Dilip Buildcon – Tunneling through!

  • Date: 18th Sept, 2020
  • Price: ₹ 374
  • Small Cap: ₹ 5,200 cr. Mkt cap
  • Industry – Roads Construction
  • Advice: Buy with a target of 810 in 2 years

jainmatrix investments, dilip buildcon

Summary 

  • Overview: Dilip Buildcon is an EPC firm undertaking projects in India in the roads, bridges, tunnels, etc. DBL’s revenue in FY20 was ₹ 9,725 crore and profits ₹ 358 cr. DBL’s revenues, EBITDA and PAT have grown at 41.2%, 41.1 and 27.9% CAGR from FY11-FY20. It’s a small cap but a sector leader.
  • Why Invest Now? Good growth in order book in Q1FY21. The Booked to Bill ratio rose to 2.84. Also DBL has diversified from primarily roads into attractive adjacent sectors like tunnels, mining, metros, airports and irrigation. It is also executing 2 large infra asset sale deals which will free up capital, improve returns, reduce debt and allow reinvestment in growth. The share is also sharply off 2018 highs and is available at a P/E of 18 times TTM. The macro is good with GoI investing heavily in infrastructure. Interest rates are falling and loans are easier to get.
  • Key Risks: 1) high debt and large working capital requirement 2) pledged shares 3) high competition 4) covid and weather disruptions 5) Roads Sector perception
  • Outlook: Investors can BUY the share a 2 year target price of ₹ 810.

Our other Roads related reports:

  1. Indian Roads Sector – A Delightful Drive Ahead? – Apr 2018

  2. H.G. Infra IPO – An Exciting Road Ahead – Feb 2018
  3. Here’s A Great Construction Achievement – July 2018
  4. Dilip Buildcon IPO – This Is A Rough Road – Aug 2016  (we have changed our opinion)

Here is our research report on Dilip Buildcon Ltd. (DBL).

Dilip Buildcon – Description and Profile

  • Dilip Buildcon (DBL) is an Engineering, Procurement and Construction (EPC) firm undertaking projects in India in the roads, bridges, tunnels, mining, metros, airports and irrigation sectors.
  • DBL’s revenue in FY20 was ₹ 9,725 crore and profits ₹ 358 cr. DBL’s revenues, EBITDA and PAT have grown at 41.2%, 41.1% and 27.9% CAGR from FY11-FY20.
  • DBL owns 12,901 vehicles and construction equipments, and employs 33,700 people.
  • DBL segment revenues for FY21 Q1 are: (a) Construction of roads and bridges – 88% (b) Mining – 1% (c) Irrigation projects – 1%. (d) Urban development – 10%
  • DBL is MP based but in Fig 1b we can see that projects are from all over the country.
  • As of Q1FY21, DBL had an order book of ₹ 26,115 cr. The Orders Booked to Billings ratio was at 1.96 times in Mar 20 has risen to 2.84 in Q1 giving good revenue visibility. Out of this 68% are central government projects and 32% state government projects.
  • Dilip Suryavanshi is CMD. He has 34 years’ experience in construction, and is President of the MP Builders Association. Devendra Jain is the CEO-ED and has 19 years’ experience in construction.
  • Shareholding of DBL is: Promoters -75%, MF – 9.5%, FII – 8.7%, Public – 6.7%.

 

JAINMATRIX INVESTMENTS – PRICING AND PAYMENT OPTIONS

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Business Model, News and Updates for DBL

  • DBL’s strategy going forward is to (a) focus on road EPC for government clients (b) divest BOT assets freeing capital (c) geographical diversification (d) projects clustering (e) Target smaller project size to reduce overdependence on large projects (f) Deleverage balance sheet.

jainmatrix investments, dilip buildconFig 1(a) – DBL Segment Revenue in FY20 and Fig 1(b) – State wise Order Book (clickable)

  • It has a policy of no subcontracting and no equipment on rental. This has helped it build good human resource and execution capabilities. They do a faster execution of projects. DBL has completed 90% of their projects early, and has received bonuses of ₹ 565 cr. from 2012-20.
  • DBL carefully selects projects and strives for geographical clustering of these outside MP. This helps in utilization of construction assets and reduce environmental and forest clearance risks. It also paves the way for regional strengths. DBL leverages its manpower, equipment and materials and saves transportation costs, thus achieving economies of scale.
  • Drones and UAV are emerging technologies used to reduce project time, improve safety and control project costs. UAV is used to collect engineering data at a construction site.
  • GPS technology is used to track machine life, fuel usage, and consumables. It provides mapping and replays vehicle location history with real time alerts and notifications. Using this tech, DBL is able to guide drivers and operators, enabling fuel savings of ~25%.
  • DBL has received a LoA for construction and upgrading of NH 131A near Narenpur to four-lane and near Purnea to two-lane with paved shoulders in Bihar on HAM mode, of value ₹ 1,960 cr.
  • DBL in Aug 2018 won a contract of Pachhwara Central Coal Mine for 55 years valued at ₹ 32,156 cr., located in Jharkhand. The Pachhwara Block is reserved for Power Sector end use and was allotted to Punjab State Power Corp by GoI. DBL will develop this in consortium with VPR Mining where DBL will hold 74% equity. It expects to generate annuities of ₹600 cr. and margins in line with the current road business.
  • In June 2012 Income Tax dept. conducted raids on promoter Dilip Suryavanshi, teacher-turned local business tycoon Sudhir Sharma and associates at 10 locations, including Indore and Bhopal in MP. The officers found incriminating documents related to tax evasion. The ED later sought details from the IT dept. regarding an alleged ₹ 140 cr. FEMA violation from South Africa. (TOI news).
  • As a part of Business Continuity Measures (BCM), DBL imposed the (WFH) policy and this was identified as major relaxation for working in the COVID-19 pandemic environment.

Industry Outlook

  • India has the 2nd largest road network in the world, aggregating to 61 lakh kms. Roads are the most common mode of transportation and account for 86% of passenger and 65% of freight traffic. In India, National Highways with length of 1.04 L km are just 1.7% of the road network, but carry about 40% of the road traffic. On the other hand, state roads and major district roads at the next level carry another 60% of traffic and account for 98% of road length.
  • There are 2 central Govt. bodies which award road projects, NHAI which is in charge of the National Highway Development Program (NHDP) and Ministry of Road Transport and Highways (MoRTH), which covers highways not under NHDP.
  • From the Fig 2 below we can see the transition of projects awarded to new models recently.

jainmatrix investments, dilip buildcon Fig 2 – Road Project Models (click on images to enlarge)

  • NHAI has set an aggressive timeline for highways, expressways and economic corridors, to be ready by Mar 2025. The combined length of these is 7,800 km and would require investment of approximately ₹ 3.3 Lakh cr. in the next five years.
  • NHAI has constructed 3,979 km of NHs in FY19-20, the highest ever achieved in a financial year.
  • GoI has envisaged a highway program Bharatmala Pariyojana for development of 65,000 km of NHs. Under Phase-I of the program, GoI has approved implementation of 34,800 km of NH projects with a stiff target of 5 years with an outlay of ₹ 5.35 L cr.
  • Highway construction in India increased at 21.4% CAGR between FY16-19. In FY19, 10,855 km were constructed, and GoI has set a target for constructing 12,000 km of NH in FY20.
  • The development of road infra in India is witnessing great momentum and construction of roads per day hit a new high of 27 kms/day for FY18, which is much higher than what was achieved earlier.

jainmatrix investments, dilip buildconFig 3 – Construction, Outlay and Projects Awarded

  • Under Union Budget 2020-21, GoI allocated ₹91,823 cr. to MoRTH, and plans to invest ₹ 15 lakh cr. in the next five years. CRISIL expects investment in roads to double to ₹10,70,000 cr. over 5 years.
  • The GoI approved the Bharatmala program under which 53,000 kms of NHs have been identified to bridge critical infra gaps. It will give the country 50 national corridors as opposed to 6 at present. Phase I will be over FY18-22 with 24,800 kms of construction expected.
  • Construction of roads generates employment and contribution to growth in GDP.
  • In recent times, the InvIT structure has become popular for holding and listing of infra assets. This structure is tax efficient and allows infra firms to monetize their assets.

Stock evaluation, Performance and Returns

  • DBL’s revenues, EBITDA and PAT have grown at 41.1%, 41% and 27.9% CAGR from FY11-20.
  • DBL’s price history is detailed in Fig 4. The share price high was ₹ 1,247.5 in May 2018.

jainmatrix investments, dilip buildconFig 4 – Price History

jainmatrix investments, dilip buildconFig 5a – DBL Financials (click on images to enlarge)

  • DBL’s revenue was ₹ 1,892 cr. in Q1 FY21, a decrease of -17% YoY. PAT also fell by -70% YoY to ₹ 34 cr. in Q1 FY21 largely due to the impact of covid-19 and lockdown, see Fig 5a. We can also see that Sept quarter is typically weakest, mostly as the rains slow the construction for roads.
  • They paid a dividend of ₹ 1/share (Rate of 1%) in FY20, a yield of 0.11% which is very small.
  • DBL has not been able to generate Free Cash Flow in the last 6 years in-spite of good Cash from Operations due to the large CAPEX needs . This is common across the industry. See Fig 5b – Cash Flow. We can also see some of the key Financial metrics in Fig 5c.

jainmatrix investments, dilip buildconFig 5b – DBL Cash Flows and Fig 5c – Financial Metrics 

  • It had a Booked to Billed ratio of 1.96 (FY20) which rose to 2.84 in Q1FY21 on wins, see Fig 5d.
  • DBL has a ROE of 11.21% in FY20.
  • It secured record orders worth ₹ 10,703 cr. in Q1FY21 across 4 sectors and 5 states including 2 new states of Uttarakhand and Bihar, see Fig 5e.
  • It is getting more diversified, and now has over 50% of Order Book from non – Road sector.
  • The promotors hold 75% shares. However 21.5% of shares have been pledged by them.
  • In Fig 6a, we see the PE chart for DBL has a historic average of 16.25 times and a range of 7.5-25 times in 4 quadrants. Today at 23.5 times, it is trading near its historic averages.
  • In Fig 6b we can see that the EPS TTM had decreased in the last year due to nationwide lockdown.

jainmatrix investments, dilip buildconFig 5d – Order Book to Billed and Fig 5e – OB in Q1FY21

jainmatrix investments, dilip buildconFig 6a – Price – PE graph

jainmatrix investments, dilip buildconFig 6b – Price – EPS graph

Benchmarking and Financial Estimates

jainmatrix investments, dilip buildconFig 7a – Benchmarking

We benchmark DBL against peer road construction companies. See Fig 7a.

  • DBL appears to be at slightly expensive valuations in terms of P/E and P/B.
  • Sales and profits growth while impressive is not the highest.
  • Debt equity ratio is high at 2.62, a problem in the sector but DBL is highest in this peer group. However Net Debt to Equity is 0.92. EBITDA and Profit margins are low. However, their strategy helps DBL grow its revenues faster. RoE, RoCE are fair.
  • Financials of DBL are projected for 2 years in Fig 7b basis order book, corporate plans, management guidance and analyst judgement.

jainmatrix investments, dilip buildconFig 7b – Financial Projections

Strengths of DBL

  • DBL is a sector leader in Indian roads EPC. It has a large order book and rising revenues.
  • DBL has a good pan India presence. It operates in geographical clusters for projects which helps with efficiency and asset utilization. So DBL has an efficient business model. The execution through strong operations helped DBL receive early completion bonuses for many projects.
  • DBL has seen a strong growth in financials and order book. In Q1FY21, it has improved order book and also diversified into new infra verticals like tunnels and irrigation projects, amid the lockdown challenge.
  • Diversification by DBL from roads to a number of adjacent infra sectors is a sign of aggression and dynamism. There are business model synergies with these sectors and they are high potential sectors.
  • The sale of road assets to Shrem and Cube Highways is helping reduce capital tied up and so debt is being reduced. DBL should be able to sharply reduce its interest payments by continuing to sell road assets as well as take advantage of the lower interest regime and reduce cost of loans.
  • Key assets are large employee strength and construction assets. It also has a factory campus in Bhopal.
  • Road projects used to be riskier earlier as NHAI etc. used to bid out projects while having acquired only a small portion of the land required for construction. Projects used to get delayed and the Construction firm used to suffer. This has now changed and most of the land is acquired before bidding it out.
  • Promoters Dilip Suryavanshi, Devendra Jain and top management are highly experienced in infra space.
  • Largest Caterpillar equipment fleet owning company in Asia.

Weaknesses and Risks of DBL

  • All firms in the roads EPC sector face issues like high working capital requirement, long project gestation periods, govt. clearances, govt. customers and PIL/ litigation issues. DBL is no exception.
  • D/E is high at 2.62 times and interest payments have been rising. However Net Debt to Equity is 0.92.
  • The promoter Dilip Suryavanshi is alleged to have a close relationship with the CM of MP, Mr. Shivraj Singh Chauhan. However he became CM again only recently. Further their business has gone national.
  • The 2012 IT Department case of tax evasion and FEMA is an issue. While the firm is attempting to settle this issue, there is no clarity on additional tax liabilities, or even more such cases against the firm.
  • The 3 promoters are paid high salaries. This is not shareholder friendly. But it is in acceptable limits.
  • The promoter has pledged 21.5% of shareholding, however this is only till award of certain projects. The pledges will be released as soon as they receive financial closure on the same from banks. But pledging of shares by promoters reduces the stability of the share in the market.
  • Competition is intense in road projects, particularly in EPC projects rather than BOT.
  • Sector perception: the roads construction sector is seen as a tough business with challenges like litigation, high working capital, opaque GoI clients and a difficult business model.
  • The Land acquisition Act in India specifies the process and compensation. It has undergone several changes recently, and we expect more changes. The uncertainty affects the roads EPC industry.
  • BOT projects are evaluated based on traffic projections. In this sector, BOT companies are facing financial pressures due to aggressive projections during evaluation and high competition during bidding.
  • High interest payments compared to earnings.
  • The covid infection affected operations in Q1, but by August, labour availability is 90% of normal.

Overall Opinion

  • There is an urgent need to build infrastructure such as roads and highways. This is reflected in the Indian budget allocations. Project awarding and completion has never been so fast in roads sector.
  • In this sector Dilip Buildcon has built a good momentum of business, and has a national presence, a fast growing order book that is diversifying from roads to attractive adjacent sectors like bridges, tunnels, mining, metros, airports and irrigation. It has a good strategy and business model.
  • Road projects undertaken include work on BOT, HAM and EPC models. However two recent large deals of sale of infra assets is releasing tied up capital and helping focus on core EPC.
  • Key Risks: 1) high debt an large working capital requirement 2) pledged shares 3) high competition 4) covid and weather disruptions 5) Sector perception
  • Excellent financial management, galloping revenues and order book, sectoral tailwinds along with a low price entry point makes Dilip Buildcon an excellent BUY.
  • Investors can BUY the share with a 2 year price target of ₹ 810.

Disclosure, Disclaimer and Assumptions

The target price has been arrived at using financial projections in Fig 7b and a target PE of 15 times. This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has an equity ownership (<1%) in DBL since Sept 2018. Other than this he has no financial interests in DBL 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.

Save Vodafone Idea

jainmatrix investments

Preface / introduction

  • JainMatrix Investments has been tracking the Indian telecom sector, since the days of BSNL and MTNL monopoly, the go-go days of mobile introduction, the rise of Bharti Airtel and the entire sector over 2000-10 with 5-6 players, the high competition over 2010-14, the consolidation over 2013-18, and the rise of Reliance Jio.
  • The mobile sector is still under stress today, reduced to a 4 player industry, including a PSU. Telecom prices are among the lowest in the world, barely supporting their operations.
  • Post Covid, telecom services have enabled many people to Work From Home (WFH) and in general stay safe from infection worries. It is critical infrastructure.
  • Player #3 is Vodafone Idea (VIL) with a ₹25,000 crore market cap, revenues of ₹45,000 cr. but operating losses in FY20, a book value of ₹6,000 cr. and a CMP of ₹8.6. Mobile subscribers number 31.9 cr.
  • VIL has Adjusted Gross Revenue (AGR) dues to Govt. of India (GoI) of ₹50,399 cr. These are either to be paid immediately (impossible) or over a 20 year period (under negotiation and subjudice due to a running court case).
  • Let me start with the worst case scenario –

What if Vodafone Idea goes bankrupt:

  • The National Company Law Tribunal (NCLT) may have to be brought in to start a painful 2-3 year process of Insolvency and Bankruptcy Code (IBC).
  • The AGR dues to GoI of ₹ 50,399 cr. would be struck off.  GoI will get next to nothing back.
  • The debt of VIL of ₹ 112,520 cr. owed to banks and institutions will become almost worthless, taking down many lending Banks and funding agencies with it. This can be a worse and more painful disaster than the IL&FS collapse a few years ago.
  • Vendors are owed at least ₹ 4,000 cr. for equipment, and would start litigation to recover.
  • Subscribers numbering 31.9 crores would be affected. Their services will be disrupted and it will be difficult and time consuming to switch providers.
  • The 18,500 VIL employees would lose their jobs. A lot of working telecom assets would be damaged, destroyed or wasted.
  • India would lose face with the international business community. Another massive loss by a reputed MNC (Vodafone) in India would spoil our Ease of Doing Business ranks
  • The TRAI and Telecom department would become perhaps the worst Indian regulator, as along with our Justice system it has overseen the transition of a 14 player healthy telecom sector, to a monopolistic, damaged, in-reality 2 player industry, in a short 10 year period. The mobile penetration in India has also actually fallen in the last 1 year.
  • The sector would become a virtually 2 player monopoly with no competition. In such a market the price of mobile services can easily rise 2-5X within 2 years, as surviving telecom firms will have a free hand. TRAI and Dept. of Telecom will not be able to control the rise, just as they have been unable to control the fall of service prices in the last 5 years.

While its expected for some firms to fail in an open economy, VIL failing is clearly a disaster that should not happen.

Whats the solution?

  • This solution should be seen as an emergency one time effort, not a solution that can be repeated or generalized for other companies or sectors.
  • All AGR dues to GoI should be paid by VIL equally over a 20 year period, with interest.
  • The annual AGR dues should be collected by GoI every year in the form of fresh equity issued by VIL at the then value of market capital of the firm. Thus GoI becomes a stakeholder of VIL to the extent of its equity holdings in it and payments due.
  • GoI must have a 1 year lock in period for its VIL shareholding and is free to sell the stake thereafter.

Why this solution will work

There are 5-6 major forces at play in this industry.

  1. The telecom sector in India is at the cusp of recovery. Demand for services like calls and internet data are booming. Prices for mobile services have been depressed, but are on a recovery since Jan 2020. Further recovery will ensure operating health of current providers. If VIL can survive the next 1 year, it has a good chance of becoming financially healthy.
  2. GoI will get its AGR dues over a period of time. By not demanding AGR dues immediately, VIL may be able to survive. In fact if VIL does well, then GoI may be able to collect more money than the current owed ₹50,399 cr. as the VIL market cap grows. It also helps if GoI starts solving outstanding disputes with industry faster.
  3. VIL should be able to service its debts from operating revenues. Thus banks and funding agencies do not have to declare this as NPA. This will avert a disaster.
  4. Customers would be able to continue with VIL without disruption. They may have to pay more, but India cannot stay the cheapest place in the world for mobile services forever.
  5. Vendors, employees and business partners of VIL can continue unaffected.
  6. Corporates in India will gain in confidence. Even Reliance Jio and Bharti Airtel should be happy about VIL’s survival. There is ample room for all players to grow.

We have a precedence

Just a few months ago, the RBI stepped in to save Yes Bank from collapse. In an admirable and swift action, the failing bank was recapitalised and the new stake ownership was spread over several PSBs and other investing institutions.

In a similar manner, perhaps more urgently than Yes Bank as this industry has just 4 players, VIL needs to be saved, and given a chance to not just survive but hopefully prosper.

DISCLAIMER

  • This document has been prepared by JainMatrix Investments Bangalore (JM), out of public interest. This is our opinion only and we have not communicated with Vodafone Idea, Reliance Industries, Bharti Airtel, TRAI, Dept of Telecom or SC or any other party directly to come to these conclusions.
  • Punit Jain discloses that he has no equity ownership or known financial interests in Vodafone Idea Ltd, Reliance Industries or Bharti Airtel or any group company, to the best of his knowledge. He has shares in Yes Bank since 2005. Punit Jain does have a VIL mobile service subscription since over 10 years.
  • This report may be used by recipients  for both  information as well as for circulation.  This report 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 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.

Jubilant Foodworks – Ship to Steady this Year

  • Date: 05th June 2020
  • CMP: Rs 1,688
  • Mid Cap with Mkt Cap Rs 22,000 crores
  • Industry: Quick Service Restaurant (QSR)
  • Advice: HOLD. Buy if it falls below Rs 1,400

jainmatrix investments, jubilant foodworks

summary

  • Overview: Jubilant Foodworks is India’s leading Quick Service Restaurant chain which operates Domino’s Pizza and Dunkin’ Donuts chains in India. FY20 revenues and profits were ₹3,927 crores and ₹279 crores The Revenues, EBITDA & PAT have grown by 15.7%, 20.9% and 11.4% CAGR resp. over 7 years.
  • What’s Good: 1) A new management team since 2017 has revived and improved the firm, growing the pizza chain, making the donuts chain profitable, launching a Chinese food segment and put focus on Same Store Sales Growth 2) The balance sheet looks strong with low debt and good free cash flow. 3) The pizza options have become innovative and more reasonably priced. 4) Valuations are at historical averages 5) Even during lockdown, home delivery business did not suffer much. 5) An upside risk is a V shaped recovery for QSR in FY21
  • Key risks: 1) FY21 will be weak due to Covid lockdown and restrictions on restaurants. Also the consumers will take time to recover their eating out habits. 2) JFL can be affected by consumption and economic cycles 3) Higher Competition 4) Promoter stake reduction plan.
  • Advice: HOLD the share for a target price of ₹1,997 by May 2022, a gain of 18% over 2 years. BUY if it falls below Rs 1,400.

The entire report in PDF form is available hereJainMatrix Investments_Jubilant FoodWorks_May2020 

Disclaimer and Explanation

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 (<0.01%) holding in Jubilant Foodworks Ltd. since March 2020. 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.

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

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.