 companies as part of this ETF.

jainmatrix investments, bharat 22 etf nfo

Fig 2 – Sectoral Allocation / Fig 3 – Performance of Index / Source: Offer Documents 

jainmatrix investments, bharat 22 etf nfo

Fig 4 – Analysis of Companies / Source: Offer Documents

  •  15 of the 22 firms are Large Cap giving some stability to this ETF composition.
  • Dividend: The Trustees may declare Dividend to Unit holders subject to the availability of surplus, at their discretion. If the Fund declares Dividend, the NAV will stand reduced by that amount.
  • Minimum Investment: It is Rs. 5,000 and in multiples of Re. 1 thereafter, with a maximum amount of Rs. 2 lakhs in retail category. Non Institutional Investors and HNIs may apply for over Rs 2 lakhs.
  • How to apply: You can apply via your broker or via the AMC (iciciprumf.com).
  • Listing:The units of the Scheme will be listed on NSE and BSE within 5 days after allotment. The allotment date of Units will be within 5 business days of offer application period. There may be an additional offering depending on NFO response.

How has the CPSE ETF performed so far?

From an issue price of Rs. 17.5/unit in March 2014 (for Retail), the CPSE trades at Rs. 30.4 giving a gain of 21% simple annual. The CPSE ETF FFO 2 launched in Jan 2017 had allotment at Rs. 25.21, giving a gain of 20.6% (in 10 months). So the energy focused ETF has so far generated above Index average returns.

Differences between CPSE ETF and BH22 ETF

  • The CPSE ETF comprised 10 PSU stocks from the Oil & Gas and energy sector. However the BH22 ETF is diversified among 6 sectors and 22 firms with a 20% cap on each sector and a 15% cap on each stock. Hence this ETF is more balanced across sectors and firms.
  • The GoI has cherry picked stocks which are into sectors where large reforms are underway.
  • This fund even includes Private sector firms like L&T, ITC and Axis Bank.
  • The CPSE ETF fund is larger. It has raised Rs 11,500 in 3 offerings from 2014 – 17.

Pros and Positives of BH22

  • This ETF has a lower management charge and the expense ratio is 0.0095% of daily average net assets. Also the maximum recurring expenses that can be charged shall not exceed 1.5% of daily net assets.
  • The fund will offer 3% discount to the NFO subscribers.
  • The 5 year share returns are 13.8% CAGR as against Sensex of 13.9%. See Fig 3. However the 1 year performance has been better at 22.5% as against 20.5% for Sensex.
  • Dividend yield for the stocks is 2.42% which is moderate, but higher compared to Nifty/Sensex, see Fig 4.
  • The constituents of BH22 have a lower P/E & P/B as compared to Nifty 50/S&P BSE Sensex. See Fig 5.

jainmatrix investments, bharat 22 etf nfo

Fig 5 – Valuations and Dividend Yields

  • The BH22 is diversified among 6 sectors with caps by sector and by stock. This gives leverage in the form of both secular & cyclical growth prospects.
  • Like the CPSE, the BH22 may be popular among Pension Funds, new equity investors and retirees.
  • Many of the firms have wonderful assets, the family silver of the GoI. Some even enjoy monopoly status in their sectors. With a resurgence in GoI governance and programs such as ‘Make in India’, Bank Recapitalization and focus on Defense and infrastructure, many firms have good prospects.
  • GoI is asking for higher dividends from PSUs and allowing them operational freedom to exploit assets and be more productive. This will benefits investors also. See report,  A Repurpose for our PSUs.

Cons and Negatives of BH22

  • There is no clarity on the future of GoI shareholding in these firms – will they be fully divested, or sold in a strategic sale, or expanded into JVs, or simply retained with GoI majority in the long run.
  • This BH22 ETF based divestment by GoI, like the CPSE, is likely to be repeated at a future date.
  • We are not sure if the high dividend paid by the PSUs will be passed on to the unit holders (either as NAV gain or Dividend) or used for recurring expenses, as per NFO document. The CPSE ETF 2014 too has not paid dividend for 3 years. The 2.42% dividend yield in BH22 involves substantial monies.
  • The average beta of these stocks is 1.28 indicating higher volatility than indices.
  • These stocks performance depends on revenue growth, which has been inconsistent in recent years.
  • Many of these firms depend on GoI policies and monopoly situations to grow. Some are externally constrained by weak infrastructure that hampers distribution.
  • Any unexpected election results at the State or Center can delay reforms and affect BH22 performance.
  • A few firms are into financing power projects. The power sector is yet to see a revival and NPAs here are a key concern. As long as this problem is not resolved, these firms may face financial troubles.
  • Within the energy basket, there are upstream and downstream oil firms. Upstream firms do well when crude prices rise as their realizations go up, whereas downstream firms do well when crude falls as margins expand. The energy basket might be balanced, but together these firms may do just average.
  • Coal India recently hiked wages by 20%. Also there is a pollution aspect to coal usage. The share has performed badly. Any adverse government reforms could impact its financials in the short term.
  • ITC is a firm that is mainly into cigarette sales. This is a harmful product and in USA the industry players are in a sunset mode due to legal action – class action suits and massive penalties for compensating unwell consumers and their families.

Overall Opinion

  • The BH22 appears better than CPSE on several counts like sector diversity, balance and higher mkt cap.
  • This ETF is set to create good value for the investor as profit making PSUs, PSUs undergoing reforms and private sector firms have been bundled together. Given the advantage of an ETF in terms of cost & liquidity along with the discounts given by the GoI, we feel that the BH22 ETF is a good long term buy for value conscious investors.
  • This product appears attractive to the low risk equity investor and is comparable to the Balanced MFs.
  • Risks – lack of strategic clarity on PSU firms, and Political – a surprise election result could affect PSUs.
  • Investors can BUY with a 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. Punit Jain may hold a position in several of the stocks mentioned in this report. He also holds an interest in CPSE ETF since NFO in 2014. Other than this JM has no known financial interests in BH22 ETF. 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 independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Reliance Nippon AMC IPO – An Asset Indeed

 

  • Date 24th Oct 
  • IPO Opens 25-27th Oct with Application Price range is Rs. 247-252
  • Valuations: P/E 38.2 times TTM, P/B 6.1 times (Post IPO) 
  • Mid Cap: Rs. 15,400 cr. Mkt cap and Industry – Asset Management
  • Advice: SUBSCRIBE 

JainMatrix Investments, Reliance Nippon AMC

  • Overview: RNAMC is one of the largest asset management companies in India, managing total AUM of Rs. 3,62,000 crores. They offer products like mutual funds, portfolio management services, alternative investment funds, pension funds; and offshore funds and advisory mandates.
  • Revenues and profit for FY17 were Rs. 1,436 cr. and Rs. 403 cr. RNAMC’s revenues, EBITDA and PAT grew at 18.2%, 18.7% and 14.9% CAGR in 5 years.
  • The Indian mutual fund industry is expected to grow at a CAGR of 20% between FY18 and FY22, due to buoyant capital markets, and a shift from physical to financial assets.
  • At a P/E of 38.2 times, the valuations of the IPO appear high. But good track record, robust financial performance, sectoral tailwinds and a good management team makes this IPO attractive.
  • Risks: Promoter related image, senior level exits and regulatory uncertainties are the key risks.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Here is a note on Reliance Nippon Asset Management Company (RNAMC) IPO.

IPO highlights

  • The IPO opens: 25-27th Oct 2017 with the Price band: Rs. 247-252 per share.
  • Shares offered to public number 6.12 crore. The FV of each is Rs. 10 and market Lot is 59.
  • The IPO will raise Rs. 1,542 cr. while selling 10% of equity. The offer includes a fresh issue of shares of Rs. 617 cr. and an OFS of Rs. 925 cr. (UMP).
  • The selling shareholders are Nippon Life (selling 4.10%) and Reliance Capital (8.85%) of the current holding. Post IPO both promoters will hold 42.8% in RNAMC.
  • The net proceeds from fresh issue of shares will be utilized as follows:

JainMatrix Investments, Reliance Nippon AMC IPO

 Exhibit 1(a) – Selling IPO Shareholders and Exhibit 1(b) – Utilization of Proceeds

  • The Promoter group (Reliance Capital and Nippon Life Insurance) owns 95.5% in RNAMC which will fall to 85.7% post-IPO.
  • Reliance Capital is an NBFC that is engaged in corporate lending and investment activities. It is an Anil Ambani – Reliance group firm. Nippon Life Insurance Company underwrites and sells life insurance and is the largest Japanese life insurance company by revenue.
  • 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. 65-70/share. This is a positive.

Introduction

  • RNAMC is one of the largest AMC companies in India, managing total Assets Under Management (AUM) of Rs. 3,62,550 cr. as of June 2017. They are involved in managing (i) mutual funds (MFs including ETFs); (ii) managed accounts, including portfolio management services (PMS), alternative investment funds (“AIFs”) and pension funds; and (iii) offshore funds and advisory mandates.
  • RNAMC was ranked the 3rd largest AMC, in terms of MF quarterly average AUM with a market share of 11.4%, as of June 2017. For FY16, they were the 2nd most profitable AMC in India.
  • Revenues and profit for FY17 were Rs. 1,436 cr. and Rs. 403 cr. It has 971 employees out of which 563 are in sales & distribution and 179 are in operations and customer service.
  • RNAMC manages 55 open-ended MF schemes including 16 ETFs, and 174 closed ended schemes under Reliance MF as of June 2017. The pan-India network is of 171 branches and 58,000 distributors like banks, financial institutions, DSAs and independent financial advisors (IFA).
  • 59% of the AUM is in MFs, 40% are managed accounts and 1% is offshore funds.
  • In managed accounts business, they provide PMS to HNIs and institutional investors including the Employees Provident Fund Organization (EPFO) and Coal Mines Provident Fund Organization (CMPFO).
  • A subsidiary, Reliance AIF manages 2 Alternative Investment Funds registered with SEBI. RNAMC manages offshore funds through its subsidiaries in Singapore and Mauritius and have an office in Dubai, which caters to investors across Asia, Middle East, UK, US, and Europe. They also advise on India focused equity and fixed income funds in Japan and South Korea. See Fig 2.

JainMatrix Investments, Reliance Nippon AMC IPO

Exhibit 2(a) – AUM by product offering and 2(b) Managed Accounts segments 

JainMatrix Investments, Reliance Nippon AMC

Fig 2 (c) – RNAMC AUM trend from FY13-17

  • Within the MFs 64% of the AUM is debt, 30% is equity and 6% are gold & ETFs. Within managed accounts 84% of the AUM is EPFO, 14% CMPFO and 2% PMS & AIF AUM.
  • Their monthly inflow from Systematic Investment Plan (SIP) into MFs increased to Rs. 509 cr. in June 2017 from Rs. 274 cr. in April 2015. The number of SIP accounts stood at 18.6 lakh accounts, an addition of 5.6 lakh. The average ticket size of SIPs rose to Rs. 3,915 in June 2017 from Rs. 2,822.
  • Leadership is Vijayendra Kaul (NonExec Chairman), Sandeep Sikka CEO and Prateek Jain CFO.

Promoter – Reliance Capital – Snapshot and Financials

  • Reliance Cap is an NBFC engaged in corporate lending and investments; AMC services through RNAMC; General and Life Insurance, Commercial Finance and other fin. services.
  • Income and PAT has grown at 23.7% and 7.5% CAGR resp. over 5 years.

JainMatrix Investments, Reliance Nippon AMC

Fig 3 – Reliance Cap Financials

  • Reliance Capital’s share price gained 11.2% CAGR over the last 5 years and CMP is Rs 566.2.
  • The life insurance segment of Reliance Capital is weak, however consolidation is over. The general insurance and commercial finance business have witnessed strong performance in Q4 FY17. The AMC arm is the strongest amongst other business segments and the outlook for the same is bullish. It is expected to post better profits in FY18.
  • Reliance Capital has a market cap of Rs 14,500 crores.

News, Updates and Strategies of RNAMC

  • RNAMC’s business strategy is as follows:
    • To expand investor base and focus on retail. According to ICRA, in India, the retail investors MA-AUM grew by 163% from Mar 2014 to Jun 2017 from 1,63,000 cr. to 4,28,000 cr.
    • To focus on developing their AIF business.
    • To grow inorganically through strategic acquisitions. In Nov 2016, in order to strengthen their ETF offerings, they acquired the AMC business of 12 schemes by the Goldman Sachs MF. RNAMC intends to leverage the experience gained through the previous acquisition.
  • The average cost of acquisition of equity shares for selling shareholders is as follows:

JainMatrix Investments, Reliance Nippon AMC IPO

Exhibit 4 – Acquisition Costs    

  • According to merchant bankers, RNAMC is expected to see demand worth more than Rs. 15,000 cr. for the shares on offer for anchor investors. The portion allocated for anchor investors is worth Rs 462 cr. The anchor book subscription will be open on 24 Oct.
  • They bought the CPSE ETF funds from Goldman Sachs in 2015, boosting govt. business and AUM.
  • The day 1 IPO performance is that it got subscribed 4.63 times by 5 pm, so IPO success is assured.

MF Industry Outlook in India

  • The economy has seen big financial events like demonetization, RERA, GST and a crackdown on black money and shell companies. All these have rekindled interest in financial assets as compared to real estate and gold which were popular earlier.
  • The regulations and disclosures around MFs have ensured that traceability and audit trails are quite clear in this industry. At the same time, SEBI has done a remarkable job of promoting the MFs as good entry level equity and debt products, so AUM growth has been good.
  • As of June 2017, there are 41 active AMCs in the market comprising 7 sponsored by PSBs, 2 by financial institutions, 25 by the private sector and other financial companies and 7 by foreign players (including JV’s).
  • The Indian MF industry is concentrated with the 10 large firms having 80% of the industry AUM. ICICI Prudential AMC, HDFC, Reliance, Birla Sun Life and SBI Funds are the 5 largest.
  • The MF industry witnessed a healthy growth in the past decade, with the AUM growing from Rs. 3,50,000 cr. (FY07), to Rs. 19,50,000 cr. (June 2017) growing at a CAGR of 18% over 10 years.
  • The growth in AUM has been supported by a favorable macro environment, the rise of capital markets, foreign fund inflows and growing investor awareness. During FY17, the fresh investments (or new sales) in MFs grew by 28% to Rs. 1,76,000 cr. in the FY 2017.
  • The Indian MF industry is expected to grow at a CAGR of 20% between FY18-22, with the AUM expected to grow to Rs. 45,00,000 cr. by Mar 2022. Growth rates are expected to be higher in FY18 and FY19 due to buoyant capital markets coupled with an increase in retail participation, after which the growth rate is expected to taper given the increase in scale. (Source RHP)
  • The stock broking firms too perform very well when markets are in a bullish phase.

Financials of RNAMC

  • RNAMC’s revenues, EBITDA and PAT grew at 18.2%, 18.7% and 14.9% CAGR in 5 years, Fig 5.
  • RNAMC had a RoE of 21% in FY17 while the RoCE stands at 30.5%. The return ratios are high.
  • RNAMC declared a high dividend in FY17 as compared to FY16 in spite of weak financials. The PAT growth was 1.6% in FY17, but the dividend growth was 72%. Declaring high dividends right before the IPO in a year with poor financial growth is a negative.
  • RNAMC has been Free Cash Flow positive in 4 of the last 5 years. This is a positive.
  • The margins fell in FY17 impacting profitability, on account of a rise in administrative expenses, higher depreciation and expenses growth for that year.
  • RNAMC allotted equity shares to existing shareholders in a bonus issue on 11 Aug, 2017. It declared a bonus ratio of 50:1, and post the issue of bonus, the no. of shares stood at 58.75 cr. and post IPO it would jump to 61.20 cr. shares.
  • This means the asking FY17 P/E is 36.8 (pre-IPO) and 38.3 (diluted post-IPO).

JainMatrix Investments, Reliance Nippon AMC IPO

Fig 5 – RNAMC Financials / Fig 6 – RNAMC Cash Flow (below)

JainMatrix Investments, Reliance Nippon AMC

Positives for RNAMC and the IPO

  • Reliance Mutual Fund is a top brand of 22 years vintage. RNAMC has a strong presence across India with subsidiaries in Singapore and Mauritius.
  • As a first AMC firm in India to list, there will be a scarcity premium to this IPO offering.
  • RNAMC has a strong focus on processes. They regularly monitor their current processes which have contributed significantly to their growth. RNAMC is certified on the International Quality Standard, ISO 9001:2008 and have implemented a robust Quality Management system. They have instituted well-documented operational processes, extensive trading systems and technology platforms.
  • RNAMC has a large and experienced management and investment team comprising of 44 professionals that manage their funds and provide advisory services. The senior investment team has an average 19 years of experience and are the key resources of to RNAMC.
  • In terms of financial performance, RNAMC has so far performed well. The margins and return ratios are high. The growth is above average and debt is low. Also RNAMC is in an industry likely to perform well over the next few years. These factors make investment in RNAMC attractive.
  • There is a bubble in IPOs with massive over subscription and unreasonable valuations in the recent past. We feel this is on account of high inflow of investment funds, and poor choices of expensive primary markets over more reasonable secondary markets. This may help this IPO offering.

Risks and Negatives for RNAMC and the IPO

  • The valuations are high side in terms of P/E at 38.3 and P/B at 6.15 times (adjusted post IPO).
  • In the past RNAMC’s reputation was built up with high profile star investors like Madhu Kela and Sunil Singhania. However, both have left RNAMC in the last 6 months. Madhu is a part time adviser to Reliance Capital and Sunil is now global head of Reliance Cap’s equity business. In fact in last 12 months, 3 top executives left. RNAMC may struggle to maintain business momentum in future.
  • Reliance Capital, the promoter of the RNAMC is part of the Anil Ambani Group. Other group companies are Reliance Power, Reliance Comm., Rel. Infra, Rel. Defense and Rel. Big Cinema. Many of these firms are not doing well financially and for shareholders. Reliance Power IPO in 2008 is still fresh in our minds. Reliance Comm. looks likely to shut down soon. Having said this, RNAMC is in the AMC business and has a fair reputation over the years.
  • AMCs are closely regulated by SEBI. The investment product industry in India has benefitted from the regulations, however it is also subject to changes or tightening of norms. For example in July 2014, the holding period for long-term capital gains tax on debt MFs was increased from 12 to 36 months. Thus regulatory changes can affect business in future.
  • SEBI has on 6 Oct 2017, issued a circular to categorize and rationalize the MF schemes so as to enable the investors to better evaluate the different options available and take informed investment decisions. Accordingly, the schemes are classified into 5 groups, i.e., equity schemes, debt, hybrid, solution oriented schemes and other schemes. These 5 groups collectively have 36 different categories of schemes under them. The circular states that, only 1 scheme per category is permitted to continue to exist/ be launched by a MF, with few exceptions. Since RNAMC runs 55 open-ended and 174 closed ended MF schemes, there may be a big consolidation required soon.
  • Competition from existing and new market participants offering investment products could reduce their market share or put downward pressure on their fees.

Overall Opinion and Recommendation

  • The MF industry is witnessing an unprecedented growth with AUM increasing 6 fold in 10 years. The number of new investors and their folios have grown by 66 lakh in the first 6 months of this year on account of strong participation from retail investors. The PMS sector is also doing well; and post Pension reforms, this sector is also coming under professional AMC purview.
  • Further Gold and real estate are a large proportion of Indian savings which have not generated significant returns. India is witnessing falling interest rates and thus FD and savings rates have fallen sharply and other metals as a store of wealth have proven to be costly. There is thus a trend of shift from physical assets to financial and risk assets in the Indian economy.
  • Reliance Nippon AMC is an established #3 market share player with a good 22 years of history.
  • At a P/E of 38.2 times, the valuations of the IPO appear to be high.
  • But a good track record, robust financial performance, sectoral tailwinds and a good management team makes this IPO attractive.
  • Promoter related image, senior level exits and regulatory uncertainties pose the key risks.
  • 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. JM has no stake ownership or known financial interests in RNAMC or any group company. Punit Jain may 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.

MAS Financial Services IPO – Small but Ambitious

  • Date 9th Oct
  • IPO Opens 6-10th Oct at Rs. 456-459
  • Valuations: P/E 36.6 times TTM, P/B 4.4 times (Post IPO)
  • Small Cap: Rs. 2,500 cr. Mkt cap
  • Industry – NBFC
  • Advice: SUBSCRIBE with a 2 year perspective

Summary

  • Overview: MAS is a Gujarat-headquartered NBFC with the business products focused on middle and low income customer segments. Revenues and profit for FY17 were Rs. 365 cr. and Rs. 69 cr. The revenues, NII and PAT grew at 26.3%, 22.8% and 25.8% CAGR in 5 years.
  • At a P/B of 4.44 times (adjusted post IPO), the valuations of the IPO are on the upper side. However strong financials, good asset quality, experienced management and operations in high growth business segments make this issue attractive.
  • Risks: 1) Regional concentration: As of FY17 60% of the AUM was in the state of Gujarat 2) Small size of the firm exposes business to seasonal and employee exit risks.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Here is a note on MAS Financial Services (MAS) IPO.

IPO highlights

  • The IPO opens: 6-10th Oct 2017 with the Price band: Rs. 456-459 per share.
  • Shares offered to public are 0.98 cr. The FV of each is Rs. 10 and market Lot is 32. The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.

Exhibit 1 – IPO Selling Shareholders

  • The IPO in total will collect Rs 460 cr. while selling 18.3% of equity. The IPO include an OFS for Rs. 227 cr. (at UMP) and an issue of fresh shares of Rs. 233 cr.
  • The promoter group owns 80.6% in MAS which will fall to 73.1% post-IPO. Other selling share-holders are DEG, FMO and Sarva Capital. DEG and FMO are selling 100% of its stake, whereas Sarva Capital is selling 60% of its current stake in the company.
  • The unofficial/ grey market premium for this IPO is Rs. 170-180/share. This is a positive.
  • On day 2, the offering is subscribed 4.8 times, so it looks headed for a very successful listing.

Introduction

  • MAS is a Gujarat based NBFC with business focused on middle and low income customer segments.
  • Revenues and profit for FY17 were Rs. 365 cr. and Rs. 69 cr. It has 606 employees.
  • It offers (i) micro-enterprise loans (ii) SME loans (iii) two-wheeler loans (iv) Commercial Vehicle loans (which include new and used CVs, used cars and tractor loans) and (v) housing loans.
  • 59% of their gross AUM are micro enterprise loans (FY17). Also, 83.9% of their loans were secured.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 2 (a) – Loan products 

JainMatrix Investments, MAS Financial Services IPO

Exhibit 2 (b) AUM in FY17 

JainMatrix Investments, MAS Financial Services IPO

Exhibit 2 (c) – AUM growth 

  • MAS operated across 6 States and the NCT of Delhi through 121 branches.
  • The gross AUM of MAS are displayed in Fig 2b and 2c. 60% and 20% of the AUM’s were from Guj. and Mah. in FY17. Hence there is a geographic concentration.
  • Borrowings were Rs 1,506 cr. (Q1 FY18) and the average cost of borrowings was 9.47% (FY17), an increase from 8.41% in FY13. But in Q1 FY18 cost of borrowings stood at 9.05% indicating a fall.
  • Leadership is Kamlesh Gandhi (CMD), Mukesh Gandhi (CFO) and Darshana Pandya (COO).

News, Updates and Strategies of MAS

  • MAS’s business strategy is as follows:
  • Strengthen marketing and sourcing channels while maintaining growth and quality of portfolio.
  • Expand product offerings –extend loans to the agricultural input and equipment segment.
  • Leverage existing network and customer base to develop their housing finance business.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 3 – Acquisition Cost for selling shareholders

  • The average cost of acquisition of equity shares for selling shareholders is in Exhibit 3.
  • Motilal Oswal Financial Services invested a total of Rs. 135 cr. ($20.8 mn.) in pre-IPO placement of MAS in March 2017 at Rs. 338/share. The IPO valuations are 36% higher than this.
  • They have been in operation for more than two decades, and as of June 2017, they had 500,000 active loan accounts. The AUM has increased at 33.4% CAGR since FY13 and NNPAs have remained below 1% during this period. They have developed stringent credit quality checks and customized their operating procedures to regularly monitoring the loan portfolio.
  • Mukesh Gandhi (CFO) is also the chairman of the Gujarat Finance Companies Association and a director of the Finance Industry Development Council.

NBFC 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.
  • NBFCs that cater to the masses in rural and semi-urban reaches, who have limited access to formal financing channels, and lend to the informal sector and people without credit histories, enable the govt. and regulators to realise the mission of financial inclusion.
  • In the past, NBFCs gained market share at the expense of banks owing to focused lending, widening reach, and resource raising ability. However, going forward, the BFSI sector is on a revival path and competition will intensify given a slew of recent regulation changes.
  • About 80-85% of NBFC lending is secured. In contrast, banks secure 60-70% of their lending portfolio. Security collateral is as plant and machinery, or current assets. To add to this, secondary collateral is collected in the form of immovable assets such as commercial and residential property and shares. Approval rates vary across NBFCs at between 70% and 75%.
  • The loans of NBFCs grew at 20% between FY12-16. As of Mar 2016, they accounted for 15% of the overall credit. The loan book of NBFCs may post 17% CAGR between fiscals 2017-18.
  • The contribution of the MSME sector to India’s GDP currently stands at 8% for 2011-12, and is growing at a rate higher than the projected GDP. MSME in India has the potential to increase the share of contribution to GDP from the current 8% to about 15% by the year 2020.
  • MAS competes with Janalakshmi and Bharat Financial Inclusion in micro-finance, Shriram Finance and M&M Financial in auto finance; and Dewan Housing Finance and PNBHF in housing loans.

Financials of MAS

JainMatrix Investments, MAS Financial Services IPO

Fig 4 – Financials  

  • MAS’s revenues, NII and PAT grew at 26.3%, 22.8% and 25.8% CAGR in 5 years, see Fig 4.
  • MAS had a RoE of 18.8% in FY17 while the FY15-17 avg. was 23.7%. The RoCE stands at 28.1%.
  • In FY17, the disbursement growth was slow on account of demonetization.
  • MAS declared a low dividend in FY17, as compared to prior years, to maintain prudent asset quality.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 5 – Loan disbursement growth and dividends declared 

JainMatrix Investments, MAS Financial Services IPO

Fig 6 – Financial Metrics

  • From Fig 6, we can see that the NIM’s, yield and spread have fallen from FY13-FY17. This is due to increased costs of borrowings and higher competition. However it is not a concern as the management has been able to maintain their asset quality combined with high growth numbers.
  • The NIM’s have fallen steadily from 10.4% in FY13 to 7% in FY17. Also the cost of borrowings has risen during this period. This is a sign of increasing competition.
  • The AUM growth and disbursement growth slowed in FY17 due to demonetization related issues.
  • MAS’s asset quality has been robust over the last 5 years at NNPA’s lower than 1%. This is excellent as asset quality is crucial. The asset quality was maintained in spite of change in the classification of NPA for NBFC’s as per RBI NPA norms for overdue payments.

Benchmarking

We benchmark MAS against other NBFC’s from the same sector. See Exhibit 7.

  • PE appears moderate at 36.5 times (diluted post IPO) compared to peers. But the P/B ratio appears high at 4.44 times (diluted post IPO). Established NBFCs like Shriram, Capital First and M&M Financial are in the 2.5-3.5 range. The highest is Bajaj Finance at 11.21 times. Thus the P/B is between above average and lower than some of the most expensively traded NBFC’s.
  • The D/E ratio at 2.87 (diluted post IPO) is in the lower range and hence gives MAS scope to aggressively lend. The CAR of MAS stood at 22.9% for FY17 as against RBI’s minimum of 15%, which indicates that it is adequately capitalized.
  • The RoE is the high at 20.6%. ROCE is the highest at 28.04%. This is a positive.
  • MAS has witnessed good sales and profit growth. The 3 year growth is high while not the best.
  • Dividend yield is low.

JainMatrix Investments, MAS Financial Services IPO

Exhibit 7 – Benchmarking

Positives for MAS and the IPO

  • MAS has a track record of consistent growth with quality loan portfolio.
  • The return ratios are high and amongst the best in the industry.
  • MAS has deep market knowledge through sourcing channels. They have developed an extensive operational network in Gujarat and Mah. They entered into commercial arrangements with a number of sourcing intermediaries including commission based DSAs as well as sourcing partners where part of a loan default is guaranteed by the sourcing partner.
  • MAS has an experienced management team. The promoters, Kamlesh Gandhi (CMD) and Mukesh Gandhi (CFO) have over 21 years of experience in financial services.
  • The asset quality of MAS is stable with NNPAs at 0.92% for FY17. The financials of the company are also good. This is a positive for long term investors.

Risks and Negatives for MAS and the IPO

  • As a very small player (revenues Rs 365 crores.) MAS may be affected by senior executive exits and seasonal fluctuations.
  • The valuations are on the higher side in terms of P/B at 4.44 times (adjusted post IPO). Additionally as a small company MAS is still asking for rich valuations associated with mid to large companies with good reputations. This is an anomaly.
  • Promoter shareholding is high at 73% post IPO. This can affect policies and decision making, and make MAS possibly prone to unilateral decisions not favoring small shareholders.
  • MAS is facing an increasingly competitive industry, that may affect margins, income and market share. Consumers are being served by a range of financial entities, including, traditional banks, captive finance affiliates, NBFCs and SFB’s approved by RBI to enhance credit penetration.
  • Geographic concentration: MAS’s business is primarily in Gujarat and Maharashtra. As of FY17, roughly 80% of AUM was located in such states, with Gujarat accounting for 60%.

Overall Opinion and Recommendation

  • The BFSI sector has done well over the last few years (barring pockets like PSU Banks) with underpenetration in financial services, a fast growing economy and new emerging sectors and opportunities. In the private sector NBFC space, well managed firms have seen good growth.
  • MAS has a good record in the regional markets of Guj. and Mah. There is ample scope for growth in these affluent regions.
  • Strong financials, good asset quality, experienced management and operations in high growth business segments make this issue attractive.
  • High geographical concentration of AUM and high valuations are key risks for MAS.
  • At a P/B of 4.44 times (adjusted post IPO), the valuations of the IPO are on the upper side. However strong financials, good asset quality, experienced management and operations in high growth business segments make this issue attractive.
  • 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. JM has no stake ownership or known financial interests in MAS 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.