V-Guard Industries – Electrifying Growth

December 11, 20141 Comment

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Date: Dec 11^th, 2014
CMP: 1095 and P/E: 41.5
Mid Cap: with mkt cap 3200 cr.
Industry: Consumer Electricals and equipment
Advice: Downgraded to a Hold due to excessive valuations

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V-Guard is a small manufacturer of household electricals like voltage stabilizers, UPS, pumps, water heaters, cables, ceiling fans, etc. After success in South India, it is rolling out nationally. Strengths include strong brand, good R&D and smart manufacturing and sourcing operations. It’s a high demand sector, with growth prospects due to affluence and rising no. of households. Revenues, EBITDA, Profits and Share Price grew at 33%, 27%, 11% and 42% CAGR over last 7 years. The share has given 16X gains since March 2008. Risks include high valuations, national scaling challenges and crowded new product categories.

V-Guard Industries – Profile

V-Guard Industries (VGI) is a Kerala based firm into electrical equipment for households.
Revenues in FY14 were Rs 1,518 crores and profits Rs 70 cr. Market Cap is 3,200 cr.
Started in 1977, with voltage stabilizers, it has expanded its product segments, see Fig 1.
VGI has 1599 employees and a network of 407 distributors, 4,344 channel partners and 25,000 retailers across the country. It has factories in Coimbatore and Perundurai (TN), Kashipur (Uttarakhand), and Kala Amb (HP), but VGI also has a smart outsourcing strategy for production.
Key Executives are: Kochouseph Chittilappilly (Chairman), Mithun Chittilappilly (MD) and V. Ramachandran (Director Marketing & Strategy).
Shareholding pattern % is: Promoters 66.2, FI/FII 19.0, Individuals & HNI 9.3, MFs 4.1 and Others 1.4.
The successful IPO of Wonderla Holidays, a sister company is a feather in the cap of this group.

Fig 1 – V-Guard Products (click image to expand)

Product Notes

The product range is depicted by Fig 1, while the product revenues of FY14 are in Fig 2.

House Wiring Cables: This is the largest product segment of VGI. The demand in the market is high and the firm is going ahead with a capacity expansion at the Kashipur Plant.
Voltage Stabilizers: This is VGI’s flagship product and continues to be one of the largest contributors to revenue and profitability of the Company. Revenues are directly related to white goods sector.
Pumps and Motors: This is one of the established segments for VGI contributing to major parts of sales. VGI continues to enjoy premium pricing over competition in the Southern markets.
Digital UPS: The digital UPS segment has been the fastest growing segment for VGI. Increased brand penetration for the product, coupled with the frequent power outages in most parts of the country has driven the growth for this segment.
Fans: VGI launched fans in 2006 and has more than 30 models with variants of ceiling, pedestal, table, wall, ventilating and exhaust fans. The overall fan market is expected to witness sharp expansion going forward on the back of strong expected growth in the housing sector.

V-Guard Product Revenues, JainMatrix Investments

Fig 2 – V-Guard Product Revenues

Other revenue segments of VGI business constitutes of LT Cables, Electric Water Heaters, Solar Water Heaters, Desktop UPS, domestic switch gears and induction cookers.
VGI has built its presence in the kitchen appliance category by launching mixer grinder (in 2014) and induction cooker (2013), and both have been well accepted in the market. The launch of Pebble, its new range of water heaters, was successful. It also unveiled Enviro, a hi-speed pedestal fan.

Business Notes

Management: The first generation entrepreneur Kochouseph Chittilappilly started this company from scratch in 1977. They later diversified into amusement parks, and Wonderla Holidays is now run by Arun Chittilappilly, his brother. His son Mithun joined VGI in 2004, and is now the MD. The Vice Chairman is Cherian N. Punnoose, an experienced CA and professional. The Director-Marketing & Strategy is V. Ramachandran, ex LG and HUL. Thus VGI may have stepped beyond a family business and has professionalized management, a necessary condition for stability and growth.
Vision: The leadership has a vision to become No. 3 player in each category in the next 3-4 years.
The VGI brand is strong, particularly in South/Kerala, and is now expanding all India. Fig 3.
VGI has expanded beyond the initial success of voltage stabilizers into related UPS, then house wiring cables, pumps and motors and household devices like fans, water heaters, etc. Fig 1 and 2.

Sales Distribution, JainMatrix Investments

Fig 3 – Sales Distribution

VGI owns two wind energy converters type E30 at Erode in Tamil Nadu with a capacity of 230 KW. Currently it produces 13 lakh units per annum, which is transferred to the state electricity grid.
Manufacturing: Considering the strong demand for wires, VGI has decided to double the capacity at the Kashipur plant in Uttarakhand from 3.3 million coils per annum to 6.6 million coils per annum in two phases. The investment for this was Rs 18 cr. VGI’s new plant for producing solar water heaters at Perundurai TN has gone on stream in 2013, with annual capacity of 90,000 solar water heaters.
It has an asset light model, and outsources more than 60% of its production.
Operational improvements in FY14 included reduction in its working capital cycle (by 8 days to 76), improvement in inventory days by 8 days and debtor days by 2 days, generating good cash flows.
R&D: VGI’s R&D Centre in Kochi was certified by the central govt’s Dept. of Scientific and Industrial Research (DSIR). Good R&D has reduced power consumption and improved products continuously.
VGI has recently won the ‘Innovative 100’ Awards 2013 hosted by Inc. India magazine, for the brand’s constant effort to bring in smart innovations in their product categories.
Advertising: VGI spent around 58 cr. (4.3% of revenues) on advertising in FY13, then increased it marginally in FY14 to 60 cr. (3.9%). Most of the expenditure in FY14 was targeted at the IPL.
Ad spends are to be maintained at 3.5-4% of revenues in FY15 as well.

Business Challenges:

Competition: In recent few years VGI has faced competition from Honeywell Automation, Genus Power Infra and Pearl Electronics. BEL is the largest player in electronics components in India. Havells is a large player in house wiring cables and fan segments in Non South regions.
Fans, heaters and kitchen appliances are established categories with organized and unorganized sector competition.
Many of the products have a negative correlation to overall development. The core voltage stabilizers product is threatened by improved power delivery by electricity utilities. It is also challenged by fridges and ACs bought pre-fitted with stabilizers.
Laptops and tablets too do not require UPS due to in-built chargeable batteries.
Seasonality affects demand – pumps, motors and stabilizers depend on rainfall and power supply.

Stock Evaluation, Performance and Returns

The price and dividend history (LINK) has shown a fine growth since it got listed in Mar’08.
The share is currently at its all-time high range. Dividend too has grown steadily in the last 7 years.
Revenues, EBITDA, Profits and Market Price grew at 33%, 27%, 11% and 49% CAGR over last 7 years.
Profit appears low only due to a high base effect in FY08. See Fig 4.

Quarterly Financials, JainMatrix Investments

Fig 4 – Quarterly Financials, by JainMatrix Investments

Revenues growth has been excellent, while the operational and profit margins are flat. The EPS has surged due to the volumes growth.
In addition, good operational decisions like more sourcing v/s in-house mfg have kept costs in check.
The Free Cash Flow has been positive in only 2 of the last 7 years. Fig 5. However the operational Cash Flow has been positive for 4/7 years. Investments have been made into capacity expansion and factories. The recent years show FCF is much higher. This is positive.
The historical average for PE of VGI is 20 times, and a range of 10-30 times over 7 years. See Fig 6.
The price chart shows an accelerating rise. The PE too is at 41.5 times, at all-time high levels. Thus it appears that VGI is overpriced at these levels.
The EPS for VGI peaked in Mar ’13 but has crossed these levels in the Q2FY15. See Fig 7.

Cash Flow and Dividend, JainMatrix Investments

Fig 5 – Cash Flow and Dividend, by JainMatrix Investments

Price, PE and EPS, JainMatrix Investments

Fig 7/8 – Price, PE and EPS, by JainMatrix Investments

ROCE and ROE are 26.1% and 24.2% respectively which is positive for the company.
The D/E of the firm has fallen to 0.47 (Q2FY15) from 0.6 (FY13), a good improvement.
Price to Book Value is at 10.3 (Q2FY15), which is high, but a sign of high insourcing of products.
PEG is 1.96 times, indicating high valuations.

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Benchmarking and Financial Estimates

We present a benchmarking exercise with listed peers in similar product categories.

VGuard Benchmarking, JainMatrix Investments

Fig 9 – Benchmarking, by JainMatrix Investments

VGI has excellent growth, returns and D/E characteristics.
Current Valuations are high, but overall VGI does fairly well in the comparison.

Financial Projections

We have carried out a financial projections exercise for VGI.

Fig 11 - VGuard Projections, JainMatrix Investments

Fig 11 – Financial Projections, JainMatrix Investments

Risks and Challenges

VGI has high brand recall in Kerala and Southern states. Future growth is dependent upon VGI being able to repeat and roll out its brand and distribution success nationally.
Dependency on the seasons like rains and summer. Here variations are getting worse every year.
Dependency on poor state electricity distribution for voltage fluctuations. This may improve slowly.
High competition in newer product categories like kitchen appliances, fans, geysers, etc. In particular VGI has to stay away from well-established global categories like computers, audio and audiovisual.
Volatility in raw material prices could impact margins in case cost escalations cannot be passed on to consumers.

Overall Opinion, Outlook and Recommendation

Strong brand that can be well leveraged for new products in South and all products in Non South.
Management that has grown businesses with good ambition, corporate governance and shareholder rewards.
Demand drivers for VGI include India’s rising population & affluence and the switching of consumers from unorganized sector to VGI products. These trends should drive demand for VGI products, even as competition in these categories intensifies.
The growing housing /real estate market can boost overall demand. Massive growth opportunities exist across household electrical and semi-electronic gadgets and equipment.
Robust distribution and dealer network setup in South that is being replicated across the country.
However at a PE of 41.5, PEG of 1.96 times and PB of 10.3 times, we feel valuations are stretched.
VGI is a Hold today due to excessive valuations.

JainMatrix Knowledge Base:

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Disclosures and 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.
JM has been publishing equity research reports since Nov 2012.
Punit Jain has been a long term investor in VGI since Oct 2014. Other than this JM and its promoters/ employees have no financial interest in VGI and no known material conflict of interest as on date of publication of this report.
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.
Any questions should be directed to the director of JainMatrix Investments at jain@jainmatrix.com

JainMatrix reports on Indian Telecom

October 15, 2014October 15, 2014Leave a comment

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Date: Oct 15, 2014
Sector: Telecom Services
Advice: The sector is recovering from several years of hyper-competition. Consolidation and M&As will reduce the number of players in the next 4-6 years. At the same time the survivors will win big.

The JainMatrix Investment Service is available for a subscription fee

Introduction

The Indian Telecom services industry was about Rs 2,38,000 crores ($ 39.1 billion) in size in 2013.
It directly contributes 3% of the Indian GDP. In addition there is a high indirect contribution through sectors like Retail (cellphones, accessories, prepaid recharge), hardware manufacture, trading, etc. where businesses are associated with Telecom sector. Fig 1.

Fig 1 – Revenues from Telecom Industry

Telecom works as a productivity enhancer due to BYOD, personal computing and availability.
The telecom sector provided about 28 lakh direct jobs and 70 lakh indirect jobs in 2013 (as per PwC).
The sector represents a wonderful story of progress in India where in two decades the sector has leapfrogged from obsolete, poor technology and lagging service standards to a contemporary, modern industry. Mobile penetration in India at an individual level is today superior to TVs.
The consumer has benefited as costs of voice and internet are among the lowest in the world.
The listed entities in this space are Idea Cellular, Reliance Infocomm, Bharti Airtel, MTNL and Tata Teleservices. It is possible that Vodaphone may list in India in a few years.

Industry News

There are 13 operators in India – see Fig 2. The top 5 have 79% of the Telecom Subscriber Shares.
Revenue market shares for Mar ’14 are Airtel 31.1%, Vodafone 23% and Idea 16.6%.

Fig 2 – Telecom Subscriber shares

The governance for Telecom involves TRAI, DoT, Ministry of Communication & IT and TDSAT for disputes.
The NTP-2012 has targeted 100% tele-density and 600 million broadband connections by 2020.
The total number of Indian subscribers of telecom services, wireless & wireline, is 93.6 cr. There has been a drop since companies are removing the inactive users from the subscriber base and hence focusing on revenue generating subscribers. The tele-density is 75.7%. Broadband penetration is at 7% (6.53 cr).
As of May 2014, the total Indian wireless subscriber base stood at 91.0 cr. There has been a monthly growth of 0.3% in the total wireless subscriber base from April-May 2014. In terms of net additions (April-May), Bharti led with 16.55 lakhs followed by Idea, Vodafone and Aircel with 11.61L, 9.82L and 9.42L resp.

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In Feb 2012, the Supreme Court of India ordered the cancellation of 122 unified access service licenses issued in Jan 2008 by former telecom minister A Raja. Players were given the option of buying licenses in auctions. As a result, competition in the Indian telecom sector is reducing. While a few players exit the market (NTT Docomo is divesting stakes, Sistema and Uninor – partial exits), others are selling their operations.
In Dec 2015, 4 licenses of Airtel, 7 each of Idea Cellular and Reliance Telecom and 6 of Vodafone will complete their 20-year term and would require renewal. The next auction for spectrum will start from Feb 3, 2015.
Reliance Jio Infocomm is expected to launch telecom services in 2015. This Mukesh Ambani firm may be a fierce competitor due to aggression and large balance sheets and investment plans.
There is a proposal pending with government for reducing the number of telecom circles in India from the current 22. This will reduce the roaming charges and benefit consumers.
The 3G & 4G subscriber base was 4.19 cr. in Jan ’14, a good growth from 2 cr in 2012. Data traffic powered by 3G services grew at 146% in India in 2013, higher than the global average. About 0.3 cr. 3G connections were added during the last quarter Q1FY15.
The OTT (Over the Top) services like Skype, Whats app, etc. have been allowed by TRAI (in a case/ dispute) and current operators are able to monetize this in terms of data revenues.
A comparison of GSM and CDMA shows higher ARPU for GSM. Both technologies are seeing an improving revenue trend. MoU of GSM is higher, but CDMA is able to charge more RPM. See Fig 3.

Fig 3 – ARPU, MoU and RPM for last 4 quarters (source: TRAI)

Observations and Inferences

The near term outlook of the sector looks positive due to reduced costs of acquisitions, higher realized rates on voice calls, improved EBIDTA margins and increased data traffic.
Airtel, Idea Cellular and Vodafone India FY15 Q1 performance had been better than the rest.
Revenue from the voice segment will grow at a slower pace, while data traffic will grow faster.
National Mobile Number Portability is likely to be implemented by March ‘15.
GSM 3G/ 4G adoption will accelerate. In the longer run, CDMA usage may stagnate (or even be dropped) as the 3G/ 4G on GSM is better for data & smartphones.

Key Challenges in Telecom:

Competition intensity in Industry: It was low till 2007, but went into hyper-competition levels with newer players in 2008. It is still high today but trending lower with reduction to 13 players, from 16 earlier.
- The cancellation of licenses issued in 2008 by the government has affected several operators. As a result some foreign and Indian players are exiting, or scaling down their operating and growth plans.
- There was a squeeze in profitability of telecom firms due to high competition. Profit margins declined, but are now seeing a rebound for larger players. For the first time in several years, the larger operators have been able to actually raise their telecom rates, and we can see a recovery in quarterly profits.
- Call prices which were among the lowest in the world (and termed uneconomic for operators) are now on the rebound. Some pricing power is returning to operators.
- Reliance Jio launch is expected in 2015. However it will take long for them to become a significant player.
Regulatory uncertainty: This has reduced a lot since 2012. However there is still a severe shortage of spectrum affecting quality of services by current players.
- The telecom sector regulatory troika of Indian Govt., TRAI and DoT (and Supreme Court) are slowly resolving issues faced by industry like spectrum and license fees, availability, excess spectrum charges, refarming of spectrum, sharing of 3G services among operators, etc.
- A successful auction of spectrum happened in Feb 2014 and there has been a stable license regime, negating the effect of cancellation of 2008 licenses. We are seeing that consolidation in Indian telecom is being accelerated by the licenses cancellation. The telecom industry will also soon have new M&A norms which will allow it to consolidate and smaller players will be able to exit at reasonable valuations.
- But allocation of spectrum won in the Feb 2014 auction has still not been done. And for several operators the 20-year license agreement for some circles expires very soon. So these firms are demanding compensation from DoT and extension of licenses to prevent any loss of service.
Driving usage and utilization of 3G/ 4G assets: The purchase of 3G/4G spectrum and licenses by operators has initially looked like a very expensive buy, as adoption of these by consumers has been slow. It is a complex ecosystem play dependent on online content, applications, games, available hardware (mobile phones and devices) and network rollouts / availability. However the jigsaw puzzle is falling into place for 3G already. In parallel, usage of 4G is being accelerated by Airtel with the launch of data devices.

Embed from Getty Images

Risks

The regulatory risks continue to be high. The complex troika of Indian Govt., TRAI and DoT have slow decision making, and govt. acting as both regulator and operator (BSNL/ MTNL) are issues. They have mapped industry needs badly with failed spectrum auctions, many pending litigation/arbitration and delays in spectrum release.
The current expectation is that M&As and exits will reduce competitive intensity in the sector. If this does not happen, it will affect profitability and margins of current players.
Overpriced auctions and excessive government costs can affect the growth and profitability of this sector. Older players have mentioned a 5% revenue share payable to government, in addition to taxes and cess.

Industry Outlook

In infrastructure, success requires the setting up of capacities, achieving critical volumes and ensuring that the cash flows exceed required additional investments in the business. This is true of Telecom too. Many of the 12-13 Indian Telecom firms have not yet have hit sustainable volumes yet.
In the next 4-6 years, with consolidation and M&A, the number of mobile services operators may reduce to 6-7.
Industry revenues will now be driven by sector consolidation, price increases, mobile based governance, growth of data services, 3G/4G adoption, audio & video, internet and applications usage, rising affluence and small penetration increases.
With maturity, the telecom sector will develop FMCG type characteristics, reflecting personal affluence and usage habits.
Telecom will continue to be a powerhouse industry as it is consumed by individuals, IT, software and education sectors, and devices such as cellphones, computers and tablets, and in future, the internet of things.
We expect that the Telecom sector growth will accelerate from current 10.4% to 12-15% for the next 4 years, driven by an economic recovery in India, better regulations & governance, rising personal affluence and business/ corporate demand.

JainMatrix Knowledge Base:

See other useful reports from telecom, infra, etc. sectors.

Snowman Logistics IPO
Bharti Airtel: This is a year of consolidation – LINK
Bharti Infratel IPO: Aggressive offering of Passive Infrastructure: Invest – LINK
Telecom: Auctions speak louder than words – LINK
Indian Telecom at Cross-Roads – LINK
Motherson Sumi – Global Auto Ancillary Growth – LINK
Why is it that great investors are also good card player? See my thoughts
Mid Cap review – LINK
CPSE NFO
Engineers India FPO
When should you Sell your equity portfolio? See Article

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Disclosures and 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.
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 providing equity research and portfolio advisory services commercially since Nov 2012.
Any questions should be directed to Punit Jain, the Director of JainMatrix Investments at punit.jain@jainmatrix.com ,
Also see: https://jainmatrix.wordpress.com/disclaimer/

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Motherson Sumi – Global Ancillary Growth

September 3, 2014September 12, 2014Leave a comment

Dear Investors,
as part of our initiative to reward investors, JainMatrix Investments is proud to present its report,
Motherson Sumi – Global Auto Ancillary Growth !!
The entire report dated Feb 2014 is published here, for the first time in public, for your benefit.
Readers may note that the share has appreciated by 79% in 6 months since my Buy call. Another blockbuster report from JainMatrix Investments !!

Click Links below to access this report.

Happy Investing,
Punit Jain

JainMatrix Investments

________________________________________________________________________

Report Date: 25 Feb’14
Market Price: 220
Large Cap – Mkt Cap 19,460 crores
Advice: Buy with a Mar’16 target of 451, a 104% appreciation

Motherson Sumi Systems is an Indian auto ancillary firm that is growing rapidly through global acquisitions. It cut its teeth as a Maruti Suzuki vendor, then expanded capabilities, product lines and customer base. In recent years it bought undervalued global plants and rapidly turned them around, and now has operations in 25 countries, supplying to all major auto firms. Revenues, EBITDA and Net profits have grown at 77%, 57% and 20% CAGR over the last 5 years. The current high debt should be reduced soon to comfortable levels. MSS is a BUY at current levels.

Description and Profile

Motherson Sumi Systems (MSS) is a Noida UP based Auto Ancillary firm operating in 25 countries.
FY13 consolidated Revenues were Rs 25,200 cr, EBITDA 1,798 cr and…

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Petronet LNG – A Recovery in Kochi

May 7, 2014June 11, 20141 Comment

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Date: May 7^th, 2014
Large Cap with Market Cap Rs 10,920 crores
CMP: Rs 146
Advice: Buy

JainMatrix Investments has published a report on Petronet LNG for its Subscribers. A partial report is available below. Removed sections include Bench-marking, Financial Projections, Risk factors, and 2 year target prices for the share. The JainMatrix Investment service is available for a subscription fee.

This is an update of the June 2012 report called Petronet LNG – A Solid Gas Company LINK

Executive Summary

Overview: Petronet LNG dominates the import of Natural Gas in India, and has a unique private sector status. It has a great record of creation and operation of LNG import facilities. Revenues have grown at a CAGR of 34%, EBITDA 9%, Profits 7% & Cash Flow 23% over 6 years.

Why Buy Now: 1) The Kochi plant utilization will improve with the addition of linkage gas pipelines in the next 1 year. 2) The Dahej facility will add 50% capacity in the next 2 years, which is already connected to consumers. 3) We anticipate the fall of LNG prices in the spot market, which will grow gas demand. 4) The PLNG share is today at 22% below the 185 high of Aug 2011. Thus the current market price offers an attractive entry point with a low downside probability.

Petronet LNG – Description and Profile

Petronet LNG (PLNG) imports, regassifies & sells gas in India, and is a JV of GAIL, ONGC, Indian Oil and BPCL.
Turnover in FY14 was Rs.37,747 cr. and PAT 711 cr. PLNG owns and operates two LNG terminals, at Dahej, Gujarat (capacity 10 million metric ton per annum – mmtpa) and Kochi (5 mmtpa).
Long-term contracts are in place for LNG supply from RasGas-Qatar (7.5 mmtpa), Exxon Mobil-Australia (1.44 mmtpa) and Gaz De France (0.6 mmtpa). These are at lower prices than spot prices.
PLNG also takes spot cargoes to meet demand and utilize available capacity. Spot price of LNG has been rising from 3-4 $/mmbtu a few years ago to 17-18 $/mmbtu today.
Sales of the long-term contracted gas are through GAIL, IOCL & BPCL, where PLNG keeps a regasification margin. With spot cargoes PLNG earns both marketing and regassification margins.
Imported LNG is regassified and supplied in pipelines or Cryogenic road Vehicles. The customers include power plants, household & commercial piped gas, fertilizer plants, Industrial boiler fuel, etc.
India Ratings has upgraded PLNG long-term issuer rating to ‘IND AA+’ from ‘IND AA’ while its Short-Term Issuer rating has been affirmed at ‘IND A1+’. The Outlook on the Long-term rating is Positive.
Shareholdings pattern is: Promoters 50%, MFs/ DII 4.8%; FIIs 18.9%, Individuals retail /HNI 13.4%, Bodies Corporate & others 12.9%.
PLNG has a private company status (PSU holdings <51%) that gives it operational flexibility.
Key Executives: Dr. AK Balyan (MD/CEO), Rajender Singh (Dir. Technical) and R K Garg (Dir. Finance).

Current Projects

PLNG has signed agreements to supply LNG to bulk consumers in Power, Refineries & Fertilizers.
Its joint venture with Adani Port for bulk Solid Cargo, Adani Petronet Port at Dahej, has commissioned its second jetty expanding its capacity to 20 MT/ year at an investment of 750 cr.
PLNG also directly markets LNG through trucks to LNG hubs and Satellite Stations to customer premises in regions not serviced by pipelines under the Brand name of Tarai Gas.
The recently commissioned Kochi terminal is being utilized to the extent of only 8%. PLNG set up the plant successfully, but its connectivity to demand centers through pipelines has been delayed inordinately. See Fig 1.

Fig 1 – Demand Centers for PLNG Kochi, JainMatrix Investments

(Click on any image in this report to enlarge)

GAIL is tasked with the creation of the Kochi/ Mangalore/Bangalore pipeline. This ran into local and political opposition, which delayed it. It is anticipated that this crucial infrastructure will be created in the next 12 months.

Future Plans

PLNG is exploring supply of LNG to coastal area consumers with LNG Vessels.
PLNG has signed the term sheet for a LNG Terminal at Gangavaram Port, AP, of 5 mmtpa capacity. It will be commissioned by 2016, at an investment of 4,500 cr. It received the MoEF clearance for 10 mmtpa LNG facilities.
PLNG board has approved setting up of a wind power generation plant of 40 MW at a cost of 250 cr. Commissioning is expected in next one year.

News

Oman may buy stake in PLNG’s planned unit at Gangavaram Port, of about 10-15% in this project, the Gulf nation’s oil minister Mohammed bin Hamad Al Rumhy said.
PLNG will lease out almost half of the capacity at its Dahej liquefied natural gas (LNG) terminal from 2017 as prices for the high-cost fuel have cut demand. PLNG has signed 20-year deals to lease 6 mmtpa of the terminal’s capacity to GAIL, IOC, BPCL and the GSPC in Gujarat.
PLNG is bullish on the domestic demand for LNG. The company will continue importing LNG in future and expects LNG prices to drop to $15/mmbtu in near-term from $17-18/mmbtu currently.
PLNG wants IOC to drop Ennore LNG terminal project. With Indian Oil Corp (IOC) planning to set up two LNG terminals on the east coast, PLNG has raised the issue of duplicate infrastructure and has offered to meet all of its gas needs through the Gangavaram facility.
PLNG plans to lease out one of the two storage tanks at its newly commissioned Kochi terminal to make the under-utilized facility commercially viable.

Industry Notes

Gas is a better fuel than Coal, Oil and Nuclear. It burns almost completely, so is the cleanest fuel.
India is a major gas/LNG consumer (13th position globally) and importer (5th largest).
The Indian economy is growing at a CAGR of 6-7% with similar growth in energy consumption.
Oil regulator PNGRB has extended the last date of bidding for licenses to retail CNG and piped cooking gas in 14 cities, including Bengaluru and Pune, by three months to 12 May’14.
Following the nuclear disaster in Japan in March 2011, there has been a big spurt in demand and also spot prices of LNG in Asia. See Fig 2.

Fig 2 – Natural Gas Spot Prices

The huge demand/supply gap for gas is expected to continue for years to come. The demand: supply ratio in ‘13-14 was 2.42 and is expected to reach 2.57 in 2019-20 and 3.1 in 2029-30. Se Fig 3.
Indian gas demand is expected to reach 713.5 mscmd by 2030, compared with a supply of 231.4 mscmd. Thus there is a pent-up demand for gas. Domestic supply of Natural gas from Reliance (Krishna Godavari), ONGC and Oil India wells has not scaled up to meet this demand.

Gas Demand Supply Gap, JainMatrix Investments

Fig 3 – Gas Demand Supply Gap

The share of natural gas in Indian energy basket should increase from 10% to 20% by 2050. Fig 4.

Fig 4 – Energy Consumption, JainMatrix Investments. (Click on any image to enlarge)

Other LNG terminals are Hazira (Shell, 3.6 mmtpa), RGPPL, Maharashtra (GAIL – NTPC JV 5 mmtpa).
Other proposed regasification terminals in the country are Pipavav LNG terminal, Mundra LNG terminal (JV of GSPC and Adani, 5mt/year), Ennore LNG terminal (JV of IOCL and TIDCO), Mangalore LNG terminal and Paradip LNG Terminal (GAIL, 4.8 mt/year)

Stock Evaluation, Performance and Returns

PLNG had its IPO in Mar’04 priced at Rs 15, and was subscribed 4.2 times. The price rose to 120 in Jan’08, in the financial crisis fell to 30 in Nov’08; the all time high was 186 in Aug’11.
PLNG at CMP of 146, has given IPO investors a 28% return CAGR in 11 years, Fig 5. The maiden dividend of Rs 1.3 was paid in 2007. Thereafter dividend has shown a steady increase.

Fig 5 – PLNG Stock Returns, JainMatrix Investments

Revenues, EBITDA and Profits have grown at 34%, 9% and 7% CAGR over 6 years (Fig. 6).
The Quarterly Operating and Profit Margins have fallen from early years even as volumes have ramped up rapidly. The Earnings per Share (EPS) grew till FY12 but has shown declines thereafter.

Fig 6 – Quarterly Revenues and Profits, JainMatrix Investments

Cash flow and EPS have a robust growth rate Fig 7. The Cash flow from operations is up 23% CAGR, but annualized EPS is up only 7% CAGR over last 6 years.
With good cash flow, PLNG has repaid some debt and D/E has fallen to 0.61, quite good.

Fig 7 – Cash Flow and EPS, JainMatrix Investments

Price and PE chart (Fig 8) shows that the historical mean of PE is 14 times. PE today is 15.3 and so the stock is just above average valuations.

Fig 8 – Price and PE Chart, JainMatrix Investments

Price and EPS quarterly graph, Fig 9, shows that EPS grew sharply in FY11-12, but recently it is in a declining trend.
We can see in Fig 9 that the share price anticipates EPS performance by about 1 year, in both EPS peaks and troughs. The current share recovery too appears to be factoring in a 2015 EPS gain.

Fig 9 – Price and EPS chart, JainMatrix Investments

The company has an interest coverage ratio of around 15.5 times which is good.
ROCE and RONW are over 25% in FY14, which is excellent.
Beta of the stock is 0.36 (Reuters) and this indicates much lower volatility to that of the Sensex.
PEG is at 0.32 – indicates safety and great value.

Opinion, Outlook and Recommendation

India continues to be fuel starved, with many projects suffering for lack of gas supply. Domestic gas findings have underperformed and there is a large demand supply gap.
All PLNG capacities are fully utilized except Kochi where there is a temporary delay in pipeline infra.
Our opinion is that Kochi capacity utilization will move to 30% (in 1 year) and 80% (2 years). The TN section pipeline – disputes should get resolved (6 months), and constructed (1 year thereafter).
We are confident that in 2 years not only the current capacities, but also newer additions will be well utilized. Gas volumes supplied by PLNG will double by end 2016.
The PLNG share is today at 22% below the 185 high of Aug 2011. The recent low was 102.5 in Jan 2014 from which it has recovered sharply. This fall is complete.
The worst is over for the PLNG stock and the next 2 years will see a recovery – both of the 2013 financials high, and the past peak share prices.
Invest now and systematically to gain from long-term out-performance.

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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. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Yes Bank – A Rediscovery

April 3, 2014October 4, 20171 Comment

02 Apr 2014
CMP: Rs 415
Large Cap – Mkt Cap 14,900 crores.
Advice: Buy

JainMatrix Investments has published a report on Yes Bank for its Subscribers. A partial report is available below. Edited from it are Financial metrics, Risk factors, Bench-marking, Financial Projections and 2 year target prices for YB stock. The JainMatrix Investment service is available for a subscription fee.

SUBSCRIBE NOW. Click on See Offering

Key Reasons to Invest:

The 24% fall since May ’13 is temporary in nature and gives an opportunity to invest at lower levels
Aggressive growth will continue in 20-35% range, with stable NIMs and profitability
Investments in Retail and SME will provide next phase of expansion
Resurgent share price indicates a recovery has started

Description and Profile

Yes Bank (YB) started in 2003, received the only greenfield bank license by RBI in last 15 years.
Based in Mumbai, Yes Bank’s FY13 revenue was Rs 9551 crore and net profit of 1300 cr.
Its market cap is 14,929 cr and it is among the top 6 private banks in India.
The leaders are Rana Kapoor (Founder, MD, CEO), Alok Gupta, Aditya Sanghi and Ajay Desai.
Share pattern %: Promoter 25.6, FIIs 39.6, MFs/DII 19.3, Retail/HNI 11.9, Corporate 2.5& Others 1.1.
YB has employee strength of over 9000, the bank branches are 550 and about 1,150 ATMs in India.
YB is focused on its Retail and MSME Loan portfolio, which has grown sharply, see Fig 1.

Fig 1 – Business Segments, JainMatrix Investments, click image to enlarge

Recent News and Updates

The recent Q3FY14 results were good. Net profit at 415.6 cr grew 21.4% YoY. NIM at 665 cr grew 13.9% YoY. NIM is at 2.9%. However results were not as good as Q2FY14.
RBI has permitted YB along with 5 other banks and 3 financial institutions to import gold under the 80:20 scheme. This is expected to lower gold cost and help the country’s external balances.
YB has raised USD 500 m in foreign currency loans and deposits in FY14 after regulatory relaxations introduced in the fiscal. RBI relaxed regulations by raising the borrowings limit from 50% to 100% of Tier I capital and concessional FCNR (B) deposit swap window. The loan facilities will be used to scale up general corporate lending and small and medium enterprise loan portfolios.
Ongoing Promoter legal tussle: Madhu Kapur, widow of Yes Bank co-founder Ashok Kapur, opposed in court the nomination of three directors to the lender’s board, an initiative led by her brother-in-law Rana Kapur. And, the Bombay HC admitted the plea.
Revised monetary policies favor YB. The RBI’s move to boost liquidity has brought down the Marginal Standing Facility rate from 10.25% (in July’13) to 9.0% (in Jan’14). This is positive for YB due to significant wholesale funding.
Savings rates deregulation in Oct’11 has aided retail customer acquisition, as YB aggressively hiked savings interest rates and shifted focus to growing the retail business.

Unique Strengths and Superior Strategies

YB has a vision to become “A global bank” and “India’s #4 private sector bank by 2015”. They have invested 60-75 cr. to expand branch network, and plan to open 100 new branches.
Their Vision-2015 was to create human capital of 12,750 employees, have 900 branch strength and a balance sheet of 150,000 cr. The bank is stretching to meet these objectives.
YB is focused on research and knowledge lead banking services. It pioneers lending to new sectors that have high potential growth prospects.
YB has a diversified and De-risked Credit Book.

Fig 2 – Diversified Credit Book, JainMatrix Investments

YB practices a strong employee value proposition of “Creating and Sharing value” with a vision to build their organization driven by professional entrepreneurship.
YB is focusing on the SME sector with access to finance and to help them excel in future.
YB has aggressively grown the CASA deposits to 20.9% from 18.3% last year. YB offers the savings bank interest rate of 7%, which is highest in the industry.
In an economy that used to be denied good banking, Yes Bank is building its brand around positivity, good services and fast approvals.

Stock Evaluation, Performance and Returns

YB had its IPO in July’05 priced at Rs 45. It was 31 times oversubscribed. At CMP of Rs 414 today, the stock has given a 28% CAGR return since IPO.
The share has risen well, but is volatile. After IPO, price rose to 277 in early 2008, fell to 41 in Mar ’09 and peaked at 547 in May ’13. Today, it is 24% below this peak price.
The Price fall around July-Aug’13 was much sharper for YB (56%) than the CNX Bank (33%).
This fall is linked to the events of 1) Taper of the monetary easing by Fed Bank in USA 2) A sharp fall in INR/USD value. 3) A case against YB by Promoter/owner Madhu Kapur.
Also YB which was an investment & trading favorite and had touched its all-time high of 547 in May’13, may have fallen more sharply due to exits by the trading community.
Total Income, NII & Other income and Profits have grown at 38%, 36% and 41% CAGR over 6 years.

Fig 3 – Yes Bank Financials, JainMatrix Investments

While total income has grown rapidly, margins have fallen a little in the last 3 years. This is natural as Yes Bank is growing into a Large Cap from a Mid Cap size. See Fig 3.

Fig 4 – Yes Bank, Book Value, dividends, JainMatrix Investments

The first dividend of Rs 1.5 was paid in ‘10, and since dividend has shown a steady increase, Fig 4.
The P/B ratio has fallen over 6 years, in spite of price rise, due to rapid growth in Book Value.
While NIM% has been flat for 5 years, other financial metrics like RoNW, RoE, CAR and CASA are showing YoY improvements. NIM has been between 2.7-3.2% over the past 5 years. This is low by industry standards as CASA is low. Capital Adequacy is at 18.3%, which is good. The ranges of ROE (20-25%) and RONW (15-23%) for last 5 years are high and growing.
The PE chart 5 shows that average PE over the last 6 years has been 15, with a range 5-25.

Fig 5-6 – Yes Bank PE and EPS charts, JainMatrix Investments

PE has fallen today to 9.55 and is in the lowest quartile. This fall was in spite of EPS growth, Fig 6.
Price and EPS quarterly graph, shows that EPS has been rising very steadily. The Share Price has been roughly following EPS, except for the last one year.
We expect the EPS of YB to stay within the channel in Fig 6.
It appears from Fig 6 that the price fall is not based on financials/ EPS but due to other reasons.
Gross & Net NPA rose by Q3FY14 to 0.39% & 0.08%, but are still at lowlevels for the industry.
Beta of the stock is 1.98 (Reuters) indicating high volatility.
Dividend yield is 1.46%, which is good for the banking sector.
PEG is at 0.36 – indicates safety and an undervalued stock.

Opinion, Outlook and Recommendation

India is under-banked. There is potential for Banks to invest in new sectors and stimulate growth.
The banking industry is a proxy to the overall economy, and should grow at 12-17% p.a.
YB as a new private bank is well placed to exploit the trend of Private sector growing faster than PSBs, will continue to be in the 20-35% range for the next 3 years.
The recent price fall of 24% since the peak in May ’13 provides an opportunity to invest in YB.
In Mar’14 YB crossed its 200DMA and has stayed above it for 2 weeks already. It is a bullish sign and may signal a long positive period for the stock.
YB will continue on the path of solid stock performance and dividends over the next decade. Invest now and systematically to gain for the long-term.
Our Call is a BUY.

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Motherson Sumi Systems – Global Auto Ancillary Growth

February 26, 2014September 3, 20141 Comment

________________________________________________________________________

Report Date: 25 Feb’14
Market Price: 220
Large Cap – Mkt Cap 19,460 crores
Advice: Buy with a Mar’16 target of 451, a 104% appreciation