JainMatrix Investments presents an Investment Report on RACL Geartech Ltd.
03rd May 2022
Sector – Life Insurance
IPO Opens 4-9th May
Price range ₹902-949 /share; discount for policyholders is ₹60, and for employees is ₹45
Large Cap: ₹ 6,00,000 crore Mkt cap
Summary
Positives: 1) High life insurance market share 2) massive Assets Under Management and equity market ownership 3) LIC is a solid brand 4) low operating cost 5) good all India sales presence 6) the IPO can be transformative to make LIC more flexible, competitive and profitable.
Risks: 1) govt. initiatives and directives that are unprofitable 2) capital and profit ratio restructuring makes financials unpredictable 3) competition from private players and falling market share 4) High NPA ratio 5) attrition in sales agents team 6) Periodic FPOs can subdue the share price.
Opinion: Conservative Investors can SUBSCRIBE to this IPO with a 2 year perspective.
LIC IPO will have a price band of ₹ 902-949 and will open from May 2 for anchor investors and May 4-9 ‘22 for others.
The firm will raise ₹ 21,000 cr. by selling 3.5% stake sale through Offer for Sale (OFS) by promoter. LIC market cap at this pricing is ₹ 6 lakh cr.
Promoters of LIC are the President of India, acting through the Ministry of Finance, Government of India. Currently GoI holds 100% stake and post-IPO this will come down to 96.5%.
The IPO quotas are: Policy Holders 10%, employees 0.7%, QIB 44.6%, Non Institutional 13.4% and retail 31.25%. The total number of shares in IPO are 22.14 crore shares. This discount for policyholders is ₹60, and for employees is ₹45.
Objects of the issue: GoI unloads stake to list LIC. Since it is an OFS, it will not receive any funds in IPO
The grey market premium (GMP) of LIC is ₹85 as of today.
One lot is 15 shares and Face Value is ₹10. Retail investors can bid for 1 to 14 lots i.e. 210 shares.
The anchor investor portion of Life Insurance Corporation of India’s (LIC) initial public offering (IPO) was oversubscribed on Monday, raising around ₹5,620 crore from anchor investors.
Introduction to LIC
LIC is the largest public life insurance companies in India, and took its current form in 1956.
It has a 64.1% market share in Gross Written Premium (GWP) in FY21 (CRISIL). It is the #5 largest life insurer globally by GWP, see Fig 1b. LIC has a distribution network of 5,004 offices spread across 36 states and UTs, with 28 cr. policies served as on FY22. It has a workforce of 1,05,207 employees.
The proposed IPO will make it the biggest Indian IPO ever.
In India, LIC has the largest agent network of 13.5 lakh individuals in 2021, which is 55% of the total agent network in the country and was 7.2 times the number of agents of the second largest life insurer.
LIC is the largest asset manager in India (Dec’21) with AUM (includes policyholders’ investment, shareholders’ investment and assets held to cover linked liabilities) of ₹ 41 lakh crores, which was (i) 3.2 times the AUM of all private life insurers in India, (ii) 15.6 times the AUM of the #2 player in Indian life insurance industry in terms of AUM, (iii) 1.1 times the entire Indian MF industry AUM and (iv) 17% of India’s GDP for FY22. (CRISIL). LIC’s investments in listed equity represented 4% of the total market capitalisation of NSE as at that date. (CRISIL). See Fig 1a. Close to 25% of this is equity oriented, and they own more government bonds than the RBI. Thus it is a mega player that can dominate and profit from the growing Indian capital markets. Thus it is India’s Family Silver, which is made available in the IPO.
LIC is thus both a Life Insurance and an Asset Management firm.
The rest of the report is available as a download, see PDF –
Do read our insightful research, we attach the complete Investment report in PDF format here.
This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or financial interests in LIC or any group company. Punit Jain has been a retail – insurance and annuity customer of LIC for 20+ years. Punit Jain intends to apply for this IPO. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from a RIA – Registered 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.
Date 30th Nov; IPO Opens 30-2nd Dec, at ₹ 870-900/share
Large Cap: ₹51,800 cr. Mkt cap; Sector – Insurance, Health
Advice: SUBSCRIBE
Why Buy Now: The waves of Covid have pushed SHI into losses but 1) we do not anticipate more severe waves in future, and 2) SHI should be able to recover through faster business growth and adjustment of prices for the covid pandemic. By having an IPO at this time, investors have an opportunity to buy SHI at low valuations We expect profitability in SHI by 2022, even as it grows rapidly in revenues and network. Once this happens, this IPO entry price will look reasonable.
Risks: 1) Loss making entity, so this is a risky investment opportunity 2) Uncertain covid outlook 3) high competition 4) New infectious diseases 5) regulatory uncertainty.
Opinion: Investors with a risk appetite can SUBSCRIBE to this IPO with a 2 year perspective.
Here is a note on Star Health and Allied Insurance IPO (SHI).
IPO Highlights
Star Health IPO will open from Nov 30 – Dec 2 with a price band of ₹ 870 – ₹ 900.
The firm will raise ₹ 7,249 crores, including fresh issue ₹ 2,000 cr. and offer for sale 5.83 cr. shares by promoters & shareholders, for max. ₹ 5,249 cr., together 14% of post IPO shareholding.
Star Health is looking for a market cap of ₹ 51,796 cr.
Promoters currently hold 66.22% stake and post-IPO this will come down to 58.3%. Public holding will increase from the current 33.78% to 41.70%. The quotas are QIB 75%, NII 15%, and Retail 10%.
Promoters of Star Health are Safecrop Investments India LLP, WestBridge AIF I and Rakesh Jhunjhunwala. The shareholders selling shares in the IPO include promoter Safecrop Investments India LLP, and many other (public) shareholders.
The grey market premium (GMP) of SHI has declined sharply to below ₹ 10 per share, according to people who deal in unlisted stocks; it has fallen from ₹ 90 per share last week.
Objects – with the funds raised from fresh offering, SHI plans to augment the company’s capital base and maintain solvency levels.
One lot size is 16 shares and Face Value is ₹ 10. Retail investors can bid for one or more lots, and a minimum of ₹ 14,400 or multiples of this, upto a maximum of ₹ 1,87,200 for 13 lots and 208 shares.
Introduction to Star Health and Allied Insurance
Star Health and Allied Insurance is the largest private health insurer in India with a 15.8% share in FY21 (CRISIL Research). Started in 2006, it is #1 based on health GWP over 3 years.
It had retail health GWP of ₹ 9,349 cr. in Fiscal 2021. SHI made a loss for the first time in 3 years in FY21 even as revenue rose, due to Covid.
Its health insurance product suite insured 2.05 cr. lives in retail and group health, which accounted for 89.3% and 10.7%, resp, of total health GWP (Gross Written Premium) in FY21.
It has a distribution network of 779 health insurance branches spread across 25 states and 5 UTs. Its agency distribution channel also includes corporate agent banks and other corporate agents, which accounted for ₹ 220.9 cr. and ₹ 19.1 cr., resp., of its GWP in FY21.
Promoter of SHI are Safecrop Investments India LLP, WestBridge AIF I and Rakesh Jhunjhunwala.
The proposed IPO will make SHI the fourth private sector insurance provider to list on Indian stock exchanges, following HDFC Life, ICICI Prudential Life and ICICI Lombard General.
Star Health’s total number of individual agents grew at a CAGR of 27.3% from 2.9 lakh (Mar’19), to 4.6 lakh (Mar’21) and 5.1 lakh (Sept’21). Under the IRDA (Appointment of Insurance Agents) Regulations, 2016, insurance agents are only permitted to sell the policies of three insurers: one life insurance company, one non-life insurer and one health insurer.
SHI has enabled online purchase of policies in as less as 5 minutes on website Starhealth.
SHI has already allocated ₹ 3,217 cr. to 62 anchor investors today.
Key leaders: V Jagannathan, Chairman & CEO, Dr. S. Prakash, MD (since ‘19), Anand Roy MD (‘19)
Fig 1a) Revenue Segments in FY21 and b) Industry Market Shares
Insurance 101, and Health Insurance in India
Insurance is a very useful product. There are several types – Life, Health, Automobile, Property, Farm/crop, and all kinds of asset insurance products. Products are for retail or business consumers.
Health insurance is a long term product. Having a health problem is not highly predictable, so it is bought so that in case a hospitalization happens, you are protected to the extent of Sum Assured.
Salaried employees may get Group health insurance from their employer. They should check if their families are also covered – this may be an add-on. Non salaried need to buy on their own.
The health insurance penetration in India is low at just 0.36% of GDP whereas the global average comes around 2% of GDP. Countries like the UK, China, Argentina and the United States have higher penetration level of 0.61%, 0.65%, 0.78% and 4.1%, respectively.
The players are regulated by IRDAI (Insurance Regulatory and Development Authority of India) and is subject to regulatory uncertainty and compliance requirements.
Fig 2a) Penetration
Fig 2b) Premium per person
Fig 2c) Industry segments
The average premium paid per person in India at $5 / ₹ 375 per year on average for the population.
Health in India is a split sector – the govt. of India does offer public hospitals and facilities that are free, but there are insufficient facilities in most places to cover the population. Wherever govt. facilities are insufficient or inadequate, people have to pay and use private medical services.
The Covid crisis of FY21 & FY22 has shown the importance of Health insurance. At the same time we can see India has low penetration of health cover, high out-of-pocket expenses, and only 10% of the population has insurance policies outside of government plans, according to CRISIL Research.
The total expenditure spent on healthcare by the centre and states for FY20 was 1.6% of GDP, including establishment expenditure of salaries, gross budgetary support to various institutions and hospitals and fund transfers to states under centrally sponsored schemes such as Ayushman Bharat.
Health insurance industry data shows the types of companies and product segments.
Personal experience: As a customer of the Family Floater product from SHI, I had it for several years with no claims. About 3 years ago, I suddenly had to use the insurance for a hospitalization and operation. It was a relief that these were covered. The process was easy and a doctor came to verify the patient, operation and hospital. SHI finally reimbursed about 90% of my claim.
Financials of SHI
Revenues have grown steadily, but PAT fell in FY21 & H1FY22 due to Covid.
The cash flow for SHI is shown in Fig 3b. It’s clear that FY20 and FY21 have been negative for FCF.
Fig 3a) Financials, and Fig 3b) Free Cash Flow
Benchmarking
We benchmark SHI against listed insurance firms in India, and PolicyBazaar. See Fig 4.
Fig 4 – Benchmarking
As a loss making firm, the PE is negative for SHI. As are the profits.
On sales growth we can see that SHI is close to the leader, SBI Life. New India lags here.
As a result, the key valuation parameters are P/B, EV/Sales and Mcap / GWP.
The P/B of SHI is about average. New India is valued low partly as it’s a PSU. HDFC Life is expensive.
On EV to sales, SHI is a value leader. Highest is SBI Life. On Market Cap to GWP, again SHI is the leader while HDFC Life is most expensive. On revenues, we can see that SHI is the leader. However, the loss making situation is marring the valuations of SHI on traditional parameters of PE and ROE.
Putting this together, we sense that SHI is a valuable asset available at low valuations due to the covid related losses. It’s entirely possible that post covid, SHI may emerge quite profitable.
Star Health stands out among other standalone health insurers (SAHI) in terms of size, strong growth rates (32% Gross Written Premium CAGR over FY18-21) and better operational performance which is reflected in pre-Covid numbers for the company (~93% combined ratio).
Positives for SHI and the IPO
Largest private health insurance firm in India with leadership in the attractive retail health segment.
There is low penetration of health insurance in India. Also Post covid, awareness of health insurance has risen. This category may continue to see high growth.
The famous Indian investor Rakesh Jhunjhunwala has backed SHI as promoter. As he has a large following in India, this helps with publicity and investor confidence.
India has an aggressive plan for vaccination and has covered a good proportion of population. The one dose number has crossed 100 cr. and two doses 37 cr. There is a plan for a booster dose too.
SHI has a good brand, a national presence, and the largest network distribution in health industry.
Diversified product suite with a focus on innovation and launch of new and specialized products.
Strong risk management with superior claims ratio and quality customer services.
Demonstrated track record of operating and financial performance.
Low valuations as per benchmark analysis.
The sector is divided 46-54% between PSU and private. There is ample opportunity to grow for SHI.
The second wave was better handled by people & hospitals compared to the first. With this experience, any further waves should be handled better in terms of prevention and cure.
Risks and Negatives for SHI and the IPO
In India we appear to be in a recovery from Covid, but we cannot accurately predict any 3rd/4th wave in India and the business impact of the same. Omicron is a new variant found recently also.
The company has suffered a setback for the last 18 months due to covid, and has run into losses.
In order to emerge from this crisis, SHI may have to raise the prices of its products.
There are 29 active health insurance companies in India. It’s a competitive space and thus it may be difficult for any one company to dominate or win a 40%+ market share.
Post covid, GoI may be forced to raise spending on healthcare, which is mostly free services.
The Medical Council of India has been replaced by the National Medical Commission in FY20 for the purpose of medical education and medical professionals. The poorly regulated sector has seen shortages of doctors and nurses, and hopefully this will improve in future.
Recent loss making firms that have IPO’ed had uneven results. Zomato and PolicyBazar have done well, but Paytm had a rough first week.
Overall Opinion and Recommendation
Public sector healthcare is inadequate and of insufficient capacity. With rising medical services and medicine costs there is ample demand for health insurance.
SHI has grown rapidly and is well focused on the health insurance sector.
The waves of Covid have pushed SHI into losses but 1) we do not anticipate more severe waves in future, and 2) SHI should be able to recover through faster business growth and adjustment of prices for the covid pandemic.
There is a massive growth opportunity for health insurance in India as affluence grows. This will also be driven by higher inflation in medical services.
As the largest private player, SHI has an opportunity to grow the market and service the demand.
We expect profitability in SHI by 2022, even as it grows rapidly in revenues and network. Once this happens, this IPO entry price will look reasonable.
Risks: 1) Loss making entity, so this is a private equity type, risky investment opportunity 2) Uncertain covid outlook 3) high competition 4) New infectious diseases
Opinion: Investors with a risk appetite 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 financial interests in Star Health or any group company. He has been a retail customer of SHI for 5+ years. Punit Jain intends to apply for this IPO. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from a RIA – Registered 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.
The global steel cycle is on an upswing. Global and domestic demand for steel is rising, and many India based steel plants are running at good capacity utilizations.
SMEL have a good financial strength, low debt, fair cash and ability to invest in their balance sheet.
Integrated operations, proximity to RM sources, in house power generation and captive railway sidings build into a low cost operating model, which is good in a commodity industry.
Growth plans are good including new products launch and doubling of mfg. capacity over 5 years.
This IPO will also help SMEL to reduce debt and strengthen the balance sheet for planned growth.
Key risks are 1) dip in steel cycle or Indian steel prices 2) high competition 3) steel price control by GoI 4) Rising iron ore and power costs.
Opinion: Investors can SUBSCRIBE to this IPO with a 1-2 year perspective.
The IPO opens from 14-16th Jun 2021 in a Price Band of ₹303-306 per share
Total IPO size is ₹909 cr. of 2.97 cr. shares, about 12% of the equity shares. The IPO includes a fresh issue of ₹657 cr. and an Offer for Sale (OFS) of the remaining value, making up 0.82 cr. shares.
The lot size is 45 shares and Face Value is ₹10 per share.
Objects of the offer: Table 1: The Fresh Issue of up to ₹657 cr. will be utilized in following manner:
Particulars
Amount which will be financed from Net Proceeds
Estimated Utilisation of Net Proceeds in Fiscal 2022
Repayment and/or pre-payment of debt of Company and SSPL, one of its Subsidiaries
470 cr.
470 cr.
General corporate purposes
187 cr.
187 cr.
The promoters own 100 % in SMEL which will fall to 88.35% post-IPO.
The IPO share quotas for QIBs: 50%, Non-Institutional Investors 15% and Retail is 35%.
In the grey market, the price of SMEL is at ₹436, a 42% premium to IPO price.
Do read our insightful research, we attach the complete Investment report in PDF format here.
This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or financial interests in SMEL or any group company. Punit Jain intends to apply for this IPO. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.
Loss making entity; profit looks 2 years away, so this is a private equity type, high risk investment
Advice: SUBSCRIBE
Summary
Why Buy Now: The Burger King chain is at an early stage of growth in India. The organization and structure set up looks good to handle the growth imperatives.
The Burger King brand is quite strong in India.
We expect profitability in BKG in 2 years, by FY23, even as it grows rapidly in revenues and outlets. Once this happens, BKG valuations will rise and this IPO entry price will look attractive.
Relative to other MNC QSR chains in India, BKG valuations look reasonable.
It has handled the covid period well, reducing costs and getting by. We expect normalcy in revenues to return in H2FY21.
Risks: 1) Loss making entity; profitability looks 2 years away, so this is a private equity type, high risk investment 2) Intense competition from Indian and MNC QSR chains in Tier 1 towns 3) Covid induced challenges – demand from customers as well as employee health. 4) High royalties to Principal.
Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.
Here is a note on Burger King India IPO (BKG) IPO.
IPO Highlights
The IPO opens from 2-4th Dec 2020 in a Price Band of ₹ 59-60 per share
The IPO includes a Fresh Issue of ₹ 450 cr. and Offer for Sale (OFS) of 6 cr. shares. So the total IPO size is max 810 cr. of about 13.5 cr. shares, and about 35.5% of the equity share capital.
The promoter is QSR Asia and it owns 94% in BKG which will fall to 60% post-IPO.
The main objects of Fresh Issue are funding new Company-owned Burger King Restaurants by 1) Repayment of borrowings taken for this of ₹ 165 cr. and 2) Capex for new Restaurants ₹ 177 cr. 3) Remaining ₹ 108 cr. are for general corporate purposes like paying for this IPO.
The promoter is a PE firm and the listing will help to monetize and profit from investments.
The lot size is 250 shares and Face Value ₹ 10 per share
The IPO share quotas for QIBs: Non-Institutional Investors: Retail is 75:15:10%.
The unofficial/ grey market premium of BKG is ₹ 20-25 /share over IPO price. This is a positive.
Introduction
Burger King India is one of the fastest growing international QSR (Quick Service Restaurant) chains in India, started in Nov 2014.
In FY20 the Revenues, EBITDA and Profits of BKG were ₹ 847 crore, ₹ 105 cr. and ₹ (77) cr. resp.
It already has 261 restaurants across 57 cities, including Delhi-NCR, Mumbai, Pune, Chennai, Hyderabad, Bengaluru, Chandigarh and Ludhiana.
The restaurants serve food and beverages, see Fig 1a, with offerings like:
Fig 1a – Menu Range, Fig 1b – Cluster Map and Fig 1c – Outlets by Region
The globally recognized Burger King brand, also known as the “HOME OF THE WHOPPER®”, was founded in 1954 in USA and is owned by Burger King Corp., a subsidiary of Restaurant Brands Intl. Inc. The Burger King brand is the #2 largest fast food burger brand globally by number of restaurants, with a network of 18,000 restaurants in 100 countries and USA.
BKG has used a well defined restaurant roll out and development process. The Principal (BKG AsiaPac) helps and supports in this process.
BKG AsiaPac has to be paid monthly royalty (of 4-5% of sales annually). BKG is also required to pay BKG AsiaPac a non-refundable one-time fee on opening each new BK Restaurant of US$15k (₹11.25L), increasing to $25k (19L) from CY 2020-22 and US$35k (26L) for all periods thereafter.
Everstone Capital, the Singapore-HQ India-focused mid-market PE firm, owns 99.39% stake in BKG India, through investment vehicle QSR Asia Pte Ltd.
As of Sept 30, the number of BKG employees was 4,836.
Key leaders: Shivakumar Pullaya Dega (Chairman and Independent Director), Rajeev Varman (CEO and Whole Time Director) and Abhishek Gupta (Chief of Biz. Dev. and Operations).
News, Updates and Strategies
Burger King India aims to have 370 stores (101 additional) by Dec 2022. Under the Master Franchise and Development Agreement (MDA), BKG is required to develop and open 700 restaurants (both Company-owned and Sub-Franchised) by Dec 2026. This agreement renewal is by Dec 31, 2039.
Fund raising through the IPO will be used for expanding its store base in India and reducing debt.
The Indian promoter is a private equity firm Everstone Capital, even as BKG works under a MDA with Burger King Corp. USA.
Based on the FIFO methodology, Everstone will earn 3.58 times returns on its 7-year investment. Its cost of investment (of the IPO shares) is pegged at ₹ 110 cr. In return, it will fetch ₹ 360 cr. from the partial exit at upper end of IPO band, per VCCircle.
The company’s average meal ticket size is ₹ 500-550.
Covid had a massive impact on BKG, as first a lockdown, and later the containment zones, lack of permission from authorities and public fear of infection kept away dine in customers.
BKG responded by reducing costs: it negotiated with landlords on rentals, reduced inventories, etc.
In Sept 2020, the number of BKG employees decreased to 4,836 employees compared to 6,141 in Mar due to attrition, effect of Covid, and redundancies.
On date of RHP of 25th Nov., out of 268 total restaurants, only 249 are operational.
BKG has a strong supply chain for all food ingredients and raw materials, to ensure traceability, freshness, long term contracts, low prices and quality ingredients.
Food Industry Outlook in India
Fig 2 – Food Services Segments
The Indian food service sector can be divided into 4 segments, see Fig 2.
QSR have fast food cuisines and minimal table service, and cater to youngsters and working professionals, offering quick delivery of food, good ambience and option of home delivery. QSRs generally target people in the 16-35 years range. Frequency of eating out (4-5 per month) is low so there is headroom to grow.
QSRs are the most preferred destination, followed by casual dining restaurants when it comes to eating out, per the India Food Services Report 2016, made by the National Restaurants Association of India (NRAI) and consulting firm Technopak Advisors Pvt. Ltd.
The most popular eating out options in India are North Indian food (28% of the time), followed by Chinese (19%) and South Indian style (9%), according to a Livemint.com report.
Restaurants, cafes and international fast food outlets have proliferated in India and eating out has become popular. About 81% of consumers prefer to eat out, and 19% get delivery or takeaway.
The QSR segment is nascent and has a lot of scope for growth in India. A large number of global QSRs have established their outlets with franchise rights of various companies like McDonalds, KFC, Pizza Hut, Subway, Taco Bell, Burger King and Domino’s, in addition to Indian QSRs.
BKG has a 5% market share in India’s ₹ 34,800 crore QSR market.
With factors such as urbanization, rising income levels and improved investment climate, the food service sector holds a huge opportunity. The sector has observed tremendous development in the past 3 years, which grew at 11% CAGR during 2015-19. The sector is estimated to grow at a 9% CAGR by 2022-23 (Source: NRAI India Food Services, IFSR 2019).
GST rate cut from 18% to 5% for the restaurant business was a significant tailwind for the sector, and generally led to a sharp recovery in SSSG’s.
Financials of BKG
BKG revenues, EBITDA and PAT over the years are in Fig 3a. The firm grew revenues well over 3 years, and is EBITDA positive but loss making.
A possible profit in FY21 quickly became a loss in H1 due to Covid.
In Fig 3b we can see that from a FCF positive FY18, the firm has made many investments and become FCF negative in FY19-20. We can also see the number of outlets by FY.
We benchmark BKG against listed food service firms, entertainment firms and the principals. See Fig 4.
Fig 4 – Benchmarking
As a loss making firm, PE is negative for BKG. So valuations are tracked using P/B and EV/EBITDA. On these parameters, the valuations of BKG are lower than the others. This is positive.
Sales growth has been good at BKG. On Profits BKG is in the negative.
D/E ratio is low, may fall after IPO. One of the objects of the fresh issue in IPO is to reduce debt.
Margins are still on the lower side as BKG is building scale for its operations.
Return ratios are low due to losses.
The Revenue per outlet is low, perhaps reflecting BKG is a newer restaurant chain.
Putting this together, we sense that BKG is an asset available at low valuations due to current losses. It’s entirely possible that if not for covid, BKG may have been much less lossmaking by now. Post covid, BKG should focus on growth, with branch expansion, brand building and consumer loyalty.
Positives for BKG and the IPO
Burger King is a strong global brand. It’s been handled well so far in India with high street, airport and malls locations of restaurants, good visibility and positive customer reviews.
As a customer, my visit to BKG in 2018 in Bangalore was memorable and the focus is excellent with burgers available in both veg. and non veg. It was tasty and fairly priced, and a good experience.
The core offering of burgers can work for both snacks and meals for the Indian palate. Traditional consumers may not be satisfied as it’s a light fried meal, but others can find it novel and tasty. The BKG brand is well positioned for the millennial customers.
The global franchise model has succeeded for competitors in Indian markets, and the BKG rollout looks like a lower risk proposition that has a fairly unique offering and good chance of success.
The growth plans of 700 outlets by 2026 looks achievable and necessary to get a scale of operations.
The firm has an experienced, passionate and professional management team
Due to the covid infection, BKG has been able to bring down its costs structures. In particular, real estate costs for QSR may reduce and stay low for some time. Employee nos too have reduced.
BKG has an MDA with Burger King USA is till 2039, giving a good visibility.
Risks & Negatives for BKG in the IPO
The covid pandemic has been a blow as BKG has switched from a growth mode to a ‘cutting costs’ and survival mode for H1, to get by during this dip. Even today after most of the outlets reopened, there is a demand issue as customers are worried about public gatherings and infection spread. The economic impact of covid means that people celebrate less and even eating out may be done at more ‘economic’ or ‘reasonable’ priced outlets than BKG. At the luxury end, demand is down.
Having said this, our opinion is that in T1 cities, demand will normalize in Q3FY21 and a combination of takeaway and home delivery should be able to bring demand back.
BKG has not declared a profit so far in all these years. As a result, the IPO has been allowed by SEBI but the Retail portion is retained at the lowest, 10% of shares offered, due to higher risks.
So on PE we have a negative value, but on other valuation parameters like PB and EV/EBITDA, BKG looks attractive and undervalued.
BKG directly competes with McDonalds and Subway in India on bread based light food options. Thus this QSR food subcategory looks a little crowded and top heavy.
BKG is at an early growth phase in its Indian network. There is a possibility that it may take several years to make a profit or dividend as it opens new outlets and invests in branding and supply chain.
Investors looking for normal valuation parameters may not find this attractive. Conversely this investment may only give good gains over several years.
Food delivery aggregators like Swiggy and Zomato intensify competition by offering massive choice and delivery to customers. BKG partners with them, but they get large commissions on orders.
Royalties for BK USA are high and a big hurdle to franchisee profitability. In FY18-20 they were ₹ 12, 24 and 34 crores for BKG.
Overall Opinion and Recommendation
QSR has a good future in India with improving affluence, and a growing eating out culture. Beyond the FY21 covid blip, this category should grow fast.
The social type businesses like BKG have been hardest hit by covid. As a result, the BKG IPO offering is undervalued. Most stock investors today are ignoring H1FY21 results, and high but temporary valuations, and expecting a full recovery by H2.
On a big picture basis, BKG is at an early stage of growth in India. The organization and structure set up looks good to handle the growth imperatives.
We expect profitability in BKG in 2 years, by FY23, even as it grows rapidly in revenues and outlets. Once this happens, BKG valuations will rise and this IPO entry price will look reasonable.
Risks: 1) Loss making entity. Profitability also looks 2 years away, so this is a private equity type, risky investment opportunity. 2) Intense competition from Indian and MNC QSR chains in Tier 1 towns 3) Covid induced challenges – demand from customers as well as employee health. 4) High royalties.
Opinion: Investors with a risk appetite 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 financial interests in BKG or any group company. Punit Jain intends to apply for this IPO. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.
Date 28th Sept; IPO Opens 29-01st Oct at ₹ 552-554
Valuations: P/E 25.4 times TTM
Mid Cap: ₹ 7,024 cr. Mkt cap
Industry – Asset Management
Advice: AVOID
Summary
Key Strengths: UTI AMC is the second largest AMC in India in terms of Total AUM and the eighth largest in terms of mutual fund AUM. UTI has a strong brand due to its presence in India for 55 years. Valuations are low in terms of P/E. This allows some upside potential to investors. With a GoI institutional ownership, the firm is perceived as safe and stable. Post IPO, T Rowe Price will continue to be the largest shareholder.
Risks: 1) The financials of UTI have been weakening over the last 3 years. 2) The share of equity MFs has reduced in percentage, as the debt, liquid, hybrid, PMS and pension products grew faster. 3) Competition from the top 5 MFs is intense. With digital sales and distribution networks growing in importance for sales, UTI may have to invest more in sales and marketing. 4) AMCs are closely regulated by SEBI and are subject to changes or tightening of norms.
Opinion: UTI is a fair business available at a low valuation. AVOID this IPO.
Here is a note on UTI Asset Management Company (UTI) IPO.
IPO highlights
The IPO opens: 29/Sept – 01/Oct 2020 with Price band: ₹ 552-554 /share. Listing is 12/Oct.
Shares offered number 3.89 crore. The FV of each is ₹ 10 and market Lot is 27 nos.
The IPO is of ₹ 2,160 cr. for 30.75% equity by institutions SBI, LIC, and BoB who are selling 1.05 cr. shares each, and T Rowe Price and Punjab National Bank are selling 38 lakhs each.
UTI AMC is a institutionally owned firm with T Rowe Price (26%), and PNB, SBI, LIC, and BoB holding 18.2% each being the major shareholders.
The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.
Grey market premium has dropped from ₹ 75 to ₹ 45 in the past few days of market volatility.
Introduction to UTI AMC
UTI AMC is the second largest AMC in India in terms of Total AUM and the eighth largest in terms of mutual fund AUM (June 30, 2020, by CRISIL). UTI AMC and its predecessor (Unit Trust of India) have been active in asset management for more than 55 years, having established the first MF in India.
Revenues and profit were ₹ 855 cr. and ₹ 276 cr. resp. for FY20. See Fig 1a. It has 1,386 employees with 658 in sales, 47 in investment, 278 in Support/other and 403 non-officers.
It has an AUM of ₹ 9,79,600 cr. in FY20 split between MFs (1,51,500 cr.) and Others (8,28,100 cr.).
We can see that Revenues, EBITDA and PAT have been falling for the last 3 years. See Fig 1a.
FY21-E is a projection based on Q1FY21 results and can be lower also.
Fig 1a – Financials and Fig 1b – Free Cash Flow
Free Cash Flow has been positive but is also falling, See Fig 1b.
Mutual Funds are further split as equity oriented and others. See Fig 2a. UTI manages 153 domestic MF schemes, comprising equity, hybrid, income, liquid and money market funds as of June 30, 2020.
The market share of MF AUM is 5.6% among AMCs see Fig 2c.
Its distribution network includes 163 UTI Financial Centers, 257 Business Development Associates and Chief Agents and 43 other Official Points of Acceptance, most of which are in each case located in B30 cities. Its Independent Financial Advisors (IFAs) channel includes 53,000 IFAs.
UTI AMC has four sponsors SBI, LIC, PNB and BOB, each of which has GoI as a majority shareholder. It also has a global asset management company T. Rowe Price International Ltd as one of its major stakeholders with a 26% stake in the Company.
Post IPO, T Rowe Price will continue to be the largest shareholder. T Rowe Price is a USD 1 trillion (75 lakh crores INR) global asset manager based in USA.
UTI AMC has 11 million live folios making up 12.8% of client base of the Indian MF industry.
Leadership is Dinesh Mehrotra (Non-Exec Chairman Dir.), Imtaiyazur Rahman (Dir.- CEO), Amandeep Chopra (Gr. President, Head Fixed Income) and Vetri Subramaniam (Gr. President, Head Equity).
Fig 2(a) – UTI AUM split – June 2020, 2(b) UTI Segment revenues and 2(c) Market share Fig 3 – Shareholding Pre and Post IPO
MF Industry Outlook and Trends
The economy has seen financial events such as demonetization, RERA implementation, GST and a crackdown on black money and shell companies. All these have rekindled interest in financial assets as compared to real estate and gold which were the most popular earlier.
The Indian MF industry as a percentage of GDP increased from 4.7% in FY05 to 10.9% in FY20. This is much below the global average of 55%. There should be a steady growth in MF industry size.
The regulations and disclosures around MFs have ensured good traceability and audit trails. SEBI has promoted MFs as good entry level equity and debt products, and MF asset growth has been good.
The growth in the AUM has been supported by a favorable macro environment, the rising of capital markets, foreign fund inflows as well as growing investor awareness and trust in the MF products.
There are 44 AMCs registered in India. But the top 10 AMCs having 83% of the industry AUM, see Fig 1c. SBI, HDFC, ICICI Prudential AMC, Aditya Birla and Nippon are the 5 largest MFs.
Average MF AUM grew at 13% CAGR of from ₹7.6 trillion in Mar 2010 to ₹27 trillion as of Mar 2020.
Global asset management firms have struggled in India as independent MF firms. Many sold out and exited. They have had a better success rate on partnering with Indian firms as the MF JV promoter.
The regulator prescribes maximum Total Expense Ratios (“TERs”) for schemes, which are calculated by dividing the total costs of the fund by its total average assets. Aggregate scheme expenses, including all fees, commissions, costs, charges, and expenses, must not exceed the applicable TER for a scheme. TER is higher for equity MFs and lower for debt.
Benchmarking
We benchmark UTI AMC against 2 AMC firms, and 4 brokerages and wealth managers. See Exhibit 4.
Exhibit 4 – Benchmarking
We can see that of the 3 AMCs, HDFC comes out leading on most parameters except valuations and dividend yield. UTI leads only in valuations.
Our conclusion is that UTI is a ‘fair business available at a good price’.
Positives for UTI AMC and the IPO
UTI has a strong brand due to its presence in India for 55 years.
Valuations are low in terms of P/E and P/B. This allows some upside potential to investors.
It is a large firm and has quasi government brand. Operations are all India.
The AUM by UTI is large, and particularly in Retirement it is a leader.
It is in the top 10 firms by MF AUM.
With a GoI institutional ownership, the firm is perceived as safe and stable.
Post IPO, GoI institutional ownership will fall to 49%, and may allow it to function like a private firm.
With financialization of savings growing, UTI should be able to grow AUM.
UTI has an experienced and stable management & investment teams.
T Rowe Price may take an active role in UTI, buy out shares from the market and take over UTI (it will trigger an open offer requirement) in future.
Risks and Negatives for UTI and the IPO
The key financials of UTI have been weakening over the last 3 years.
Partly this was because in 2019, SEBI reduced the TERs allowed for all MFs, impacting revenues and profits. AMCs are closely regulated by SEBI and is subject to changes or tightening of norms.
The equity part of UTI MFs reduced in percentage, as debt, liquid and hybrid products grew faster.
Competition from the top 5 MFs is intense. With digital sales and distribution networks growing in importance for sales, UTI may have to invest more in sales and marketing.
In July 2014, the holding period for long-term capital gains tax on debt MFs was increased from 12 to 36 months. It is possible that such regulatory changes can affect their business in future.
The tax on LTCG from equity was introduced in budget 2018 in Feb at 10%, from zero earlier. This caused a correction in markets, particularly the mid and small cap stocks, and MFs.
Competition to the MF industry is from alternatives like the PMS industry, AIF/ Hedge Funds, Private equity markets and direct equity advisory. Many of these are the next steps for MF investors after they have started their investment journey with MFs.
Overall Opinion and Recommendation
Mutual Funds industry in India has benefited from the financialization of assets, the growth of the digital economy and the entry of a wave of new investors in recent years.
However growth may be concentrated among the top 5-6 firms which already command 57% share.
UTI has a strong brand due to its presence in India for 55 years. Valuations are low in terms of P/E. But we can see that in last 2-3 years financials have weakened. While AUM has increased, UTI is big in low margin areas like retirement, pension and GoI PMS. We perceive UTI as a fair business available at a low valuation in IPO.
Risks: 1) The financials of UTI have been weakening over the last 3 years. 2) The equity share of MFs has reduced in percentage, as the debt, liquid, hybrid, PMS and pension products grew in share. 3) Competition from the top 5 MFs is intense. With digital sales and distribution networks growing in importance for sales, UTI may have to invest more in sales and marketing. 4) AMCs are closely regulated by SEBI and are subject to changes or tightening of norms.
Opinion: Investors can AVOID this IPO.
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 UTI AMC. 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.
Date 05th Sept 2020; IPO Opens 7-9th Sept at ₹165-166/share
Valuations: P/E 34 times FY20, P/B 7.6 times (Post IPO)
Small Cap: ₹ 2,438 Mkt cap
Sector – IT Services
Advice: SUBSCRIBE
Here is a note on Indian Happiest Minds Technologies Ltd (HMT) IPO.
Summary
Key Strengths: HMT is a small but fast growing IT services firm with a focus on digital services.
HMT concentrates on new and emerging technologies, platforms and ecosystems, which have a greater impact on customers and help HMT stand out in a crowded industry.
The promoter Ashok Soota, is a successful executive and serial entrepreneur.
The Covid pandemic has accelerated outsourcing, offshoring and demand for digital services.
In FY20 the Revenues, EBITDA and Profits of HMT were ₹ 698 crore, ₹ 101.9 cr. and ₹ 71.7 cr. resp. In just 9 years the firm has gone from startup to $100 million of revenues, and Rs 100 crores of EBITDA, it is a good achievement.
Risks: 1) Valuations at PE of 34 times and PB of 7.6 times (TTM) are expensive. 2) Intense competition 3) Covid induced challenges – demand from customers as well as employee health 4) Rupee strengthening against USD
Opinion: Investors can SUBSCRIBE to this IPO with a 2-3 year perspective.
IPO highlights
The IPO opens from 7 – 9th Sept 2020 in a Price Band of ₹ 165 – 166 per share
The IPO includes a Fresh issue of ₹ 110 cr. and an Offer for Sale of 3.56 cr. shares. So the Total IPO size is max 702 cr. of about 4.2 cr. shares.
This will be about 28% of the equity share capital of HM.
The lot size is 90 shares and Face Value ₹ 2 per share
The IPO share quotas for QIBs: Non-Institutional Investors: Retail is 75:15:10%.
The promoter & promoter group owns 61.8% in HMT which will fall to 53.3% post-IPO. Th other seller is CMDB-ll (JP Morgan Asset Management).
The unofficial/ grey market premium is ₹ 115-125 /share over IPO price. This is a positive.
Introduction
Happiest Minds Technologies provides end-to-end solutions in digital business, product engineering, infrastructure management and security services. It was incorporated in 2011.
The FY20 Revenues, EBITDA and Profits of HMT were ₹ 698 crore, ₹ 101.9 cr. and ₹ 71.7 cr. resp.
It offers solutions across the spectrum of digital technologies such as Robotic Process Automation (RPA), Software-Defined Networking/Network Function Virtualization (SDN/NFV), Big Data and advanced analytics, Internet of Things (IoT), cloud, BPM and security.
There are 3 key divisions: the Product Engineering Services (PES) unit helps by transforming the potential of digital by making the product secure and smart. The Infra Management (IMSS) provides an end to end monitoring and management capability for applications and infrastructure. The Digital Business (DBS) is focused on digital content management, connected retail and other customised offerings for clients.
In FY20, 96.9% of revenues were from digital services, one of the highest among Indian IT companies. See Fig 1 a, b and c for details of revenue by Service Lines, Industry and Geography. d) gives us the trends in onsite: offshore employee deployments.
Fig 1 – HMT FY20 Revenues by (a) Service Lines (b) Industry Vertical and (c) Geography (d) Onsite share (clickable)
HMT has 79% USA based business, higher than most Indian IT firms where it is 65-70%.
The HMT philosophy is quite simple – that the happiest people make happiest customers. Thus there is a focus in the company to keep employees motivated, engaged and happy.
The business units of the company are assisted by the 3 Centers of Excellence which are Internet of Things, Analytics / Artificial Intelligence, and Digital Process Automation.
As of FY20, the company had 157 active customers with average revenue per customer at USD 614,675. Its repeat business (revenue from existing customers) has steadily grown and contributes a significant portion of revenues. There is a high degree of customer stickiness.
It has 2,439 employees.
Happiest Minds delivers services across industry sectors such as Retail, Edutech, Industrial, BFSI, Hi-Tech, Engineering R&D, Manufacturing, Travel, Media and Entertainment.
Key leaders: Ashok Soota (77, Promoter, Exec. Chairman-Dir.), V. Narayanan (ED-CFO) J. Anantharaju (V. Chairman, President-CEO PES), Rajiv Shah (Pres-CEO DBS) and C. Ramamohan (Pres-CEO IMSS).
News, Updates and Strategies
Deep Tech can Enable Business Growth: Per a news report, HMT has Deep Tech capabilities like AI, 5G, Blockchain, drone-tech, 3D printing, advanced material, quantum computing, biotechnology, etc. These emerging technologies are powerful and can solve specific business problems, and enable growth for clients. The adoption has accelerated post Covid.
Happiest Minds is India’s Top 25 Best Workplaces in IT & IT-BPM – Nov 2019.
However attrition was high at 19 %, higher than industry levels of 17-18%.
Happiest Minds has positioned itself as “Born Digital, Born Agile”.
The IPO share quotas indicate a tilt towards QIB, with smaller quotas to NII and Retail.
The Digital Content Monetization is a software as a service platform from HMT that helps firms digitize and monetize their content, delivering it to their customers, partners, and users. DCM comes with consumption-based pricing, and is powered by IBM Cloud.
Post Covid, the Indian IT services firms are seeing a surge in offshoring biz. This may be due to cost pressures from clients, or even a change in attitude caused by Work from Home (WFH) as firms allow employees to WFH to stay safe and productive during the pandemic.
The Covid pandemic has accelerated investments in technology infra as corporates have upgraded to allow WFH and also redesigned the customer and employee interactions.
HMT works with partners like Microsoft, Amazon Web Services, McAfee, IBM, PTC, etc.
On Sept 4 HMT raised ₹ 315.9 cr. from 25 anchor investors, ahead of its IPO. Anchor investors included Govt. of Singapore, Pacific Horizon Investment Trust, Integrated Core Strategies Asia Pte, Aditya Birla Sun Life MF, Axis MF, Goldman Sachs India Fund, HDFC Life Insurance, Franklin Templeton MF, ICICI Prudential MF, Kuwait Investment Fund, Fidelity Asian Values Plc and SBI MF.
IT Services Industry Outlook in India
The global sourcing market in India continues to grow at a higher pace compared to the IT & BPM industry. India is the leading sourcing destination globally, accounting for 55% market share of the US$ 200-250 billion services sourcing business in 2019-20. Indian IT & BPM firms have set up over 1,000 global delivery centers in 80 countries across the world. (IBEF)
IT & BPM industry global revenue was US$ 191 billion in FY20, growing at 7.7% y-o-y. It is estimated to reach US$ 350 billion by 2025. Moreover, revenue from the digital segment is expected to form 38% of the total industry revenue by 2025. (IBEF).
The Covid pandemic has sharply accelerated the adoption of digital solutions and automation across corporates and personal consumers. The safety and isolation requirements for employees in factories and offices and individual consumers has resulted in high demand for eCommerce based purchasing, employee WFH solutions, video call services and demand for contact free work and customer interaction solutions.
While the pandemic has accelerated the demand for digital, it is unlikely that the trend will reverse, as it has benefited productivity and efficiency. For example WFH may partially reverse in time but it may emerge as a permanent option as it has been widely accepted.
Financials of HMT
HMT’s revenues, EBITDA and PAT over the years are in Fig 2. The firm moved from losses in FY18 to good profits by Q1FY21. EBITDA and PAT margins have improved from FY18-20.
EPS too is sharply up, from losses in FY18 to an excellent result in Q1FY21.
In Fiscal 2018, HMT had restated loss for the year of ₹22.5 cr. This was due to relatively lower revenue from contracts with customers and higher employee benefit expense and finance costs. Further, to write off accumulated losses, the Company reduced the Securities Premium Account of HMT by ₹159.5 cr., after approval from the NCLT, Bengaluru bench through its order to the scheme of reduction of capital filed by HMT.
RoCE was 28.9% and RoE was 27.1% in FY20, a positive.
Fig 2 – HMT Financials (clickable)
Benchmarking
We benchmark HMT against listed small IT service firms and the leader TCS. See Fig 3.
Fig 3 – Benchmarking (clickable)
While the other firms are larger than HMT, we can draw some parallels:
The valuations of HMT are higher than all the others.
Sales growth has been good a leader in HMT. Profits cant be measure as HMT was loss making to years ago.
D/E ratio is highest here. One of the objects of the fresh issue in IPO is to reduce debt.
Margins are still on the lower side as HMT is building scale for its operations.
Return ratios are high while not being highest.
The Revenue per employee is low, indicating that HMT is investing in employees for growth.
Positives for HMT and the IPO
Ashok Soota is the promoter, he has a great track record as a software executive at Wipro, and serial successful entrepreneur who started (and created great value with) Mindtree and now Happiest Minds. He has built great teams in these firms. He is well known also due to several books he has written on entrepreneurship. Many investors will be drawn in by him, to buy into this, his next firm. However at 77, he may be unlikely to be able to take an active / executive role in the firm.
However there is a solid next line of management team in place at HMT.
HMT says it is “Born Digital, Born Agile” and has over 90% of revenues from digital services, quite higher than most other Indian services firms. There is no doubt that digital services are a high demand, cutting edge space with better growth prospects.
The Indian IT services firms are generally debt free, high cash and RoE generating firms once they stabilize operations. HMT should be able to do this in 1-2 years post IPO.
The philosophy at Happiest Minds is simple yet powerful – that happy employees ensure happy customers. While this is well known, there appears a special focus on this at HMT.
In just 9 years the firm has gone from startup to $100 million of revenues, and Rs 100 crores of EBITDA, is a good achievement.
The covid pandemic offers an opportunity to grow faster as customers are forced to work remotely and need more solutions and support.
Risks and Negatives for HMT and the IPO
Valuations at PE of ~34 times and PB of ~7.6 times (FY20 trailing basis) are expensive. However a premium is usually demanded by good quality firms in their IPOs.
While HMT may present a digital focus, and a large percentage of business from digital, most Indian software services firms have a digital business segment, and their significant legacy businesses may actually offer an opportunity to add a digital layer. So competition is intense for HMT and the key in IT services has always been to adopt and absorb new technologies fast and roll these out to clients.
HMT appears to be just another vanilla 1st generation IT services firm, when we are already seeing the 2nd generation services firms focused on Engineering R&D, Pharma R&D, legal, etc.
The 79% tilt to USA of business can be a constraint if visa availability declines there.
The financial performance of HMT has been uneven, and there’s no certainty that the solid FY19 and FY20 will be followed by a good FY21 post IPO.
While Covid offers some opportunities, there is no doubt that many economies are entering a recession and corporate spending for the most part may reduce over the next 1-2 years.
IT services are facing competition from 1) the enterprise Product firms 2) the large application and product firms dedicated to Google Android, Apple and Microsoft platforms and 3) the Social Media firms.
The INR:USD is at 73.3 today. After many years of 5% a year average weakening of INR against USD, in the last few months the trend appears to have reversed. Indian economic factors such as lower crude prices, lower gold imports, international trade surplus, large forex reserves, falling fiscal deficits and USA Fed policies all point to a stable or strengthening of INR against USD. We expect INR to be in a 70-75 range against USD over the next year.
Overall Opinion and Recommendation
IT services are always going to be needed to stitch together solutions for their clients, and to help them navigate, evaluate and deploy the complex IT landscapes and technology options. Indian IT services companies have time and again proven their mettle and have the skilled resources and project management skills to deliver successfully.
Happiest Minds as a small-cap firm has many of the quality ingredients required to succeed including great management, new digital tech focus and good employee policies.
If HMT continues its growth story over 5 years, this IPO entry price will look quite reasonable.
Risks: 1) Valuations at PE of 34 times and PB of 7.6 times (TTM) are expensive. 2) Intense competition 3) Covid induced challenges – demand from customers as well as employee health 4) Rupee strengthening against USD
Opinion: Investors can SUBSCRIBE to this IPO with a 2-3 year perspective.
Disclaimer
This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or financial interests in HMT or any group company. Punit Jain intends to apply for this IPO in the Retail category. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.
Date 11th July; IPO Opens 13-15th July at ₹423-425/share
Small Cap: ₹ 2,200 Mkt cap
Sector – Specialty Chemicals
Valuations: P/E 30.7 times TTM, P/B 6.9 times (Post IPO)
Advice: SUBSCRIBE
Summary
Overview: Rossari Biotech is a leading Indian textile and specialty chemical firm. Revenues, EBITDA and profit for FY20 were ₹ 603.8 cr., ₹ 105 cr. and ₹ 65 cr. resp., and grew at 32.3%, 67.6% and 66 % resp. over the last 3 years. Rossari has seen a rapid growth in recent times, and has a balanced product portfolio and a large number of domestic customers. Growth plans look promising with the planned Dahej plant. The debt is low, and balance sheet looks healthy with good return ratios. Expansion plans have been funded mostly from internal cash generation. The firm is small but looks nimble in terms of product formulations, R&D, new export markets, etc. At a P/E of 30.7 times FY20 earnings, the valuation is expensive. However the current growth rates justify this valuation.
Risks: 1) Valuations look expensive 2) delay in new Dahej plant could affect growth 3) Covid19 infection can affect Revenues. It can also affect manufacturing operations.
Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.
Here is a note on Indian Rossari Biotech (Rossari) IPO.
IPO highlights
The IPO opens: 13-15th July 2020 with the Price band ₹423-425 per share.
There is a Fresh issue of ₹ 50 crore, and an Offer for Sale of 10,500,000 shares by promoters. The FV is ₹ 2. The IPO in total will collect ₹ 500 cr.
The IPO share quotas for QIB, NII and retail are in ratio of 50:15:35.
The unofficial, grey market premium is ₹125-130 /share, indicating a 30% upside. This is a positive.
Introduction
Rossari Biotech is a leading Indian textile and specialty chemical firm with over a decade history of innovative, agile, and rapid growth. They provide customized solutions to industrial and production requirements of customers through a diversified chemical products portfolio. Building upon expertise in textiles sector, they have successfully diversified into the home, personal care, animal health and nutrition and performance chemicals markets.
Revenues, EBITDA and profit for FY20 were ₹ 603.8 cr., ₹ 105 cr. and ₹ 65 cr. resp.
It has 3,783 employees. The Silvassa (in UT of Dadra & Nagar Haveli) mfg. facility has a capacity of 120,000 MTPA. They have a dedicated team of 22 employees in R&D facilities situated at Silvassa mfg. facility and another one in Mumbai.
Rossari relevant market includes following Segments – Home Care, Personal Care, Textile Chemicals, Construction Chemicals, Paints & Coatings, and Water Treatment Chemicals.
Promoters of the company are Edward Menezes, 59, and Sunil Chari, 54. They started together in 2003, and are career technocrats having 45 years of experience cumulatively in specialty chemicals industry.
The two Promoters hold about 82% pre IPO and 62% shares post IPO and are the primary sellers.
On 10th July, Rossari raised Rs 149 cr. from anchor investors, with top 3 MFs as key investors.
Financials of Rossari
Fig 1 – Financials
The 4 years financials shows rapid revenue growth, and improving EBITDA and profit margins. The Revenues, EBITDA and Profits grew at 32.3%, 67.6% and 66 % resp. See Fig 1.
The firm has grown Operating Profits sharply, but the working capital has grown in FY20, reducing the final Cash from Operations, see Fig 2. The firm is also making significant investments into a new manufacturing facility at Dahej, so the Free Cash Flow has turned negative in FY20.
Fig 2 – Free Cash Flows
The firm has in recent years grown its offering in the Home, personal care and performance chemicals (HPPC) segment and this is 47% of its revenues, see Fig 3.
Per news reports, Rossari seized the opportunity after Covid19 to make Hand Sanitizers and Disinfectants, which saw a massive demand spurt in recent months.
Fig 3 – Key Product Segments
The firm has also grown its exports pie and now exports to 18 countries including Vietnam, Bangladesh and Mauritius. It plans to grow the international business in future. See Fig 4.
Fig 4 – Exports
The firm has grown its manufacturing capacity steadily at the Silvassa plant, see Fig 5.
The Capacity utilization has been over 80% for the last 2 years.
Rossari is setting up a new plant at Dahej (Gujarat) of 1,32,000 MTPA. This is expected to go on stream in FY21. There is no expansion planned at Silvassa, as the plant area is saturated.
Funding for this plant has been from internal cash generation as well as loans.
The rapid revenue growth has come at the cost of slightly lower average realizations from products.
In brief, we are positive on Chemicals and particularly Specialty Chemicals sector. There are good opportunities around replacement of Chinese supply for domestic and global demand.
Benchmarking
We compare Rossari to Chemical industry peers in India. See Fig 6.
Fig 6 – Benchmarking
It’s the smallest firm by revenues in this group. In terms of valuations, ie P/E and P/B, it is on the higher side. The margins are also on the lower side, both Operating and Profit.
Growth numbers are leading, both Sales and Profits, indicating a good burst of recent success.
In terms of ROE it’s a leader, and on RoCE above average. Post IPO there is some 5% dilution to equity, so the number may be reduced to that extent.
The D/E looks healthy, even though the company is in expansion mode. This is good.
In a growth phase, one does not expect dividends from small cap firms, so its not an issue.
Plans are afoot around growing exports, and this should help Rossari improve revenues and realization.
Risks and Negatives for Rossari and the IPO
Valuations at PE 30.7 times of FY20 earnings looks expensive. However the PEG is 0.46, indicating undervalued levels.
Any delay in the Dahej plant in terms of commissioning and a start of production in FY21 will slow the revenue momentum at Rossari as the current plant is running close to capacity.
The IPO is primarily an offer to sell by promoters, so the firm gains only by Rs 50 crores of capital raised by fresh issue of shares. Conversely the equity capital will not be much diluted.
In FY20 domestic sales were 86% of revenues, a low ratio, so exports is an opportunity.
When we see a sharp burst of growth in financials in 2-3 years before an IPO, we worry that such growth may not be sustained in the next 5-10 years after a successful listing.
The promoter owned firm has not benefited from the oversight, partnership and approval of Private Equity or other investors, so future success of Rossari is highly dependent on them.
This is the first IPO after a pause of several months. It’s possible that demand from hurt investors for this IPO may be low. But this may be to the benefit of investors in this IPO.
Covid19 epidemic is still gathering momentum in India, and till we see a fall in infection numbers, both investors and overall demand in the economy may be subdued. However the firm has grabbed the opportunity by making Covid safety products such as d Sanitizers and Disinfectant liquids.
This is a B2B space, so verification and confirmation of customers, brands and quality is difficult.
Overall Opinion and Recommendation
Specialty Chemicals sector is a high potential growth sector.
Rossari Biotech has seen a rapid growth in recent times, and has a balanced product portfolio and a large number of domestic customers. Growth plans look promising with the planned Dahej plant.
The debt is low, and balance sheet looks healthy with good return ratios. Expansion plans have been funded mostly from internal cash generation.
The firm is small but looks nimble in terms of product formulations, R&D, new export markets, etc.
At a P/E of 30.7 times FY20 earnings, the valuation is expensive. However the current growth rates justify this valuation.
Risks: 1) Valuations look expensive 2) delay in new Dahej plant could affect growth 3) Covid19 infection can affect Revenues. It can also affect manufacturing operations.
Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.
Disclaimer
This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain discloses that he has no stake ownership or known financial interests in Rossari Biotech or any group company. Punit Jain intends to apply for this IPO. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.
Fig 2 – Free Cash Flows
Fig 3 – Key Product Segments 
Fig 4 – Exports
Fig 5 – Manufacturing
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