Category: IPO/FPO ANALYSIS

Opportunities provided in IPO and FPO situations are analysed

L&T Infotech IPO – An Exciting Tech Spinoff

Summary

  • IPO Applications: IPO Period: 11th-13th July
  • IPO Price range: Rs. 705-710 with Retail discount: Rs 10/share
  • Mid Cap – Rs 12,056 crore Market Cap and Industry – IT services
  • Overview: LTECH is the sixth largest Indian IT services firm, and part of L&T group.
  • LTECH had FY16 revenues and profits of Rs 6,143 crores and Rs 922 cr. LTECH’s revenue, EBITDA and PAT have grown 16.4%, 17.4% and 20.7% CAGR over 5 years.
  • LTECH is a leader among IT services midcaps. It has a good balance sheet, solid global presence and diversified business vertical segments. It has access to rich knowledge pools. We are optimistic that leadership in LTECH will settle down to start shaping a better trajectory in the next few years.
  • Valuations appear attractive. The asking PE at 12.65 times is lower than listed peers. There is a discount of Rs 10/- for retail. There is something on the table for investors.
  • However there are a few risks: the uncertainties at LTECH are on current leadership, low growth rates, and planned acquisitions. Business development appears weak.
  • Outlook: As an investment, the LTECH IPO is rated a medium risk, medium return type of offering. Investors may Buy LTECH with a 2-3 year perspective.

Here is a note on L&T Infotech Ltd (LTECH)

IPO highlights

  • IPO opens: Monday 11-13th July 2016 with Issue Price band: Rs. 705-710 per share.
  • A discount of Rs 10/- is offered to retail category investors.
  • Shares offered to public: 1.75 crores of Face Value: Rs. 1 per share, Market Lot: multiples of 20.
  • Shares offered are 10.3% of equity. The IPO is of Rs 1,242 cr. (upper band) which is a sale by current shareholders; there is no fresh issue of shares.
  • The promoter of LTECH is L&T which holds 94.9% stake, and post IPO this will fall to 84.6%. The IPO shares are available to QIB, NIB and retail in ratio of 50:15:35. Post IPO shareholding will be promoter 84.6%, IPO (QIB 5.1%, NIB 1.5%, retail 3.6%) and Others 5.1%.
  • This IPO will unlock value for L&T, as LTECH will be independently valued in line with IT firms.
  • The IPO grey market premium on LTECH is Rs 80 – 83, a positive indication.

Introduction

  • LTECH is the sixth largest Indian IT services firm, is Mumbai based and part of L&T group.
  • LTECH had revenues and profits of Rs 6,143 crores and Rs 922 cr. resp. in FY16.
  • Its revenue, EBITDA and PAT have grown 16.4%, 17.4% and 20.7% CAGR over 5 years.
  • LTECH has 41 sales & 22 delivery offices globally. See Fig 1. It has 20,072 employees.
  • It addresses clients in diverse industries such as BFSI, insurance, energy, CPG, retail, pharma, etc. See Fig 2. Their range of services includes application development, maintenance, outsourcing, enterprise solutions, infrastructure mgt., testing, digital solutions and platform-based solutions.
  • LTECH has 258 active clients which include 49 from the Fortune 500. LTECH’s top client Citibank accounted for 14.9%, while the top 10 clients constituted 52.7% of FY16 revenue.
  • Citibank, Chevron, Barclays and Time Warner are the largest clients. Revenue geography is in Fig 1.
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Fig 1 – Geographic revenue/ Fig 2 – Revenues by Vertical (JainMatrix Investments)

 

L&T Infotech, JainMatrix Investments

Fig 3 – Segment Margins (Click on images to expand)

  • In 2015, NASSCOM ranked LTECH the 6th largest Indian IT services firm in export revenues. They were among top 20 IT service providers globally in 2015 (Everest Group’s PEAK Matrix).
  • A. M. Naik is the non-executive Chairman; Sanjay Jalona is the CEO & MD of LTECH.
  • As part of a business restructuring by L&T, all engineering services businesses of L&T were consolidated under the subsidiary – LTTSL (L&T Technology Services Ltd). The IT services were retained by LTECH. In Jan 2014, LTECH sold and transferred their PES Business to LTTSL. The PES business included the telecom cluster, for services and solutions to telecom clients.
  • As we can see from Fig 3, the operating margins of the telecom business were witnessing a fall. Hence transferring the business to LTTSL was perhaps beneficial for LTECH.

Promoter (L&T) – Snapshot and Financials

  • L&T is a diversified engineering, construction, manufacturing, technology and financial services company.
  • Income and PAT has grown at 12.4% and 4.3% CAGR resp. over 5 years. In the same duration EPS witnessed a fall of -8.03% CAGR. P/E ratio has however risen to 22.34 times. See Fig 4.
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Fig 4 – L&T financials (JainMatrix Investments)

  • L&T has low net profit margin of 5.21%. The current dividend yield for L&T stands at 1.24%. The RoCE stands at 10.6% and RoE at 11.33%. This is average performance.
  • This is the third listing from the group after L&T India and L&T Finance.
  • L&T has struggled in the last 3 years. Its hydrocarbon division reported a loss in the 2014 June quarter. Profitability in segments such as power, material handling and metallurgy were flat. In West Asia, there is uncertainty on account of falling crude prices. There was slow revenue recognition in Indian projects due to weak project execution and delay in client payments.
  • L&T’s share price has gained only 4.9% CAGR over 5 years with high volatility.
  • However we are positive that the investment cycle and infra focus will re-emerge over the next 2 years as the economy picks up. Sectors like defense, railways, roads and construction are recovering. L&T is best placed to benefit from this, given its exposure to diverse sectors, its strong balance sheet and positive cash flow as compared to its peers. So we are positive on L&T.

Business Model, News and Updates for LTECH

  • It as part of the L&T group benefits from their expertise and experience in a range of verticals. This strong domain experience and understanding of businesses assists in developing and delivering IT services and solutions. This model called “Business-to-IT Connect” by LTECH is a key strength.
  • The management plan is to enhance key new technologies such as their digital platforms, build industry and technology frameworks, the internet of things (IoT), business process digitalization and end-to-end digital transformational delivery capabilities.
  • LTECH plans to increase its geographical reach in markets that have potential which includes Australia, Singapore, Japan, South Africa, India and the Middle East.
  • The INR is holding up against USD, and we expect a range of 66-70 Rs/$, a positive for LTECH.
  • LTECH is targeting a doubling of revenues in the next 3-4 years through acquisitions and organic growth. For acquisitions, the company will focus on the North American and European markets.
  • A news article said LTECH had issued 1,500 engineering graduates job offer letters on campus in 2015 but withdrew these in May 2016. (news – Indian Express)
  • There was industry speculation that exits of senior executives at LTECH were due to the interference of A. M. Naik. However he has denied this, and said the exits were due to their own decisions.
  • The unofficial/ grey market premium for this IPO is in the range of Rs 80 – 82.

Industry Outlook

  • In 2015-16, the global economy was characterized by volatility and turmoil. According to NASSCOM, developed and emerging countries experienced multiple headwinds with as economies stagnating, terrorism increase, turbulence in currency and equity markets, and high unemployment.
  • Globally, the total capital investment in technology is estimated at USD 6 trillion in 2014.
  • As per NASSCOM the shift towards digital is inevitable. Incremental expenditures over the next decade may be driven by digital technologies.
  • According to NASSCOM, worldwide IT & business process management spend in 2015 (excluding hardware) was impacted by the volatility in global currencies resulting in a near flat growth of 0.4% (USD 1.2 trillion) in 2015. IT services saw a slight decline in growth (-0.2%). A shift to cloud-based applications led to a decline in traditional IS outsourcing and Network and Desktop Outsourcing.
  • According to NASSCOM, exports in FY16 were USD 108 billion, a 10.3% annual growth.
  • The industry projection is 10-12% for FY17, lower than the 12-14% for FY16.
  • We feel that Indian IT services are gaining market share against US and European firms. This is because of good IT talent & lower cost structures in India, and better service maturity in firms.
  • There are rapid changes in IT services, from linear to non-linear business models, from isolated applications to cloud services & networks. The firms have to take a lead in introducing tech changes.

Financials of LTECH

  • LTECH’s revenue, EBITDA and PAT grew 16.4%, 17.5% and 20.8% CAGR over 5 years. Revenue has grown steadily and margins of LTECH are stable, see Fig 5.
  • However for FY16 LTECH reported a gain of Rs 276.5 cr from forex on a profit of Rs 922.2 cr. Thus 30% of the profits were from Forex gains.
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Fig 5 – L&T Infotech Financials (JainMatrix Investments)

  • The operating margins have been flat over the years. The net profit margin improved marginally to 15% in FY16 from 13.6% in FY12.
  • LTECH witnessed a massive jump 61.8% in PAT for FY14. There was an extraordinary gain of Rs 239.7 cr. for that year since the PES business unit was sold to LTTSL.
  • LTECH paid a dividend of Rs 32.65/share in FY16, a yield of 4.6%. This is a big positive.
  • LTECH has positive Free Cash Flow over the last 5 years, a big positive. See Fig 6. LTECH has a ROE of 45.55% (FY16) making it the leader in the industry.
  • The cash per share including Reserves & Surplus and Cash in B/Sheet is Rs 130/share. Hence the operations of LTECH are available in IPO at (710-130) = Rs 580/share.
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Fig 6 – L&T Infotech Cash Flows (JainMatrix Investments)

Benchmarking

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Fig 7 – Benchmarking (JainMatrix Investments)

We benchmark LTECH against peers like Mindtree, Infosys, Wipro etc. See Fig 7.

  1. LTECH appears to be available at reasonable valuations in terms of PE. It doesn’t look cheap on P/B though.
  2. Highest ROE is a positive. But this is because it has a tiny share capital of Rs 16.8 cr.
  3. Dividend yield is very good; the balance sheet is strong and can be leveraged in future. Debt is very low, free cash flows are positive. However this is common across the Indian IT sector.
  4. Margins are average. Also unimpressive are 3 year growth rates, utilization and profit/ employee.
  5. However if we relook at this firm as a mid-cap comparable to only Mindtree and Hexaware, its margins, utilizations and profit/ employee suddenly look good. Only growth looks weak.

Positives for LTECH and this IPO

  • LTECH has an advantage of association with L&T group, which gives it a great access to 1) specialized knowledge in many sectors 2) a big customer base in India and Middle East. LTECH has a sister firm LTTSL, which is focused on engineering services. There are good synergies between them for cross selling and common sales teams. We believe these two firms are already working together in Sales.
  • With revenues > Rs 5,000 crore and employees > 20,000, LTECH is well placed to pitch for and win large orders of size $10-50 million (70-350 crores).
  • The IPO pricing is attractive. At the upper band of Rs 710/share, LTECH’s asking P/E is 12.65 times which is lower than Mindtree (18.33 times) and other peers. Also there is a retail discount.
  • LTECH is a low debt firm, with strong balance sheet, cash balance and high return on equity. It has a high dividend yield of 4.6%. This makes LTECH attractive.
  • With a good geographic spread and employee strength, LTECH has the potential to grow rapidly. Per management it will double revenues in 3-4 years with acquisitions & organic growth.
    • However we are unconvinced about this, with little evidence of high growth in recent past.
  • We are positive that new leadership will settle in and rally this firm to new heights.
  • The small share capital base (in relation to revenues and profits) is not right and LTECH is likely to award bonuses and rights to shareholders in the next few years to expand this.
  • LTECH has a focus on emerging technologies such as Social, Mobile, AIM, Cloud Computing, Big Data, IoT, Enterprise Integration, Biz Process Digitalisation, User Experience and Cognitive Computing. This is good.

Internal Risks

  • LTECH bears a client concentration risk, and top 10 accounts get 52.7% of revenues.
    • However this is not a worry, if the firm gets good growth from new clients.
  • Leadership – There have been many top level exits in LTECH in recent years. This is worrying as any new executive takes time to settle down. Current CEO-MD Sanjay Jalona has been here for less than 1 year.
  • We don’t see a clear strategy from LTECH or how it differentiates itself. The strategy and vision has to come from top management, and so again this issue is related to the executive changes.
  • In FY2014, a restructuring was taken up to transfer the engineering services unit to LTTSL. Typically IT firms like TCS and Infosys include both IT and engineering services. We are unable to find the reasons or justification for this demerger, since we see a good synergy among the firms. Is this a pre IPO clean-up of LTECH?
  • The sister company, LTTSL operates in the engineering services space and has global clients. While these 2 firms have well defined focus, there may be many areas where strong coordination is required. There can be areas of business and sales conflict.
  • About 15 contracts which make up 22% of FY16 business contain benchmarking and most favored customer provisions. They allow customers to benchmark services provided by LTECH to competition, and if found wanting, LTECH may have to reduce pricing, improve the quality of services or provide higher service levels. These can impact revenues and profits.
  • LTECH had reneged on campus job offers – while the firm may not be legally bound to honor such promises, the public perception of the firm can take a beating with such incidents.
  • The attrition rate in LTECH in FY16 was 18.4%, which is slightly higher than industry. It also means that a lot of energy in the firm is wasted in handovers & takeovers and so much knowledge is lost.

External Risks

  • There is high competition in the IT services market from Indian firms and MNCs.
  • 30% of FY16 profits were gains from forex hedges. This is typically an unpredictable and volatile source of other income, and can easily reverse in the future.
  • All IT exports firms face forex rate fluctuations which have an effect on revenues.
    • The firm does appear to have a good forex hedging policy in place.
  • About 97% of revenue in FY16 came from existing clients. This could be a sign of weak new business and sales pipelines.
  • LTECH has plans to take up acquisitions in future. However the firm does not have much of a history of acquisitions. The task of M&A /integration is complex and risky.
  • The Brexit event recently caused volatility in forex and may affect UK business. This is an example of global business risks.

Overall Opinion

  • Indian IT services industry clearly has a lot of competitive advantages and as the #6 player, LTECH is in a good position to ride this multi decade rise of Indian tech firms.
  • LTECH is the leader among IT services midcaps. It has a good balance sheet, solid global presence and diversified business vertical segments. It has access to rich knowledge pools. We are optimistic that leadership in LTECH will settle down to start shaping a better trajectory in the next few years.
  • Valuations are at a discount to peers and are attractive. At a PE of 12.65 times, it looks cheaper than other midcaps.
  • There are a few risks listed above that must be understood.
  • Overall, as an investment, the LTECH IPO is rated a medium risk, medium return type of offering.
  • Investors may Buy LTECH with a 2-3 year perspective.

JAINMATRIX KNOWLEDGE BASE 

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has a small equity ownership < Rs 2 lakhs in L&T, where he is a shareholder since 2007. Other than this JM has no known financial interests in L&T Infotech 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 (SEBI Registration No. INH200002747) 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.

Mahanagar Gas – A Hot Piping IPO

  • Date: 20th June 2016
  • Issue Price range: Rs. 380 – 421 and Period: 21st-23rd June
  • Industry – Gas Distribution
  • Mid Cap – Rs 4,156 crores Mkt cap
  • Advice: Buy for 2 years 

Summary

  • Overview: MGL is a city gas distribution firm that has the sole distribution rights for CNG and PNG supplies in and around Mumbai. It is a JV between GAIL and the British Gas of U.K.
  • MGL had revenues of Rs 2,121 cr. and profits of Rs 309 cr. in FY16. MGL’s revenue, EBITDA and PAT have grown 12.4%, 1.8% and 0.1% CAGR over 5 years. MGL has a good balance sheet, low debt, high cash and a high dividend yield.
  • MGL supplies CNG to over 4.7 lakh vehicles through a network of 188 CNG filling stations, and PNG to 8.6 lakh households, 2,866 commercial and 60 industrial consumers.
  • With global gas prices falling, demand for gas is expected to rise. MGL is growing pipeline networks.
  • It is available at attractive valuations. Based on the adjusted FY16 EPS, the asking PE stands at 13.47 which is lower than listed peers.
  • Opinion: The Mahanagar Gas IPO is rated a BUY with a 2 year perspective.

IPO highlights

  • IPO opens: 21-23rd June 2016 with Issue Price band: Rs. 380-Rs. 421 per share.
  • Shares offered to public: 2.46 cr. of Face Value: Rs. 10 per share, Market Lot is multiples of 35.
  • Shares offered are 25% of post equity. Promoter holding will fall from 90% to 65%. The IPO is of Rs 1,040 cr. which is a sale by current shareholders; there is no fresh issue of shares.
  • MGL is a JV between promoters GAIL and British Gas Asia Pacific Holdings (BGAS) where each owns 45% stake. Govt. of Maharashtra holds an additional 10%. Through the IPO, promoters would offload a stake of 12.5% each. The IPO helps MGL meet the 25% public holding norm.
  • The offering is available to institutional, non-institutional and retail in ratio of 50:15:35 of the offer.

Introduction

  • MGL is a city gas distribution (CGD) firm that supplies natural gas in Mumbai and surrounding areas. It is the sole distributor in Mumbai. MGL is a JV between GAIL and the British Gas of U.K. For abbreviations full form or glossary, see last page.
  • MGL had revenues and profits of Rs 2,121 crores and Rs 309 cr. resp. in FY16.
  • The firm distributes and sells natural gas, moving it from suppliers to end consumers. It distributes CNG for use in vehicles and PNG for domestic households, commercial and industrial use.
  • In FY16, MGL supplied CNG to over 4.7 lakh vehicles through a network of 188 CNG filling stations. It also provided PNG connection to 8.6 lakh domestic households, 2,866 commercial and 60 industrial consumers in Mumbai and adjoining areas.
  • For FY16, their CNG and PNG businesses accounted for 71% and 29%, of their total gas revenue. And 23.1% of the total CNG sales were to retail customers through company owned/ franchised outlets and 76.9% of CNG sales were through Oil Marketing Cos. and State Transport Units. See Fig 1.
  • MGL has a supply network of 4,646 km of pipelines, with 4,231 km polyethylene and 415 km steel.
  • Ashutosh Karnatak is Chairman; Rajeev Mathur is MD of MGL. In FY16, they had 499 employees.
  • MGL has the exclusive authorization (Infrastructure Exclusivity) to lay, build, expand and operate the CGD network in Mumbai until 2020, its adjoining areas until 2030 and the Raigad district until 2040.
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Fig 1 – Segments by Value/ Fig 2 – Post IPO shareholding in MGL

British Gas Snapshot

  • BGAS (British Gas Asia Pacific Holdings) is a subsidiary of BG Group UK, which in turn is a subsidiary of Royal Dutch Shell plc. Shell is one of the world’s largest independent oil and gas firms.
  • In 2016, Shell had cash flow from operations of $30 billion. The Shell Group develops crude oil and natural gas supplies from major fields. Natural gas based liquefied natural gas (LNG) is shipped to markets around the world. The Shell Group’s portfolio of refineries and chemical plants enables it to add value to the oil and gas, turning them into a range of refined and petrochem products, which have domestic, industrial and transport uses.

GAIL Snapshot and Financials

  • GAIL (India) Ltd. is the largest state-owned natural gas processing and distribution firm in India. The company has 80% market share in natural gas transmission. It possesses about 11,000 km of gas pipeline network with a capacity of 210 mmscmd. It has presence in Egypt and China through city gas projects and in Myanmar through E&P. It acquired shale gas assets in USA through US subsidiary GAIL Global (USA) Inc.
  • Income has grown at 5.6% CAGR over the last 5 years Fig 3. In the same duration, EBITDA and PAT witnessed a fall of -6.5% and -17.4% CAGR. P/E ratio has however risen to 19.6 times.
  • GAIL has low net profit margin of 5.2% and a 80% market share (monopoly) in gas distribution, controlled by the govt. The current dividend yield for GAIL stands at 1.48%.
  • The RoCE stands at 9.57% and RoE at 9.24%. This is average performance.
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Fig 3 – GAIL Financials Snapshot

  • The firm’s performance was poor because of long term contractual agreements. Under an agreement GAIL is liable to take 60% of Petronet LNG’s procurement which was sourced from Qatar based company RasGas. Based on the contract signed between the Petronet LNG and RasGas in 1999, Petronet LNG was getting LNG at $12-13 per mBtu (million British thermal unit) in FY16 whereas the spot gas prices had fallen to $7 per mBtu, leading to GAIL India suffering losses.
  • However the contract terms were renegotiated in FY16, under which the price for the buyer would be governed by market dynamics based on a crude price linked formula. So GAIL is expected to perform better in FY17 with reasonable costs, good demand and high utilization of pipelines.

Business Model, News and Updates for MGL

  • MGL has paid a dividend of Rs 17.5/ share in the previous 3 years, which gives a yield of 4.1%.
  • As per the MoPNG guidelines, MGL has access to cost effective domestic natural gas equal to 110% of their CNG and domestic PNG requirements (such customers are “Priority Sector”). The domestic natural gas is currently sold to them at US$ 3.06/ mmbtu (GCV), which is lower than the price of imported natural gas, for supply exclusively to the Priority Sector. These sales accounted for 84.1%, 85.0% and 85.6% of MGL total sales volume in FY14, FY15 and FY16, resp. For industrial and commercial PNG consumers, they source regasified liquefied natural gas both on term and spot basis. The selling price of natural gas is not regulated and thus they generally are able to pass on an increase in the cost to customers.
  • The price at which MGL sells natural gas is benchmarked to the price of alternate fuels as petrol, diesel, other liquid fuel and LPG, which are in turn linked to crude oil. MGL is given pricing flexibility based on procurement costs for both CNG and PNG. However CNG prices are regulated. It means that MGL is allowed to change the price, but govt. can intervene for the price of CNG, but not PNG.
  • The price of domestic natural gas allocated by the MoPNG is determined as per the Pricing Guidelines, this is the administered price mechanism (APM). The price of natural gas is presently US$ 3.06/MMBTU on GCV basis, this price is much lower than the price of imported natural gas.
  • MGL launched its mobile application ‘MGL Connect’ for its PNG and CNG customers. The mobile application featured various consumer friendly features and services.
  • In 2014 there was a Gas leak in MGL’s pipeline in Mumbai’s Worli area. The measures were taken at the right time and a major mishap was averted.
  • A ban on >2000 cc diesel engine car sales in New Delhi is meant to help clean the environment. It was imposed by the NGT (National Green Tribunal) in Dec 2015. This may soon be extended to other cities and regions in the country. It emphasizes the importance of natural gas as a clean fuel in India.
  • New Delhi was the first to enforce CNG as fuel for all bus services, helping clean the air. We expect this to be rolled out in all major cities over time.
  • Growth driver – MGL has commenced project activities in Raigad district to lay pipeline infrastructure. The Raigad district provides good opportunities for expansion of their networks.
  • On 21st June, the Day 1 of IPO, the issue was subscribed 110% by 5pm, indicating a good demand.
  • MGL collected Rs 309 crore from anchor investors, a day ahead of its IPO, by raised money from over 20 anchor investors, by selling shares at Rs 421 apiece – the higher end of the price range.
  • The unofficial/ grey market premium for this IPO is in the range of Rs 100 – 102.

Industry Outlook

  • Natural gas production in FY14 was 97 mmscmd by ONGC, OIL, non-state owned and JV companies. This however constitutes only about 26% of India’s gas consumption.
  • The Indian CGD market size was estimated at INR 24,000 cr. in FY14, with sales volumes of 20 mmscmd, accounting for 13% of India’s total natural gas consumption.
  • The PNGRB has envisaged a rollout plan of CGD network development through competitive bidding in more than 300 Geographical Areas (GA) in a phased manner. The actual rollout has been delayed due to lack of connectivity and supply constraints, with the Govt. needing to assure domestic gas supplies for CGD entities (CNG and domestic PNG). The PNGRB has bid out 34 GAs in the sixth round of CGD bidding. 106 GAs have been identified by PNGRB for subsequent bidding subject to natural gas pipeline connectivity.
  • PNGRB’s bidding rounds could be a large opportunity for growth with 11 GAs in Maharashtra and 60 GAs in rest-of-India offering multiple opportunities to MGL for expansion beyond Mumbai.
  • By the end of FY14, India had a natural gas pipeline network length of 14,988 km with capacity of 401 mmscmd spread over 15 states and UTs. GAIL as a leading player owns 73% of the network.
  • CRISIL Research expects CGD sales volumes to rise from 20 mmscmd in FY14 to 22.4 mmscmd in FY17. Volumes of both industrial and commercial segments have declined over the last 2 years. But volumes are expected to increase from 2015-16 and grow at approximately 6%, led by fleet additions to public transport, private vehicle conversions and rising economic activity.
  • Natural gas demand for CGD sector is expected to rise steadily due to the growth of gas networks in new cities, price advantage of CNG and increased use of PNG in domestic, industrial and commercial sectors. The Govt. plans to set up 15,000 kms of new gas pipelines would aid CGD usage in newer areas.
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Exhibit 4 – Prospects for the CGD Sector, Source: MGL RHP

  • The last 2 years saw a sharp fall in prices of crude oil and natural gas, caused by both a supply glut and a fall in global growth. India however is a beneficiary as it is a major importer of natural gas.
  • Mumbai has a population of 20.7 mn with 5 mn households and 6.7 mn motor vehicles. MGL serves only 0.47 mn vehicle and 0.86 mn domestic users. Thus the penetration stands at 7.01% (0.47/6.7) for motor vehicles and 17.2% (0.86/5) for domestic users.

Financials of MGL

  • MGL’s revenue, EBITDA and PAT has grown 12.42%, 1.76% and 0.08% CAGR over the last 5 years.
  • The revenue and EPS growth (Fig 5) were flat for FY15 and FY16 as CGD companies faced cost pressures and a fall in margins. MGL supplied 1.95 mmscmd of natural gas in FY12 which rose to 2.43 mmscmd for FY16, registering a CAGR of 5.67%. Thus over the years, MGL had increasing revenues and volumes, however there was almost no PAT growth because of rising input costs.
  • The operating margin fell from 39% (2012) to 26.9% (2016). The net profit margin also fell from 23.17% (2012) to 14.55% (2016). But margins are likely to be stable from now on.
MGL Financials, JainMatrix Investments

Fig 5 – MGL Financials

MGL Cash Flow, JainMatrix Investments

Fig 6 – Free Cash Flow

  • MGL has been able to generate Free Cash Flow over the last 5 years, a big positive. Fig 6.
  • MGL has a ROE of 20.2% (FY16) and RoCE of 22.0% (FY15). These are healthy return ratios.
  • The cash per share including Reserves & Surplus and Cash in Balance sheet is Rs 163/share. This indicates that the current operations of MGL are available at (421-163) = Rs 258/share.

Benchmarking

We have benchmarked MGL against peer gas companies like Indraprastha Gas, Gujarat Gas, etc.

JainMatrix Investments

Exhibit 7 – Benchmarking

  • MGL appears to be available at reasonable valuations. The low D/E is a positive. Dividend yield is the highest. The balance sheet is strong and can be leveraged for future business needs.
  • Margins are in the fair range. But MGL has good ROE (20% +) even with low margins. Margins are expected to improve from now on and volumes would also be higher. Thus return ratios are good.

Positives for MGL and the IPO

  • The IPO pricing is attractive. At the upper band of Rs 421/share, MGL’s asking price P/E is 13.47 times which is lower than its peer Indraprastha Gas Ltd. (19.55 times).
  • The CGD industry is at a turning point with a renewed focus on cleaner environment and lower costs of gas versus competing fuels which is likely to push volumes. Green efforts and NGT rulings will push transportation towards CNG as fuel. This is likely to benefit MGL.
  • MGL is a debt free, with strong balance sheet, cash balance and high return ratios (RoCE and RoE).
  • MGL has the exclusive rights for gas pipelines & sales in Mumbai (2020 limit), Raigad (2040) and Thane (2030). There is ample potential for MGL to grow in these regions.
  • The promoters of British Gas/ Shell can provide technology and commercial expertise for growth.
  • Piped gas supply by MGL is superior to the cylinder based LPG supply by state owned oil marketing firms. As soon as MGL sets up a network in an area, most consumers will switch.

Internal Risks

  • The price of domestic natural gas and RLNG purchased by MGL is USD denominated while the selling price is in INR. The currency risks have to be absorbed by MGL and its customers.
  • Transporting natural gas is hazardous and there can be accidents caused by floods, other utility company activities, road accidents, etc. These could adversely affect their reputation and business.
  • Smooth relations between the equal shareholder promoters is important for MGL.
  • MGL has a monopoly on Mumbai region gas pipelines and supply till 2020. It must rapidly set up a high quality network in this period to ensure it continues to dominate the gas business thereafter.
  • MGL will not have any gains from this IPO, and the proceeds will go to the promoters only.

External Risks

  • MGL’s gas supply is met by the allocation by the MoPNG at prices in accordance with the Gas Pricing Guidelines. Any increase in the cost price or reduction in allocation will adversely affect business.
  • MGL’s natural gas marketing exclusivity in Mumbai and adjoining areas has not been dealt with by PNGRB. The subject is subjudice in the Delhi High court for a case involving IGL. Their request to PNGRB to retain marketing exclusivity in Delhi was rejected, and which was in turn taken to Delhi HC. The Delhi HC verdict is pending on the issue. An unfavourable ruling would mean that CGD firms will have to distribute other competing companies’ gas through their own pipeline.
  • MGL may be restricted in its operation to the Mumbai/ Thane/ Raigad areas, and hence may not be allowed to continue to grow into a national player. Thus after a point, MGL growth may be limited.
  • The growth of renewables has been very rapid, encouraged by GoI. These are superior to fossil fuels but require a higher capex. After a few decades, gas may become a backup fuel source. However gas sector will continue to grow for 10-20 years as it is cleaner and superior to other fossil fuels.

Overall Opinion

  • Gas as a source of energy is superior to other fossil fuels. In energy hungry India, it will continue to grow as a fuel source. With the recent fall in prices, we see an upswing in demand.
  • MGL operates in a regional monopoly and has ample scope to grow in Mumbai & surrounding areas.
  • The recent financials of MGL were stressed by higher cost of gas. However measures have been taken and costs have stabilized for MGL. The outlook now is much superior for MGL. Inspite of this stress, MGL has a good balance sheet, no debt, high cash and a good dividend yield.
  • In a sector dominated by PSUs, MGL brings in a high level of governance, vision and shareholder friendliness. It is available at attractive valuations. Based on the adjusted FY16 EPS, the asking PE stands at 13.47 which is lower than listed peers.
  • MGL is not just a piping hot IPO, but also A Hot Piping IPO.
  • Hence, MGL is a BUY with a 2 year perspective.

Abbreviations

Exhibit 8 - Abbreviations

Exhibit 8 – Abbreviations

JAINMATRIX KNOWLEDGE BASE 

See other useful reports

  1. A Repurpose for our PSUs
  2. How to Approach the Stock Market – A Lesson from Warren Buffet
  3. An IPO Roundup and Update 
  4. Parag Milk Foods IPO – Let This Drink Go
  5. JainMatrix Track Record May 3rd, 2016
  6. Thyrocare IPO – Wellness for your Wealth
  7. New Banks: Big Changes in Small Change
  8. Equitas IPO – Leader in SF Banks
  9. JainMatrix Investments Announcements
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  12. Alkem Labs IPO
  13. Goods And Services Tax (GST): Integration And Efficiency
  14. Café Coffee Day IPO – Very Hot Coffee 
  15. Syngene IPO: Good Pharma R&D spinoff from Biocon.
  16. JainMatrix IPO Reports deliver 60.5% returns

..

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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 Mahanagar Gas Ltd. or any related group. 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 (SEBI Registration No. INH200002747) 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.

An IPO Roundup and Update

Dear Readers,

The IPO season is hot now, hotter than the summer outside. In this note we recap recent events and try to look ahead too:

EQUITAS HOLDINGS IPO

  • Our investment report was Equitas IPO – A Leader in Small Finance Banks
  • It is available on link  Equitas Holdings IPO Note
  • JainMatrix Investments had recommended a BUY
  • The IPO was open from 5-7thApr 2016 and Issue Price band was 109-110 per share
  • There was a healthy subscription for the offer:

equitas

  • The issue price was Rs 110 and the shares got listed on April 21, 2016.
  • As of today the share price is trading at Rs 147.80 and is up by 34.5%.

THYROCARE IPO 

  • Our report was Thyrocare IPO – Wellness for your Wealth
  • The link is  Thyrocare Technologies IPO Note
  • JainMatrix Investments had recommended a BUY on Thyrocare.
  • IPO was open from 27-29thApr 2016, and the Issue Price band was 420-446 per share.
  • There was a tremendous demand for the IPO and the category wise subscription was:

Thyrocare

  • The issue price was Rs 446 and the shares got listed on May 9, 2016.
  • As of today the share price is trading at Rs 625.5 and is up by 40.3% in absolute terms.

PARAG MILK FOODS IPO

  • Our report was Parag Milk Foods IPO – Let This Drink Go
  • The link is Parag Milk Foods IPO Note
  • JainMatrix Investments had recommended an Avoid on this offer.
  • IPO was open from 4-6th May 2016 and the Issue Price band was Rs. 220-227 per share. There was a retail Discount of Rs 12 /share.
  • Response was not good, so the company had to cut the issue price and extend the closing by three days as it could not garner the full QIB participation.
  • It finally closed on 11th The category wise subscription was as follows:

parag

  • As per the grey market rumors, Parag Milk Foods is likely to list at a discount.
  • Let’s see how this listing turns out.

We’re happy to note that we are able to predict even complex IPO offerings with some success using our fundamental research techniques.

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Happy investing,

Punit Jain

JAINMATRIX KNOWLEDGE BASE 

See other useful reports

  1. JainMatrix Track Record May 3rd, 2016
  2. Thyrocare IPO – Wellness for your Wealth
  3. New Banks: Big Changes in Small Change
  4. Equitas IPO – Leader in SF Banks
  5. JainMatrix Investments Announcements
  6. A Superior Investing Process – Do a DIP SIP
  7. JainMatrix Investments presents the Investment Outlook for 2016
  8. Alkem Labs IPO
  9. Goods And Services Tax (GST): Integration And Efficiency
  10. Café Coffee Day IPO – Very Hot Coffee 
  11. Syngene IPO: Good Pharma R&D spinoff from Biocon.
  12. JainMatrix IPO Reports deliver 60.5% returns

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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 Parag Milk Foods/ Thyrocare/ Equitas Holdings or any related group. 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 (SEBI Registration No. INH200002747) 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.

Parag Milk Foods IPO – Let This Drink Go

  • Date 4th May 2016
  • Price range: Rs. 220-227 and Period: 4 – 6th May 2016
  • Small Cap – Rs 1900 cr. Mkt Cap
  • Industry – Dairy Foods
  • Advice: Average offering. AVOID.

IPO highlights

  • IPO is open from 4-6th May, with Issue Price band: Rs.220-227 /share, Retail Discount is Rs 12 /share
  • Shares offered to public: 3.37 cr. of Face Value: Rs. 10 per share, Market Lot is multiples of 65
  • Shares offered are 40.4% of post equity. Promoter holding will fall from 61% to 44%.
  • IPO is of Rs 767 cr. of which Rs. 467 cr. is OFS and Rs 300 cr. is a fresh issue of shares.
  • The fresh issue proceeds would be used for
    • Expansion and modernization of plants (Rs 147.7 cr.)
    • Investment in Subsidiary (Rs 2.3 cr.)
    • Repayment of Working Capital Loan (Rs 100 cr.)
    • Balance for general corporate purpose – Rs 50 cr.
  • The offering is available to institutional, non-institutional and retail in ratio of 75:15:10.

Parag-Foods-logo

Summary

  • Parag Milk Foods (PMF) makes a range of branded milk and dairy products.
  • PMF had revenues and profits of Rs 1442 cr. and Rs 29.47 cr. in FY15. PMF’s revenue, EBITDA and PAT has grown 21.6%, 20.8% and 24.8% CAGR over the last 3-4 years.
  • They derive all of their products only from cow’s milk. Their milk processing capacity is 2 million litres per day and their cheese plant has the largest capacity in India, of 40 MT per day.
  • Their brands of ‘Gowardhan’, ‘Go’, ‘Pride of Cows’ and ‘Topp Up’ are growing fast.
  • While the market is large and the premium segment they target is attractive, there is intense competition and PMF needs to be aggressive to be a significant national player.
  • The IPO pricing has been average leaving little on the table for current investors.
  • The IPO is rated as average, and Retail Investors can AVOID it.

READ AND DOWNLOAD THE ENTIRE REPORT

Here is a note on the Parag Milk Foods IPO in PDF format.

JainMatrix Investments_ParagMilk IPO_May2016

Click the link above to open/ download the PDF document.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports

  1. JainMatrix Track Record May 3rd, 2016
  2. Thyrocare IPO – Wellness for your Wealth
  3. New Banks: Big Changes in Small Change
  4. Equitas IPO – Leader in SF Banks
  5. JainMatrix Investments Announcements
  6. A Superior Investing Process – Do a DIP SIP
  7. JainMatrix Investments presents the Investment Outlook for 2016
  8. Alkem Labs IPO
  9. Goods And Services Tax (GST): Integration And Efficiency
  10. Café Coffee Day IPO – Very Hot Coffee 
  11. Syngene IPO: Good Pharma R&D spinoff from Biocon.
  12. JainMatrix IPO Reports deliver 60.5% returns

Search for companies/ sectors of your interest in Search box in the right panel.

Visit and Like JainMatrix FB or Follow on JainMatrix Twitter for reports

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. JM has no known financial interests in Parag Milk Foods or any related group. 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 (SEBI Registration No. INH200002747) 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.

Thyrocare IPO – Wellness for your Wealth

  • Date 26th April 2016
  • Price range: Rs. 420-446 and application period: 27-29th April 2016
  • Industry: Healthcare – Diagnostics
  • Mid Cap with Rs 2400 cr Mkt Cap
  • Advice: BUY with a 2-3 year perspective 

Summary

  • Overview: Thyrocare is a top 4 player in the pan-India diagnostic lab companies.
  • Revenue, EBITDA and PAT have grown 23.7%, 19.4% and 15.7% CAGR over 4 years.
  • The key strengths of Thyrocare are – 1) strong hub and spoke model for diagnostics collections and testing; 2) good growth visible in domestic diagnostics, in foreign diagnostics, and the Nueclear Healthcare – NHL and water testing businesses 3) Strong franchisee network 4) Positive free cash flow, and growth to be funded from internal accruals 5) Good management team.
  • Thyrocare has an asking PE of 44.9 times FY16 (P) which seems expensive. However comparing with Dr Lal Pathlabs, and retail food service firms, the valuations look reasonable.
  • Opinion: Investors can subscribe to this IPO with a 2 year perspective

Here is the investment note on Thyrocare Technologies Ltd. (Thyrocare).

IPO highlights

  • IPO is open from 27-29th April 2016 with Issue Price band: Rs 420-446 per share
  • Shares offered to public: 1.07 cr of FV Rs.10 which is 20% of equity. The sellers and offered shares are: shown in Exhibit 1 – Selling Shareholders.
  • Amount proposed to be raised: Rs.480 cr. by Offer for Sale OFS route.
  • Market Lot: 33 shares and in multiples of 33 shares there off.
  • The issue is mostly a sale by PE investor Agalia Pvt Ltd., which holds 22% and is selling 90.4% of this.
  • There is no fresh issue. The promoter stake would reduce to 64% from 65% post IPO. See Fig 2b.
Fig 2a – Revenue Segments and Fig 2b – Shareholding Post IPO, JainMatrix Investments

Fig 2a – Revenue Segments and Fig 2b – Shareholding Post IPO, JainMatrix Investments

Introduction

  • Thyrocare is a Mumbai based diagnostic lab company with services in India and a few other countries.
  • Thyrocare had revenues, EBITDA and profits of Rs 190.3 cr., Rs 79.2 cr. and Rs 44.4 cr. resp. in FY15.
  • It operates its testing services through a fully-automated Central Processing Lab (CPL) in Navi Mumbai and 5 Regional Processing Labs (RPLs) in New Delhi, Coimbatore, Hyderabad, Kolkata, and Bhopal.
  • Thyrocare collects samples through a pan-India network of franchisees of TAGs (Thyrocare Aggregators) and TSPs (Thyrocare Service Providers). It has a network of 1,041 franchisees, comprising of 687 TAGs and 354 TSPs spread across 466 cities and 24 states and UTs.
  • Thyrocare offers 198 tests and 59 profiles of tests to detect a number of disorders, infertility and infectious diseases. Their profiles of tests include 16 profiles of tests administered under their “Aarogyam” brand, which offers patients a suite of wellness and preventive health care tests. Fig 3a.
  • A wholly owned subsidiary, NHL (Nueclear Healthcare Ltd) operates a network of molecular imaging centers focused on early and effective cancer monitoring. It merged with Thyrocare in Dec 2015.
  • In order to further expand their offering of tests, they are now using the CPL to test new technology and develop innovative testing. In FY15, they explored new specialized testing techniques such as cytogenetic testing, water testing and the development of new tests based on mass spectrometry.
  • Thyrocare obtains its machinery, instruments and other equipment from international and Indian vendors. Siemens Ltd. is their largest supplier.
Fig 3a – Thyrocare’s Brands and Service Offerings

Fig 3a – Thyrocare’s Brands and Service Offerings

Fig 3b – Thyrocare’s Geographic Presence

Fig 3b – Thyrocare’s Geographic Presence

Business Model, News and Updates

  • Thyrocare operates with a hub-and-spoke model. The chain is of CPL-RPL-Satellite Labs – Collection Centers (CC). The CCs are located in hospitals, nursing homes, pathology labs, doctors’ clinics, prime commercial properties and retail spaces among other places. CCs may be company-owned or franchised. A franchisee usually pays a fee, Rs 30-50,000 to sign up. CCs do not carry out any testing, and are involved only in the collection/ forwarding of patient samples to a satellite or reference lab.
  • The TAGs and TSPs franchisee model reduces last mile costs and efforts of Thyrocare. This is a nimble and efficient model that can scale up rapidly too.
  • In the CPL, Thyrocare enters into equipment leasing arrangements, which vendors provide for a purchase commitment of reagents and consumables. This helps reduce capital equipment costs.
  • Since opening the RPLs in 2015, the volumes growth has been excellent: The diagnostic tests daily volume grew from 95,610 (FY14) to 159,350 (9m FY16). The annual data is a CAGR of close to 38% over the past 3 years from 2.5 crore tests (in FY13) to 5.38 cr. tests (11 mths of FY16). The PET-CT scans performed by NHL grew from 34 scans (FY13) to 11,173 scans (FY15).
  • To grow their business and volumes of samples processed, they plan to expand their network of RPLs and have a lab in every Indian city with an airport, to reduce the turnaround time to deliver the reports to the end customer. The firm has opened labs in Coimbatore, Bengaluru, Hyderabad, Delhi and Bhopal.
  • Outside India, Thyrocare appears to be present in Afganistan, Bahrain, Bangladesh, Egypt, Iraq, Kuwait, Nepal, Oman, Qatar, Saudi Arabia and United Arab Emirates.
  • Thyrocare was looking to list its shares last year, but the issue was stuck on a minor technical issue with the Companies Act, 1956. The clause was relaxed in the 2013 Act and Thyrocare could proceed.
  • The Thyrocare staff includes medical doctors, PhDs and postgraduates in biochemistry, pathology, microbiology and other related disciplines. The company has 718 employees (including consultants, nuclear medical professionals, trainees and contractual employees).
  • Thyrocare Bangladesh Ltd had recently started offering a service where blood tests could be done at home and reports were delivered to the customers.
  • Thyrocare developed a new automation track in Mumbai in 2014, Aptio Automation, which was able to reduce the turnaround time on a blood sample from 4.5 hours to 2.5 hours.
  • Thyrocare has an experienced management team. Dr. A. Velumani is the promoter, MD & CEO and has 19 years of experience in the diagnostics business. Prior to this, he worked for 12 years as a scientific officer in immunodiagnostics and radioimmunoarrays, at BARC Mumbai. Mr. A. Sundararaju, Director & CFO is a graduate in law from the Univ. of Bombay with 18 years of experience in finance, legal and administrative activities. Mr. Sohil Chand, Director holds a PG in Accounting & Finance from the Univ. of London and an MBA (Univ. of Chicago). His 14 years of experience is in financial services industry, including PE, VC and I-banking.
  • A personal visit: We visited a Thyrocare franchisee to better understand their business and get personal impressions. The Thyrocare franchisee is well located and has a small office with simple furniture and décor. The staff was hospitable and courteous, explained the services, handed over a brochure, and was willing to give better services/ home delivery and pick up at reasonable rates. We also noted that Thyrocare services were 20-30% cheaper than Dr Lal Pathlabs for similar services.

Industry Outlook

  • According to the Global Health Expenditure Database compiled by WHO, India’s total expenditure on healthcare was 4% of India’s GDP as of 2013. India trails not just developed countries such as the USA and UK, but also developing countries like Brazil, Russia, China and Thailand, in healthcare spending to GDP. This is due to the under penetration of healthcare and lower consumer spending.
  • Industry estimates show there are over 100,000 diagnostic laboratories across the country. Pathology labs represent around 70% of this, and Radiology and high end imaging is 30% of the industry.
  • Size of diagnostic industry pegged at around Rs 33,000 cr. ($5 b), growing at 15-16% annually.
  • National chains like Dr Lal Pathlabs, Metropolis, SRL Diagnostics, and Thyrocare are present. But Unorganised players dominate 88-90% of the industry.
  • Demand drivers for the Indian diagnostic industry include: Increase in evidence-based treatments; Huge demand-supply gap, Increase in lifestyle related diseases; Changing disease profiles; Increase in health insurance coverage; Need for greater health coverage as population and life expectancy increase; Rising income levels make quality healthcare services more affordable
  • Urban areas account for higher revenues in diagnostics. According to CRISIL Research, India’s urban population (28%) contributes up to 67% of revenues in diagnostics.
  • The Govt. accounted for 32.2% of healthcare spends in India (2013), a small increase in 10 yrs.

Financials of thyrocare

  • Thyrocare Revenue, EBITDA and PAT have grown 23.7%, 19.4% and 15.7% CAGR over 4 years. Fig 4.
  • For 9 months of FY16 the EPS stood at Rs 7.45 and the projection for FY16 is Rs 9.93. The EPS growth is 20.1% over FY15. Note FY16P data is a simple projection of 9 months of FY16 data.
  • The operating margin has decreased slightly from 47.9% in 2011 to 41.6% in 2015. However for the first three quarters of FY16 the figure stands at 42.2%, a small gain.
  • Thyrocare is the leader amongst the pan India diagnostic players in terms of margins.
Five Year Financials, JainMatrix Investments

Fig 4 – Five Year Thyrocare Financials, JainMatrix Investments

  • The company did not have any free cash flows in two of the last 5 years. See Fig 5. Heavy investments were made during that period. The projected free cash flows for FY16 are excellent.
  • It’s a zero debt company.
Fig 5 – Thyrocare Cash Flows, JainMatrix Investments

Fig 5 – Thyrocare Cash Flows

Benchmarking

We compare Thyrocare with healthcare peers and retail focused service companies:

Exhibit 6 – Benchmarking, JainMatrix Investments

Exhibit 6 – Benchmarking

  • Thyrocare appears to be the smallest of this group. However, since most of the front end is outsourced to franchisees, the gross revenues may be much higher than this.
  • Thyrocare appears to be available at a discount to Dr Lal Pathlabs, the closest peer.
  • Margins are high for Thyrocare. This is a big plus. On the other hand, growth while high, is lower than the leaders here. With the building of the hub and spoke model, growth can improve in the next few years. But it may come at the cost of high margins.
  • Debt is zero, which is good. RoE is low but this is due to a number of recent growth initiatives – NHL as well as international.

Positives for the IPO

  • It appears that the diagnostics sector is underpenetrated, so there is a massive room to grow.
  • It’s a high growth business with initiatives like the core diagnostics in India and abroad, the NHL and water testing. These are being funded from internal accruals, and can be very profitable soon. The financials have seen robust growth over 4 years. This may continue with their strong all India footprint.
  • The IPO valuations are attractive on a relative basis.
  • Their hub and spoke & franchisee model is profitable for Thyrocare as it reduces the cost of expansion, and the last mile and customer acquisition is done by the partners. It has the best EBITDA and Profit margins among pan India diagnostic firms. Debt is also zero. Also Thyrocare is very asset light.
  • Thyrocare has an experienced management team. The firm, and most of the new initiatives are the brain-child of CMD Dr. A. Velumani. He has sharply defined testing and diagnostics as his focus area.
  • Promoters are retaining control of the firm at 64% ownership, this is a good sign.
  • The recent success of Dr Lal Pathlabs IPO, Alkem Labs and Narayana Hrudalayala, and the appreciation thereafter are positives. We must note the optimism around healthcare and diagnostics industry.
  • With so many positives, we feel that this IPO offer is going to provide Wellness for your Wealth !!

Internal Risks

  • Thyrocare’s business depends on their reputation and brand, and any negative publicity or other harm may materially and adversely affect their business, financial condition and results of operations.
  • Thyrocare’s business is more dependent on a few tests. So wellness and preventive care (51%) and thyroid (17%) dominate the diagnostic services for FY15. There is product concentration risk.
  • Their subsidiary, NHL, operates a molecular imaging business that presents significant operational risks, and is loss making since 3 years. This could have an adverse effect on Thyrocare financials. Similarly, the Gulf and Mauritius subsidiaries, set up recently, are also loss making companies.
  • The land and premises on which the CPL and the RPLs are located are held by them on a leasehold basis or on a leave and license basis, which subjects them to certain risks.
  • Their business is subject to seasonality, so revenues can be lumpy.

External Risks

  • Thyrocare operates in a competitive business environment which has low barriers to entry, from local /unorganized sector outlets and even city/ regional chains.
  • There are a lot of grey areas policy wise in this sector. Regulatory frameworks include Clinical Establishment (Registration and Regulation) Act 2010, but it has been adopted only by a few states. It does seem to be a largely unregulated sector without norms or necessary standards.
  • Political instability or disruptions at locations where they operate can affect business.

Overall Opinion

  • India with its large and growing population is stretched in terms of available healthcare facilities. Expenditure in this sector will trend upwards as the economy develops. The Govt’s free facilities are in low supply and cater to the low end of market.
  • In this space, Thyrocare’s diagnostic and testing services provide an essential, high demand service. It is a wellness/ preventive as well as an essential service.
  • The business model is robust and scalable, and there are clear benefits of a national chain over small and local service providers. Thyrocare is in 3-4 high growth areas, and is now generating enough cash to invest in them. We expect the financials to grow faster in future.
  • In terms of valuations, Thyrocare has an asking PE of 44.9 times FY16 (P) which looks expensive. However looking at the valuations of Dr Lal Pathlabs as well as those of retail food services (a business model comparable), then the valuations do not look expensive.
  • As an investment, the Thyrocare IPO is rated a medium risk, high return type of offering.
  • Retail Investors can BUY this IPO with a 2 year perspective.

READ AND DOWNLOAD THE ENTIRE REPORT

Here is a note on the Thyrocare IPO in PDF format.

JainMatrix Investments_Thyrocare IPO_Apr2016

Click the link above to open/ download the PDF document.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports

  1. New Banks: Big Changes in Small Change
  2. Equitas IPO – Leader in SF Banks
  3. JainMatrix Investments Announcements
  4. A Superior Investing Process – Do a DIP SIP
  5. JainMatrix Investments presents the Investment Outlook for 2016
  6. Track Record – Dec 2015
  7. Alkem Labs IPO
  8. Goods And Services Tax (GST): Integration And Efficiency
  9. Indigo IPO – Flying High, Wide And Handsome
  10. Café Coffee Day IPO – Very Hot Coffee 
  11. Syngene IPO: Good Pharma R&D spinoff from Biocon.
  12. JainMatrix IPO Reports deliver 60.5% returns

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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 Thyrocare or any related group. 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 (SEBI Registration No. INH200002747) 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.

News including Equitas IPO Listing

Dear Investor,

Today the Equitas Holdings IPO listed on the stock exchanges. The share had earlier had an excellent IPO application count of 17 times over subscribed. The listing price was Rs 110, at the top end of a small price range of 109-110.

If you missed our report, click link – Equitas IPO – Leader in SF Banks

We were happy to see that our BUY recommended IPO did well on its first day !! Today the Equitas share peaked out today at Rs 147, a 34% gain on the listing price !! After this initial peak, it settled lower, and finally closed today at a good 23% gain.

The IPO season thus is certainly gaining momentum, and we can look forward to a number of fresh issues. Some good, and some bad too. Expect JainMatrix Investments to continue to give thorough, independent and opinionated reports that help investors !!

On another note, we published an Infrastructure equity research report today. This firm has good potential. However the report is restricted to subscribers only.

JainMatrix Investment Service is available for an annual Subscription. Click link for details.

SUBSCRIBE NOW !!

Happy investing,

Punit Jain 

Equitas IPO – Leader in SF Banks

  • Date: 3rd April 2016
  • IPO price range Rs 109 – 110, Apply from 5-7th Apr 2016
  • Industry: BFSI – Small Finance Bank
  • Mid Cap: Rs 3,560 cr Mkt Cap
  • Advice: BUY 

logo

Summary

  • Overview: Equitas Holdings is a financial services firm that has extended beyond microfinance to  MSME, CV and housing loans to people that are underserved by formal financing channels.
  • Equitas had revenues of Rs 756 cr. and profits of Rs 107 cr. in FY2015. The topline and PAT have grown by 56.1% and 39.2% respectively CAGR over the last four years.
  • Why BUY: 1) Equitas has a good record of business so far, in terms of growth, segment diversification and profits. 2) In terms of valuations, Equitas has priced the shares attractively, leaving something on the table for investors.
  • Key risks: are geographic concentration and impending SFB structural changes.
  • Retail Investors can BUY this IPO.

Here is a note on Equitas Holdings Limited (Equitas)

IPO highlights

  • The IPO is open from 5-7th Apr 2016 with Issue Price band: Rs.109-110 per share
  • It will raise Rs 2,177 cr. totally, as Offer for Sale (1457 cr.) and fresh issue (720 cr.)
  • No of Shares offered to public are 19.8 crore of Face Value: Rs.10. These are 59.07% of the equity base, and include OFS from shareholders (13.2 cr.) and a fresh issue (6.6 cr.).
  • Market Lot: 135 shares and in multiples of 135 shares there off
  • Objects of the issue are – reduction in foreign shareholding – In Sept 2015, the firm received approval from RBI for a small finance bank. But foreign shareholders held 93% of the firm. As per the current FDI policy, the foreign investment in a private bank will be a maximum of 49%. So the IPO will help reduce foreign stake to below 49%. It will also provide an Exit opportunity for current shareholders.
  • The funds raised in the fresh issue (Rs 720 cr), would be used to set up the Small Finance Bank (Rs 620 cr), set off the IPO expenses, and extend loans to the subsidiaries (Rs 100 cr.).

To download the PDF version of report, proceed to bottom of this page. 

Introduction to Equitas

  • Equitas is a financial services firm into microfinance, MSE Finance, CV and housing loans. Total Income in FY15 was Rs 756 crore and Net Profits stood at Rs 107 cr.
  • Equitas revenues and PAT grew at 56.1% and 39.2% resp. CAGR over four years.
  • The HQ is in Chennai, and operations are spread across 11 states, one UT and Delhi. Equitas has 539 branches and 8,067 employees. The loan portfolio in FY2015 was Rs 4,185 cr. See Fig 1
  • Equitas had been granted approval by RBI for setting up a SFB. It is the fifth-largest MFI behind Bandhan (Bank), SKS (NBFC-MFI), Janalakshmi (SFB) and Ujjivan (SFB).
Fig 1 – Key Segments, JainMatrix Investments

Fig 1 – Key Segments     

Fig 2 - Loans Accounts by State, JainMatrix Investments

Fig 2 – Loans Accounts by State

Fig 3 - Post IPO shareholding, JainMatrix Investments

Fig 3 – Post IPO shareholding

  • The capital adequacy ratio (CAR) of EMFL (microfinance) and EFL (vehicle finance and MSE finance) was 21.02% and 31.45%, resp. as of Q3 FY2015, compared to the RBI mandated CAR of 15%. The CAR of EHFL (housing finance) was 32.1%, compared to the requirement of 12%. These look comfortable.
  • The Gross NPAs ratio to On-Book AUM was 1.33%, while Net NPAs to On-Book AUM was 0.97%.
  • Leadership is Mr P.N. Vasudevan (MD), N Rangachary (Non-exec chairman) & S Bhaskar (CFO).
  • Foreign ownership in Equitas, currently at 92.6%, will drop below 49% after IPO.

Business News and Updates

  • In Dec 2015 Equitas informed BSE of the proposed amalgamation with EHFL with EFL subject to approval of RBI and High Court of Madras.
  • Equitas’ proposal to be a SFB was assessed of financial soundness, proposed business plan and fit and proper status based on due diligence reports. The RBI received 72 applications for small finance banks, and granted the status to just 10.
  • India’s second largest MF house and two of the largest private life insurers were in final stages of talks to buy stake in Equitas for a total of Rs 300 cr as on 30/3/2016.
  • Equitas founder Vasudevan’s vision is to create a widely owned firm run by professionals.
  • Equitas will open SFB branches in all the 11 states, in which it has presence.
  • Equitas has introduced two products, loan against gold jewellery and two-wheeler loans.

Industry Outlook

  • Three developing economies, namely China, India and Indonesia, account for 38% of the world’s unbanked, wherein India is home to 21% of the world’s unbanked adults.
  • Indian MFI sector is set to grow at 30-40%. The Loan Portfolio in Urban areas is Rs 35,320 cr (72%) and in Rural is Rs 13,563 cr (28%). (Source: The Bharat Microfinance Report 2015).
  • Average loan outstanding per borrower has been an important metric for MFIs. Average loan size in FY2015 was nearly Rs 13,000 which rose 31% YoY. Average loan size in Northeast is highest at Rs 16,200 followed by North at Rs 14,300. The loan size is larger in Northeast as the economic activities in this region require higher outlays due to the hilly terrain.
  • The total credit made available to poor /financially excluded clients had crossed Rs 48,882 cr. and number of clients benefited crossed 3.7 cr. by Mar2015. NBFC MFIs have CAR of 21.5%.
  • The eight MFIs (Bandhan, Janalakshmi, Equitas, Equitas, ESAF, Utkarsh, Suryoday and RGVN) accounted for 26% of MFI assets in FY2015. They will convert into SFBs along with Bandhan (a bank, with 20% of AUM), so the NBFC-MFI industry size will halve.
  • Outreach grew by 13% and loan outstanding grew by 33% in FY15 over FY14. The South continues to have the highest share of both outreach and loans outstanding, followed by East. However growth rates are higher in the Northeast and Central regions.
  • CRISIL expects the loan book of NBFCs to post 15-17% growth till FY 2017. The MFI Industry is expected to grow at 28-30% over next 2 years. (Source: CRISIL MF Opinion, 2015).
  • In the aftermath of the AP microfinance crisis, the Malegam Committee was established to review the MFI sector in India. It highlighted concerns included the high rates of interest charged, the lack of transparency in fixing of interest rates and other charges, multiple loans, upfront collection of security deposit, over borrowing, ghost borrowers and coercive methods of recovery. The Malegam Committee report resulted in the introduction of the NBFC – MFI guidelines which lay down a stringent regulatory regime for the MFI industry.
  • The GoI and RBI have created conducive policy and regulatory framework for MFIs to operate in the country, by setting up MUDRA for refinancing and regulating the microfinance sector.
  • The net loan portfolio as on Mar 2015 for the MFI’s stood at Rs 34,344.64 cr. Equitas thus has a market share of 6.2% in the microfinance sector.

Financials of Equitas

  • Equitas Revenue, EBITDA and PAT has grown 56.1%, 41.1% and 39.2% CAGR over the last 4 years. This is a very high growth rate. See Fig 4.
Fig 4 – Equitas Financials, JainMatrix Investments

Fig 4 – Equitas Financials

  • The operating margin increased from 49.2% in 2011 to 61.7% today. Also for Q3FY16 the figure stands was 63.6%. The profit margin  increased from 11.9% in 2011 to 14.2%. NIM dropping from 21.9% in 2011 to 11.6% in 2015. This is the effect of high growth.
  • The AUM, disbursements and interest income have grown fast over 4 years, a positive, Fig 5.
  • The cost of funds has been flat over the years, but the spread has fallen slightly due to fall in the yields. So the interest margins have declined. However it is not a cause for concern.
Fig 5 – Key Financial Metrics, JainMatrix Investments

Fig 5 – Key Financial Metrics

Spread is the difference between the Yield and the Cost of Funds

Positives for the IPO

  • The revenue, EBITDA and EPS growth rate have been very good over the last 4 years.
  • Equitas won the SFB license approval in Sept 2015. This is a good validation of the firm’s financial soundness, business model and practices.
  • Equitas as a SFB may now have access to lower cost funds, which can improve margins.
  • Equitas is quite diversified in its business areas. Hence it has the flexibility to change focus segments in case of a changed business outlook.
  • Equitas has a senior mgt. team with rich experience in financial services, that has developed and implementing the business strategy with a commitment to fair and transparent business practices while maintaining effective risk management and competitive margins.
  • Equitas MD P.N. Vasudevan is going to sell only 1,80,000 shares, a small percentage of his holding. The company will continue to benefit from the founder’s ‘skin in the game’.
  • Equitas has robust corporate governance standards, transparent operations and customer goodwill. “Equitas” in Latin means fair & transparent. Since inception, Equitas has attempted to comply with corporate governance standards applicable to publicly listed companies.
  • Equitas had received the CRISIL Governance and Value Creation Level 2 rating. Also their wholly owned subsidiary EHFL received a CRISIL rating of A-/Stable in Oct 2015.
  • Equitas has a large customer base of over 27 lakhs and provides wide range of credit products. The company can leverage its customer base to grow faster. As indicated by the management, once the company becomes a SFB, it intends to leverage its strength by providing agri based loans.

Internal Risks

  • Political Risk: In 2010, the adverse financial conditions in Andhra Pradesh and debt related suicides by farmers led to bad publicity for the MFI sector. Subsequently, the AP govt froze the MFI loans and operations, causing extensive losses and damage to current operators. Thereafter regulatory condition improved and RBI issued MFI and SFB regulations. But the sector retains a political risk.
  • In future, growth is likely to happen in two phases. Equitas has a deadline of 18 months for it to comply with the requirements under the RBI – SFB Guidelines and fulfil various conditions. Thus until next year Equitas may witness high growth as seen in the past. However post setting up of the SFB, the growth may slow as the firm adjusts to the new structure and conditions. Equitas will be required to maintain CRR and SLR, which may impact on their business operations.
  • While current leadership lead by Mr. P.N. Vasudevan is excellent, the next phase of growth for Equitas requires a strong next line of management /leadership.

External Risks

  • Geographic concentration: Their business is heavily dependent on their operations in Tamil Nadu (63% of loans), and any adverse changes in this region will impact business.
    • Equitas is present in 12 more states, and growth there should reduce this dependence.
  • SFB Challenges: The SFBs will be required to extend Priority Sector Lending to identified sectors, which may have higher delinquency rates and lower returns. If Equitas is unable to comply with these PSL requirements, then they will need to invest in funds with lower than market returns.
    • The regulatory framework to govern SFBs is uncertain, due to the absence of administrative, operational or judicial precedent, in terms of regulatory non-compliances and penal actions.
    • If Equitas is not able to set up its SFB structure and processes within the 18 months timelines prescribed, it will have an adverse effect on their SFB status and approvals.
  • Listing issues: In the IPO, foreign investors may not be able to participate freely under the QII and NII categories as the firm is trying to reduce foreign ownership, see Fig 3. This may reduce demand.
  • Competition: The MFI industry is at an early stage of growth and enjoys high margins and growth rates. However competition is intensifying as related sectors of NBFCs and Banks may diversifying into this sector. It is likely that margins may be reduce in a few years, as also industry growth rates.

Benchmarking

We compare Equitas with peers in the microfinance and rural lending space.

Exhibit 6 - Benchmarking, JainMatrix Investments

Exhibit 6 – Benchmarking

  • Equitas leads on PE, P/B, growth and D/E parameters.
  • The margins that Equitas enjoys seem low compared to these peers. This could be due to the diversified loan book of Equitas.

Overall Opinion

  • Microfinance in India is a sunrise industry. In an underbanked country, availability of credit for self-employed persons in rural areas is very low.
  • In this scenario Equitas follows SKS Microfinance to be the second listed company in this space. It is also the first (of 10 approvals) of Small Finance Bank in India to list.
  • Equitas has a good record in terms of growth, segment diversification and profits.
  • In terms of valuations, Equitas has priced the shares attractively, leaving something on the table for investors. The P/E and especially P/B appear at a discount to the peers.
  • Key risks are geographic concentration and impending SFB structural changes.
  • The IPO is rated a medium risk, high return offering. Retail Investors can BUY it.

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Search for companies/ sectors of your interest in Search box in the right panel.

Visit and Like JainMatrix FB or Follow on JainMatrix Twitter for reports

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. JM has no known financial interests in Equitas Holdings or any related group. 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 (SEBI Registration No. INH200002747) 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 .