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.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. Vikas Ecotech – Get ‘Vikas’ for your Investments
  2. CPSE ETF FFO 2 – An Energizing Offer – BUY
  3. Investment Notes – Euphoria
  4. Avenue Supermarts IPO: The Mart of Choice
  5. Bharat Electronics OFS
  6. Whats different about the Investment Service from JainMatrix? – A video
  7. Why are Indian stock markets attractive for Investments? – A video
  8. BSE IPO: Put this Exchange on Hold – Report plus Video
  9. CPSE ETF FFO – An Energizing Offer – Report plus Video
  10. Balmer Lawrie – An Update
  11. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  12. Investment Outlook – Short Term Pain, Medium Term Gain
  13. PNB Housing Finance IPO: A Transformed Lender
  14. RBL Bank IPO 
  15. New Banks: Big Changes in Small Change 
  16. Do you want to be a value investor?
  17. Mahanagar Gas IPO 
  18. A Repurpose for our PSUs
  19. How to Approach the Stock Market – A Lesson from Warren Buffet
  20. 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. 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.

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CPSE ETF FFO 2 – An Energizing Offer – BUY

  • FFO Applications: 15-17th Mar; Listing by 7th Apr 
  • ETF has 10 PSUs; Oil and Gas heavy
  • Raising amount: Rs. 2,500 cr. 
  • Managed by Reliance Nippon Life Asset Management
  • Central PSEs, Exchange Traded Fund, Further Fund Offer 2
  • Buy with a 1 year perspective

Overview: The Scheme is a further follow on issue (FFO 2) after the January 2017 offer which was successful. CPSE ETF facilitates GoI’s initiative to disinvest stake in CPSEs through the ETF route. Past performance of CPSE ETF 2014 has been good with 19.2% CAGR over 3 years. A discount of 3.5% on the “FFO Reference Market Price” of the Nifty CPSE Index shall be offered in this Scheme. There are high sectoral risks in Oil and Gas sector with a commodities play. Also typically the asset rich PSUs are slow moving firms with a poor, lethargic culture. However overall the offer is attractive and rated a BUY with a 1 year perspective.

Advice: This is a medium risk, medium return offering suitable for conservative investors. Buy with a 1 year perspective.

Here is a note on the CPSE ETF FFO 2 offer 2017.

Offer Differences

  • This is a smaller offer, of Rs 2,500 crores compared to Rs 6,000 crores FFO earlier in Jan 2017
  • Very similar product, with CPSE ETF as benchmark
  • The retail discount on offer is 3.5% this time compared to 5% in the first FFO in Jan 2017
  • There is a small change in the allocation to the 10 companies of the Index, with PSU firms having more central govt. holdings getting a few % higher allocations.

Description

  • The Scheme is an open-ended index scheme, listed on the Exchanges in the form of an ETF. The investment objective is to provide returns like the Nifty CPSE Index.
  • In this offer 70% is reserved for Retail and QIB, while max 30% is for Anchor investors.
  • The CPSE ETF 2017 has been created to help in GoI disinvestment of PSUs. The Further Fund Offer (FFO) launched in Jan 2017 received good response; collections were Rs.13,742 cr., out of which Rs.7,742 cr. was refunded to investors due to limited issue size of Rs.6,000 cr.
  • The ten PSUs’ included in the ETF are known high dividend, low capital gains, asset rich firms.
  • FFO Price: The FFO Units being offered will have a face value of Rs. 10/- each and a premium equivalent to the difference between FFO Allotment Price and the FV . The FFO Allotment Price would be equal to 1/100th of Nifty CPSE Index less discount.
  • Discount: A discount of 3.5 % on the FFO Reference Market Price of the underlying shares of Nifty CPSE Index shall be offered to FFO of the Scheme by GOI. A discount of 5% was offered to retail investors in the first FFO in Jan 2017 which has been reduced to 3.5% this time.
  • The scheme is being managed by Reliance Nippon Life Asset Management Ltd.

Investment Details of the Scheme

  • Amount to be raised: Rs. 2,500 cr. The Scheme will invest at least 95% of assets in stocks of the Nifty CPSE Index. It may invest in Money Market Instruments upto a max of 5% of assets which could include T-Bills, commercial paper of public private sector corporate entities, etc.
  • The AMC will use a passive or indexing approach to try and achieve Scheme’s investment objective. Unlike other Funds, the Scheme does not try to beat the markets they track and do not seek temporary defensive positions when markets decline or appear overvalued.
  • Sectoral asset Allocation and historic returns:

jainmatrix investments, CPSE ETF

Table 1 – Sector allocation           Table 2 – CPSE ETF 2014 returns including Dividend

Source: Reliance Mutual Fund FFO 2 document

Analysis of the ten PSUs as part of this ETF:

jainmatrix Investments, cpse ETF

Table 3 – CPSE ETF FFO PSUs analysis

  • Note 1: The Engineers India report by JainMatrix Investments is available on LINK
  • Note 2: The Bharat Electronics report by JainMatrix is available at LINK
  • Note 3: When we say price is high, it is relative to 5 year historical prices. We have not done valuation exercises on these firms.
  • Portfolio Turnover: It is expected that there would be a number of Subscriptions and Redemptions on a daily basis. Portfolio Turnover Ratio of the Scheme is 1.02 as on Feb 28, 2017.
  • Dividend: The income received by way of Dividend shall be used for recurring expenses and redemption requirements or shall be accumulated and invested as per the investment objective of the Scheme. The Trustees may declare Dividend to the Unit holders under the Scheme subject to the availability of surplus, and at the discretion of the Trustees. If the Fund declares Dividend, the NAV of the Scheme will stand reduced by that amount.
  • Listing: The units of the Scheme will be listed on NSE and BSE by maximum April 7, 2017.
  • RGESS Eligibility: Investments made by a Retail Individual Investor in the RGESS Scheme will qualify for a 50% deduction of the actual amount invested from the taxable income of the financial year.

The ETF structure is explained below.

JainMatrix Investments, CPSE ETF

Table 4 – Nature of ETFs             Source: Reliance Mutual Fund FFO 2 document

Past Performance since launch in March 2014

jainmatrix investments, cpse

Table 5 – Performance of CPSE ETF since 2014 (as on 13th Mar 2017)

The CPSE ETF 2014 was listed in April 2014, and has been able to give original NFO retail investors an absolute 69.4% returns over 36 months. This includes a 1 year bonus for Retail, which is not available in CPSE ETF 2017. The CAGR returns are 19.2%, higher than those in Table 2 published in FFO. See reports:

  • JM Investments Mar 2014 report – CPSE ETF 2014 – New Fund Offer report
  • JM Investments Sept 2015 performance review – Review Sept 2015 of CPSE ETF 2014
  • We had published a report on the FFO (Further Fund Offer) of CPSE ETF on 14th Jan, 2017. And recommended a BUY with a 1 year perspective. You can have a look at the report on the following LINK and the video on this LINK.
  • Subscription response: The Reliance Mutual Fund managed CPSE ETF opened for applications from 17-20th It was subscribed by 2.30 times, with bids worth Rs13,802 cr. coming in against the issue size of Rs 6,000 cr. The FFO received 250,000 applications, with good demand across investor segments.
  • FFO Price: The FFO Allotment Price is approximately equal to 1/100th of Nifty CPSE Index minus discount. The allotment price was Rs 25.21 and this tranche was listed on 31st
  • Performance: The EOD closing price on the exchange was Rs. 27.71 today, i.e. 13thMar, 2017. This translates into a gain of 9.9% in 1.5 months.

PROS

  • This ETF has a lower management charge as this automatic. The expense ratio is 0.065% annualized.
  • The fund will offer 3.5% discount to the FFO 2 subscribers.
  • The 5 year share returns are 7.47% CAGR, see Table 3. This is fair but below Sensex of 10.63%.
  • The dividend yield for these stocks is 5.18% today which is good, Table 3.
  • The average beta of these stocks is 1.15 indicating higher volatility than indices.
  • Many of these firms own wonderful assets, the family silver of the GoI. Some of these firms also enjoy monopoly status in their sectors. See our opinions in Table 3.
  • GoI is asking for higher dividends from PSUs and allowing operational freedom to exploit assets and be more productive. This will benefits investors also. See report, A Repurpose for our PSUs
  • The crude oil price fall from USD 100+ levels to sub 50 per barrel is complete. While it is volatile, crude in next 1 year should be in USD 40-60 range. If it does, the Oil & Gas sector can perform well.
  • This fund is Oil and Gas heavy with 57% weightage. However it does have a mix of upstream, mid and downstream O&G firms, which together can de-risk the portfolio against commodity volatility.

CONS

  • This third fund raising is an opportunistic attempt by GoI to raise funds in FY17 based on the good market conditions and the success of the Jan 2017 offer. However every successive offer dilutes incremental gains and novelty of the offer. This dilution is being run in parallel with stock level dilution efforts like the Offer for Sale (OFS) with Bharat Electronics and Engineers India.
  • There is no strategic clarity on GoI shareholding in these firms – will they be fully divested, or a strategic sale, or as JVs, or retained with GoI majority holding in the long run.
  • While the expense ratio of the ETF is low, the high dividend paid by the PSUs is not being passed on to the unit holders, but used for recurring expenses, as per FFO document. The CPSE ETF 2014 too has not paid dividend for 3 years. The 5.18% dividend yield involves substantial monies. It’s not clear if dividends have contributed to the NAV of the CPSE ETF 2014.
  • This fund is O&G heavy with 57% weightage. If one extends the description to Energy/Coal/ Power/ Oil & Gas and related financing, it increases to 90%. These sectors are essential to the economy, but are typically operationally constrained and not shareholder friendly. They are dependent upon global prices, and so even well managed firms can swing to losses with a fall in commodity prices.
  • In Oil & Gas sector, the upstream Oil Exploration firms have been hit by falling crude oil prices. The CPSE ETF is upstream Oil & Gas heavy with ONGC having 25% weightage.
  • Even though Gail India has a monopoly, it has been hit in pipeline construction by interstate politics, farmer /social pressures and weak infra execution environment.
  • PFC and REC are executors of GoI programs in power sector. Their returns are sometimes guaranteed by GoI but when the entire sector gets stressed, they can suffer poor performance.
  • These stocks performance depends on revenue growth, which has been inconsistent in recent years.
  • Many of these firms depend on GoI policies and monopoly situations to grow. Some are externally constrained by weak infrastructure that hampers distribution (Railways for coal, pipelines for gas).
  • This CPSE ETF 2017 offering is managed by Reliance Mutual Fund.

Overall Opinion

  • The current govt. is focusing on good execution and better administration with a series of reforms. The environment is more result oriented with less political interference in PSUs.
  • The outlook for Oil & gas sector is stable this year. Domestic demand is high.
  • Past performance of CPSE ETF 2014 has been good with 19.2% CAGR over 3 years.
  • There are high sectoral risks with an Oil & Gas heavy commodities play. Also typically the asset rich PSUs are slow moving firms with a poor, lethargic culture.
  • However overall the offer is attractive and rated a BUY with a 1 year perspective.
  • This is a medium risk, medium return offering suitable for conservative investors.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. Investment Notes – Euphoria
  2. Avenue Supermarts IPO: The Mart of Choice 
  3. Bharat Electronics OFS
  4. Whats different about the Investment Service from JainMatrix? – A video
  5. Why are Indian stock markets attractive for Investments? – A video
  6. BSE IPO: Put this Exchange on Hold – Report plus Video
  7. CPSE ETF FFO – An Energizing Offer – Report plus Video
  8. Balmer Lawrie – An Update
  9. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  10. Investment Outlook – Short Term Pain, Medium Term Gain
  11. The Natural Quotient: A Sustainability Metric for Business
  12. PNB Housing Finance IPO: A Transformed Lender
  13. GNA Axels IPO
  14. RBL Bank IPO 
  15. New Banks: Big Changes in Small Change 
  16. Equitas IPO – Leader in SF Banks
  17. Do you want to be a value investor?
  18. Mahanagar Gas IPO 
  19. A Repurpose for our PSUs
  20. How to Approach the Stock Market – A Lesson from Warren Buffet
  21. Announcement – SEBI approval as a Research Analyst

DO YOU FIND THIS SITE USEFUL?

  • Visit the Investment Service page to find how you can get more. Or Click LINK
  • Register Now to get our Free reports and much more, on the top right of this page, or by filling this Signup Form CLICK.

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 holds CPSE ETF units since NFO in 2014. Other than this JM has no known financial interests in CPSE ETF / Reliance Mutual Fund or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

Avenue Supermarts IPO: The Mart of Choice

  • Date 7th Mar 2017, IPO Open 8-10th Mar at Rs. 295-299
  • P/E 39.9 times TTM
  • Large Cap: Rs 18,660 crore Mkt cap
  • Industry – Retail 
  • Advice: Investors can BUY with a 2 year perspective

jainmatrix investments, dmart supermarkets

  • Overview: D-Mart is an emerging national supermarket chain, with a focus on value retailing. Total income for FY16 was Rs 8,606 cr. and net profit Rs 319 cr. Its revenues, EBITDA and PAT have grown at 40.3%, 45.5% and 51.6% resp. CAGR over 5 yrs. It has 118 stores with total retailing area of 35.9 lakh sq.ft. It has a low employee count and uses contract staff to contain costs.
  • Operations: D-Mart has a cluster based growth strategy which has allowed it to extend reach in areas where it has a presence. The store expansion strategy and cost control techniques are good. D-Mart has a professional management team, a respected promoter and clear vision and growth strategies which are likely to keep the company on the successful path. At a current P/E of 39.9, the asking price is fair, considering that DMT is the leader in its segment.
  • Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Most good IPOs get oversubscribed and few applicants get share allotments. Subscribe to JainMatrix Investments to get their pre-listing IPO notes, and invest successfully.  

Here is a note on Avenue Supermarts Ltd. (DMT) IPO.

IPO highlights

  • This IPO opens: 8-10th Mar 2017 with the Price band: Rs.295-299 per share.
  • Shares offered to public number 6.25 cr. The FV of each is Rs. 10 and market Lot is 50. These shares are 10.02% of equity. The IPO will collect Rs 1,870 cr. with a 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.
  • DMT was incorporated in the year 2000 by Mr. Radhakishan Damani. He is also a well known Stock market Investor, Stockbroker and a Trader. He owns 43.8% in DMT while his investment vehicle Bright Star owns another 15.8%. His brother and several family trusts own the remaining shares. The promoter group holds 91.36% stake, which will fall to 82.2% post-IPO.
  • DMT will benefit from the fresh issue of shares as the proceeds will go the company.
  • Utilization of IPO proceeds: Repayment of loans / redemption of NCDs Rs. 1,080 cr., construction and new stores Rs. 366.6 cr., and general corporate purposes Rs. 423.4 cr.

Introduction

  • DMT is an emerging national supermarket chain, with a focus on value-retailing.
  • Revenue in FY16 was Rs. 8,606 cr. and profit Rs. 319 cr. It has 4,738 full time employees.
  • According to Technopak, DMT was among the larger and more profitable Food and Grocery (F&G) retailer in India in FY16. DMT offers a range of products like Foods, Non-Foods (FMCG) and General Merchandise & Apparel. See Fig 1.
  • For FY16, sales were from Mah. (62.6%), Guj. (18.8%), Telangana (10.15%) and Kar. (6.14%).

jainmatrix investments, dmart superstores

Fig 1 – D’Mart Segment revenues

  • DMT opened its first store in Mumbai, Mah. in 2002. By Jan 2017, they had 118 stores and retail area of 35.9 lakh sq.ft, located across 45 cities in Mah. (59), Guj. (27), Telangana (13), Kar. (7), AP (4), MP (3), Chhattisgarh (1), NCR (1), Daman (1) and Raj. (2).
  • DMT will expand store network in south & west India, and follows a cluster-based expansion.
  • Leadership is Ignatius Noronha (MD), Ramakant Baheti (CFO), Udaya Yarlagadda (COO Retail).

News, Updates and Strategies of DMT

  • DMT operates and manages all its stores. They operate mostly on an ownership model (incl. long-term lease, with lease period over 30 years and building is owned by the company).
  • DMT opens new stores using a cluster approach on the basis of adjacencies and focuses on an efficient supply chain, targeting densely-populated residential areas with middle class consumers. It operates distribution & packing centers that form the supply chain backbone for stores. They have 22 dist. centers and 6 pack. centers in Mah., Guj., Telangana and Kar.
  • DMT’s approach is to retail quality goods at competitive prices. The majority of products stocked are everyday basic products rather than discretionary items. They minimize operating costs by procuring goods directly from vendors /manufacturers, having an efficient distribution system, minimize inventory build-up, and good store operations.
  • DMT is piloting a project to open delivery centers or pick-up points in catchment areas where it has a store, for online customers. The 150-250 sq. ft. centers named “D’Mart Ready” and will be package pick-up points for eCommerce.
  • DMT plans to add 60% more store space in 3 years, about 21 lakh sq. ft. by FY20.
  • A high proportion of DMT staff are employees on contract. As of Dec 2016, they had only 4,738 full-time employees compared to a high number of employees on contract.
  • The grey market premium for the IPO is about Rs. 227-228. This is a positive.
  • A personal visit to the store was interesting. There were discounts on most products, and on some very good deals. The store location was good, and it was in a busy area. The parking space was ample for customers. There were a range of products under various categories, and in one section DMT had its own private label products with brand names like “D Homes” and “D Premia”. One had to search a little to find shop assistants. There were long queues, even though there were many cashiers counters, indicating popularity at 9.30 pm on a weekday. Overall the experience was good because of the location and deals.

Retail Sector Outlook

  • While organized retail, primarily brick & mortar, has been in India for more than two decades, its contribution to total retail is still low at 9% (USD 55 bn.) as of 2016, a modest increase from around 7% in 2012. This is expected to become 12% (USD 115 bn.) by FY20.
  • Share of urban retail is expected to grow from 49% in FY16 to 52% in FY20 due to increasing urbanization, a higher urban household income, rural distress due to erratic monsoons and increasing penetration of organized retail in urban centers.
  • Currently, the food and groceries (F&G) segment constitutes a majority share of retail (67%). According to Technopak, F&G will have a share of 66% in 2020. Apparel & accessories and consumer electronics categories account for another 8% and 6% of the the retail market.
  • 16 Indian states contribute 85% of the total retail spend. Retail opportunity in three south states – Kar., AP and Telangana is currently USD 100 bn. According to Technopak, these three south states will witness robust growth. Mah. with 19% and Gujarat will grow steadily.
  • Footwear has the highest penetration in organised retail at 40%; apparel & accessories, jewellery and CDIT have penetrations of 22%, 27% and 25%, resp. whereas F&G has just 3%.
  • The implementation of GST will benefit the retail industry over the next 1 year. Source: RHP
  • At present, the organized general merchandise players in India occupy around 40-45 million sq. ft. area. This requirement of retail space is estimated to grow to 60-65 mn. sq. ft. by 2020.
  • Supermarkets have been observed to garner higher levels of productivity amongst the general merchandise focused formats. The store productivity of a supermarket is typically 20-25% higher than that of a hypermarket. Though the efficiencies are higher for supermarkets, the margins are lower as compared to hypermarkets due to F&G category accounting for a greater portion of the product mix, in which the margins are lower as compared to other non-FMCG categories.

jainmatrix investments, dmart superstore

Exhibit 2 – Sales PSF of Supermarket Firms

  • We can see in Exhibit 2 that DMT has superior sales psf. The profit drivers of this industry are 1) Growth of Private Label 2) Optimum Store Size and 3) Growth in Food Processing.
  • Organized retail at a national level opened up only 10-15 years ago in India. On introduction, there were worries that a lot of labor intensive small retail businesses will be affected, so it will have negative social impact. However quite quickly we saw that 1) the sector has taken off rapidly and consumer habits have changed fast 2) small retail has not been much affected 3) political opposition has eased. However there are still restrictions on Walmart or other MNC chains with multiple brand retail business directly entering India without local partners.
  • Market shares – Per reports, in F&G, Future group holds the largest market share with 13% followed by D’Mart at 10% and Reliance at 8%. Together, they contribute 31% of F&G segment. Additionally, the overall organised retail market in India is $60 billion in size. With DMT revenue for FY16 = Rs. 8,606 cr., DMT has a 2.11% in the total organized retail market.

Financials of D-Mart

  • DMT’s revenues, EBITDA and PAT have grown at 40.3%, 45.5% and 51.6% CAGR from FY12-16, see Fig 3. (FY17 data is a projection of 9M FY17 financials). Thus revenue & PAT growth is good.
  • The EPS has risen sharply in the last 5 years. This is excellent.

jainmatrix investments, dmart superstores ipo

Fig 3 – D-Mart Financials

jainmatrix investments, dmart superstores, IPO

Fig 4 – D-Mart Cash Flow

  • DMT has positive cash from operations, see Fig 4, but it has been investing into fresh capacities and hence the company has negative FCF.
  • DMT has an ROE of 21% and ROCE of 23.7% for FY16 which is excellent.
  • DMT has not declared dividend in the last 5 years though the promoter has 91.4% stake. The firm has instead reinvested funds generated into capacity expansion.
  • DMT has good margins. The PAT margin for FY16 stood at 3.7% and for 9M FY17 at 4.4%. The margins will improve as the company reduces debt. DMT has a bank balance of Rs. 351 cr. which translates into Rs. 5.6 as cash/share which is low. So cash is being managed efficiently.

Benchmarking

We benchmark DMT against other retail majors and global retail giant Walmart. See Fig 5.

jainmatrix investments, dmart superstores IPO

Exhibit 5 – Financial Benchmarking (click image to enlarge)

  • PE for DMT appears average compared to listed Indian retail firms. (TTM is trailing 12 months). However it is high as Trent and Shoppers Stop are recovering from losses till 2 years ago.
  • DMT has witnessed excellent PAT growth compared to peers in the last few years. The 3 year PAT growth over 50% makes it the leader. The D/E ratio at 0.74 is moderate. This will fall after the IPO and so it’s a positive. The inventory turnover ratio at 14.2 times makes DMT leader on this parameter too. The ratio indicates how quickly inventory is sold / rotated.
  • The return ratios are best in the industry. Majority of the retail players are stressed.
  • Notes: Revenues, EBITDA and PAT values for Walmart are for CY15/CY16. Operating Margin (EBIT)/Operating Income is used interchangeably with EBITDA Margin/EBITDA for Walmart. Exchange rate of 1USD = Rs. 67.8

Positives for DMT and the IPO

  • DMT is good at offering value retail to the cost conscious consumers. The consumption story in India is robust with a rising aspirational urban middle class. This sector has potential.
  • DMT has taken up its footprint expansion using a distinct store acquisition strategy and ownership model. Business has grown rapidly in recent years, and there is ample opportunity in current presence states in West & South, as well as growth in Central, North & East regions.
  • DMT as high operating efficiencies and a lean cost structure through stringent inventory management and good IT systems. DMT has a strong track record of growth and profitability.
  • DMT enjoys a strong promoter background and an experienced & entrepreneurial management team and high of employee ownership.
  • DMT can aspire for high valuations given that they are growing steadily, profitably and organically. It may soon reduce debt, and has a sustainable business model.
  • The IPO is a fresh issue of shares. Hence the promoters aren’t cashing out, this is positive.
  • With just 9% penetration in retail, the organized sector has massive room to grow.
  • The company has been conservatively managed financially with a D/E of 0.74 this year.

Risks and Negatives for DMT and the IPO

  • The valuations look expensive in terms of P/B ratio. However DMT is able to ask for a premium because of its leadership position.
  • Warren Buffet sold off his stake in global retail leader Walmart last quarter. This is partially due to fierce competition from eCommerce, like Amazon. However USA is at a very different stage of development compared to India. Organized retail dominates there; it is at an early stage of penetration here. eCommerce is well established there; it is at a nascent mostly PE stage here.
  • Having said this, well-funded eCommerce firms are offering good discounts and rapid delivery in urban regions thus grabbing volumes and market share, and changing buying habits.
  • In many pockets in India real estate development is restricted by hidden forces like local politician fiefdoms, administrative permit raj and corruption. Any of the retail firms can be victims of this.
  • Future Retail is a fierce competitor with all India presence, and both organic and acquisition based growth with brands like EasyDay, Nilgiris and Heritage retail. Reliance Retail too is a very big player with Reliance Fresh and vertical chains. Several MNC firms are keen to enter.
  • With stake of 82% post IPO, the promoters will need to reduce to 75% within 3 years of listing.

Overall Opinion and Recommendation

  • Organized retail in India has a good future, and will offer consumers better services and range of products. We can certainly expect multi-year growth, new formats and innovation.
  • DMT has managed current operations and growth very well, and built up a loyal customer base. It has good performance metrics and should grow well organically.
  • The IPO is going to benefit the company in terms of premium inflows that will help reduce debt and grow the network/ operations. Repayment of debt will reduce finance costs.
  • DMT has a professional management team, a respected investor promoter and clear vision and growth strategies which are likely to take the company to new heights in the near future.
  • At a current P/E of 39.9, the valuations are good, considering that DMT is the leader in its segment.
  • This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. Bharat Electronics OFS
  2. Whats different about the Investment Service from JainMatrix? – A video
  3. Why are Indian stock markets attractive for Investments? – A video
  4. BSE IPO: Put this Exchange on Hold – Report plus Video
  5. CPSE ETF FFO – An Energizing Offer – Report plus Video
  6. Balmer Lawrie – An Update
  7. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  8. Investment Outlook – Short Term Pain, Medium Term Gain
  9. The Natural Quotient: A Sustainability Metric for Business
  10. PNB Housing Finance IPO: A Transformed Lender
  11. ICICI Prudential Insurance IPO – An Expensive BUY
  12. GNA Axels IPO
  13. RBL Bank IPO 
  14. New Banks: Big Changes in Small Change 
  15. Equitas IPO – Leader in SF Banks
  16. Do you want to be a value investor?
  17. Mahanagar Gas IPO 
  18. A Repurpose for our PSUs
  19. How to Approach the Stock Market – A Lesson from Warren Buffet
  20. Announcement – SEBI approval as a Research Analyst

DO YOU FIND THIS SITE USEFUL?

  • Visit the Investment Service page to find how you can get more. Or Click LINK
  • Register Now to get our Free reports and much more, on the top right of this page, or by filling this Signup Form CLICK.

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 DMT 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.

Bharat Electronics – Post OFS Note

  • 1st Mar 2017, CMP: Rs 1,518
  • Large Cap – Mkt Cap 33,900 crores
  • OFS Retail Cut off Price: Rs 1,557/share plus a 5% discount
  • Advice: Buy now from the secondary market at CMP

jainmatrix investments, bharat electronics

Here is a post Offer for Sale (OFS) note on Bharat Electronics Ltd (BEL).

About the OFS Offer

OFS Application dates were from 22-23rd Feb with only the second day for Retail. Govt of India sold 1.11 cr. equity shares – 5.0% of stake in BEL, through the OFS route. This was done to meet FY17 divestment targets. The shareholding was 74.4% which has come down to 69.4% after the OFS. The OFS floor price was Rs 1,498; 20% of OFS offer was reserved for Retail, who also got 5% discount. See detailed OFS report: Bharat Electronics – A Value BUY

jainmatrix investments, bharat electronics

Post OFS applications and allotment

  • The Retail quota got subscribed 3.67 times; overall the issue was subscribed 5.3 times. Due to high demand, the actual allotment price/ cut-off was fixed at Rs. 1,558 for retail. After a 5% discount this translates into a price of Rs. 1,479.
  • Many investors lost out on allotment due to 1) sudden OFS announcement 2) confusion around floor price v/s cut off price 3) High cut off price.
  • The share is trading at Rs. 1,518 which is 2.6% higher than discounted OFS price. See Figure above. BEL stock is also 7% below the all-time high of 1,624 of 30th Jan 2017, and 50% above the 1 year low of 1,009 of 1st Mar 2016, reflecting a sharp price uptick in the recent past.
  • We had also written about a transformation in the public sector – A Repurpose for our PSUs 

Opinion

  • BEL is still a value stock for investors who may buy the shares from the open market.
  • IPOs, OFS and FFOs focus attention of investors on a particular stock. However far better bargains are available in the listed company/ secondary markets.

JainMatrix Knowledge Base

See other useful reports:

  1. Whats different about the Investment Service from JainMatrix? – A video
  2. Why are Indian stock markets attractive for Investments? – A video
  3. BSE IPO: Put this Exchange on Hold – Report plus Video
  4. CPSE ETF FFO – An Energizing Offer – Report plus Video
  5. Balmer Lawrie – An Update
  6. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  7. Investment Outlook – Short Term Pain, Medium Term Gain
  8. The Natural Quotient: A Sustainability Metric for Business
  9. PNB Housing Finance IPO: A Transformed Lender
  10. Endurance Technologies IPO 
  11. ICICI Prudential Insurance IPO – An Expensive BUY
  12. GNA Axels IPO
  13. RBL Bank IPO 
  14. New Banks: Big Changes in Small Change 
  15. Equitas IPO – Leader in SF Banks
  16. Do you want to be a value investor?
  17. Mahanagar Gas IPO 
  18. A Repurpose for our PSUs
  19. How to Approach the Stock Market – A Lesson from Warren Buffet
  20. Announcement – SEBI approval as a Research Analyst

Do you find this site useful?

  • Visit the Investment Service page to find how you can get more. Or Click LINK
  • Register Now to get our Free reports and much more, on the top right of this page, or by filling this Signup Form CLICK.

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 current holding in BEL, and JM has no known financial interests in BEL or any related firm. 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 equity investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JM at punit.jain@jainmatrix.com

Bharat Electronics OFS – A Value BUY

  • 22nd Feb 2017 
  • CMP: Rs 1,510
  • Large Cap – Mkt Cap 33,700 crores
  • Issue Period: 23rd Feb 2017, one day only
  • OFS Floor Pricing: Rs 1,498/share. Retail gets a 5% discount
  • Advice: Investors can BUY with a 2 year perspective 

Summary

  • Overview: BEL is a PSU Navaratna engaged in design, mfg. and supply of electronics products/systems for the defense requirements, as well as for non-defense markets.
  • The EPS growth has been excellent recently and the price has risen faster than EPS growth leading to re-rating of the PE ratio/valuation of the company. The current government has a big thrust on defense which is evident from the quantum of fresh orders acquired for FY16.
  • Investors have got a 5 year CAGR return of 25.7% and 12.1% CAGR in the last 2 years.
  • BEL has conservatively preserved cash and is poised to grow financially as the Indian defence sector starts to grow domestically.
  • Overall Opinion: We feel BEL is a value BUY for investors in this OFS.

OFS Offer details

  • CMP is Rs 1,510. The OFS floor price is Rs 1,498; there is a 5% discount for Retail investors. 20% of the OFS offer is reserved for Retail. At floor price this is Rs 1,423.
  • Cut off is the lowest price at which OFS shares will be sold, and will be equal or above the floor price. Cut off depend on the bids. Applicants may apply for OFS at floor price, or above, or at Cut Off.
  • OFS Application date is only one day – Feb 23rd, 2017 between 9.15 am to 3.30 pm.
  • The GoI will sell 1.11 cr. equity shares (5.0%) of stake in BEL through the OFS route. The govt. is selling this to meet its FY17 divestment targets. The shareholding is currently 74.4% which will come down to 69.4% after the OFS. It could fetch GoI about Rs 1,672 cr., based on the pricing declared.
  • P/E as on 21st Feb, 2017 closing price is 21.8 times, which appears high.

Here is a note on the Bharat Electronics Ltd (BEL) Offer for Sale (OFS).

Introduction

  • BEL is a Bangalore based PSU engaged in design, mfg and supply of electronics products/systems for mostly defense, and some non-defense applications.
  • It has been accorded Navratna status by the GoI. BEL owns 9 factories.
  • Turnover and profits were Rs 7,459 cr. and Rs 1,357 cr. in FY16. BEL has 9,848 employees (FY16) and a market Cap of Rs. 33,734 cr. Exports make up 7% of turnover.
  • Shareholding in % is – GoI 74.4, DIIs 15.8, QFIs 4.3, Individuals 2.8, Others 2.74%.
  • Its key products are weapon systems, radar and fire control systems, and communication. Its defense products include defence communication; radars; naval systems; computers, intelligence systems; weapon systems; telecom and broadcast systems; electronic warfare; electro optics, and solar photovoltaic systems. Its nondefense products include turnkey system solutions; civilian radars; e-governance systems, and homeland security. It also offers electronic mfg. services in areas of PCB assembly and testing; precision machining and fabrication; opto electronics components and assemblies, and offsets, among others.

Stock Evaluation, Performance and Returns

jainmatrix investments, bharat electronics

Fig 1 – Price History

  • Revenues, EBITDA and Profits have grown at 7.1%, 6.2% and 7.7% over 7 years.
  • There’s been a recent acceleration – the EPS TTM has grown from Rs 28.3/share in Dec 2012 to Rs 69.4/share in Dec 2016, a 25.2% CAGR growth in EPS in 4 years.
  • The share price, grew at 25.7% CAGR over 5 years, see Fig 1 – Price History.
  • The margins are good. The EBITDA and PAT margin for FY16 stood at 35.2% and 24.7%, see Fig 2.

 

jainmatrix investments, bharat electronics

Fig 2 – Quarterly Financial

  • We can see that the Q4 – March quarter is the largest by far due to Govt. customers.
  • ROCE and RONW are currently at 20.2% and 16.2% resp. Both these ratios have been high and fairly stable over the last 5 years.
  • The dividend at 257% on a FV of Rs 10, provides a dividend yield of 1.13%. This is good.
  • Cash from operations and Free Cash Flow are positive for 7 of the last 9 years. This is a positive. Fig 3.
  • As a result BEL has good cash reserves and zero debt. The cash on hand is Rs.7,553 cr (FY16), which is Rs 315 per share. In theory, the operations of BEL are available today for Rs 1510-315= Rs 1,195.
  • This cash on the balance sheet may be used for expansions, M&A or dividends.

 

jainmatrix investments, bharat electronics

Fig 3 – Cash Flow and Dividend

jainmatrix investments, bharat electronics

Fig 4 – Price and PE Chart/ Fig 5 – Price and EPS Chart

jainmatrix investments, bharat electronics

  • The Price and P/E chart is Fig 4. The 8 year historical average PE is 17.5 times and range is 10 to 25 times in 4 quadrants. Current P/E at 21.75 times is in the high or overpriced quadrant per the chart.
  • The Price and EPS chart Fig 5 shows a strong rise in EPS from 2014-16. However the BEL share price rose faster, so the PE too has risen in the last 4 years.
  • We conclude that the BEL stock has got re-rated and the historical average has moved to a higher level in the last 2.5 years.

jainmatrix investments, bharat electronics

Fig 6 – Booked to Bill ratio / Fig 7 – New Orders 

jainmatrix investments, bharat electronics

  • A key ratio is Total Orders Booked to Revenues Billed, Fig 6. This is linked to annual new orders, Fig 7. The last 4 years view shows that the ratio is improving.
  • It is because of GoI thrust on defense combines with the Make in India program where they are trying to develop domestic capabilities in both private and public sectors. This is evident from the quantum of fresh orders acquired for FY16.

Benchmarking

benchmarking

Exhibit 8 – Financial Benchmarking (click image to enlarge)

In the benchmarking exercise we compare BEL with some peers. See Exhibit 8.

  • It’s difficult to find comparable firms to BEL due to its unique defence sector, electronics products, emerging industry and PSU status.
  • The PE ratio appears moderate, however the P/B ratio appears to be high.
  • It has a good position in terms of margins and dividend yield and return ratios.
  • The double digit return ratios are good and stable over the years. This is a positive considering the nature of the business of BEL.

Overall Opinion

  • India has the third largest armed defense force in the world. India’s requirements on defense are currently catered largely by imports. The GoI policy is now promoting self-reliance, indigenisation, technology upgradation, achieving economies of scale and development of capabilities in defense.
  • BEL occupies an important space as it has a momentum of capabilities in electronics and is being entrusted with many new initiatives. Its growth has picked up massively in the recent years.
  • We feel that opening up of the defence sector to the private players is the way to go in the long run. However the growth of private domestic defense firms may take time to translate to reality. Until then, PSU defense firms will dominate. They will also help in the transition to private sector.
  • BEL like most PSUs has conservatively preserved cash and is poised to grow fast.
  • We feel BEL is a value BUY for a 2 year holding period in this OFS and at current levels from markets.

Download the PDF to see entire note.

JainMatrix Investments_BEL_Feb2017

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DISCLAIMERS

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 current holding in BEL, but he may apply in the OFS in the retail category. Other than this, JM has no known financial interests in BEL or any related firm. 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 equity investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

CPSE ETF FFO – An Energizing Offer – Post Listing Note

Date: 3rd Feb 2017 

Hi investors,

Introduction: We had published a report on the FFO (Further Fund Offer) of CPSE ETF on 14th Jan, 2017. And recommended a BUY with a 1 year perspective. You can have a look at the report on the following LINK and the video on this LINK.

Here is an update about the offer and about the performance of the CPSE ETF FFO.

  • Subscription response: The Reliance Mutual Fund managed CPSE ETF opened for applications from 17-20th It was subscribed by 2.30 times, with bids worth Rs13,802 cr. coming in against the issue size of Rs 6,000 cr. The FFO received 250,000 applications, with good demand across investor segments.
  • Allotment: Retail investors were favoured in this offer. It seems that full allotment has been made to all retail applicant applying up to Rs. 2 lakh worth of this Fund. Investors may also get a rounding off amount credited as refund.
  • Discount: A discount of 5 % on the FFO Reference Market Price of Index was offered to retail.
  • FFO Price: The FFO Allotment Price is approximately equal to 1/100thof Nifty CPSE Index minus discount. The allotment price was Rs 25.21 and this tranche was listed on 31st  Jan.
  • Performance: The EOD closing price on the exchange was Rs. 27.88 today, ie. 3rd Feb, 2017. This translates into a gain of 10.6% in 14 days.
  • Advice: (We stay with our recommendations) that this is a medium risk, medium return offering suitable for conservative investors. Buy with a 1 year perspective.
  • News: Based on the success of this second tranche of CPSE ETF, the Union Budget for FY 2017-18 announced that the government will continue to divest stake in state-owned companies in FY18 in the form of variations of CPSE ETF.

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 has an ownership in CPSE ETF 2014 units and CPSE ETF 2017 as a Retail applicant in NFO/ FFO only. Other than this JM has no known financial interests in CPSE ETF / Reliance Mutual Fund or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

BSE IPO: Put this Exchange on Hold

  • Date 20th Jan 2017 
  • IPO Opens 23-25th Jan at offer price range: Rs. 805-806
  • Its a Mid Cap with Rs 4,400 crore Mkt cap
  • Industry – Stock Exchange 
  • P/E 35.9 and P/B 1.80 times (based on FY16)
  • Advice: the IPO is rated AVERAGE

bse_logo

Overview: BSE is a stock exchange platform which is the first stock exchange in Asia and the world’s largest exchange by number of companies. Income for FY16 was Rs 658 cr. and profits Rs 123 cr. It offers a wide range of trading related services and monitors the listed companies, Sensex index and market activities. New product offerings, start of operations at GIFT city and stake divestment via CDSL IPO are likely to boost financials in the medium term. However it is an OFS, so BSE doesn’t benefit in IPO. Market shares are low at 39% in currency derivatives and 14% in equity cash. At FY16 P/E of 35.9, and a FY17E forward PE of 21.0, the valuations are high. NSE is a fierce competitor, and is ahead in terms of volumes, growth and profits, reducing BSE to a niche player.

Opinion: This offering is rated AVERAGE, and investors may look elsewhere for long term gains.

We present here a short video on the BSE IPO.

A VIDEO on BSE IPO 

Here is a note on the Bombay Stock Exchange Ltd. (BSE) IPO.

IPO highlights

  • This IPO opens: 23-25thJan 2017 with the Price band: Rs.805-806 per share.
  • Shares offered to public number 1.54 cr. The FV of each is Rs. 2 and market Lot is 18. These shares are 28.26% of equity. The IPO will collect Rs 1,243 cr. (UMP) under the OFS route.
  • The IPO shares are available to institutional, non-institutional and retail in ratio of 50:15:35.
  • Trading Members hold 44% stake of BSE, and 56% is held by institutions & investors. Singapore Exchange, Atticus Mauritius Ltd and Quantum Ltd. are completely exiting through this IPO offering.
  • BSE would not benefit from the IPO as it is an offer for sale (OFS).

Introduction

  • BSE is a stock exchange platform, the first stock exchange in Asia, formed in 1875. It is the world’s largest exchange by number of listed companies, and India’s largest and the world’s 10th largest exchange by listings market cap, with US$ 1.7 tn. in total market cap of listed companies.
  • Total income for FY16 was Rs 658 cr. and net profit Rs 123 cr. It has 513 employees.
  • As a platform, it regulates listed issuers and provides a market for listing and trading in various types of securities as allowed by SEBI. The primary operating businesses of BSE are as follows: (See Fig 1)
    • Listing business: called the primary market, which relates to the issuance of new securities. It also has a platform for listing and trading in equities of small-and-medium enterprises (SME).
    • Market business: which consists of trading of listed securities, MFs, OTC corporate bonds, membership of depository participants in CDSL depository and providing post-trade services.
    • Data business: which consists of the sale and licensing of information and trading products.
    • Their operations also include IT services and solutions, the setting up of indices and training. They offer equity and currency derivatives, securities lending and borrowing, and platforms to facilitate buyback and sale of securities by substantial shareholders of listed companies.
  • BSE has listed 5,868 companies and 1,446 members across all segments, and in FY16 it took 28.49 crore orders and executed 15.5 lakh trades in equity shares average per trading day, making it the 12th most active trading exchange in the world.
  • BSE extensively monitors the listed companies and market activities to minimize the risk of default, promote market transparency and integrity, contributing to growth of the Indian capital markets.
  • Deutsche Borse, Singapore Exchange, SBI, LIC, and GKFF Ventures hold 4.75%, 4.75%, 4.75%, 4.68% and 4.58% respectively.
JainMatrix Investments, BSE IPO

Fig 1 – BSE FY16 Segment Revenues

JainMatrix Investments, BSE IPO

Fig 2 – BSE revenue growth

  • BSE has a market share of 39% in the currency derivatives segment and 14% in equity cash segment whereas NSE remains the leader with shares of 56% and 86% respectively. In the profitable equity derivatives segment, BSE market share has dropped to almost zero.
  • In April 2012, the SEBI board passed regulations limiting stock exchanges from owning more than 24% of the share capital of a depository and gave 3 years to comply. BSE was not compliant and SEBI extended its deadline to FY17. To meet this requirement, BSE divested 4.15% stake in CDSL to LIC in Oct 2016, but still holds 50.05%. BSE will dilute the excess stake in CDSL in the IPO of CDSL.
  • Leadership Sudhakar Rao-Ch’man, Ashish Kr. Chauhan-MD/CEO, Nehal Vora-CRO, Nayan Mehta CFO

News and Updates for BSE

  • BSE’s index – the S&P BSE Sensex is India’s most widely tracked stock market benchmark index.
  • India International Exchange (IIE), a subsidiary of BSE, commenced trading at Gujarat International Finance Tech (GIFT) city on 16th Jan, 2017. Tech offerings by IIE will facilitate co-location of members in its center at GIFT IFSC as well as algo trading including high frequency traders. The high speed platform will provide cross-border opportunities of investment with a supportive regulatory framework, and many infra and tax benefits. NSE is also expected to launch here soon.
  • SEBI announced a reduction of 25% in the fee payable by brokers and also decided to amend regulations to enable them to make payments through digital mode. This is a positive for the sector.
  • BSE discontinued lump sum transactions through paperless SIP facility for MF investors in Jan 2017. It introduced iSIP to help set up a SIP without documents, and ‘BSE StAR MF’ mobile app for android.
  • BSE was caught in two legal disputes just before the IPO. A contempt of court petition was filed in the high court because of irregularities in the Corporate office building, where a legal notice has challenged the launch of the IPO for BSE. The contempt petition has been filed by Yogesh Mehta against city officials, highlighting their inaction against illegalities in the building. The stock exchange lost the case right up to the Supreme Court, while another PIL in the case was dismissed by the HC.
  • BSE introduced new interest rate futures (IRF) contracts from Dec 30, 2016 on 6-year govt. bonds. The contract is based on 6.84% central govt. security maturing in 2022. An IRF contract is an agreement to buy or sell a debt instrument at a specified future date at a pre-determined price.
  • BSE announced in Jan 2017 that it will conduct periodic call auction for illiquid securities of 335 illiquid stocks. The auction would be based on trading activity during the period July–Dec 2016.
  • BSE shares 85% of profits as dividend, and plans to continue with high dividend in future
  • Subsidiary CDSL has filed papers for IPO with SEBI. BSE would dilute 26% stake in this IPO.
  • The unofficial/ grey market premium for this IPO is in the range of Rs. 128-130. This is a positive.

STOCK Exchange Sector OVERVIEW

  • Globally, there are over 70 major stock exchanges with a listings market cap of more than US$5 bn each. The total global market cap of WFE member exchanges (World Federation Exchanges) aggregated to US$68 tn. Of these stock exchanges, 16 had a market cap of above US$1 tn. each. Market cap of these stock exchanges taken together account for 86% of the total global market cap.
  • The NYSE dominates with a market cap of about US$18.2 tn. In terms of turnover, Shanghai SE topped the list with a turnover of about US$21.3 tn. in 2015. BSE was the largest in the world in terms of number of listed companies at the end of Oct 2016, with 5,868 companies.
  • Global exchanges derive revenue from transaction fees, listing, clearing and depository services. For both exchanges, BSE and NSE, revenue mainly comes from securities. Services to corporates, like listing income makes a significant contribution to revenues.
  • Equity as a percentage of financial savings in India is just 5%, compared with 14% China, 15% (Brazil), 20% (Indonesia) and 42% in USA. Growth for equity should grow and BSE will surely gain from this.
  • The key growth drivers for the exchange sector in India are as follows:
    • Demographic: India’s working age population is more than 60% of the population. A rising working age population results in a boost to consumer spending in the economy.
    • Awareness and participation by retail investors: In recent years, equity investments by Indian investors is slowly increasing due to specific tax breaks for equity investors and financial awareness programs conducted by MF houses and stock exchanges.
    • Initiatives by the GoI: Last year, GoI allowed the Employee Provident Fund Organisation (EPFO) to invest in equity markets. The state-run pension fund had a retirement corpus of Rs 8.5 lakh crore in 2015. It made a small investment of Rs 6,577 cr. in FY16, which may increase.
    • FIIs: The FIIs are significant players in Indian capital markets, and constitute 18% of turnover in cash market, and 10% of client turnover in derivatives. FII flows will be a key driver of growth.
  • From FY12 to FY16, the no. of shares traded on BSE & NSE combined grew by 30%. However, in H1 FY17, the shares traded on BSE declined by 9% YoY, while those traded on NSE increased by 22%.
  • Information and data services contribute just 4-5% compared to 10-25% in other economies. They grew at 14% CAGR over 5 years. However, the base is low, so they should grow annually by 15-20%.
  • India had an IPO revival recently, driven by strong economic fundamentals, favorable policy climate and strong investor confidence. Listing fees should grow at 15-20% over the next 5 years.
  • Revenues from index services can further grow for the Indian market by expanding product offerings beyond equities. Revenues from index services should grow at 15-20% over the next 5 years.
  • Source: BSE –RHP, NSE – DRHP

Financials of BSE

  • BSE’s revenues, EBITDA and PAT have grown at 3.28%, -4.4% and -8.2% resp. CAGR from FY12 to FY16, see Fig 3. (Note: FY17 data is a simple doubling of H1 FY17 financials). Thus revenue growth is flat while profits have fallen, with NSE fast gaining market share in various segments. But we can see there is a recovery in earnings in H1 FY17.
  • BSE has an ROE of 5% and ROCE of 8.2% for FY16 which is poor.
JainMatrix Investments, BSE IPO

Fig 3 – BSE Financials

JainMatrix Investments, BSE IPO

Fig 4 – BSE Cash Flow

  • BSE has robust margins that are improving. Even a small revenue growth will see improvements.
  • The current dividend yield is 1.86% which is moderate. BSE distributes 85% of its profits as dividend and plans to continue with the high dividend in the future.
  • The top 5 subsidiaries of BSE are CDSL, ICCL, Marketplace Technologies, CDSL Venture and BSE Institute. It has 50.1%, 100%, 100%, 100% and 100% stake in them resp. and all are profitable.
  • BSE has a bank balance of Rs. 1,692 cr. which translates into Rs 310 as cash/share. With an IPO pricing of Rs 806, we can buy the operations of BSE for Rs 496. BSE has been generated free cash flows from FY12 through FY16. This is a positive. However it may be negative in FY17. See Fig 4.

Benchmarking

We benchmark BSE against NSE, MCX and other listed global stock exchanges. See Fig 5.

JainMatrix Investments, BSE IPO

Exhibit 5 – Financial Benchmarking (click on image to enlarge)

  • The FY16 based PE for BSE appears to be high. P/B is lower and looks reasonable.
  • BSE has the witnessed low sales and PAT growth compared to its peers. NSE has performed far better in the same macroeconomic conditions. BSE is debt free which is good. However low/no debt is common across all exchanges globally. BSE margins are high, which is a positive. However it appears low compared to its peer group. BSE has low return ratios, but moderate dividend yield.

Notes to financial benchmarking: Revenues, EBITDA and PAT values have been ascertained using the latest financial data/information available for global exchanges (CY15, Jun 16). Operating Margin (EBIT)/Operating Income has been used interchangeably with EBITDA Margin/EBITDA for global stock exchanges. Exchange rate of 1USD = Rs. 68, 1HKD = 8.77, 1SGD = 47.8, 1Euro = 72.5, 1AED = 18.51

Positives for BSE and the IPO

  • BSE has strong brand recognition with a track record of innovation. According to CARE Research, BSE ranks third globally in terms of currency options and futures contracts traded in 2015.
  • BSE has a diversified & integrated business model and good relationships with market participants. Revenues are more broad based with lower risk. With the largest number of listed firms, BSE provides critical listing infra for many firms.
  • The valuations are moderate in terms of P/E and P/B. The company is debt free and has generated free cash flows from FY12 through FY16. This is good for investors looking for stable companies.
  • Due to a good cash position, we can buy the operations of BSE for Rs 496, which is quite low.
  • The IT platform of BSE is robust and high speed, which can be a valuable asset.
  • BSE is nimble in its offerings and services, and has grabbed new opportunities, including the IIE.
  • There has been a spate of IPOs in Indian markets in recent times, and they have almost all sailed through, some with massive over subscriptions. Listing revenues segment can be quite positive.
  • In H1FY17, margin improved due to healthy growth in transaction charges and higher other income. In the near term, earnings may be boosted by changes in settlement guarantee fund (SGF) norms.

Risks and Negatives 

  • The IPO is an OFS, so BSE does not benefit. It is a liquidity event for past investors.
  • The BSE is very weak in the profitable equity derivatives segment.
  • Stock exchanges are the basic infrastructure for the trading industry. With higher volumes there can be a sharp rise in profits. However we see a flat revenue growth and falling profits at BSE. Even though H1FY17 results were good, we cannot say that this trend has been reversed yet. It’s likely that NSE will dominate the high volume and profitable segments, and BSE will remain a niche player.
  • BSE operates in a highly regulated industry and may be subject to censures, fines and other legal proceedings if they fail to comply with their legal and regulatory obligations.
  • BSE has received certain complaints from the public after filing of the DRHP with SEBI, with many allegations. Any litigation arising on account of such complaints, if adversely determined, could materially affect its businesses and financial condition.
  • BSE isn’t loss making per se, however there hasn’t been real growth in the last 3 years. In spite of double digit margins, the bottom-line may not improve if there is no sales growth.
  • Unconfirmed reports suggest that investors in BSE over the past few years are exiting with flat gains.

Overall Opinion and Recommendation

  • Post demonetization, we feel Indian households will increasingly channel savings to equity markets, as will FIIs and DIIs. BSE should benefit from this.
  • Not just historically but also in terms of market breadth, BSE is a leader and should be able to consolidate its position financially over the next few years.
  • More product offerings, commencement of operations at GIFT city and stake divestment via CDSL IPO are likely to keep BSE financials healthy in the medium term.
  • However NSE is a fierce competitor, and is way ahead in terms of volumes, growth and profits.
  • At a FY16 P/E of 35.9, and a FY17E forward PE of 21.0, the valuations are average.
  • This IPO offering is rated AVERAGE, and investors are advised to look elsewhere for long term gains.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. CPSE ETF FFO – An Energizing Offer
  2. Balmer Lawrie – An Update
  3. Why Stocks, and Investment Outlook – Dec 2016
  4. Investment Outlook – Short Term Pain, Medium Term Gain
  5. The Natural Quotient: A Sustainability Metric for Business
  6. PNB Housing Finance IPO: A Transformed Lender
  7. Endurance Technologies IPO 
  8. ICICI Prudential Insurance IPO – An Expensive BUY
  9. GNA Axels IPO
  10. RBL Bank IPO 
  11. New Banks: Big Changes in Small Change 
  12. Equitas IPO – Leader in SF Banks
  13. Do you want to be a value investor?
  14. Mahanagar Gas IPO 
  15. A Repurpose for our PSUs
  16. How to Approach the Stock Market – A Lesson from Warren Buffet
  17. 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 known financial interests in BSE 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.