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.

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Capacite Infraprojects IPO: Play the Trump Card

  • IPO Opens 13-15th Sep at Price range: Rs. 245-250
  • Small Cap: Rs. 1,700 crore cap
  • Industry – Construction
  • P/E 24.4 and P/B 2.37 times (Post IPO)
  • Advice: Investors can BUY this IPO with a 2 year perspective

Capacite Infraprojects IPO, jainmatrix investments

Summary

  • Overview: It is a Mumbai based construction contracting firm started in 2012; makes Residential & Commercial buildings in 7-9 major cities. Income and profit were Rs. 1,166 cr. and Rs. 70 cr. (FY17).
  • Operations: It is into the construction of high rise buildings (> 6 floors), super high rise (> 39), villaments and gated communities. It is building the Trump tower in Mumbai. CIP owns tools, technologies and processes that help it deliver with high quality and on time. CIP stands out as an innovative, aggressive building contractor. It has an excellent client base among Property firms. Given this client base and assuming the relationships stay strong, CIP can look at revenues rising at over 30% annually for 3-4 years which will give it a good size, market share and high return ratios.
  • Risks: The major risks are loss of a top 5 client, and project disruption due to labour or other issues.
  • Opinion: The valuations at the IPO price are average, however we are positive due to strong growth potential. This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is a note on Capacite Infraprojects Ltd. (CIP) IPO.

IPO highlights

  • This IPO opens: 13-15th Sep 2017 with the Price band: Rs. 245-250 per share.
  • Shares offered to public are 1.60 crore at UMP, these are 23.57% of equity. The FV is Rs. 10 and market lot is 60. The IPO will collect Rs 400 cr. by fresh issue of shares. There is no OFS by holders.
  • The IPO shares are available to institutional, non-institutional and retail in ratio of 50:15:35.
  • The promoter group owns 57.2% in CIP while Paragon Partners, Infina and New Quest own 30.7%. Paragon Partners is backed by Siddharth Parekh, the son of Deepak Parekh, the chairman of HDFC. The promoter group holding will reduce to 43.7% (Post-IPO) which is low, see Fig 3.
  • CIP benefits as it is a fresh issue and the proceeds will go to it. See utilization proceeds in Exhibit 1.
  • The unofficial/ grey market premium for this IPO is Rs.110/share. This is a positive.

Capacite Infraprojects IPO, jainmatrix investments

Exhibit 1 – Utilization of IPO proceeds

Introduction

  • CIP is a Mumbai based construction firm focused on Residential and Commercial buildings.
  • Total income for FY17 was Rs. 1,166 cr. and net profit Rs. 70 cr.
  • It has 1,711 full time employees and 10,035 contract workmen across all projects (May ‘17).
  • They provide end-to-end construction services for residential buildings, multi-level car parks, corporate offices, commercial buildings and for educational, hospitality and healthcare.
  • CIP is into the construction of villaments, gated communities, high rise buildings (> 6 floors) and super high rise buildings (> 39 floors). They operate in the Mumbai, NCR, Bengaluru, Pune, Patna, Chennai, Hyderabad, Kochi and Vijaywada, and projects in the West, North and South Zones constituted, 58.9%, 14.2% and 26.7% of total projects, resp. See Fig 2.

Capacite Infraprojects, jainmatrix investments

Fig 2 – CIP Project Portfolio Concentration /Fig 3 – CIP Post Shareholding Pattern

  • CIP works for reputed clients and are associated with marquee construction projects such as Trump Towers Mumbai. Clients include Kalpataru, Oberoi Constructions, Wadhwa Group, Saifee Burhani Upliftment Trust, Lodha Group, Rustomjee, Godrej Properties, Brigade Enterprises and Prestige.

Capacite Infraprojects, jainmatrix investments

Fig 4 – Order book by Project Purpose, and by Project Type – Fig 5

  • CIP had an order book of Rs. 4,602 cr. (May 2017). CIP majorly operates in residential projects space. The order book breakup by project purpose and by project type is in Fig 4 and Fig 5.
  • CIP has received an ISO 9001:2008 certification for their quality management system. They have also received an ISO 14001:2004 for environmental management system and an OHSAS 18001:2007 in respect of their occupational health and safety management systems.
  • Leadership is Deepak Mitra (Ch’man & Director), Rohit Katyal (ED & CFO) and Rahul Katyal (MD).

Business Model and news for CIP

  • CIP has a hub-and-spoke model, with 3 zonal hubs located at Mumbai, NCR and Bengaluru.
  • CIP believes in owning equipment that is required throughout the lifetime of a project, that is, formwork, tower cranes, passenger and material hoists, concrete pumps and boom placers (their core assets) as this allows them to have timely access to key equipment.
  • CIP uses specialised formwork tech., including vertical composite panel system for columns, horizontal composite panel system for slabs, crane enabled composite table formwork, aluminium panel formwork and automatic climbing system formwork. The modern formwork technologies help reduce the construction cycle time of replicating floors in a highrise construction compared to conventional formwork systems, such as cup-lock formwork.
  • CIP have the capabilities to undertake building construction projects using modern tech. including temperature-controlled concrete for mass pours, self-compacting free flow concrete for heavily reinforced pours and special concrete for vertical pumping in Super High Rise / High Rise Buildings.
  • The order book was Rs. 4,602 cr. in May 2017. CIP obtained orders worth Rs. 1,500 cr. from real estate developers like Oberoi, Wadhwa, Rustomjee and Kalpataru in Mumbai, Emaar in Gurgaon and Ozone in Bengaluru after the demonetisation in Nov 2016, an achievement in a tough economy. In addition, CIP received orders worth Rs. 305 cr. as sub-contractors for erecting the Trump Towers in Mumbai’s Lower Parel and 2 orders from Radius Developer worth Rs. 300 cr. in Aug 2017.
  • CIP plans to expand its business operations to Ahmedabad in 2-3 quarters.
  • New Quest, Infina, Paragon and JT HUF invested Rs. 60 cr. in CIP in 2017. They were issued 6,49,332 compulsorily convertible preference shares of FV Rs. 20 each.
  • CIP received the ‘Achievement Award for Construction Health, Safety & Environment’ at the 9th Construction Industry Dev. Council Vishwakarma Awards 2017 for 3 of its ongoing projects. It got the ‘Emerging Construction Company of the Year’ award at the Construction Times Builders Award 2017.
  • Promoter profiles: Mr. Rahul Katyal (age 42) has 16+ years experience in business development. He has been a Director of CIP since Sept 1, 2012. He focuses on Sales and Operations. Mr Rohit Katyal (age 46) has held roles of CFO and ED at CIP since Mar 1, 2014. He has 25 years of experience. He is a BCom from Podar College. Both are brothers. Both had senior/ director level positions in Pratibha Industries Ltd. before CIP.

Industry Outlook

  • The Real estate sector plays a crucial role in the Indian economy, contributing to 5-6% of the country’s GDP. It is the second largest employment generating sector after agriculture.
  • Apart from generating direct employment it also stimulates demand in over 250 ancillary industries such as cement, steel, paint, brick, building materials, furniture, consumer durables, fittings, etc.
  • India’s construction industry is expected to log materially faster growth, fuelled by spends in road, irrigation, rail and urban infra projects over 2016-21. Spending in the period is expected to be Rs. 23-24 tn., translating into a CAGR of 10-12%, way faster than a 2-4% rate observed between 2012-15, when an economic slowdown and attendant sluggish demand had stalled India’s investment cycle.
  • Over 5 years, infrastructure projects will provide construction demand of 92% of overall construction spend, owing to the govt. focus on roads, urban infrastructure and railways.
  • Demonetization may have limited impact on construction as such transactions are cashless.
  • The growth drivers in urban housing and commercial real estate are: Higher urban population, Nuclearisation of families, rising income levels and large working age population. Source: RHP
  • In India, urban housing stock was about 8.9 cr. units and rural stock was 17.9 cr. units as of 2015. It is estimated that the growth in rural housing stock will be at 1.7%-1.9% CAGR of over 2016-19, as compared to a 2-4% CAGR for urban housing over the same period. (Source – CRISIL from RHP).
  • The major competitors of CIP are L&T Construction, Shapoorji Pallonji Construction, Simplex Infrastructures, JMC Projects, and Ahluwalia Contracts. Competition from multinational companies is primarily from Leighton India Contractors, Samsung E&C India and Eversendai Construction.

Financials of CIP

Capacite Infraprojects IPO, jainmatrix investments

Fig 6 – CIP Financials

  • CIP Revenues, EBITDA and PAT have grown at 75.2%, 114% and 157% resp. CAGR in FY14-17, Fig 6. CIP has a ROE of 23.15% and ROCE of 24.15% for FY17 which is excellent.
  • CIP has moderate margins which have been stable over 3 years. The D/E was 0.51 in FY17 which is moderate, but has improved from 2.02 times (FY15). The EPS has risen in the last few years, Fig 6.
  • On May 2017, CIP had an order book of Rs. 4,602 cr. This gives 3.9 years of revenue visibility at the FY17 run rate. This is a positive. In practice, CIP must accelerate growth to deliver on OB.

Capacite Infraprojects IPO, jainmatrix investments

Fig 7 – CIP Cash Flow    

  • CIP had declared a dividend of 20% in FY16; but no dividend was declared for FY17.
  • CIP had positive cash from operations in 4 of 5 years, and has made investments steadily. CIP had positive FCFE in only 2 out the last 5 years, due to debt reduction as well as CAPEX. Fig 7.
  • Management has indicated a 60-90 days’ worth of account receivables on ongoing projects. That is about Rs 291 cr. based on FY17 revenues. Debt is low in comparison at about Rs 120 cr.

Benchmarking

We benchmark CIP against peers, both construction contractors and developers. See Exhibit 8.

Capacite Infraprojects IPO, jainmatrix investments

Exhibit 8 – Financial Benchmarking

  • The FY17 based PE for CIP appears moderate. However the high growth rates make the valuations look attractive for a 2 year holding period. The P/B ratio of CIP at 2.37 times is fair.
  • CIP has excellent Sales and PAT growth compared to peers over 4 years. This is a positive.
  • The D/E ratio at 0.51 is moderate. This has fallen from over 2 times in FY15. So growth has been with improving financials. This may also have come from funds raised from PE investors.
  • Margins are high among the Contractor pack. The RoE at 23.15% makes CIP a leader in this parameter. A lot of other real estate players have low or negative return ratios due to a variety of industry wide challenges.
  • The inventory turnover ratio, fixed assets turnover ratio and margins are average among peers.

Positives for CIP and the IPO

  • The rise and rise of CIP is due to the success of promoter brothers, Rohit Katyal and Rahul Katyal. With rich work experience from Pratibha Industries, they set up CIP together. They also handle different portfolios – Rahul as MD handles Sales and Operations and Rohit is CFO.
  • CIP has a good reputation of doing quality work in a timely fashion, which is delivered by using its proprietary tools and technologies which bring down the construction cycle time.
  • CIP has an exclusive focus on construction of buildings in major cities. The geographical spread of their projects has been limited to major cities in India, with a focus on Mumbai, NCR and Bengaluru.
  • CIP has a marquee client base and a large order book at 3.9 times revenues in May 2017.
  • They have secured repeat orders from some of their clients, like the Lodha Group, The Wadhwa Group, Godrej Properties, Transcon Developers, Ahuja Constructions and Puravankara Projects. In fact clients have taken them to new geographies outside Mumbai, and helped in their growth.
  • CIP has a strong track record of growth and profitability. They have reduced debt over 2 years.
  • The asking P/E at 24 times is moderate. CIP has low debt and a sustainable business model.
  • The IPO is a fresh issue of shares. Hence the promoters aren’t cashing out which is a positive.

Risks and Negatives for CIP and the IPO

  • CIP has risen to today’s strengths in less than 5 years of operations. This sounds incredible, in such a high competition business. However we have found that that the promoters had many years of work experience in a related business (Pratibha Industries) before starting CIP.
  • A revenue growth of 30-50% may be required to sustain high RoE for CIP. The high RoE of CIP is explained by high revenue growth of the firm. Margins are in average range and cannot rise sharply for a construction contractor. On time delivery is a given. To continue this high performance, CIP will need to continue growing at a fast clip, in the chosen high growth cities.
  • The brother promoter relationship must stay strong, for CIP to flourish.
  • To continue its success, CIP’s senior management team will also need to scale up.
  • Client concentration – projects awarded by their top 5 clients represented 38.7%, and top 10 clients have 59.7% of their Order Book, as of May 2017. This is a risk. However conversely we can say that if relationships stay strong, these solid customers can power future growth.
  • Promoters have diluted 43% of CIP pre IPO. This is not worrying as they retain 44% post IPO.
  • Typical Industry risks include 1) manpower shortage issues. 2) Liability claims or claims for damages or termination of contracts with clients for failure to meet project milestones or defective work issues. 3) fluctuating prices of steel, sand and ready-mix concrete. 4) Clients operate in a highly regulated environment, and existing and new laws, regulations and govt. policies can affect the sector. 5) Construction involves physical hazards and risks. 6) A competitive market, CIP must bid for and continue to win construction projects.

Overall Opinion and Recommendation

  • Construction sector is massive in India and likely to witness a revival from increased demand from real estate and infrastructure projects, govt. initiatives and funding and private sector investments.
  • In this massive sector with numerous players and high competition, CIP stands out as an innovative, aggressive building contractor which brings in technologies and processes that helps it deliver with high quality and on time delivery. It has an excellent client base among Property firms.
  • CIP has a professional management team, a reputed PE backing and clear growth strategies which are likely to take the company to new heights in the near future.
  • Given this client base and assuming relationships stay strong, CIP can look at revenues growth over 30% p.a. for 3-4 years which will give it a good size, market share and high return ratios.
  • Major risks are loss of any top 5 client, and project disruptions due to labour or other issues.
  • The valuations at the IPO price are average, however we are positive due to strong growth potential. This IPO offering is rated BUY, and investors can invest with a 2 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 known financial interests in Capacite Infraprojects Ltd. 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.

Apex Frozen Foods – IPO – An Apex Buy

  • Report – 20th Aug 2017 
  • IPO Open 22–24 Aug at Rs. 171-175 range 
  • P/E: 22.4 times TTM, P/B: 2.45 times 
  • Small Cap with Rs. 547 cr. Mkt cap 
  • Industry – Seafood exports 
  • Advice: BUY with a 2 year perspective 

Summary

  • Overview: Apex is a Kakinada AP based integrated producer and exporter of frozen shrimp. Exports are to the U.S., UK, and other European countries. In FY17 Revenues and PAT were Rs 709.7 crore & Rs 24.4 crore, and they have grown at 29.1% & 26.9% CAGR resp. from FY13-17.
  • Operations: Apex operates a shrimp processing facility in Kakinada of capacity 9,240 Metric Tons Per Annum and also leases an additional 6,000 MTPA. It also operates a shrimp farm which provides 15-20% of raw produce. These products are exported through nearby seaports to customers. The post IPO plans are to expand own processing facilities by 20,000 MTPA, increase its value-added product portfolio and expand shrimp farming area. Apex has a 2.3% share in volumes of shrimp exports from India.
  • Risks: 1) Promoter and promoter group dominate in current pre-IPO shareholding and executive positions in Apex. Top two promoter’s compensation was 22.2% of PAT in FY17. 2) Shrimp prices can suffer swings that can adversely affect revenues. Farming is also prone to weather changes and disease. 3) INR has strengthened affecting exporters. 4) High competition globally in sector.
  • Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is our research report on Apex Frozen Foods Ltd. IPO. (Apex). Download the report in PDF format to study at leisure. JainMatrix Investments_Apex IPO_Aug2017

IPO highlights

  • Apex is an integrated producer and exporter of ready-to-cook frozen shrimp to developed economies including the U.S., UK, and other European countries.
  • This IPO opens: 22–24th Aug 2017 with the Price band: Rs. 171-175 per share.
  • The IPO issue size is Rs. 152.3 cr. at UMP. Selling shareholders will receive Rs. 25.4 cr. of this.
  • Shares offered in IPO are 83 lakh out of which 14.5 lakh are tendered under OFS route. The FV is Rs. 10 and market Lot is 80 nos. These shares are 26.6% of equity.
  • Apex would benefit with fresh issue of shares and the funds of Rs. 126.9 cr. would be used for:

jainmatrix investments, Apex Frozen Foods IPO

Exhibit 1 – Utilization of net proceeds from fresh issue of shares

  • The promoter and his group own 99.9% in Apex which will fall to 72.08% Post-IPO. Karuturi S Murthy and Karuturi Padmavathi have tendered 7.55% and 15.41% of pre-IPO shares for the OFS.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35, a positive for Retail.
  • The unofficial/ grey market premium for this IPO is in the range of Rs. 25. This is a positive.

Introduction to Apex

  • Apex is a Kakinada, AP based integrated producer and exporter of ready-to-cook shrimp products.
  • Revenues & PAT in FY17 were Rs 709.7 crore & Rs 24.4 cr. Apex has 1,344 employees.
  • It exports its frozen products to food companies, retail chains, restaurants, club stores, and distributors in the U.S., UK and Europe. Some major customers in the U.S. include Chicken of the Sea Frozen Foods, Ocean World Ventures LLC, and Pacific Sea Food Group.
  • Apex operates a few shrimp farms near the Kakinada processing plant in AP. The total cultivable farming land available to the company is 1,338 acres, of which 106 acres are owned and the rest are leased. The company is able to fulfill 15-20% of its raw shrimp requirements from these farms.
  • Fig 2a shows that majority of revenues are from USA. From Fig 2b, we can see that revenues and exports have been steadily trending upward along with the exports to Production ratio. However, capacity utilization declined in FY17. This is a negative.
  • In Fig 2c we can see the in house brands of Apex.
  • Leadership is Karuturi S Murthy (CMD), Karuturi S Chowdary (ED), G V Raghava Raju (Purchase), H. Rajashekhar (Operations), V. Thiyagarajan (Farm in Charge) and D. S. Madhavi (QA).

jainmatrix investments, Apex Frozen Foods IPOFig 2a – Revenue Mix

jainmatrix investments, Apex Frozen Foods IPO

Fig 2b – Revenues, Exports and Capacities

jainmatrix investments, Apex Frozen Foods IPO

Fig 2c – Brands

jainmatrix investments, Apex Frozen Foods IPO

Fig 2d – Remuneration Rs cr. (Source RHP)

News, Updates and Strategies of Apex

  • Promoter: Karuturi S Murthy, the founder of Apex, currently holds 40% stake. He has 22 years experience in aquaculture after setting up Apex Exports in 1995, which later became Apex Frozen Foods. He heads the company and handles strategic and business dev. decisions. Karuturi S Chowdary is Murthy’s son, also holds 40% stake, and has 12 years experience in aquaculture, and is involved in operations and marketing activities.
  • Promoter salary & dividend are high, see Fig 2d. It was 21.8%, 20.8% and 22.2% of PAT over FY15-17.
  • The U.S. Dept. of Commerce has imposed an anti-dumping duty on frozen warm water shrimp from India (and a few more countries). The U.S. DoC has pegged its preliminary anti-dumping duty on Indian shrimp at an average rate of 1.07%, according to the Business Standard.
  • Logistics are very good. Apex processes at the Kakinada plant, and procures from its own farm and others all close by. Exports are from ports of Kakinada (20 Kms) and Vizag (150 Kms).
  • In April, Apex and Royale Marine Impex extended their agreement to allow Apex to lease an additional 3,000 MTA processing capacity (total is 6,000 MTA) valid till FY18.
  • Apex plans to grow its business by:
    1. capacity expansion with a new processing facility of 20,000 MTA.
    2. Increase its value-added product (VAP) portfolio – 5,000 MTA of the new facility will be for VAP such as cooked, dusted, and breaded shrimp.
    3. Expand global footprint to Midde East, Africa, and Russia.
    4. Expand shrimp farming area to increase the ratio of procurement from own farms.

Shrimp Exporting Industry

  • The shrimp exporting industry in India underwent a big shift in 2009 when the Govt. approved commercial production of Whiteleg (Vannamei) shrimp. The species is more resistant to disease, grows faster, and is cheaper than the Tiger Shrimp, that was popular at the time.
  • In FY16, India was the 2nd largest producer of Whiteleg shrimp, after disease and labor issues affected production in Vietnam, Thailand, Indonesia, and China.
  • Agencies and the Marine Products Export Development Authority (MPEDA) are targeting an expansion of aquaculture by 20% per year. With a big coastline of 8,000 kms, there is great potential for growth. MPEDA is also encouraging freshwater aquaculture in inland areas.
  • The U.S. imported 188,617 MT of Indian seafood in FY17, an increase of 22.72% YoY volume wise and 33% value wise. The EU accounted for 16.73% of India’s seafood exports in FY17.
  • India is currently the top exporter of shrimp to USA. Shrimp exports grew 16.2% in FY17 in volume to 434,400 MTs and 20.3% in value to Rs. 24,439 cr. After only 3% growth in FY16 due to reduced prices, the industry bounced back in FY17 (MPEDA). See Fig 3.

jainmatrix investments, Apex Frozen Foods IPO

Fig 3 – Shrimp Imports by USA

  • Exports for Vannamei shrimp grew 28.5% YoY to 329,766 MTs. In value terms, 49.55% of Whiteleg Shrimp was exported to the U.S. followed by 23.28% to South East Asia, 13.17% to the EU, 4.53% to Japan, 3.02% to the Middle East and 1.35% to China (MPEDA).
  • GST will have no effect on the Shrimp exports as it does not apply to raw shrimp or exports.
  • Shrimp exports are expected to continue growing rapidly at a CAGR of 17-19% through 2021 supported by growth in aquaculture production of 11-13% through 2021 (CRISIL in RHP).
  • With the U.S. operating at a massive trade deficit, President Trump has signed an executive order to enforce countervailing duties strictly on countries held to be dumping goods. He has also ordered the DoC to review trade deficits contributing to the consolidated $500B deficit USA had in 2016. The shrimp trade deficit was estimated to be roughly $4.5B in 2016.
  • Apex has a 2.3% share in volumes of shrimp exports from India.

Financials of Apex

jainmatrix investments, Apex Frozen Foods IPO

Fig 4 – Apex Financials

jainmatrix investments, Apex Frozen Foods IPO

Fig 5 – Apex Cash Flow

  • Revenues, EBITDA and PAT have grown at 29.1%, 25.6% and 26.9% CAGR from FY13-17, Fig 4.
  • EPS has more than doubled in 5 years as the company grew exports and expanded capacity. EPS here is diluted, post IPO, assuming it is successful and price is at UMP.
  • Exports also grew by 15.7% CAGR in from FY14-17. In FY16, while Revenues and EPS grew, the lower growth can be attributed to low shrimp prices causing a slowdown in industry exports.
  • EBITDA margins improved in the last 2 years and PAT margins increased 3 years in a row.
  • Margins are slim in shrimp exports as raw material prices are market driven, but this can be mitigated by backward integration into farming as Apex is planning.
  • Apex has positive and increasing Free Cash Flows in the last 5 years. After repaying debt in FY16, the company took on fresh borrowings in FY17 to fund capital expenditures. See Fig 5.
  • Apex declared its first dividend in FY17 at Rs. 1/share equaling 10% of the FV.

Benchmarking

We benchmark Apex against Avanti Feeds, Zeal Aqua, and Waterbase. Players like Falcon Marine Exports and Nekkanti Seafoods are privately held. See Exhibit 6.

jainmatrix investments, Apex Frozen Foods IPO

Exhibit 6 – Benchmarking

  • Valuations of Apex appear attractive with a post-IPO P/E of 22.41 and P/B of 2.45.
  • Sales have grown moderately over 3 years. Avanti’s growth appears high because of its aquafeed business, but the exporting segment revenue grew at 12.3% CAGR.
  • Profits have grown at double the pace of sales as margins improved. Meanwhile Zeal Aqua and Waterbase had declining profits over the same period.
  • Apex is fairly leveraged with a D/E ratio of 1.14 falling at the high end of the peer group. However, post-IPO this ratio should fall to around 0.49.
  • Margins are high, again Avanti is higher due to the aquafeed business.
  • ROCE is excellent and better than ROE, perhaps because of high interest and Tax.
  • The dividend yield is the highest. It was calculated basis FY17 dividend and UMP.

Positives for Apex and the IPO

  • Valuations based on peer group analysis look attractive.
  • With this IPO, Apex will get funds for a capacity expansion of 216% of processing facilities. Margin expansion can come from scale increase, VAP and backward integration into farming.
  • The Govt. particularly AP is supporting the aquaculture industry, providing growth and employment.
  • Shrimp exports are expected to continue their high growth over the next 5 years with massive global market potential and the increasing focus on healthy food consumption in developed economies.

Risks and Negatives 

  • The current shareholders are dominated by the promoter and promoter family. Other IPOs have had PE participation as investors, but not Apex. Senior executives & directors too are dominated by them. For Apex to grow well over the years it will need to hire and develop professional managers.
  • The top two Promoters compensation has been high over the last 3 years. See Fig 2d. However at 22.2% of PAT for FY17 it is not excessive.
  • Production capacity utilization has declined slightly each of the last two years indicating operations may not be running as efficiently as they should.
  • While Apex was able to grow exports by 20% in FY16 in a down year, it is concerning that exports grew at only 3.82% in FY17 when overall shrimp industry exports grew at 16.2%.
  • Shrimp prices have seen volatile swings that can adversely affect Apex and industry.
  • India has benefited from disease affecting shrimp production of Vietnam, Thailand, Indonesia, and China. As these countries emerge from the problem, they make take back market share from India.
  • The cultivation of shrimp is highly dependent on climactic conditions such as rain, and any sharp variation – excess as well as insufficient rains, will affect shrimp farming. It is also disease prone.
  • USA under President Trump is making an effort to lower trade deficits by raising tariffs on imports. This could squeeze margins for Indian exporters. U.S. has a trade deficit with regards to shrimp.
  • After many years of weakening, the INR gained against the USD by 7% in the last 10 months (from Rs 68.5 to 63.7). Our view is that it will be in 60-65 range in the next one year. This will affect Apex.

Overall Opinion and Recommendation

  • Shrimp exports is a sunrise industry with a small base, ample global and India markets, opportunities for value addition and branding. The environment is also conducive with govt. support.
  • Apex’s revenues and earnings have grown substantially over the last 5 years as the company added processing capacity, exports and backward integration into shrimp farming.
  • The IPO will enable Apex to more than double shrimp processing capability. This is a good opportunity as current capacity utilization is in the 80-90% range. With the exports focus, demand may not be a constraint, so Apex should be able to grow fast after new capacity commissioning.
  • Promoters and management are industry veterans with experience handling the business.
  • The main risks are high Promoter compensation and strengthening of INR against USD.
  • This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. A Note on Crypto-currency
  2. Security and Intelligence Services IPO
  3. IRB Infra Developers – In INVIT We Trust – 25 JULY
  4. Stock Market Awareness Presentation by JainMatrix – July 
  5. Equity Investment Made Easy by JainMatrix – Updates July 2017
  6. A Rural focused Stock Pick – premium – 08 July
  7. Eris Life IPO – and Pre listing note – premium – 28 June
  8. AU Small Finance Bank IPO – 26 June 
  9. The JainMatrix Investments Outlook – 22 June
  10. MSC Portfolio Review – 10.8% CAGR Alpha – premium – 21 June
  11. JainMatrix – Track Record – 31 May
  12. IndiGo Airways – Flying High, Wide and Handsome – 30 May
  13. Eicher Motors – It’s Firing on Both Engines – 16 May
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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. Punit Jain intends to apply for this IPO in the Retail category.  Other than this, JM has no known financial interests in Apex 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.

Security and Intelligence Services IPO

Good Growth but Expensive

  • Date 01st Aug 2017 
  • IPO Open 31st Jul – 2nd Aug at Rs. 805-815
  • Mid Cap: Rs. 6,000 cr. Mkt cap
  • Industry – Security Services
  • P/E: 66.5 times
  • Advice: The IPO is rated as AVERAGE

Summary

  • Overview: SIS is a provider of private security and facility management services in India and Australia. It is the largest company in security services in Australia and the #2 in security services and cash management in India. SIS’s revenues, EBITDA and PAT have grown at 14.5%, 13.7% and 12.4% CAGR from FY13 to FY17. They have a network of 251 branches in 124 cities and towns in India. Also they have an employee base of 154,432 employees across India and Australia.
  • Key risk: Valuations look expensive in terms of P/E ratio at 66.5 times.
  • Opinion: We rate the IPO as AVERAGE.

Here is our research report on Security and Intelligence Services Ltd. (SIS) IPO.

IPO highlights

  • This IPO opens: 31st Jul – 2nd Aug 2017 with the Price band: Rs. 805 – 815 per share.
  • SIS is a provider of security services, cash logistics services, electronic security and facility management services (FMS).
  • The IPO issue size is Rs. 780 cr. at UMP. Shares offered to public number 0.95 cr. out of which 0.51 cr. are tendered under the OFS route. The FV of each is Rs. 10 and market Lot is 18. These shares are 13.07% of equity. The selling shareholders will receive Rs. 417 cr. at the UMP. See Exh. 1a.
  • SIS benefits as the fresh issue of shares will generate Rs. 362.25 cr. to be utilized as in Exh. 1b:

JainMatrix Investments, Security and Intelligence Services IPO

Exhibit 1a – Post IPO shareholding pattern

JainMatrix Investments, Security and Intelligence Services IPO

Exhibit 1b – Utilization of proceeds from fresh issue of shares

  • The promoter and promoter group owns 76.9% in SIS which will fall to 70.4% (Post-IPO).
  • The IPO share quotas for QIB, NIB and retail are in ratio of 75:15:10. Retail has low quotas.
  • Theano (the investment vehicle of CX partners, which is a leading private equity group in the Indian mid-market) holds 15.19% stake in SIS (Pre-IPO). Theano is partially exiting through the IPO by tendering 32.6% of its current holding. The average cost of acquisition of equity shares for the Investor selling shareholders (Theano and AAJV) is Rs. 182.84/share. Ravindra Sinha (Chairman) and Rituraj Sinha (MD) have tendered 2.75% and 7.47% of their pre-IPO shares in the OFS.

Introduction to Security and Intelligence Services

  • SIS is a provider of private security and facility management services in India and Australia. Started 32 years ago, it now has a #1 position in manned guarding in Australia and #2 in manned guarding and cash management in India. Revenues for FY17 were Rs. 4,577 cr. and profit Rs. 91 cr.
  • They are a massive employer with an employee base of 154,432 personnel across India & Australia, of which 150,325 are billing employees. SIS categorizes employees as ‘billing’ who are deployed at customer premises and ‘non-billing’ who perform administration and support.
  • SIS has a network of 251 branches in 124 cities and towns in India. Employees are not unionized, other than employees in their cash logistics business in Maharashtra; and some employees of a subsidiary. This is an advantage.
  • In Australia, they provide paramedic and allied health, fire rescue services, mobile patrol, loss prevention and other related services. For Revenue segments, see Fig 2.
  • SIS is the #2 cash logistics service provider in India. This includes transportation of bank notes and other valuables, doorstep banking and cash processing, ATM services include ATM replenishment, first line maintenance and safekeeping, and vault services for bullion and cash. The electronic security services include integrated and turnkey electronic security and surveillance solutions combining electronic security with trained manpower. They have recently entered into a JV in order to provide home alarm monitoring and response services. FMS in India include cleaning, janitorial services, disaster restoration and clean-up of damage, as well as facility operation and deployment of receptionists, lift operators, electricians and plumbers, and pest & termite control.

JainMatrix Investments, Security and Intelligence Services IPO

Fig 2 – SIS Segment Revenues FY17 / Fig 3 – SIS Revenue Geographies

  • SIS has strategic relationships with several MNCs in India. For the cash logistics and alarm monitoring and response businesses, they have a JV with Prosegur, a global player. They also have a JV with Terminix, a MNC provider of termite and pest control services. SIS has licensed the ‘ServiceMaster Clean’ brand, and associated processes, operating materials and knowhow for their FMS in India from ServiceMaster group, a top service provider.
  • Revenues grew faster in India at 33% compared to Australia – 5% CAGR over 5 years. See Fig 3.
  • It has deep geographical reach for manpower sourcing & training; operates 18 training academies (India) and 4 in Australia. Security personnel undergo extensive 28 day residential program in various aspects of security. They also pay for this course so this is a revenue center.
  • Leadership is Ravindra Sinha (Ch’man), Rituraj Sinha (MD), Uday Singh (CEO) and Arvind Prasad (CFO).

News, Updates and Strategies of SIS

  • Promoter Background: Ravindra Sinha is the founder. He currently holds 41.57% stake. He is a member of Partiament. He started his career as a journalist, then became an investigative reporter and served as a war correspondent during the Indo-Pak war 1971. He has served as an advisor to the MoHRD. Per reports he declared personal assets of Rs. 850 cr. in 2014.
  • In July’17 SIS, through a subsidiary SIS Australia, acquired an addl. 41% of the voting rights in SXP, formerly an associate, to now make it a subsidiary. In Aug’16, SIS acquired 78.7% of the equity of Dusters Total Solutions Services at a cost of Rs. 116.9 cr. Dusters is the 4th largest FMS provider in India, in terms of revenues, as of FY16.
  • SIS’s revenue share from Australia has fallen from 74.5% in FY13 to 52.45% in FY17, due to faster revenue growth in the Indian market. The trend is likely to intensify.
  • The strategy at SIS is to 1) Grow their businesses across customer segments including govt. and private sectors 2) Upgradation of technology to improve productivity. In Aug’16 they deployed ‘iOps’, a mobile security services operations platform; and deployed ‘SalesMaxx’ in Mar’17, a portable tablet sales kit, to enhance sales productivity and reduce time overheads 3) Leverage existing branches to achieve operational synergies 4) Inorganic growth through acquisitions 5) Australia business has good cash flows while the growth has been coming from the India businesses.
  • The unofficial/ grey market premium for this IPO is in the range of Rs. 105-107. This is a positive.

Industry Reviews:

  • In India: The security services market in India is witnessing high growth due to an improved economic environment, concerns about crime, terrorism, public safety measures and urbanization.
  • The market for security services in India grew at 18.2% CAGR from FY10-15 to reach Rs. 39,000 cr. by FY15. It may grow at the rate of 20% between FY15-20 to reach Rs. 97,000 cr. by 2021.
  • The industry works on a credit period of 60-90 days from completion of services. Many smaller operators pay wages only when they receive payments from customers while larger players pay wages on a monthly basis. In addition, security services is a low margin, high volume business. This makes the security services industry a working capital intensive business. This operating model is not expected to undergo much change in the next few years.
  • The industry faces high attrition (57% for SIS), but that does not mean the guards are exiting the industry. When a large contract is lost or expired, the guards already employed in that location may be absorbed on the payrolls of the firm that wins or takes over the contract. This is a common business practice in the Indian security services market.
  • The security services market is fragmented but has good growth. National operators currently have 20% share and regional /local operators have 80%. However, with the rollout of GST and stricter enforcement of PSARA (Private Security Agency Regulation Act 2005), the share of national operators is going to improve and local operators may get hit by cost of compliance. By FY20, national and regional operators are likely to have 90% of the market in India.
  • The demand drivers of the Indian security services are 1) Increasing economic activity and GDP growth leading to need for improved security 2) Growth in Wages 3) Increased threat from anti-social elements and terrorist outfits 4) Societal perception on threats and awareness on security.
  • Facility Management Industry in India: FMS refers to the outsourcing of services and functions which are considered non-core activities. The total FMS market has grown at a CAGR of 16% from FY10-15. The total FMS market in India is estimated to grow with a CAGR of 20.3% between FY16-20.
  • Demand for FMS is consistently growing with increasing awareness among end-users. End-users include offices, hotels, hospitals, malls, residential spaces, the auto industry, the pharma industry, electronics, food and infra development, mostly the commercial sector.

Financials of SIS

JainMatrix Investments, Security and Intelligence Services IPO

Fig 4 – SIS Financials

  • SIS’s Revenue, EBITDA and PAT grew at 14.5%, 13.7% and 12.4% CAGR from FY13-17, see Fig 4.
  • The EPS grew moderately in the last 5 years. There was a fall in FY15 as the bonus was increased from Rs. 10,000 to Rs. 21,000 with retrospective effect from Apr 1, 2014 per a Dec 2015 amendment in Payment of Bonus Act. As a result SIS incurred additional expenses of Rs. 8.75 cr. in FY15. Also a change in depreciation calculations as per new regulations impacted the bottom-line for FY15.
  • SIS has an ROE of 16.8% and a RoCE of 22.4% for FY17 which is good. The return ratios are high. Dividend declared grew at a CAGR of 30.7% from FY13-16. But in FY17 there was no dividend. SIS has low and flat margins over the years which is due to the nature of the business and industry. Thus high sales growth is essential for attractive PAT growth.
  • SIS had negative FCFE in only 1 out of the last 5 financial years, see Fig 5.
  • The attrition rate of employees in the security services business in India for FY15, FY16 and FY17 was 65.7, 57.7% and 55.7% resp. The attrition rate of employees in Australia, for FY15, FY16 and FY17 was 24.2%, 21.4% and 20.6%, resp. The industry faces high attrition.
  • But borrowings have been high recently on account of acquisitions. The current D/E ratio is 1.37 (FY17). This may improve after Rs. 200 cr. debt is paid off post IPO from a total debt Rs. 762.5 cr.

JainMatrix Investments, Security and Intelligence Services IPO

Fig 5 – SIS Cash Flow

Benchmarking

We benchmark SIS against Quess Corp and TeamLease Services. The business segments for these firms are different as compared to SIS. Majority of Quess revenues are derived from recruitment (RPO), general staffing, training and skill development etc. whereas TeamLease is into multiple HR services ranging from temp staffing (general & IT), permanent recruitment, payroll processing etc. However they are close comparables. We also view but not rate Redington and NIIT. See Exhibit 6.

JainMatrix Investments, Security and Intelligence Services IPO

Exhibit 6 – Benchmarking

  • PE for SIS is moderate at 66.52 times as compared to its peers. Quess Corp enjoys PE valuations at 117 times largely due to high expectations from investors due to high recent sales and PAT growth.
  • The valuation is moderate in terms of P/B ratio (adjusted post IPO at 6.67 times).
  • SIS has witnessed poor sales growth compared to its peers in the last few years. The 3 year sales growth below 13.8% and the 3 year PAT growth at 9.9% is moderate. However the India business has grown much faster than the Australia business and is now over 50% of revenues.
  • The D/E ratio at 1.37 is highest but is expected to improve post IPO.
  • The margins are moderate. The return ratios are good with RoE at 16.8% and RoCE at 22.44%.
  • The dividend yield is the highest, however the yield is low on a standalone basis.
  • Note: The dividend yield has been calculated basis FY16 and the UMP of the IPO at Rs. 815/share.

Positives for SIS and the IPO

  • Leader: SIS is #1 in security services in India & Australia, and #2 cash logistics provider in India.
  • SIS has a diverse customer base, so is de-risked from economic cycles and customers dependence.
  • SIS has a scalable business model. Also security services are becoming essential over the years and this makes the business shock-proof to any kind of demand fluctuations.
  • New initiatives like GST are positive for organized players like SIS.

Risks and Negatives for SIS and the IPO

  • The valuations look expensive in terms of P/E ratio. SIS has the high D/E, low margins and low growth rates for the asking PE ratio which stands at 66.5 times FY17 which is expensive.
  • Rising labour costs are worrisome for SIS and will impact profitability.
  • SIS has a large workforce deployed across workplaces and customer premises, in high risk/ crime affected roles. They may be exposed to service claims and losses or employee disruptions that could have an adverse effect on the business.
  • SIS is exposed to 18 criminal proceedings and 27 taxation related matters currently. Any adverse outcome in any of these proceedings may negatively affect the business.
  • SIS’s businesses involve carrying and handling of firearms by employees. Any misuse or contravention of laws or policies relating to firearms by personnel may affect their reputation.

Overall Opinion and Recommendation

  • Employment generation is a challenge in today’s environment. SIS with its large workforce and structure is well placed to create jobs and build strong brands around services of security, cash management and FMS.
  • With deep relationships in govt. and private sectors, and a good niche, SIS may continue to get good growth in the Indian market.
  • The Indian securities business of SIS grew 33% YoY in FY17 and grew 50% faster than the industry. The management is focused on the Indian market for the years to come.
  • The valuations are expensive at a P/E of 66.5 times of FY17 earnings, so we rate the IPO as AVERAGE.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. IRB Infra Developers – In INVIT We Trust – 25 JULY
  2. Stock Market Awareness Presentation by JainMatrix – July 
  3. Equity Investment Made Easy by JainMatrix – Updates July 2017
  4. A Rural focused Stock Pick – premium – 08 July
  5. Eris Life IPO – and Pre listing note – premium – 28 June
  6. AU Small Finance Bank IPO – 26 June 
  7. The JainMatrix Investments Outlook – 22 June
  8. MSC Portfolio Review – 10.8% CAGR Alpha – premium – 21 June
  9. JainMatrix – Track Record – 31 May
  10. IndiGo Airways – Flying High, Wide and Handsome – 30 May
  11. Eicher Motors – It’s Firing on Both Engines – 16 May
  12. Hudco IPO – Sector Uncertainties, AVOID – 09 May
  13. S Chand IPO: An Educational Content Powerhouse – 27 Apr
  14. Vikas Ecotech – Get ‘Vikas’ for your Investments – 24 Apr

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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. Punit Jain intends to apply for this IPO in the Retail category.  Other than this, JM has no known financial interests in SIS 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.

AU SF Bank IPO – Transformation Required, Valuations Stretched

  • Report dated 26th June
  • IPO Open 28-30th June at Rs. 355-358
  • Valuations: P/E 31 times TTM, P/B 5.1 times 
  • Large Cap: Rs. 10,000 cr. Mkt cap
  • Industry – Small Finance Bank
  • Advice: AVOID
  • Overview: AUB is a Jaipur based small finance bank (SFB) which operates in 3 business lines: vehicle finance; MSME and SME loans. They used to be an asset oriented NBFC earlier, and commenced SFB operations in Apr 2017 and launched new retail and rural focused loan services.
  • Revenues and profit for FY17 were Rs. 1,431 cr. and Rs. 329 cr. It has 8,515 full time employees. AUB’s revenues, NII and PAT grew at 36.4%, 43.9% and 47.5% CAGR in 5 years. The gross AUM and disbursements of AUB for FY17 stood at 10,734 cr. and 6,730 cr. resp.
  • AUB has a massive task ahead of itself to rebuild itself within 3 years as a priority sector SFB institution. This involves setting up deposits infra, giving MFI loans which are high volume low value and reaching out into the villages. PSL (Priority Sector Loans) to non PSL is 35:65% today and has to become 75:25% in 3 years. These changes are costly, time consuming and involve staff retraining.
  • At a P/B of 5.09 times TTM FY17, the valuations of the IPO are high and aggressive. Further the book value per share rose sharply in FY17 due to the sales of subsidiaries and associates, and BVPS growth may not sustain operationally. Thus on the P/B parameter, AUB is overvalued.
  • Risks: 1) Regional concentration: As of FY17 54% of the AUM was in the state of Rajasthan 2) Business concentration: Vehicle loans constitute 50% of AUM, making AUB dependent on this sector 3) The recent farm loan waivers by govts. may affect the credit behavior of farmers.

Opinion: This IPO offering is an AVOID, investors can pass up this opportunity and instead look to pick up the shares at more reasonable levels in future.

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See other useful BFSI reports:

  1. PNB Housing Finance IPO: A Transformed Lender
  2. RBL Bank IPO – A Grand Revival
  3. New Banks: Big Changes in Small Change
  4. Equitas IPO  – Leader in Small Finance Banks
  5. Announcement – SEBI approval as a Research Analyst

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 AUB or any group company. Punit Jain does intend 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.

Eris Lifesciences (IPO) is Strong on B2D

  • Date 15th June; IPO Open 16-20th June at Rs. 600-603
  • Valuations: P/E 34.3 times TTM, P/B 15.4 times
  • Mid Cap: Rs. 8,300 crore Mkt cap
  • Industry – Pharma sector
  • Advice: Investors can BUY with a 2 year perspective

Overview: Eris is an Ahmedabad based firm that develops, manufactures and sells branded pharma products from the chronic and acute categories in the Indian pharma market. Revenues for FY17 were Rs. 725 cr. and profit Rs. 242 cr. ERIS’s revenues, EBITDA and PAT grew at 16.6%, 34.7% and 42.8% CAGR in 5 years. Within the growing industry, Eris has a market share of 0.7% achieved in just 10 years of existence. There is certainly ample scope for Eris to grow both market share and absolute revenues. Eris is already growing fast and stands out for the domestic focus, strong marketing & sales, good business relationships with doctors (B2D) and efficient mfg. & procurement giving high margins. At a P/E of 34.25 TTM the valuations in the IPO are high but not aggressive, and justified by Eris’ growth rates.

Key risks: 1) Pending complaints with the Medical Council of India 2) Adherence to voluntary code of UCPMP 3) We are unsure that Eris will be able to maintain its high growth rates, high procurement of products and subsequently margins

Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is a note on Eris Lifesciences Ltd. (Eris) IPO.

IPO highlights

  • The IPO opens: 16-20th June 2017 with the Price band: Rs. 600-603 per share.
  • Shares offered to public number 2.87 cr. The FV of each is Rs. 1 and market Lot is 24.
  • The IPO in total will collect Rs 1,741 cr. while selling 21% of equity. The offer is a complete OFS and the selling shareholders will receive the entire sum. ChrysCapital’s investment arm Botticelli would be exiting by selling its current 16.3% stake. Botticelli’s average cost of acquisition in Eris was Rs 87.27/share giving them 6.9x on their investment in 6 years. The other selling shareholders are individuals who hold around 4-9% stake individually in the company. The promoter & promoter group owns 59.18% in ERIS which will fall to 55.9% post-IPO.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 75:15:10.
  • The unofficial/ grey market premium for this IPO is Rs. 86/share. This is a positive.

Introduction

  • Eris is an Ahmedabad based firm that develops, manufactures and sells branded pharma products from the chronic and acute categories in the Indian pharma market.
  • Revenues and profit for FY17 were Rs. 725 cr. and Rs. 242 cr. It has 2,645 full time employees out of which over half – 1,501 are sales reps.
  • So Eris has strong sales, marketing and distribution capabilities with 7 sales divisions focused on developing and growing engagement with doctors.
  • Eris products are cardiovascular, anti-diabetics, vitamins, gastroenterology and anti-infectives from the chronic and acute category which are linked to lifestyle disorders. The chronic category contributed 65.6% of its revenues in FY17. The product portfolio has 80 mother brand groups (FY17) and is focused on therapeutic areas which are handled by specialists and super specialists such as cardiologists, diabetologists, endocrinologists and gastroenterologists. See Exhibit 1.

JainMatrix Investments, Eris Lifesciences

Exhibit 1 – Eris products, therapeutic areas, revenues and brands, Source RHP

  • Between FY13 and FY17, there has been an increase in the no. of doctors prescribing their products from 37,842 (about 13.8% of doctors in metros and class 1 towns in India) to 50,282 (15.7% of doctors in metro and class 1 towns) with a prescription share of 1.3% for FY17.
  • Eris owns and operates a mfg. facility in Guwahati, Assam. They also outsource the mfg. of some products, and currently have 20 third party mfg. vendors.

JainMatrix Investments, Eris Lifesciences

Fig 2 – ERIS Segment revenue and Fig 3 Post IPO Shareholding Pattern

  • Eris has 3 subsidiaries namely Eris Therapeutics Pvt. Ltd (wholly owned), Aprica Health (wholly owned) and Kinedex. As of June 2017, Eris and subsidiaries have registered 138 trademarks for various brand names. It has a team of 32 personnel working in its IP and R&D department.
  • In July 2016, Eris acquired trademarks in relation to 40 brands, from Amay Pharma for Rs.32.8 cr., in order to grow their product portfolio in the cardiovascular and anti-diabetics therapeutic areas. Amay Pharma’s revenues, from these brands were Rs. 19.3 cr.
  • In Nov 2016, ERIS acquired 75.48% share of Kinedex for Rs. 77.2 cr.
  • It focuses on products for mobility related disorders in the musculoskeletal therapeutic area, within the acute pain-analgesics therapeutic area. Kinedex’s revenues were Rs. 83 cr. for FY17.
  • Eris’s facility in Guwahati had a capacity utilization for tablets, capsules and sachets of 76%, 57.6% and 19.6% resp. It enjoys tax break under Income Tax Act, which will continue post GST till FY24.
  • For FY16 and FY17, the products made at Guwahati contributed to 51.6% and 59.3% of their revenues. An additional 28.2% and 18.7% of revenues for the same periods was mfg. in partnership with Sozin Flora Pharma. Eris was a partner in Sozin up to Aug 2016, and then transferred their stake to the other partners of Sozin, to enhance operational efficiency and productivity.
  • Leadership is Amit Bakshi (CMD), Kaushal Shah (Head mfg. & dist.) Sachin Shah (CFO), Rajendra Patel (Head procurement)

News, Updates and Strategies of ERIS

  • Eris with Indian Medical Association and Heart Care Foundation of India conducted a national study for ambulatory blood pressure readings amongst medical fraternity in May 2017. It was found that 50% physicians were suffering from hypertension despite taking hypertensive medicines; 56% from irregular BP at night and 21% from masked hypertension.
  • Eris will consolidate its position in therapeutic areas in which they have good presence including:
  • Targeting new categories within its existing therapeutic areas, e.g. strengthening its position in the anti-diabetes therapeutic area by launching new products.
  • Continuing to expand its network of key opinion leaders (KOL) in existing therapeutic areas and increase its coverage of specialists to drive growth in prescriptions.
  • Continuing to execute on its doctor-patient engagement model by leveraging diagnostics and technology to aid better outcomes and enhance patient compliance.
  • Eris will explore in-licensing and co-development opportunities with other pharma firms. It will also utilize its R&D efforts to target select products which are currently under patent protection in India.

Indian Pharma Market Outlook

  • India is one of the largest pharma markets in the world. Between FY13-17, revenues grew at 11.8% CAGR to reach Rs. 1,14,326 lakh cr. The IPM is the 13th largest market globally in terms of value and 3rd largest in terms of volume.
  • The IPM is expected to grow at a CAGR of 11.6% between CY16-21. The underlying growth is driven by: 1) Favorable demographics and macro-economic developments 2) Rising prevalence of chronic diseases and 3) Medical talent including specialists and super specialists 4) increasing insurance coverage and 5) the under-penetration of medical infrastructure and talent.
  • The IPM can be classified into acute and chronic The acute category comprises therapies intended for diseases of short duration and recent onset, including anti-infectives, gastro intestinal medication, vitamins and gynecology. The chronic category caters to non-communicable diseases that are prolonged in duration like heart disease, diabetes, cancer and arthritis.
  • Eris has a 0.7% market share in IPM. It was ranked 20th out of the 377 domestic and MNC firms in the chronic category, in terms of revenues, for FY17, compared to 26th in FY13.
  • Market share by revenue in the chronic category increased from 0.9% in FY13 to 1.4% in FY17.

Financials of ERIS

  • ERIS’s revenues, EBITDA and PAT grew at 16.6%, 34.7% and 42.8% CAGR in 5 years, see Fig 4.
  • The EPS has risen sharply in 5 years. This is excellent.
  • Eris has positive cash from operations and FCF all the last 5 years, Fig 5. This is a positive.

JainMatrix Investments, Eris Lifesciences

Fig 4 – ERIS Financials

JainMatrix Investments, Eris Lifesciences

Fig 5 – ERIS Cash Flow

  • Eris has declared dividend an interim dividend for FY16 amounting to Rs. 83 cr. (62.2% of FY16 PAT). Apart from this, the company hasn’t declared any dividend in the last 5 years including FY17.
  • Eris had a RoE of 44.8% in FY17 while the 3 year avg. RoE stood at 42.9% (FY15-FY17). The RoCE stands at 50.9%. These are high, healthy and consistent return ratios.
  • EBITDA margins jumped from 29.3% (FY16) to 39.7% (FY17), whereas the PAT margin increased from 22.4% (FY16) to 33.4% (FY17), reflecting a massive positive change. Such high margins were on account of low input costs, low interest costs and low effective tax rate (tax benefit at mfg. facility).
  • Eris has a reserves and surplus balance of Rs. 526 cr. which is Rs. 38.26/share.

Benchmarking

We benchmark Eris against peers from pharma sector. See Exhibit 6.

  • PE appears high at 34.25 compared to peers, but not a worry. The D/E ratio at 0.19 is comfortable.
  • The P/B ratio is high at 15.36 times, but this is because just 52% of products are mfg. in-house, and the rest is procured. As long as vendor-partners can adhere to the quality norms, it’s good.

JainMatrix Investments, Eris Lifesciences

Exhibit 6 – Benchmarking

  • Eris has witnessed fair sales but good profit growth recently. The 3 year PAT growth, EBITDA and PAT margins are high, coming in second highest of this group.
  • The return ratios are excellent and highest in the group at 45-51% each. This is a positive, and allows Eris to command premium valuations as returns are on a small equity base of Rs. 13.75 cr.
  • The company has not declared any dividend in FY17 unlike other pharma companies.

Positives for ERIS and the IPO

  • Eris is a fast growing pharma company with a portfolio of complementary products. In the chronic category, they were the fastest growing, among the top 25 in terms of revenues.
  • Eris has a portfolio of high volume and leading brands. Its focus is on metro cities and class 1 towns which have higher incidence of lifestyle disorders.
  • Eris has strong sales, marketing and distribution capabilities and good engagement with doctors.
  • The product range does not contain OTC products, so Eris has avoided the investment heavy consumer space. Instead it focuses on the B2D or Business to Doctor marketing. This we feel entails lower costs and helps maintain margins.
  • The financial health of the company is good, and the company has grown rapidly under the leadership of Amit Bakshi. He was a pharma salesman who worked in companies like Torrent, Eli Lilly and Intas and had many years of experience in the pharma industry before starting Eris.
  • Eris is immune to the global approvals/ USFDA risks as they have a domestic focused business.
  • Leadership appears to be dynamic and aggressive, and using strategies that play to their strengths.

Risks and Negatives for ERIS and the IPO

  • Eris has received letters from the Medical Council of India and certain state medical councils in connection with anonymous complaints, which allege that they have provided special benefits to several doctors. In the event the allegations are found to be true and in violation of applicable regulations and statutes, their reputation and business may be adversely affected.
  • Stricter norms in India for companies doing business in the pharma industry could affect their ability to effectively market its products. The Dept. of Pharma announced details of the UCPMP, which became effective across India from Jan 1, 2015. The UCPMP is a voluntary code which, among other things, provides detailed guidelines about promotional materials, conduct of medical reps, physician samples, gifts and relationships with healthcare professionals. Although these guidelines are voluntary in nature, they may be made mandatory in the future.
  • Will Eris be able to sustain the high growth rates and margins as it grows larger? While Eris still has a small market share in a growing market, typically pre IPO and small cap growth rates are difficult to sustain as a mid-cap firm. Competition too is intensifying in Eris’ key segments, and they will have to envision new strategies to continue on the growth path.
  • By procuring 48% of products from vendors, Eris has kept investments low and got high margins. Will this strategy be suitable in future? Any quality control problems at their mfg. facility or those of their third party mfg. may damage their reputation and expose them to litigation or other liabilities.
  • Some generic pharma sector risks: 1) If any of their products cause, or are perceived to cause, severe side effects, their reputation, revenues and profitability could be adversely affected. 2) The availability of counterfeit drugs, such as drugs passed off by others as their products, could adversely affect their brands.

Overall Opinion and Recommendation

  • As India accelerates its per capita income from a low base, a lot of the individual income gains are directed to the pharma sector for better healthcare.
  • Within the growing industry, Eris has a market share of 0.7% achieved in just 10 years of existence. There is certainly ample scope for Eris to grow both market share and absolute revenues.
  • Eris is already growing fast and stands out for the domestic focus, strong marketing & sales, good connect with doctors & medical ecosystems, and efficient mfg. & procurement giving high margins.
  • While the IPO is an exit opportunity for some investors, it empowers Eris for the next phase of growth by providing visibility and prestige, and the ability to raise fresh funds at low cost.
  • At a P/E of 34.25 TTM the valuations in the IPO are high but not aggressive, and justified by Eris’ growth rates.

Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. JainMatrix Investments – Track Record 
  2. IndiGo Airways – Flying High, Wide and Handsome
  3. Eicher Motors – It’s Firing on Both Engines
  4. Hudco IPO – Sector Uncertainties, AVOID
  5. S Chand IPO: An Educational Content Powerhouse
  6. Vikas Ecotech – Get ‘Vikas’ for your Investments
  7. CPSE ETF FFO 2 – An Energizing Offer – BUY
  8. Investment Notes – Euphoria
  9. Avenue Supermarts IPO: The Mart of Choice
  10. Bharat Electronics OFS
  11. Whats different about the Investment Service from JainMatrix? – A video
  12. Why are Indian stock markets attractive for Investments? – A video
  13. BSE IPO: Put this Exchange on Hold – Report plus Video
  14. Balmer Lawrie – An Update
  15. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  16. Investment Outlook – Short Term Pain, Medium Term Gain
  17. PNB Housing Finance IPO: A Transformed Lender
  18. RBL Bank IPO 
  19. Do you want to be a value investor?
  20. Mahanagar Gas IPO 
  21. Announcement – SEBI approval as a Research Analyst

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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 Eris Lifesciences or any group company. Punit Jain may choose 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 Adviser. 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.

S Chand IPO: An Educational Content Powerhouse

  • IPO Open 26-28th Apr at Rs. 660-670
  • Mid Cap: Rs. 2,328 crore Mkt cap
  • Industry – Education Publishing
  • P/E 36.8 times TTM
  • Advice: Investors can BUY with a 3 year perspective

Summary

  • Overview: SCL is a 70 year old firm that delivers books, content and services in education to the K-12, higher education and early learning segments with strong presence in CBSE/ICSE schools. SCL revenues, EBITDA and PAT have grown at 32.6%, 47.5% and 33.9% CAGR from FY12 to FY16. SCL had a strong distribution and sales network across India. SCL has good relationships with authors who create and refine content. Textbook quality is excellent. The recent M&A strategy has given them a strong position across subjects, central and state boards and multiple languages. SCL is a thought and execution leader in this space with good content through authors and reach through distribution networks. It is capturing innovation by buying good education firms to enhance offerings. The IPO will help reduce debt even as operational revenues grow at 32.6% CAGR.
  • Key risks: 1) At a PE of 36.8 TTM, the valuations are expensive. 2) SCL has a seasonal business 3) NCERT provides subsidized textbooks and may prevent usage of SCL textbooks.
  • Opinion:   This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is a note on S Chand and Company Ltd. (SCL) IPO.

IPO highlights

  • The IPO opens: 26-28th Apr 2017 with the Price band: Rs. 660-670 per share.
  • Shares offered to public number 1.08 cr. The FV of each is Rs. 5 and market Lot is 22.
  • The IPO in total will collect Rs 729 cr. while selling 31.34% of equity. Of this, SCL will raise Rs. 325 cr. by issuing fresh shares and the selling shareholders will receive Rs. 404 cr. at the UMP. The promoter group owns 58.33% in SCL which will fall to 46.7% post-IPO.
  • SCL would benefit from the fresh issue of shares and the proceeds of Rs. 325 cr. would be used for:

Exhibit 1 – Utilization of proceeds from fresh issue of shares

  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35. This is good for Retail.
  • IFC holds 9.4% stake in SCL (Pre-IPO) and Everstone Capital Partners holds 32.3% (Pre-IPO). IFC will remain invested, while Everstone is selling half of its current stake in SCL.
  • The unofficial/ grey market premium for this IPO is in the range of Rs. 160. This is a positive.
  • The first day of IPO saw that it is already 52% subscribed, so it looks like it will sail through very successfully.

Introduction

  • SCL is a 70 year old firm that delivers books, content and services in education to the K-12, higher education and early learning segments and has a strong presence in CBSE/ICSE affiliated schools.
  • Revenues for FY16 were Rs. 541 cr. and profit Rs. 47 cr.
  • It has 2,135 full time employees (Dec ‘16.), whereas Chhaya has 309 employees (Dec ‘16.).
  • In Dec2016, SCL bought a 74% stake in Kolkata-based publisher Chhaya Prakashani Pvt. Ltd for Rs. 170 cr. SCL will acquire remaining 26% by Nov2018. In the past S Chand acquired Delhi-based publishers New Saraswati House in 2014 and Vikas Publishing House in 2012.
  • SCL has 55 consumer brands across knowledge products and services including S. Chand, Vikas, Madhubun, Saraswati, Destination Success and Ignitor. It recently acquired 74% of Chhaya Prakashani Pvt. Ltd. and now also offers 4 Chhaya brands including Chhaya and IPP.
  • SCL has a contractual relationship with 1,958 authors (including co-authors) for over 5 years. Additionally, Chhaya has contractual relationships with at 24 authors.
  • SCL had a sales and distribution network of 42 warehouses in 19 states, 4,932 distributors and dealers, and a sales team of 838 working from 52 branches and marketing offices. Chhaya Acquisition has expanded presence in East India to add 771 distributors and dealers.
  • SCL has developed a robust supply chain. In FY16, 85% of printing requirements were met by facilities in Sahibabad and Rudrapur. The paper purchases are integrated, which lowers costs.
  • About 72.5% of SCL’s sales are derived from the K-12 segment (KG to 1st to 12th grade). And 75% of sales of SCL are generated in the 4th quarter every year, at the start of the new academic year. Fig 2.

Fig 2 – a) SCL revenue over the years and  b) FY16 segments

  • Leadership is Desh Raj Dogra (Chairman), Himanshu Gupta (MD), and Saurabh Mittal (CFO).
  • In FY11, SCL’s key subjects were English grammar, Math and Science. It has since made many acquisitions. In 2013, SCL acquired Madhubun and Vikas – to improve its Hindi language titles. In FY15, it acquired Saraswati brand to strength its French, languages, arts and crafts titles.
  • SCL has 12 subsidiaries including Chhaya Prakashini. But 7 of these 12 have incurred losses in FY16.

News, Updates and Strategies of SCL

  • In FY16, SCL sold 3.55 crore copies of 11,144 titles. Additionally, Chhaya sold 98.8 lakh copies of 433 titles. SCL’s top 10 best-selling titles accounted for sales of 29.6 lakh copies in FY16, and 15 of their authors had each sold over 10 lakh copies of their titles during the last 5 years.
  • On the website, schandpublishing.com the firm offers ecommerce services.
  • SCL is looking to acquire firms in the higher education business, particularly in the test prep market. It plans to do so to increase its market share in the State Board segment in attractive markets.
  • SCL invested in online test prep startup Testbook in Mar2016. It is an online test prep platform for competitive exams such as GATE, CAT, SBI PO and IBPS PO, besides others. The platform allows students to simulate an environment similar to the actual examination.
  • SCL invested Delhi-based Smartivity Labs Pvt Ltd, an online venture that deploys augmented reality and robotics for kids learning projects in Oct 2015.

Education Sector Outlook

  • A recent survey by market research agency Nielsen revealed that India’s book publishing market is the sixth-largest in the world at Rs 26,100 crore, and is likely to touch Rs 73,900 crore by 2020.
  • The formal education segment comprises both K-12 schools (including secondary and senior secondary schools) and higher education institutions (colleges, higher education institutes). Whether government or privately owned, this segment is governed by the ‘not for profit’ diktat, meaning that such educational institutions in India cannot be operating on a ‘for profit’ basis.
  • The informal segment comprises test preparation, tutoring, early education and vocational/skill-based training segments. The informal segment does not have restrictions on operating on a ‘for profit’ basis and does not have restrictions on profit distribution.
  • The formal, informal and ancillary segments are collectively estimated at US $90 billion as of 2015 and expected to reach US $188 billion by 2020. India has a large population in the education age bracket of students aged 5-24, which stood at 52 crores in 2016. This may grow to approximately 53.4 crores by 2020. In addition to the growing population, a reduction in drop-out rates is expected to contribute to increase in market size.
  • The K-12 education system in India is one of the largest in the world, with a market size of US $49.5 billion, comprising 11 lakh govt. schools and 4 lakh private schools. Schools have grown from 13.6 lakh (FY11) to 15.2 lakh in (FY15). During 2011-2014, the share of private unaided schools recorded the highest growth rate among other types of schools from 14.2% to 19%.
  • Most schools in India are affiliated to 1 of 3 main governing bodies for K-12 schools: (a) state level SSC education board; the Central Boards of (b) CBSE; and (c) ICSE.
  • CBSE schools have grown at the fastest CAGR of 8.9% during 2011-2015.
  • The growth drivers of the K-12 education segment are: 1) Rising disposable incomes 2) Consumer preference for private unaided schools 3) Government initiatives on promoting primary education
  • SCL is a market leader with a share of 13% in education content. The closest peers are Oxford Publication and Orient Black Swan have a share of 6% each. (source – newspaper reports).

Financials of SCL

  • SCL’s revenues, EBITDA and PAT grew at 32.6%, 47.5% and 33.9% CAGR in 5 years, see Fig 3.
  • FY17 revenues is a projection of 9M FY17 financials, assuming 75% comes in Q4; and adding financials of Chhaya Prakashini. Thus revenue and PAT growth are good.
  • The EPS has risen sharply in 5 years. This is excellent. But there was a fall in FY15. Here SCL witnessed a disruption due to Chennai floods; it also acquired 51% in New Saraswati House.

Fig 3 – SCL Financials/ Fig 4 – SCL Cash Flow

  • SCL has negative cash from operations and FCF in 3 of last 5 years, Fig 4. This is a negative. However this is explained by the vigorous M&A activity as SCL has grown inorganically.
  • SCL has not declared dividend in the last 2 years, however it hadan interim dividend for FY17.
  • SCL has an ROE of 7.8% in FY16 which is low.
  • Operating margins have been flat while profit margins have fallen a little. However with acquisition of Chhaya Prakashini, the margins should improve, it had a net profit margin of 12.4% (Dec 2016).
  • SCL has a cash balance of Rs. 24.4 cr. today which translates into Rs. 7.03 as cash/share which is low.

Benchmarking

We benchmark SCL against peers from education /publishing sector. However the main comparison is with Navneet due to Repro (losses), MPS (technology), CLE (classroom) and others (newspaper publishing). Note that Navneet too has a significant stationary business. See Fig 5.

Exhibit 5 – Financial Benchmarking

  • PE for SCL appears expensive at an FY17P* of 36.8 as compared to Navneet at 25.2 times with better financials. The valuation of SCL is moderate in terms of P/B ratio.
  • SCL has witnessed high sales growth in the last few years. The EBITDA margins are good, while profit margins have dragged.
  • The 3 year PAT growth is moderate at 13.4%. The D/E ratio at 0.82 is moderate, however the highest in the industry. The return ratios are poor. This is a negative.
  • The SCL numbers are consistent with a firm on a growth and acquisition spree that is well on the way to becoming a textbooks and education content leader. In 2-3 years the benefits of this will accrue to shareholders.

Positives for SCL and the IPO

  • The IPO is beneficial to SCL. The fresh issue proceeds will retire some of the debt and improve financials.
  • SCL has strong brand equity with high consumer recall. The IPO and post listing visibility will enhance the brand of SCL as a consumer product.
  • SCL has in the last 4 years followed a coherent M&A strategy – first to expand subjects under coverage, then including state boards, regional languages and education innovation tech firms.
  • SCL is a comprehensive consumer education content player across the education lifecycle.
  • A strong presence in the CBSE/ICSE schools and increasing presence in state board schools.
  • SCL has strong integrated in-house printing and logistic capabilities. In FY16 over 85% of their printing requirements were met by their facilities located in Sahibabad and Rudrapur.
  • SCL has a pan-India sales and distribution network driving deep market reach.

Risks and Negatives for SCL and the IPO

  • SCL has a highly seasonal business of their main K-12 business segment with 75% of their sales generated in Q4 every year. This also means seasonality in working capital.
  • The valuations look expensive in terms of P/E ratio. Debt is high, with ok margins and low RoE.
  • SCL operates in a highly-competitive and fragmented industry. Many of the content providers have strong brand recognition in local markets and long term relationships with schools, school authorities and educational authorities. They also face competition from the govt. National Council of Educational Research and Training (NCERT) and the State Council of Educational Research and Training (SCERT), which publish books for the K-12 market at subsidized costs.
  • For the past 2 years, CBSE board has issued an advisory circular advising CBSE affiliated schools to use only NCERT books for all classes. CBSE issued the circulars in response to reports and complaints from parents that schools were asking them to buy books published by private companies. The CBSE books are much cheaper (subsidy) but there is a big difference in quality and content of these.
  • A large portion of SCL revenues are derived from titles of their top authors. In FY16, their top 20 authors contributed to 48.9% of revenues. The loss of such authors could adversely affect business.
  • SCL has an obligation to acquire the remaining 26% of share capital of Chhaya Prakashani by Nov 2018 which may need to be financed with additional debt.
  • SCL may be impacted by the introduction of the GST. However it is likely that after making the operational alignment changes, it may be beneficial for business and ease distribution and pricing.
  • The presence of 55 consumer brands sounds daunting. It may be a legacy of M&A. It may be necessary for SCL to simplify branding by merging many and focusing on 5-10 key brands.
  • M&A are often risky and SCL needs to ensure success of all acquisitions, and suitable synergy gains.

Overall Opinion and Recommendation

  • India has a very young population that is underpenetrated in terms of education. A lot of govt. focus is already on improving availability and outcomes in K-12 education.
  • Education content continues to be an important aspect of K12 education with textbooks, guides and question papers being key elements.
  • SCL is a thought and execution leader in this space with good content through authors and reach through distribution networks. It is also aggressively growing across subjects and languages, from central to state boards, and from paper to online distribution. It is capturing innovation by buying good education firms to enhance offerings.
  • At a PE of 36.8 TTM, the valuations are expensive. However we feel that debt can be reduced post IPO even as operational revenues gallop forward at 32.6% CAGR.
  • Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

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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. Punit Jain intends to apply for this IPO in the Retail category.  Other than this, JM has no known financial interests in SCL 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.