Colgate Palmolive (India) – A Shiny Idea

  • Date: 25th May 2020 ;  CMP: Rs 1,313 
  • Large Cap – Mkt Cap Rs. 35,700 and Industry: Consumer – FMCG 
  • Valuation: P/E at 37.3 
  • Advise: BUY 

jainmatrix investments, colgate palmolive

Summary

Overview: Colgate Palmolive (India) is the leader in India’s oral care market with a 49% share. Their range includes toothpastes, toothpowder, toothbrushes, mouthwashes and personal care products products under the Colgate and Palmolive brands. FY20 revenues were ₹ 4,574 crores, and profits ₹ 816 cr. CPL today has one of the widest distribution networks in India – a logistical marvel with 61 lakh retail outlets. Most of the products of CPL were part of the ‘Essential products’ that were allowed to be distributed even during lockdown. Also by May 4th, all CPL plants were allowed to open. Given all this, we feel that CPL will be less disrupted than most consumer firms through Q1 and Q2 FY21 due to the lockdown.

Key Risks: 1) Covid 19 lockdown in Q1FY20 will impact both mfg. and the demand as supply chains as well as outlets have been closed 2) strong competition 3) Indian preferences for natural and ayurvedic products

Advice: BUY with a May 2022 target of ₹ 1,555, a 18.5% gain

The entire report in PDF form is available hereJainMatrix Investments_Colgate Palmolive Ltd_May2020

Disclaimer and Disclosures 

  • Punit Jain has no holding in CPL. In addition, JM and its promoters/ employees have no financial interest in CPL and no known material conflict of interest as on date of publication of this report.
  • 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. 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.
  • JM has been publishing equity research reports since Nov 2012, and is registered with SEBI as a Research Analyst since 2016. Any questions should be directed to the director of JainMatrix Investments at jain@jainmatrix.com

COVID 19 – India Gets Back on Track

Redirect link https://jainmatrix.com/2020/05/23/india-gets-back-on-track1/

We have been tracking this infection since March when it came to India and we had to declare the lockdown.

Today, 2 months on, we are at a different phase in the economy. The first phase of lockdown and defense against this virus has been by and large successful in India. We did not have a massive early spike in cases. We did far better than Spain and Italy and USA  in the early phase. We have been able to set up Covid hospitals, track infection cases, close our borders and airports and more or less, slow initial infections. The statistics today is that we have 125,000 infections and 3,720 deaths from the infection. This is a very very small number for India’s population.

After the very strict lockdown 1.0, we have had lockdown 2.0, 3.0 and now 4.0. The fact of the matter is that the economy has suffered immensely. Crores of people lost their jobs due to the lockdown. Many had to migrate back to their native places due to loss of wages. The economic losses are much more severe from the economic slowdown. Now that the infection is in control, we need to reverse our losses and regain the momentum. Even as we take sufficient precautions.

Both demand and supply were frozen, and it will take a massive effort from each of us for the economy to regain momentum. Its now time to open up our economy and as far as possible, get back to normal. We have to understand that this virus will not go away, it is we who have to adjust to it. Even as we maintain social distancing, and wear masks, and wash hands regularly, the important thing now is to dive back into business and some semblance of normalcy.

At JainMatrix Investments, we want to encourage India to get back on Track, so we are going to publish a series of articles and track stories in this space. Here we go, click LINKS:

  1. AFTER 2 MONTHS, FLIGHTS ARE BACK – 25th May

  2. HOW INDIA INC. GOES BACK TO WORK, LEADERSPEAK (Eco Times) – 25th May

  3. A THIRD OF NSE MFG FIRMS BACK AT WORK (Eco Times) : 23rd May

  4. MAHINDRA FACTORY – COVID CARE READY – 23rd May

  5. India Gets Back on Track – 23rd May

  6. We actually wrote about the need for a lockdown in Mar 2020 – CALL IN THE INDIAN ARMY TO HANDLE THIS EMERGENCY

Regards,

Punit Jain

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 and JM has no ownership or known financial interests in any company mentioned in this note. 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.

Indian Speciality Chemicals Sector – A Spotlight

The Indian economy has been hit by the Covid-19 epidemic. Even in this tough market, we find that the Indian Specialty Chemicals sector has the potential to not just survive, but actually grow rapidly.

Introduction

  • The Chemical sector constitutes a significant part of Indian economy. It’s a very diversified industrial sector, as chemicals cover over 70,000 commercial products. India is the 6th largest producer of chemicals globally and 3rd largest in Asia. Export were US$ 19.1 billion during the year 2018-19.
  • The Govt. of India allows 100% FDI in the chemical sector. The mfg. of most of the chemical products like organic/ inorganic, pesticides and dyestuffs is delicensed except hazardous products. It contributes 16% of the mfg. sector GDP.
  • Industry has 5 segments: basic chemicals, agrochem, specialty chem, pharma and consumer products. The specialty chemicals constitute 22% of total chemicals market in India.
  • Chemicals are the basic building blocks of a range of end-user products like drugs & pharmaceuticals, agrochemicals, paints, construction material, auto parts, textiles, and packaging, among others.
  • Specialty chemicals are value added chemicals, they are used towards specific end use applications They are performance or quality products, niche and high value. These provide a wide variety of functionality on which many other industry sectors rely.

Chemical Sector Notes

  • India is an attractive hub for chemical companies. The Indian chemical industry is a global outperformer in terms of Total Returns to Shareholders (TRS), source McKinsey & Co report. This has resulted in rapid growth for chemical industry of India. See Fig 1. It can be seen that The Indian Chemical industry enjoys superior returns.

jainmatrix investments, chemicalsFig 1. CAGR of TRS, source McKinsey & Co

  • China has implemented strict environmental norms, because of which many Chinese capacities are shutting down, which is benefitting large organised Indian players.The Ministry of Environment of China stated that 70% of companies inspected failed to meet the air pollution standards. Large global chemical supply chains may look at India as an alternative mfg. location.
  • The Coronavirus lockdown in China in Jan-Mar 2020 revealed and exposed global dependency on Chinese mfg. China is now seen to be an unreliable partner and many countries are actively looking at alternate manufacturing locations to de risk supply chain. Loss of China (37 % share) as a reliable partner and continued shifts from EU/Japan (16 %/4 % share) means share of India (3%) will rise. India will gain advantage because of availability of talent for mfg. and R&D.
  • Fig 2 represents share of countries in sales of global chemical industry.

jainmatrix investments, specialty chemicalsFig 2. Region wise sales of Chemicals

  • Today, India has a chemical trade deficit of $15 billion. There is a massive opportunity for import substitution – for Indian demand, as well as exports, of such products.
  • INR to Dollar is now Rs 75.5, it is weakening so imports are becoming expensive. So, import substitution for chemical products is attractive.
  • In India, during lockdown due to COVID, there was a disruption in supply chains and speciality chemicals also faced logistics (supply chain) and labour problems. But chemical industry is expected to be less impacted by COVID because most companies have fully or partially restarted their operations as it supplies chemicals to essential sectors like pharma, hygiene, personal health and agrochemicals.

Key Players

  • Fig 3 shows contribution of domestic and exports revenues to the total revenues of firms.

jainmatrix investments, speciality chemicalsFig 3. Revenue from exports

  • We have done a benchmarking exercise to compare the Chemical industry’s sector players. Fig. 4 depicts the comparison between different Indian companies on basis of vital parameters.

jainmatrix investments, specialty chemicalsFig. 4 Benchmarking

  • We can see that Vinati Organics has the highest contribution of export to revenues and Aarti the lowest.
  • In terms of size and scale SRF and Aarti lead.

jainmatrix investments, specialty chemicalsFig 5 – Relative Share Prices 

  • Over a 2 year period we can see the relative share prices.
  • Vinati and Navin have gained the most while Aarti and SRF the least among these firms.

Conclusion

  • Indian chemicals players will benefit from the expanding specialty chemicals market globally led by growing new applications alongside manufacturing shifts from China ― which has been battered by reliability and transparency woes; and EU, due to its ageing workforce; focus on innovation, and M&As.
  • There exists a good opportunity for Indian chemicals players to scale up and tap the opportunities for import substitution and exports.

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 no known financial interests in any firm mentioned here. 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 JM at punit.jain@jainmatrix.com.

Reliance Industries – A Firm to Rely On

  • CMP: ₹1,532
  • Industry: Refining, Petrochem, ++ Conglomerate 
  • Large Cap with ₹9,85,000 crore mkt cap
  • Current Valuation: P/E: 23 times and P/B: 2.4 times
  • BUY with a target of ₹2,200 by May 2022 

Summary

  • Overview: Reliance Industries is the largest private sector firm and #1 by market cap in India. RIL has over decades proven its ability to build businesses of global scale and execute complex, time critical, and capital-intensive projects. ~80% of RIL’s operating profits are being generated from the refining and petchem verticals. Going ahead newer businesses like Retail and Telecom are expected to grow profitably. RIL earnings has green shoots from (a) Improving ARPU from Jio wireless business (b) Launch of Jio Fiber Broadband services (c) Traction in enterprise solutions service offering (d) Lower interest costs as RIL aims to become net debt free (e) improving margins and stable growth in Retail and eCommerce.
  • Key Risks: (a) Adverse crude prices/ petroleum margins (b) Inability to reduce debt at the committed pace. (c) Lower plastic consumption affecting the petchem vertical. (d) Muted growth in Indian economy. (e) regulatory changes in telecom
  • Advice: Investors can BUY this share with a May 2022 target price of ₹2,200/share. This will allow their investment to appreciate 42% absolute or 17% annualized over this period.

The entire report in PDF form is available here – JainMatrix Investments_Reliance Industries_Jan2020

Disclaimer and Disclosure

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has no position in Reliance Industries. In addition, JM has no known financial interests in RIL 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 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.

IndiGo – Spreading Wings but Oil Squeeze

  • Date: 09th May 2019
  • Industry – Airlines 
  • CMP: Rs 1,575 
  • Large Cap of Rs 58,000 cr. mkt cap 

jainmatrix investments, indigo airlines

  • Overview: IndiGo is the market leader in Indian aviation with a low cost carrier model. It has a dominating domestic market share of 46.9%. The revenue and profit were Rs 23,967 crores and Rs 2,242 cr. resp. for FY18. The Income, EBITDA and profits have grown 31.6%, 26.6% and 21.3% CAGR over 8 years. The aggressive growth plans are in place for capacity addition. The Airline industry in India is going to see massive growth. With a big population, low penetration and weak railway sector, it should continue to grow at 15% over next few years. IGO has a strong brand and a leading domestic market share, consistent delivery and high growth. It has executed well on its LCC strategy. IGO has expanded the market with its growth. It will continue to dominate Indian skies due to network effect and good capacity additions. The IGO share is high due to market share gains, the Jet failure and Boeing grounding, inspite of high ATF prices. However there are several risks.
  • Key risks: 1) crude price rise affects ATF prices leading to sharp profit falls 2) large sector capacity adds puts pressure on prices 3) The risk of an engine failure is still there

Get the recommendation and research report: JainMatrix Investments_IndigoAir_May2019

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 been an investor in IGO since Nov 2015. He has also flown Indigo Airlines several times as a normal paying customer. Other than this JM has no known financial interests in IGO or Interglobe Aviation 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 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.

ICICI Securities IPO – A Direct Purchase

  • Date 24th Mar; IPO Opens 22-26th Mar at Rs. 519-520
  • Valuations: P/E 34.6 times TTM
  • Large Cap: Rs. 16,750 cr. Mkt cap
  • Industry – Stock Broking
  • Advice: SUBSCRIBE

Summary

  • Overview: ICICI Securities is a technology-based securities firm that offers a wide range of services including brokerage, financial products distribution and investment banking. They have been the largest equity broker in India since FY14 by revenue and active customers in equities. ISec FY17 revenue, EBITDA and PAT were Rs. 1,404 cr., Rs. 580 cr. and Rs. 338 cr. resp. ISec revenues, EBITDA and PAT grew at 19%, 36% and 47% CAGR in 5 years.
  • ISec has a good brand, a top 5 market position, good synergy with ICICI Bank, a nationwide infra for supporting and growing its customer base and an excellent last 5 years and 9M FY18 financial performance where it has emerged as one of the leaders.
  • At a P/E of 34.6 times, the valuations of the IPO appear to be high. However earnings growth is likely to continue at a high rate. Superior RoE, high and improving margins, scalable business model, and sectoral tailwinds make this issue attractive.
  • Key Risks: 1) Cyclical industry 2) High and rising competition 3) No discount brokerage offering from ISec 4) Poor image
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Here is a note on ICICI Securities (ISec) IPO. You may also read and save the report in a PDF file attached – JainMatrix Investments_ICICI Securities IPO_Mar2018

IPO highlights

  • The IPO opens: 22-26th Mar 2018 with the Price band: Rs. 519-520 per share.
  • Shares offered to public number 7.72 cr. The FV of each is Rs. 5 and market lot is 28.
  • The IPO will raise Rs. 4,017 cr. while selling 24% of post IPO equity. The offer will be an Offer for Sale (OFS) of Rs. 4017 cr. and there is no fresh issue of shares.
  • The promoter (ICICI Bank) owns 100% of ISec which will fall to 76% post-IPO.
  • ICICI Bank is the selling shareholder as it is the sole owner of the entire company. Out of the 7.72 cr. shares offered for sale, 38 lakh shares have been reserved for existing ICICI Bank shareholders. The IPO quotas for QIB, Non Institutional Buyer (NIB) and Retail are in ratio of 75:15:10, quite unusual.
  • The unofficial/ grey market premium for this IPO is Rs. 10-15/share. This is a positive.

Introduction

  • ISec is a technology-based securities firm in India that offers a wide range of financial services including brokerage, financial product distribution and investment banking for both retail and institutional clients. They have been the largest equity broker in India since FY14 by brokerage revenue and active customers in equities on the NSE.
  • ISec’s FY17 revenue, EBITDA and PAT were Rs. 1,404 cr., Rs. 580 cr. and Rs. 338 cr. resp.
  • ISec is a full service brokerage that offers its retail customers a range of products and services in equities, derivatives and research. Advisory services include financial planning, equity portfolio advisory, alternate investments, retirement planning and estate planning. They also distribute third-party products like mutual funds, insurance, FDs, loans, tax services and pension products.
  • The retail brokerage and distribution business is supported by a nationwide network 200 own branches, 2,600 ICICI Bank branches through which ISec is marketed and over 4,600 sub-brokers, authorized persons, independent financial associates and independent associates.
  • ISec provides domestic and foreign institutional investors with brokerage services, corporate access and equity research. ISec has a large cross-section of institutional clients, including FIIs who are serviced through dedicated sales teams. ISec investment banking business offers equity capital markets and financial advisory services to corporate clients, the govt. and financial sponsors. The equity capital markets services include management of IPO/FPOs, share buybacks, tender offers and equity private placements, domestic and cross-border M&A, private placements, and restructuring.
  • ICICI Direct (ISec’s electronic brokerage platform) currently has 39 lakh operational accounts of which 8 lakh had traded on NSE in the last 12 months. Since inception, they acquired a total of 46 lakh customers through this platform.
  • ISec’s brokerage and commissions business accounted for 89.5% of the total revenue. See Fig 1.

jainmatrix investments, icici securities IPO

Fig 1- ISec FY17 Segment Revenue/ Fig 2 – ISec Segment Revenue Growth

  • ISec was one of the pioneers in the e-brokerage business in India, and started offering online, real-time execution of trades on the NSE and BSE in FY 2000 through ICICI direct, their proprietary electronic brokerage platform. In FY17, over 95% of brokerage transactions by value, and over 90% of MF transactions by number, were performed by customers online.
  • Leaders are Shilpa Kumar MD/CEO, Chanda Kochar Chairperson, Ajay Saraf ED, Harvinder Jaspal CFO

Promoter ICICI Bank – Snapshot and Financials

  • ICICI Bank is the #1 private sector universal bank providing a range of services like commercial & retail banking, project & corporate finance, insurance, VC/PE, IBanking, broking & treasury services.
  • Income and PAT has grown at 11.1% and 1.5% CAGR resp. over 5 years, see Fig 3.
  • There was a weakening in the balance sheets of banks witnessed since FY11-15. During the year 2014-16, ICICI Bank saw asset quality concerns rising and higher NPAs. Some of this was RBI driven, and the policy focus was to clean the books of all banks.
  • ICICI Bank share gained 8.7% CAGR over 5 years and CMP is Rs. 289.6. Dividend yield is around 1%.

jainmatrix investments, icici securities ipo   Fig 3 – ICICI Bank Financials

  • However we are positive that private banks will grow faster at over 20% and gain market share over PSB’s. ICICI bank too is expected to recover rapidly from the 2015-16 asset clean up. Private banks are currently well placed to lead credit growth supported by strong capitalization.
  • From this short note we conclude that ICICI Bank has a fair reputation, and has somewhat rewarded shareholders over the past few years.

News, Business Model and Strategies of ISec

  • ISec’s business strategies are:
    • To strengthen their leadership position in the brokerage business.
    • Continue investing in technology and innovation.
    • Strategically expand their financial product distribution business through cross-selling.
  • Business Model: ISec has a technology based business model which is scalable and asset light. So costs are controlled and cost to income ratio decreased from 84.6% in FY13 to 62.8% in FY17.
  • ISec raised Rs. 1,717 cr. from 58 anchor investors. ISec will allot shares at a price of Rs 520/share to anchor investors, including Temasek, Nomura, Fidelity, Blackrock and Fairfax. IDFC Premier Equity Fund, L&T Mutual Fund Trustee, L&T Prudence Fund Pioneer Investment Fund, Reliance Strategic Investments Ltd and SBI Magnum Balanced Fund were also among the anchor investors.
  • As per ISec, their distribution business is growing at a faster pace than brokerage business. ISec aims to continue leveraging the brokerage customer base for cross-selling. In Mar 2018, ISec commenced robo advisory, which is a goal-based advisory without manual intervention and based on algorithms.
  • In Dec 2017, ISec requested SEBI permission to manage its own IPO.
  • ISec had approached the NCLT in Sep 2017 against the Deccan Chronicle to recover dues. They claimed Rs. 125 cr. dues from DC, as they had indicated their inability to repay the entire amount and offered Rs. 45 cr. of non-convertible debentures. DC partly refunded Rs. 80 cr. but failed to deliver debentures worth Rs 45 cr. Over the last 5 years few banks and financial institutions have been trying to recover loans extended to DC after the publishing house plunged into financial crisis.
  • ISec would be the 3rd subsidiary of ICICI bank which to be listed; ICICI Lombard General Insurance listed in Sep 2017 and ICICI Prudential Life Insurance listed in Sep 2016.
  • ISec aims to increase market share in institutional brokerage business by leveraging their strong position among domestic institutional investors and by increasing their focus on FIIs.

Broking and Distribution Industry Outlook in India

  • The Indian equity brokerage industry, which includes cash equities and equity derivatives brokerage, recorded revenues of Rs. 14,000 cr. in FY17, representing a 20% YoY growth. Industry revenues grew at 14% CAGR between FY12-17 due to rising trading turnover and growing retail participation.
  • Market Share: The top 25 brokers accounted for 51% of trading turnover in the NSE cash equities market in H1 FY18. ISec had a market share of 7.8% in the broking business and 3.5% market share in the distribution business in FY17.
  • The Indian brokerage sector can be classified in terms of type of brokerage service, nature of parent company and business diversification. The following chart sets forth the market structure:

jainmatrix investments, icici securities IPOFig 4 – Indian Broking Industry Structure

  • The equity ADTO (average daily turnover) has increased from Rs. 1,68,400 cr. in FY13 to Rs. 6,21,000 cr. in H1 FY18, a CAGR of 33.6%. Equity derivatives account for a major portion of the volumes, representing 95.1% of the total equity turnover in H1 FY18. Further, the equity ADTO from the equity derivatives segment has grown at a CAGR of 34.5% from FY13 to H1 FY18, as compared to a CAGR of 20.6% in the cash equities segment, primarily on account of higher index levels, reduced STT on equity futures from 0.017% to 0.01% and an increasing share of high frequency and algorithmic trading, especially in the derivatives market.
  • As per CRISIL Research estimates, the Indian equity brokerage industry revenues are projected to increase at 15-18% CAGR in the next 5 years and reach Rs. 30,000 cr. by FY22, driven mainly by the continued uptick in trading volumes and increasing retail investor participation. (Source: ISec RHP)
  • As per AMFI, the commissions paid by MFs to distributors grew from Rs. 2,400 cr. in FY13 to Rs. 5,000 cr. in FY17, a CAGR of 20.1%. Increased financial savings, superior returns from MFs, greater reliance on distributors and govt. policies acted as key catalysts in driving the distribution revenue growth. In addition, as per a SEBI directive in Sep 2012, AMCs were permitted to pay higher commissions to distributors in B15 cities to increased investments from under-penetrated regions.
  • According to CRISIL Research, the AUM of AMCs is projected to grow at a CAGR of 21% from FY17 to reach Rs. 44 lakh cr. in FY22. Improvement in economic growth, low MF penetration, higher disposable income coupled with increased financial savings, rising retail participation, expanding geographic reach, higher digitisation and supportive govt. policies focusing on increasing awareness and ease of investing are expected to be the growth catalysts. (Source: ISec RHP).
  • There was a growth in number of demat accounts (30% CAGR FY13- H1FY18).

Financials of ISec

  • ISec’s revenues, EBITDA and PAT grew at 18.7%, 35.8% and 47.3% CAGR in 5 years, see Fig 5.
  • The 9M FY18 financials look excellent. The 9M FY18 PAT is 17.6% higher than the entire FY17 PAT.

jainmatrix investments, icici securities IPOFig 5 – Financials

  • The margins are high and have improved sharply over 5 years of FY12-17. PAT margin has risen from 10.1% (FY13) to 24.1% (FY17), and to 29.6% in 9M FY18. This is a positive.

jainmatrix investments, icici securities IPOFig 6 – ISec Cash Flow

  • ISec has been Operational Cash flow positive in the last 5 years FY13-FY17. This is a positive. In 9M FY18, this CFO is slightly negative; however the trend was the same for 9M FY17 after which for the full year CFO was large and positive. See Fig 6.
  • FCFE here is Free Cash Flow to Equity, which is the sum of CFO, Capex and Net Borrowings.
  • ISec had a RoE of 77.5% in FY17 while the 3 year average RoE stood at 76.9% (FY15-17). The RoCE stands at 90.8%. These return ratios are high and excellent.
  • The current D/E ratio is 1.27:1 which is moderate. The debt completely pertains to short term debt where money has been raised using commercial paper repayable within one year.
  • The dividend payout ratio has improved from 41.8% to 60.5% (FY13-17). This is a positive.
  • ISec’s business is asset light and requires minimum CAPEX and hence the company has throughout generated positive FCFE and a high return on equity. The trend is likely to be the same going ahead.

Benchmarking

We benchmark ISec against other listed companies providing similar services. See Exhibit 7.

jainmatrix investments, icici securities IPOExhibit 7 – Benchmarking

Note 1 – While these firms are the closest peers, ISec is mostly a stock broker. EFS, IIFL and JMF have substantial NBFC activities. EFS, IIFL and MOFS are also asset managers with PMS and MF activities. Note 2 – ISec P/B has been calculated basis Book Value as on 9M FY18. For other companies P/B has been calculated basis closing price as on 22.03.18. 

  • The PE post IPO is high/expensive, so pricing appears aggressive, this is a negative. On the P/B front as well, ISec is expensive. The 3 year sales growth of ISec is the lowest in the industry, however the 3 year PAT growth is excellent due to improving margins and cost controls.
  • The RoE at 77.5% is massive and excellent, the best in the industry. This is a positive. The RoE is likely to remain high in the future as well due to the nature of their business.
  • ISec had the lowest EBITDA margin, however the highest PAT margin in the industry indicating a great cost control and efficiencies in operations. The dividend yield at 1.22% is the highest.
  • We can understand that ISec is a pure stock broker, and has group companies handling other asset management and NBFC activities. It thus has good focus on this business. It is able to keep operating costs low. With this, it is able to provide high profit margins and leading returns and is a high dividend firm. Thus we feel that the high valuations are justified.

Positives for ISec and the IPO

  • ISec is powered by a solid proprietary technology platform called ICICI Direct. It is backed by robust infrastructure and has processed at peak over 19 lakh orders and trades in a day.
  • ISec has a strong and growing distribution business with an “open-source” model.
  • ISec is a beneficiary of a transformation in the Indian savings environment, of household savings shifting from physical to financial assets. The share of financial savings as a proportion of household savings has increased from 31.1% (FY12) to 41.5% (FY16). The share is likely to rise further, as physical savings such as gold and real estate are providing lower investment returns.
  • ISec is a strategic component of the icici ecosystem and have mutually beneficial agreements with companies in the Group. The customers of ICICI Bank are allowed to trade in equity securities using a“3-in-1 account” facility with seamless integration providing great convenience.
  • Strong financial performance with significant operating efficiency.
  • As a full service stock broker, ISec provides ‘good enough’ services for new and small investors.
  • ISec has a good brand thanks to ICICI Bank, so visibility for this IPO is not an issue.

Risks and Negatives for ISec and the IPO

  • The valuations appear on the higher side among peers as P/E is 34.6 times.
  • Stock broking industry is cyclical. It does very well in positive investment climates. However if there is a slowdown, a global trade war or adverse economic situation, and investors turn defensive, brokerage revenues can dry up rapidly and return ratios can turn negative. The RHP financial data of ISec is for a 5 year period and does not reveal the financial effects of a negative climate on ISec.
  • The entry and success of discount brokers like Zerodha, 5Paisa and RKSV is already attracting away HNI and advanced trading customers with low costs, better user experiences, etc. We do feel that so as to not lose customers ISec may be soon forced to add a discount broking platform.
  • The brokerage industry is highly competitive and fragmented with close to 500 brokers in operation. Many of ISec’s peers added businesses like financial services, loans and asset management as brokerage rates got squeezed over the last 10 years from 2-4% to a maximum of 0.75% today (on cash delivery). Consolidation is happening. However as a top 5 player, ISec can hope to benefit from consolidation.
  • ISec is subject to extensive statutory and regulatory requirements and supervision from SEBI, and any adverse policy changes or punitive action in future can have material influence on ISec.
  • ISec relies heavily on its relationship with ICICI Bank for many aspects of their business. Any changes in this relationship, or even a policy change that (hypothetically) forces ICICI Bank to allow customers to have “3-in-1” accounts with other stock brokers, can affect ISec business.
  • The stock broking industry has an image problem with many issues:
    • Pushy sales persons often force new accounts on unsuspecting prospects, which then remain inactive. The RHP itself reveals 31L of 39L accounts of ISec inactive on NSE over last 12 months.
    • Aggressive wealth managers and “advisers” call customers and “churn” their portfolio ever so often.
    • ‘Higher brokerage revenues’ and ‘growing the wealth of customers’ are inherently clashing objectives for stock brokers, which customers may not understand until too late.
    • Managing of equity portfolios of value below Rs 25 lakhs is a common (grey area) activity by stock broking employees and affiliates with uneven results for customers.
    • Stock broking equity research reports target 10-15% gains from stocks (and quick exits) while simultaneous reports from RIAs or Research Analysts on the same stocks may target 100-150% gains (over 1-3 years), which may have better wealth outcomes.
  • We feel ISec has a fuddy duddy image and may need to undergo UI and design transformation changes to appeal to millennials.
  • The Indian broking industry has a long way to go in terms of customer friendly initiatives such as tracking and shadowing of professional portfolios, providing trading access to professionals, portability of trading accounts and investments, etc.

Overall Opinion and Recommendation

  • The Indian equity markets are growing deeper and wider year after year.
  • The shift towards financial assets over physical assets has grown brokerage and financial products distribution businesses, supported by demonetization, improved financial markets awareness, financial inclusion and ramp up in digital infrastructure. The retail participation is nowhere near the peak and likely to grow even stronger in the years to come.
  • ISec has a good brand, a top 5 market position, good synergy with ICICI Bank, a nationwide infra for supporting and growing its customer base and an excellent last 5 years and 9M FY18 financial performance where it has emerged as one of the leaders.
  • At a P/E of 34.6 times, the valuations of the IPO appear to be high. However earnings growth is likely to continue at a high rate. Superior RoE, high and improving margins, scalable business model, and sectoral tailwinds make this issue attractive.
  • Key risks are 1) Cyclical industry 2) High and rising competition 3) No discount brokerage offering from ISec 4) Poor image
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Disclaimer and Disclosure

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has been a customer of ISec and ICICI Bank since over 10 years. JM has no stake, ownership or any other known financial interests in ISec 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.

Relaxo Footwears – A Value for Money Investment

 

  • Date: 4th Nov 2017
  • Industry: Footwear
  • CMP: Rs. 581
  • P/E: 56.4 and P/B: 11.5 times
  • Mid Cap: 7,003 crore mkt cap
  • Advice: BUY with a target price of Rs. 905 by May 2019
  • We prefer this stock to an IPO open currently.

Summary

  • Overview: Relaxo Footwear is a firm into footwear products for over 40 years; is India’s largest footwear maker and sold 13.5 cr. pairs in FY17. RXO offers comfort, style and affordable footwear. 70% of RXO’s sales is from the
  • RXO’s revenue in FY17 was Rs. 1,741 cr. and profits Rs. 123 cr. Revenues, EBITDA and PAT have grown at 19.8%, 24.1% and 30.9% CAGR from FY09-FY17.
  • Key new trends include growth in non-leather footwear and eCommerce. The firm is going to expand faster using the franchise model. Margins and volumes are likely to improve this year due to reduced interest & tax costs, new value added products and a favorable macro environment. RXO has adapted itself over the years to changing consumer needs.
  • Risks: The key risk is a rise in raw material prices could impact margins.

Here is our report on RXO Footwears Ltd. (RXO)

Relaxo Footwear – Description and Profile

  • RXO is engaged in the mfg. and sale of footwear products made of textile, rubber, PU (synthetic leather) and EVA (ethylene vinyl acetate). Today RXO is India’s largest footwear firm.
  • RXO’s revenue in FY17 was Rs. 1,741 crores and profits Rs. 123 cr. It has 4,855 employees.
  • RXO has its HO in Delhi and mfg. at Bahadurgarh (H’yana), Bhiwadi (Raj.) and Haridwar (U’khand).
  • RXO stepped into the footwear industry in 1976 when brothers Mukund Lal Dua and Ramesh Kumar Dua started off with the mfg. of slippers and subsequently expanded the range.
  • At present, RXO makes 6,75,000 pairs per day with capacity utilization of 60%. Products include slippers, canvas shoes, flip flops, PVC DIP shoes, sport shoes and sandals. The brands are Bahamas, Flite, Casualz, Schoolmate, Sparx, Elena, Mary Jane, Kidz Fun and Boston.
  • Unlike Bata and Metro Shoes, RXO has taken a conscious decision to stay away from leather products where the prices may be higher but the market size is much smaller.
  • RXO sells its products through 275 exclusive COCO stores {Company Owned and Co. Operated}, large format retail stores and e-commerce. However, the majority of company’s business comes from general trade, with 800 distributors and 50,000+ retailers across the country. 75% of the COCO stores are located in north India particularly in UP, Delhi, Haryana and Punjab.
  • As a part of its product positioning, RXO offers a combination of comfort, style and affordable footwear. See Fig 1. RXO has 6,000 SKUs and 400 articles (products).

jainmatrix investments, relaxo footwear

Fig 1 – RXO Product positioning; Fig 2 – RXO Geographical presence; Fig 3 – Brands  

  • RXO brands are promoted by Salman Khan, Akshay Kumar, Shahid Kapoor and Shruti Haasan from the film industry. Fig 3 highlights the positioning and target market of each brand.
  • Key Executives are: Ramesh Dua (MD), Mukund Lal Dua (Whole Time Director), Sushil Batra (CFO), Gaurav Dua (ED Marketing) and Ritesh Dua (ED Finance, Exports and HR).
  • Shareholding pattern % is: Promoters 74.9, DII 1.8, QFI 4.5, Individuals 5.0 and Others 13.8.

Business Notes, Strategies and Events

  • RXO reported a 1% rise in profit YoY at Rs. 37 cr. in Q1 FY18. Revenues grew by 19% to Rs. 483 cr. in Q1 FY18 YoY. Revenue growth was high in Q1 FY18 due to pre-ponement of sales prior to implementation of GST. However, the same kind of growth is not expected in Q2 FY18, but it may revive in subsequent quarters. This PAT growth was flat due to sharp increase in cost of materials by 37.1% YoY.
  • Management expects double digit revenue growth (mid-to-high teen) for FY2018 driven by improvement in sales volume and better realization (due to improvement in revenue mix).
  • GST has improved prospects as footwear priced up to Rs. 500 is now taxed at 5% (earlier 9.5%) and the rest at 18% (earlier 23.1-29.5%). This is a positive for organized footwear players.
  • RXO changed its 40-year old logo in Jan 2017 to stay relevant amid the changing consumer preferences.
  • RXO has always owned the resources like land, machinery, factory etc. to keep a check on quality. It has recently adopted the franchise model to accelerate reach in untapped markets.
  • In 2009 Bata had filed a case against RXO in the Delhi HC accusing it of infringement of its brand Sparx. The issue was settled out of the court in 2015 in favor of RXO.
  • RXO is setting up its 9th mfg. unit in Bhiwadi, Rajasthan with a capex of Rs 100 cr. to make the Hawai brand of footwear as current capacity is fully utilized. This should boost revenues.
  • eCommerce is an important channel with an Online Presence with shopatrelaxo.com and Online Shopping Websites like Amazon, Flipkart, Snapdeal, Jabong, etc.

Industry Outlook

  • The total footwear industry is of Rs. 55,000 cr. and organised sector is of Rs. 10,000 cr.
  • Relaxo has a 3% market share within the entire industry and 20% of the organized footwear market in value terms, and 5-6% in volume terms. It sold 13.5 cr. pairs of footwear in FY17.
  • The domestic footwear market in India is projected to grow at a CAGR of 15% from FY16-20. The key drivers for the footwear segment will be: a) increased adoption owing to versatility in usage, and b) shift from unbranded to branded.
  • Men’s footwear dominates this market with 54% share, next is women (37%) and children/ school (9%). But women’s segment will outpace Men’s to take 41% of the market by FY 2020.
  • Branded footwear market is expected to grow at a CAGR of 20% to account for 50% of the organized market by FY 2020 from current 40%.
  • Footwear market is among the most organized categories in the country with 26% of the organized share with presence of EBOs (Exclusive Brand Outlets). The unorganized pie of 74% will grow at 14% while the organized market will grow at 18% CAGR to account for 29% of the market by FY21. (Source RHP)
  • Bata India has the largest store network followed by Khadim’s and Liberty Shoes. See Fig 4.
  • 54% of the retail stores sales are under the Rs. 500 category and 30% in the range of Rs. 500-1000. See Fig 5. 70% of Relaxo’s sales is generated from the

jainmatrix investments, relaxo footwear

Fig 4 – Store network of footwear brands / Fig 5 – Average Selling Price and Shares

Stock Evaluation, Performance and Returns

  • The share price has grown at 54.2% CAGR over 5 years and at 34.6% over 2 years. This includes a split in Nov 2013 (FV 5 to FV 1) and a bonus in July 2015 (1:1). See Fig 6.
  • The FY17 remuneration of Mukund Dua and Ramesh Dua is high at Rs. 9.12 cr. each. Under Companies Act, the ceiling in pay to key managers is 10% of profits. This limit is being given as remuneration.

jainmatrix investments, relaxo footwear

Fig 6 – Price History

  • Revenues, EBITDA and PAT have grown at 19.8%, 24.1% and 30.9% CAGR from FY09-17. We can see improvements in Operating & Profit margins even as Revenues grew steadily. See Fig 7.
  • Dividend growth has been good. RXO has generated positive Free Cash Flow in the last 8 years indicating conservative financial management, Fig 8.

jainmatrix investments, relaxo footwear

Fig 7 – Quarterly Financials / Fig 8 – Cash Flow 

jainmatrix investments, relaxo footwear

  • The historical average for PE is at 37.6 times of the last 5 years. However in the last 2 years, it has risen to 45.2 times, implying a re-rating. Currently RXO has PE of 56.4 times and is the top quadrant. See Fig 9.

jainmatrix investments, relaxo footwear

Fig 9 – Price and PE Chart / Fig 10 – Price and EPS TTM Chart

  • The earnings of RXO grew 4x from Jan12 – Jan16. In Fig 10, we show the EPS growth in a channel. Employee costs rose sharply from Mar 2016 affecting the EPS growth. Later demonetization also affected business.
  • ROCE and ROE are 25.7% and 22.6% respectively which is robust.
  • The D/E of the firm has fallen from over 0.96 to 0.38. This is a positive. As per mgmt. in Q1 FY18, RXO’s interest costs fell over 50%. This is likely to drive the margins up.
  • However earnings revival will be witnessed now due to benefits arising from GST, fall in interest costs, premiumization of product portfolio and adoption of the franchise model for faster expansion.

Benchmarking and Financial Estimates

We present a benchmarking exercise with listed peers in similar product categories. Since Mirza Intl. is focused on exports, it is not strictly comparable. See Exhibit 11.

  • In terms of P/B the valuations appear high. However this is explained by RXO strategy of owning the mfg. plants. P/E appears little high. RXO has good growth and a low D/E ratio compared to the peers.
  • RXO leads on margins, which reflects on good sales and costs controls. They are likely to improve as the management continues to focus on premiumization products while also focusing on cost reduction.
  • The return ratios are robust with a leading RoE score. The dividend yield is fair.
  • In all we can conclude that RXO looks more attractive than Khadim whose IPO is due.

jainmatrix investments, relaxo footwears

Exhibit 11 – Benchmarking / Exhibit 12 – Two year Projections  

Financial Projections: We present 2 year financial projections for RXO, see Exhibit 12.

Strengths                                                     

  • Key new trends include growth in non-leather footwear and eCommerce. RXO has only a small fraction of leather, and may benefit from this. On eCommerce RXO has its own website and tie ups with popular portals to grow online presence.
  • Strong brand equity strength & Celebrity endorsement: RXO has many brands, and has created good brand equity by endorsing celebrities to connect brands with customers, like Salman Khan, Akshay Kumar, Shahid Kapoor and Shruti Haasan. These activities positively impact volume growth.
  • GST: 70% of RXO’s sales falls in < Rs 500 price which has been positively impacted by lower GST.
  • Improved Financials: RXO has reduced debt over 5 years and current D/E is at 0.2 times, lowering interest costs in Q1 FY18. Along with premiumisation these will improve margins in the medium term.
  • RXO is a well-managed firm financially. The return ratios have historically been high and the cash flow management is good. This is a positive from an investment perspective.
  • Exports is a priority and will help RXO ramp up volumes in future.
  • RXO owns all its mfg. facilities. This allows better quality control and higher returns.
  • While the two brothers have been running the firm for 40 years, the next generation appears to have smoothly taken charge along with senior professionals. There should be continuity at RXO.
  • Focus on fashion: The key driver at RXO is to be in-sync with changes in fashion for consumers. Many of the new brands, design changes and premiumization initiatives are to tap consumer behavior. The new logo of Relaxo has also been created to appeal to the younger crowd.
  • A fall in rubber and raw material costs in recent times has helped RXO to improve margins.
  • The initiative around franchisee network growth will help RXO expand reach and availability.
  • Capacity utilization at RXO is 60% so there is ample room to grow volumes.

Risks and Challenges

  • The IPO of Khadim which is ongoing may throw a spotlight on the sector, and make valuations expensive. RXO has already gained close to 20% in the last 1 month.
  • Also some investors in Relaxo may like to exit it and enter Khadims.
  • High valuations – at a PE of 56 times, a lot of growth and profitability expectations are baked into the price. Any non-delivery of such performance will result in a big correction of price.
  • Any change in Govt. policies, and GST tinkering can affect the company’s performance.
  • Rubber and crude oil prices volatility can affect the costs structure and margins. The key raw materials, ethylene vinyl acetate (EVA) etc., are crude derivatives and hence prices follow the crude cycle with a lag effect. A sharp rise in these crude prices could significantly affect input cost.
  • Intensifying competition – entry of MNCs such as Nike, Adidas, Puma and many top brands can affect RXO. However our feel is that currently these firm’s products are priced much higher and so will not affect RXO.
  • Macro-economic factors like a downturn in the economy, unforeseen political and social upheavals, natural calamities and below normal monsoon can affect RXO.
  • Any sharp fluctuations in dollar price can adversely impact the cost of imported raw materials.
  • In family owned businesses there is always a risk of breakups and business separation.
  • High promoter compensation – it is at prescribed limits.

Overall Opinion, Outlook and Recommendation

  • In India the per capita consumption of footwear is 1.66 per year compared to 3 pairs globally and 6-7 pairs in advanced countries. This indicates high potential demand.
  • RXO has a positioning of a Value for Money but visible and good quality footwear. There is a massive unorganized sector in footwear. With GST and other tax initiatives, RXO may capture a lot of marketshare vacated by unorganized sector while taking up premiumization and brand strengthening.
  • The management is planning to expand faster using the franchise model. FY17 was flat financially on account of demonization and higher employee expenses. The margins and volumes are both likely to improve this year on account of reduced interest & tax costs, introduction of more value added products and a favorable macro environment.
  • RXO has adapted itself over the years to changing consumer needs and preferences. This financially reflects well on the company in terms of superior return ratios and good cash flow management.
  • Valuations are expensive at P/E of 56.1, but good companies tend to be richly valued for long durations.
  • We project a target price for RXO of Rs. 905 by May 2019, a rise of 55% absolute and 33% annualized.
  • Investors can BUY this share with a 2 year investment horizon.

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.
  • The basis for the Financial Projections in Exhibit 12 and Target Price are revenue growth per footwear pair at 8% p.a. for FY18-20, volume growth of 11% p.a. for FY18-20, margins at Q1FY18 levels, a P/E target of 50x, management commentary and analyst judgement.
  • Punit Jain has no position in Relaxo Footwears. In addition, JM has no known financial interests in Relaxo Footwears 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 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