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 is for information purposes of recipients and not to be used 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.

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.