Indian IT Services Sector – Add a Digital Portfolio

Dear Investors,

Which Indian Industry is globally competitive today?

In which industry are Indian skills and most respected and admired globally?

The answer is – the Indian IT Services Sector. JainMatrix Investments identified it as also most likely to generate future wealth.
The world is discovering the charms of real time reports and distributed teams. Waves of technology, digital and the internet are invading and engulfing enterprises and personal users alike. The Indian IT Services sector is uniquely positioned to dominate the global services market. Just 3 software firms figure in a recent Biggest Indian Wealth Creators in the top 50 list. However with the sector firms gaining critical size, many more will be added in the next 10 years.

We have made a report, Indian IT Services Sector – Add a Digital Portfolio. Our report covers the following:

  • IT Services – the state in India and Country Share worldwide.
  • We dive deeper to understand Progress, News and Trends. What is the impact of Covid?
  • Why is the IT Services sector doing well in India? What’s the Future of the Indian IT Services Industry?
  • We Benchmark a selection of the firms on financial parameters, across Large cap and Mid cap players. We chart the FY20 revenues by domestic and exports.
  • We map the share price performance of these firms over several years.
  • All this helps to arrive at a small high quality portfolio of the Sector, for investors.

Offer #1

  • Buy the JainMatrix Investments annual subscription for a special offer @ ₹14,999 (normal rates ₹16,999)
  • Get the Indian IT Services Sector report free along with the Welcome Kit and high performing Model Portfolios. It includes a whole year of guidance on direct equity investing in Indian Markets.
  • This offer is valid only for January 2021 as a special pre-budget offer.
  • See details
  • To take this offer, go to https://jainmatrix.com/talk-to-us/, fill your correct details. In the Question box, ask for – Special pre-budget JainMatrix Subscription offer. Give us a day or two to contact you to start.

Offer #2

This report is free. To get this report, go to https://jainmatrix.com/talk-to-us/, fill your correct details. In the Question box, ask for – Report on the Indian IT Services Sector. Give us a day or two to send it to you by email.

Happy investing !!

Regards,

Punit Jain – Founder, JainMatrix Investments

Disclaimer – While the report is free, we reserve our rights and may decline to share it in case our marketing objectives are not fulfilled.

Burger King India IPO – Pre Listing Note –Subscribers Only

Dear Investor,
About 10 days ago, we shared the IPO report on Burger King India. Our investment report was Burger King India IPO – Try the Whopper !!.

Today JainMatrix Investments has published a Pre-Listing Note on BKG. The listing is on Monday, 14th Dec.

With a heavy over-subscription, allottment of shares in this IPO was a lottery. So what should you do now?

Subscribers have already received this report.

If you track Burger King India IPO or would like to receive this high quality investment report, and many others over the next 12 months, Subscribe to JainMatrix Investments, at 

PRICING AND PAYMENT OPTIONS

Warm regards,

Punit Jain

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or financial interests in BKG or any group company. Punit Jain has not got any allotment, and intends to buy BKG shares after listing of IPO. 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.

Burger King India IPO – Try the Whopper!!

  • Date 01st Dec; IPO Opens 2-4th Dec, at ₹59-60/share
  • Small Cap: ₹ 2,438 cr. Mkt cap
  • Sector – Restaurant chain, QSR
  • Valuations: P/E negative, P/B 10.5 times, EV/EBITDA 4.4.
  • Loss making entity; profit looks 2 years away, so this is a private equity type, high risk investment
  • Advice: SUBSCRIBE

Summary

  • Why Buy Now: The Burger King chain is at an early stage of growth in India. The organization and structure set up looks good to handle the growth imperatives.  
  • The Burger King brand is quite strong in India.
  • We expect profitability in BKG in 2 years, by FY23, even as it grows rapidly in revenues and outlets. Once this happens, BKG valuations will rise and this IPO entry price will look attractive.
  • Relative to other MNC QSR chains in India, BKG valuations look reasonable.  
  • It has handled the covid period well, reducing costs and getting by. We expect normalcy in revenues to return in H2FY21.
  • Risks: 1) Loss making entity; profitability looks 2 years away, so this is a private equity type, high risk investment 2) Intense competition from Indian and MNC QSR chains in Tier 1 towns 3) Covid induced challenges – demand from customers as well as employee health. 4) High royalties to Principal.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

JainMatrix Subscription Pricing and Payment Options

JainMatrix Investments reports….

Here is a note on Burger King India IPO (BKG) IPO.

IPO Highlights

  • The IPO opens from 2-4th Dec 2020 in a Price Band of ₹ 59-60 per share
  • The IPO includes a Fresh Issue of ₹ 450 cr. and Offer for Sale (OFS) of 6 cr. shares. So the total IPO size is max 810 cr. of about 13.5 cr. shares, and about 35.5% of the equity share capital.
  • The promoter is QSR Asia and it owns 94% in BKG which will fall to 60% post-IPO.
  • The main objects of Fresh Issue are funding new Company-owned Burger King Restaurants by 1) Repayment of borrowings taken for this of ₹ 165 cr. and 2) Capex for new Restaurants ₹ 177 cr. 3) Remaining ₹ 108 cr. are for general corporate purposes like paying for this IPO.
  • The promoter is a PE firm and the listing will help to monetize and profit from investments. 
  • The lot size is 250 shares and Face Value ₹ 10 per share
  • The IPO share quotas for QIBs: Non-Institutional Investors: Retail is 75:15:10%.
  • The unofficial/ grey market premium of BKG is ₹ 20-25 /share over IPO price. This is a positive.

Introduction

  • Burger King India is one of the fastest growing international QSR (Quick Service Restaurant) chains in India, started in Nov 2014.
  • In FY20 the Revenues, EBITDA and Profits of BKG were ₹ 847 crore, ₹ 105 cr. and ₹ (77) cr. resp.
  • It already has 261 restaurants across 57 cities, including Delhi-NCR, Mumbai, Pune, Chennai, Hyderabad, Bengaluru, Chandigarh and Ludhiana.
  • The restaurants serve food and beverages, see Fig 1a, with offerings like:

Fig 1a – Menu Range, Fig 1b – Cluster Map and Fig 1c – Outlets by Region

  • The globally recognized Burger King brand, also known as the “HOME OF THE WHOPPER®”, was founded in 1954 in USA and is owned by Burger King Corp., a subsidiary of Restaurant Brands Intl. Inc. The Burger King brand is the #2 largest fast food burger brand globally by number of restaurants, with a network of 18,000 restaurants in 100 countries and USA.
  • BKG has used a well defined restaurant roll out and development process. The Principal (BKG AsiaPac) helps and supports in this process.
  • BKG AsiaPac has to be paid monthly royalty (of 4-5% of sales annually). BKG is also required to pay BKG AsiaPac a non-refundable one-time fee on opening each new BK Restaurant of US$15k (₹11.25L), increasing to $25k (19L) from CY 2020-22 and US$35k (26L) for all periods thereafter.
  • Everstone Capital, the Singapore-HQ India-focused mid-market PE firm, owns 99.39% stake in BKG India, through investment vehicle QSR Asia Pte Ltd.
  • As of Sept 30, the number of BKG employees was 4,836.
  • Key leaders: Shivakumar Pullaya Dega (Chairman and Independent Director), Rajeev Varman (CEO and Whole Time Director) and Abhishek Gupta (Chief of Biz. Dev. and Operations).

News, Updates and Strategies

  • Burger King India aims to have 370 stores (101 additional) by Dec 2022. Under the Master Franchise and Development Agreement (MDA), BKG is required to develop and open 700 restaurants (both Company-owned and Sub-Franchised) by Dec 2026. This agreement renewal is by Dec 31, 2039.
  • Fund raising through the IPO will be used for expanding its store base in India and reducing debt.
  • The Indian promoter is a private equity firm Everstone Capital, even as BKG works under a MDA with Burger King Corp. USA.
  • Based on the FIFO methodology, Everstone will earn 3.58 times returns on its 7-year investment. Its cost of investment (of the IPO shares) is pegged at ₹ 110 cr. In return, it will fetch ₹ 360 cr. from the partial exit at upper end of IPO band, per VCCircle.
  • The company’s average meal ticket size is ₹ 500-550.
  • Covid had a massive impact on BKG, as first a lockdown, and later the containment zones, lack of permission from authorities and public fear of infection kept away dine in customers.
  • BKG responded by reducing costs: it negotiated with landlords on rentals, reduced inventories, etc.
  • In Sept 2020, the number of BKG employees decreased to 4,836 employees compared to 6,141 in Mar due to attrition, effect of Covid, and redundancies.
  • On date of RHP of 25th Nov., out of 268 total restaurants, only 249 are operational.
  • BKG has a strong supply chain for all food ingredients and raw materials, to ensure traceability, freshness, long term contracts, low prices and quality ingredients.

Food Industry Outlook in India

Fig 2 – Food Services Segments
  • The Indian food service sector can be divided into 4 segments, see Fig 2.
  • QSR have fast food cuisines and minimal table service, and cater to youngsters and working professionals, offering quick delivery of food, good ambience and option of home delivery. QSRs generally target people in the 16-35 years range. Frequency of eating out (4-5 per month) is low so there is headroom to grow.
  • QSRs are the most preferred destination, followed by casual dining restaurants when it comes to eating out, per the India Food Services Report 2016, made by the National Restaurants Association of India (NRAI) and consulting firm Technopak Advisors Pvt. Ltd.
  • The most popular eating out options in India are North Indian food (28% of the time), followed by Chinese (19%) and South Indian style (9%), according to a Livemint.com report.
  • Restaurants, cafes and international fast food outlets have proliferated in India and eating out has become popular. About 81% of consumers prefer to eat out, and 19% get delivery or takeaway.
  • The QSR segment is nascent and has a lot of scope for growth in India. A large number of global QSRs have established their outlets with franchise rights of various companies like McDonalds, KFC, Pizza Hut, Subway, Taco Bell, Burger King and Domino’s, in addition to Indian QSRs.
  • BKG has a 5% market share in India’s ₹ 34,800 crore QSR market.
  • With factors such as urbanization, rising income levels and improved investment climate, the food service sector holds a huge opportunity. The sector has observed tremendous development in the past 3 years, which grew at 11% CAGR during 2015-19. The sector is estimated to grow at a 9% CAGR by 2022-23 (Source: NRAI India Food Services, IFSR 2019).
  • GST rate cut from 18% to 5% for the restaurant business was a significant tailwind for the sector, and generally led to a sharp recovery in SSSG’s.

Financials of BKG

  • BKG revenues, EBITDA and PAT over the years are in Fig 3a. The firm grew revenues well over 3 years, and is EBITDA positive but loss making.
  • A possible profit in FY21 quickly became a loss in H1 due to Covid.
  • In Fig 3b we can see that from a FCF positive FY18, the firm has made many investments and become FCF negative in FY19-20. We can also see the number of outlets by FY.

Fig 3a – BKG Financials and Fig 3b – Free Cash Flow

Benchmarking

We benchmark BKG against listed food service firms, entertainment firms and the principals. See Fig 4.

Fig 4 – Benchmarking

  • As a loss making firm, PE is negative for BKG. So valuations are tracked using P/B and EV/EBITDA. On these parameters, the valuations of BKG are lower than the others. This is positive.
  • Sales growth has been good at BKG. On Profits BKG is in the negative.
  • D/E ratio is low, may fall after IPO. One of the objects of the fresh issue in IPO is to reduce debt.
  • Margins are still on the lower side as BKG is building scale for its operations.
  • Return ratios are low due to losses.
  • The Revenue per outlet is low, perhaps reflecting BKG is a newer restaurant chain.
  • Putting this together, we sense that BKG is an asset available at low valuations due to current losses. It’s entirely possible that if not for covid, BKG may have been much less lossmaking by now. Post covid, BKG should focus on growth, with branch expansion, brand building and consumer loyalty.

Positives for BKG and the IPO

  • Burger King is a strong global brand. It’s been handled well so far in India with high street, airport and malls locations of restaurants, good visibility and positive customer reviews.
  • As a customer, my visit to BKG in 2018 in Bangalore was memorable and the focus is excellent with burgers available in both veg. and non veg. It was tasty and fairly priced, and a good experience.
  • The core offering of burgers can work for both snacks and meals for the Indian palate. Traditional consumers may not be satisfied as it’s a light fried meal, but others can find it novel and tasty. The BKG brand is well positioned for the millennial customers.
  • The global franchise model has succeeded for competitors in Indian markets, and the BKG rollout looks like a lower risk proposition that has a fairly unique offering and good chance of success.
  • The growth plans of 700 outlets by 2026 looks achievable and necessary to get a scale of operations.
  • The firm has an experienced, passionate and professional management team
  • Due to the covid infection, BKG has been able to bring down its costs structures. In particular, real estate costs for QSR may reduce and stay low for some time. Employee nos too have reduced.
  • BKG has an MDA with Burger King USA is till 2039, giving a good visibility.

Risks & Negatives for BKG in the IPO

  • The covid pandemic has been a blow as BKG has switched from a growth mode to a ‘cutting costs’ and survival mode for H1, to get by during this dip. Even today after most of the outlets reopened, there is a demand issue as customers are worried about public gatherings and infection spread. The economic impact of covid means that people celebrate less and even eating out may be done at more ‘economic’ or ‘reasonable’ priced outlets than BKG. At the luxury end, demand is down.
    • Having said this, our opinion is that in T1 cities, demand will normalize in Q3FY21 and a combination of takeaway and home delivery should be able to bring demand back.  
  • BKG has not declared a profit so far in all these years. As a result, the IPO has been allowed by SEBI but the Retail portion is retained at the lowest, 10% of shares offered, due to higher risks.
    • So on PE we have a negative value, but on other valuation parameters like PB and EV/EBITDA, BKG looks attractive and undervalued.
  • BKG directly competes with McDonalds and Subway in India on bread based light food options. Thus this QSR food subcategory looks a little crowded and top heavy.
  • BKG is at an early growth phase in its Indian network. There is a possibility that it may take several years to make a profit or dividend as it opens new outlets and invests in branding and supply chain.
  • Investors looking for normal valuation parameters may not find this attractive. Conversely this investment may only give good gains over several years.
  • Food delivery aggregators like Swiggy and Zomato intensify competition by offering massive choice and delivery to customers. BKG partners with them, but they get large commissions on orders.
  • Royalties for BK USA are high and a big hurdle to franchisee profitability. In FY18-20 they were ₹ 12, 24 and 34 crores for BKG.

Overall Opinion and Recommendation

  • QSR has a good future in India with improving affluence, and a growing eating out culture. Beyond the FY21 covid blip, this category should grow fast.
  • The social type businesses like BKG have been hardest hit by covid. As a result, the BKG IPO offering is undervalued. Most stock investors today are ignoring H1FY21 results, and high but temporary valuations, and expecting a full recovery by H2.
  • On a big picture basis, BKG is at an early stage of growth in India. The organization and structure set up looks good to handle the growth imperatives.  
  • We expect profitability in BKG in 2 years, by FY23, even as it grows rapidly in revenues and outlets. Once this happens, BKG valuations will rise and this IPO entry price will look reasonable.
  • Risks: 1) Loss making entity. Profitability also looks 2 years away, so this is a private equity type, risky investment opportunity. 2) Intense competition from Indian and MNC QSR chains in Tier 1 towns 3) Covid induced challenges – demand from customers as well as employee health. 4) High royalties.
  • Opinion: Investors with a risk appetite can SUBSCRIBE to this IPO with a 2 year perspective.

Disclaimer

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

UTI AMC is Losing Share (IPO)

  • Date 28th Sept; IPO Opens 29-01st Oct at ₹ 552-554
  • Valuations: P/E 25.4 times TTM
  • Mid Cap: ₹ 7,024 cr. Mkt cap
  • Industry – Asset Management
  • Advice: AVOID

jainmatrix investments, UTI AMC IPO

Summary

  • Key Strengths: UTI AMC is the second largest AMC in India in terms of Total AUM and the eighth largest in terms of mutual fund AUM. UTI has a strong brand due to its presence in India for 55 years. Valuations are low in terms of P/E. This allows some upside potential to investors. With a GoI institutional ownership, the firm is perceived as safe and stable. Post IPO, T Rowe Price will continue to be the largest shareholder.
  • Risks: 1) The financials of UTI have been weakening over the last 3 years. 2) The share of equity MFs has reduced in percentage, as the debt, liquid, hybrid, PMS and pension products grew faster. 3) Competition from the top 5 MFs is intense. With digital sales and distribution networks growing in importance for sales, UTI may have to invest more in sales and marketing. 4) AMCs are closely regulated by SEBI and are subject to changes or tightening of norms.
  • Opinion: UTI is a fair business available at a low valuation. AVOID this IPO.

Here is a note on UTI Asset Management Company (UTI) IPO.

IPO highlights

  • The IPO opens: 29/Sept – 01/Oct 2020 with Price band: ₹ 552-554 /share. Listing is 12/Oct.
  • Shares offered number 3.89 crore. The FV of each is ₹ 10 and market Lot is 27 nos.
  • The IPO is of ₹ 2,160 cr. for 30.75% equity by institutions SBI, LIC, and BoB who are selling 1.05 cr. shares each, and T Rowe Price and Punjab National Bank are selling 38 lakhs each.
  • UTI AMC is a institutionally owned firm with T Rowe Price (26%), and PNB, SBI, LIC, and BoB holding 18.2% each being the major shareholders.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.
  • Grey market premium has dropped from ₹ 75 to ₹ 45 in the past few days of market volatility.

Introduction to UTI AMC

  • UTI AMC is the second largest AMC in India in terms of Total AUM and the eighth largest in terms of mutual fund AUM (June 30, 2020, by CRISIL). UTI AMC and its predecessor (Unit Trust of India) have been active in asset management for more than 55 years, having established the first MF in India.
  • Revenues and profit were ₹ 855 cr. and ₹ 276 cr. resp. for FY20. See Fig 1a. It has 1,386 employees with 658 in sales, 47 in investment, 278 in Support/other and 403 non-officers.
  • It has an AUM of ₹ 9,79,600 cr. in FY20 split between MFs (1,51,500 cr.) and Others (8,28,100 cr.).
  • We can see that Revenues, EBITDA and PAT have been falling for the last 3 years. See Fig 1a.
  • FY21-E is a projection based on Q1FY21 results and can be lower also.

jainmatrix investments, UTI AMC IPOFig 1a – Financials and Fig 1b – Free Cash Flowjainmatrix investments, UTI AMC IPO

  • Free Cash Flow has been positive but is also falling, See Fig 1b.
  • Mutual Funds are further split as equity oriented and others. See Fig 2a. UTI manages 153 domestic MF schemes, comprising equity, hybrid, income, liquid and money market funds as of June 30, 2020.
  • The market share of MF AUM is 5.6% among AMCs see Fig 2c.
  • Its distribution network includes 163 UTI Financial Centers, 257 Business Development Associates and Chief Agents and 43 other Official Points of Acceptance, most of which are in each case located in B30 cities. Its Independent Financial Advisors (IFAs) channel includes 53,000 IFAs.
  • UTI AMC has four sponsors SBI, LIC, PNB and BOB, each of which has GoI as a majority shareholder. It also has a global asset management company T. Rowe Price International Ltd as one of its major stakeholders with a 26% stake in the Company.
  • Post IPO, T Rowe Price will continue to be the largest shareholder. T Rowe Price is a USD 1 trillion (75 lakh crores INR) global asset manager based in USA.
  • UTI AMC has 11 million live folios making up 12.8% of client base of the Indian MF industry.
  • Leadership is Dinesh Mehrotra (Non-Exec Chairman Dir.), Imtaiyazur Rahman (Dir.- CEO), Amandeep Chopra (Gr. President, Head Fixed Income) and Vetri Subramaniam (Gr. President, Head Equity).

jainmatrix investments, UTI AMC IPOFig 2(a) – UTI AUM split – June 2020, 2(b) UTI Segment revenues and 2(c) Market share jainmatrix investments, UTI AMC IPOFig 3 – Shareholding Pre and Post IPOjainmatrix investments, UTI AMC IPO

MF Industry Outlook and Trends

  • The economy has seen financial events such as demonetization, RERA implementation, GST and a crackdown on black money and shell companies. All these have rekindled interest in financial assets as compared to real estate and gold which were the most popular earlier.
  • The Indian MF industry as a percentage of GDP increased from 4.7% in FY05 to 10.9% in FY20. This is much below the global average of 55%. There should be a steady growth in MF industry size.
  • The regulations and disclosures around MFs have ensured good traceability and audit trails. SEBI has promoted MFs as good entry level equity and debt products, and MF asset growth has been good.
  • The growth in the AUM has been supported by a favorable macro environment, the rising of capital markets, foreign fund inflows as well as growing investor awareness and trust in the MF products.
  • There are 44 AMCs registered in India. But the top 10 AMCs having 83% of the industry AUM, see Fig 1c. SBI, HDFC, ICICI Prudential AMC, Aditya Birla and Nippon are the 5 largest MFs.
  • Average MF AUM grew at 13% CAGR of from ₹7.6 trillion in Mar 2010 to ₹27 trillion as of Mar 2020.
  • Global asset management firms have struggled in India as independent MF firms. Many sold out and exited. They have had a better success rate on partnering with Indian firms as the MF JV promoter.
  • The regulator prescribes maximum Total Expense Ratios (“TERs”) for schemes, which are calculated by dividing the total costs of the fund by its total average assets. Aggregate scheme expenses, including all fees, commissions, costs, charges, and expenses, must not exceed the applicable TER for a scheme. TER is higher for equity MFs and lower for debt.

Benchmarking

We benchmark UTI AMC against 2 AMC firms, and 4 brokerages and wealth managers. See Exhibit 4.

jainmatrix investments, UTI AMC IPOExhibit 4 – Benchmarking

  • We can see that of the 3 AMCs, HDFC comes out leading on most parameters except valuations and dividend yield. UTI leads only in valuations.
  • Our conclusion is that UTI is a ‘fair business available at a good price’.

Positives for UTI AMC and the IPO

  • UTI has a strong brand due to its presence in India for 55 years.
  • Valuations are low in terms of P/E and P/B. This allows some upside potential to investors.
  • It is a large firm and has quasi government brand. Operations are all India.
  • The AUM by UTI is large, and particularly in Retirement it is a leader.
  • It is in the top 10 firms by MF AUM.
  • With a GoI institutional ownership, the firm is perceived as safe and stable.
  • Post IPO, GoI institutional ownership will fall to 49%, and may allow it to function like a private firm.
  • With financialization of savings growing, UTI should be able to grow AUM.
  • UTI has an experienced and stable management & investment teams.
  • T Rowe Price may take an active role in UTI, buy out shares from the market and take over UTI (it will trigger an open offer requirement) in future.

Risks and Negatives for UTI and the IPO

  • The key financials of UTI have been weakening over the last 3 years.
  • Partly this was because in 2019, SEBI reduced the TERs allowed for all MFs, impacting revenues and profits. AMCs are closely regulated by SEBI and is subject to changes or tightening of norms.
  • The equity part of UTI MFs reduced in percentage, as debt, liquid and hybrid products grew faster.
  • Competition from the top 5 MFs is intense. With digital sales and distribution networks growing in importance for sales, UTI may have to invest more in sales and marketing.
  • In July 2014, the holding period for long-term capital gains tax on debt MFs was increased from 12 to 36 months. It is possible that such regulatory changes can affect their business in future.
  • The tax on LTCG from equity was introduced in budget 2018 in Feb at 10%, from zero earlier. This caused a correction in markets, particularly the mid and small cap stocks, and MFs.
  • Competition to the MF industry is from alternatives like the PMS industry, AIF/ Hedge Funds, Private equity markets and direct equity advisory. Many of these are the next steps for MF investors after they have started their investment journey with MFs.

Overall Opinion and Recommendation

  • Mutual Funds industry in India has benefited from the financialization of assets, the growth of the digital economy and the entry of a wave of new investors in recent years.
  • However growth may be concentrated among the top 5-6 firms which already command 57% share.
  • UTI has a strong brand due to its presence in India for 55 years. Valuations are low in terms of P/E. But we can see that in last 2-3 years financials have weakened. While AUM has increased, UTI is big in low margin areas like retirement, pension and GoI PMS. We perceive UTI as a fair business available at a low valuation in IPO.
  • Risks: 1) The financials of UTI have been weakening over the last 3 years. 2) The equity share of MFs has reduced in percentage, as the debt, liquid, hybrid, PMS and pension products grew in share. 3) Competition from the top 5 MFs is intense. With digital sales and distribution networks growing in importance for sales, UTI may have to invest more in sales and marketing. 4) AMCs are closely regulated by SEBI and are subject to changes or tightening of norms.
  • Opinion: Investors can AVOID this IPO.

Disclaimer

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

 

Dilip Buildcon – Tunneling through!

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

jainmatrix investments, dilip buildcon

Summary 

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

Our other Roads related reports:

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

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

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

Dilip Buildcon – Description and Profile

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

 

JAINMATRIX INVESTMENTS – PRICING AND PAYMENT OPTIONS

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Business Model, News and Updates for DBL

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

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

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

Industry Outlook

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

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

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

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

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

Stock evaluation, Performance and Returns

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

jainmatrix investments, dilip buildconFig 4 – Price History

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

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

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

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

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

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

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

Benchmarking and Financial Estimates

jainmatrix investments, dilip buildconFig 7a – Benchmarking

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

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

jainmatrix investments, dilip buildconFig 7b – Financial Projections

Strengths of DBL

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

Weaknesses and Risks of DBL

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

Overall Opinion

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

Disclosure, Disclaimer and Assumptions

The target price has been arrived at using financial projections in Fig 7b and a target PE of 15 times. This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has an equity ownership (<1%) in DBL since Sept 2018. Other than this he has no financial interests in DBL or any group company. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Happiest Minds IPO – Ride the Digital Wave

  • Date 05th Sept 2020; IPO Opens 7-9th Sept at 165-166/share
  • Valuations: P/E 34 times FY20, P/B 7.6 times (Post IPO)
  • Small Cap: ₹ 2,438 Mkt cap
  • Sector – IT Services
  • Advice: SUBSCRIBE

Here is a note on Indian Happiest Minds Technologies Ltd (HMT) IPO. jainmatrix investments, happiest minds

Summary

  • Key Strengths: HMT is a small but fast growing IT services firm with a focus on digital services.
  • HMT concentrates on new and emerging technologies, platforms and ecosystems, which have a greater impact on customers and help HMT stand out in a crowded industry.
  • The promoter Ashok Soota, is a successful executive and serial entrepreneur.
  • The Covid pandemic has accelerated outsourcing, offshoring and demand for digital services.
  • In FY20 the Revenues, EBITDA and Profits of HMT were ₹ 698 crore, ₹ 101.9 cr. and ₹ 71.7 cr. resp. In just 9 years the firm has gone from startup to $100 million of revenues, and Rs 100 crores of EBITDA, it is a good achievement.
  • Risks: 1) Valuations at PE of 34 times and PB of 7.6 times (TTM) are expensive. 2) Intense competition 3) Covid induced challenges – demand from customers as well as employee health 4) Rupee strengthening against USD
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2-3 year perspective.

IPO highlights

  • The IPO opens from 7 – 9th Sept 2020 in a Price Band of ₹ 165 – 166 per share
  • The IPO includes a Fresh issue of ₹ 110 cr. and an Offer for Sale of 3.56 cr. shares. So the Total IPO size is max 702 cr. of about 4.2 cr. shares.
  • This will be about 28% of the equity share capital of HM.
  • The lot size is 90 shares and Face Value ₹ 2 per share
  • The IPO share quotas for QIBs: Non-Institutional Investors: Retail is 75:15:10%.
  • The promoter & promoter group owns 61.8% in HMT which will fall to 53.3% post-IPO. Th other seller is CMDB-ll (JP Morgan Asset Management).
  • The unofficial/ grey market premium is ₹ 115-125 /share over IPO price. This is a positive.

Introduction

  • Happiest Minds Technologies provides end-to-end solutions in digital business, product engineering, infrastructure management and security services. It was incorporated in 2011.
  • The FY20 Revenues, EBITDA and Profits of HMT were ₹ 698 crore, ₹ 101.9 cr. and ₹ 71.7 cr. resp.
  • It offers solutions across the spectrum of digital technologies such as Robotic Process Automation (RPA), Software-Defined Networking/Network Function Virtualization (SDN/NFV), Big Data and advanced analytics, Internet of Things (IoT), cloud, BPM and security.
  • There are 3 key divisions: the Product Engineering Services (PES) unit helps by transforming the potential of digital by making the product secure and smart. The Infra Management (IMSS) provides an end to end monitoring and management capability for applications and infrastructure. The Digital Business (DBS) is focused on digital content management, connected retail and other customised offerings for clients.
  • In FY20, 96.9% of revenues were from digital services, one of the highest among Indian IT companies. See Fig 1 a, b and c for details of revenue by Service Lines, Industry and Geography. d) gives us the trends in onsite: offshore employee deployments.

jainmatrix investments, happiest minds

Fig 1 – HMT FY20 Revenues by (a) Service Lines (b) Industry Vertical and (c) Geography      (d) Onsite share (clickable)

  • HMT has 79% USA based business, higher than most Indian IT firms where it is 65-70%.
  • The HMT philosophy is quite simple – that the happiest people make happiest customers. Thus there is a focus in the company to keep employees motivated, engaged and happy.
  • The business units of the company are assisted by the 3 Centers of Excellence which are Internet of Things, Analytics / Artificial Intelligence, and Digital Process Automation.
  • As of FY20, the company had 157 active customers with average revenue per customer at USD 614,675. Its repeat business (revenue from existing customers) has steadily grown and contributes a significant portion of revenues.  There is a high degree of customer stickiness.
  • It has 2,439 employees.
  • Happiest Minds delivers services across industry sectors such as Retail, Edutech, Industrial, BFSI, Hi-Tech, Engineering R&D, Manufacturing, Travel, Media and Entertainment.
  • Key leaders: Ashok Soota (77, Promoter, Exec. Chairman-Dir.), V. Narayanan (ED-CFO) J. Anantharaju (V. Chairman, President-CEO PES), Rajiv Shah (Pres-CEO DBS) and C. Ramamohan (Pres-CEO IMSS).

News, Updates and Strategies

  • Deep Tech can Enable Business Growth: Per a news report, HMT has Deep Tech capabilities like AI, 5G, Blockchain, drone-tech, 3D printing, advanced material, quantum computing, biotechnology, etc. These emerging technologies are powerful and can solve specific business problems, and enable growth for clients. The adoption has accelerated post Covid.
  • Happiest Minds is India’s Top 25 Best Workplaces in IT & IT-BPM – Nov 2019.
  • However attrition was high at 19 %, higher than industry levels of 17-18%.
  • Happiest Minds has positioned itself as “Born Digital, Born Agile”.
  • The IPO share quotas indicate a tilt towards QIB, with smaller quotas to NII and Retail.
  • The Digital Content Monetization is a software as a service platform from HMT that helps firms digitize and monetize their content, delivering it to their customers, partners, and users. DCM comes with consumption-based pricing, and is powered by IBM Cloud.
  • Post Covid, the Indian IT services firms are seeing a surge in offshoring biz. This may be due to cost pressures from clients, or even a change in attitude caused by Work from Home (WFH) as firms allow employees to WFH to stay safe and productive during the pandemic.
  • The Covid pandemic has accelerated investments in technology infra as corporates have upgraded to allow WFH and also redesigned the customer and employee interactions.
  • HMT works with partners like Microsoft, Amazon Web Services, McAfee, IBM, PTC, etc.
  • On Sept 4 HMT raised ₹ 315.9 cr. from 25 anchor investors, ahead of its IPO. Anchor investors included Govt. of Singapore, Pacific Horizon Investment Trust, Integrated Core Strategies Asia Pte, Aditya Birla Sun Life MF, Axis MF, Goldman Sachs India Fund, HDFC Life Insurance, Franklin Templeton MF, ICICI Prudential MF, Kuwait Investment Fund, Fidelity Asian Values Plc and SBI MF.

IT Services Industry Outlook in India

  • The global sourcing market in India continues to grow at a higher pace compared to the IT & BPM industry. India is the leading sourcing destination globally, accounting for 55% market share of the US$ 200-250 billion services sourcing business in 2019-20. Indian IT & BPM firms have set up over 1,000 global delivery centers in 80 countries across the world. (IBEF)
  • IT & BPM industry global revenue was US$ 191 billion in FY20, growing at 7.7% y-o-y. It is estimated to reach US$ 350 billion by 2025. Moreover, revenue from the digital segment is expected to form 38% of the total industry revenue by 2025. (IBEF).
  • The Covid pandemic has sharply accelerated the adoption of digital solutions and automation across corporates and personal consumers. The safety and isolation requirements for employees in factories and offices and individual consumers has resulted in high demand for eCommerce based purchasing, employee WFH solutions, video call services and demand for contact free work and customer interaction solutions.
  • While the pandemic has accelerated the demand for digital, it is unlikely that the trend will reverse, as it has benefited productivity and efficiency. For example WFH may partially reverse in time but it may emerge as a permanent option as it has been widely accepted.

Financials of HMT

  • HMT’s revenues, EBITDA and PAT over the years are in Fig 2. The firm moved from losses in FY18 to good profits by Q1FY21. EBITDA and PAT margins have improved from FY18-20.
  • EPS too is sharply up, from losses in FY18 to an excellent result in Q1FY21.
  • In Fiscal 2018, HMT had restated loss for the year of ₹22.5 cr. This was due to relatively lower revenue from contracts with customers and higher employee benefit expense and finance costs. Further, to write off accumulated losses, the Company reduced the Securities Premium Account of HMT by ₹159.5 cr., after approval from the NCLT, Bengaluru bench through its order to the scheme of reduction of capital filed by HMT.
  • RoCE was 28.9% and RoE was 27.1% in FY20, a positive.

jainmatrix investments, happiest minds

Fig 2 – HMT Financials (clickable)

Benchmarking

We benchmark HMT against listed small IT service firms and the leader TCS. See Fig 3.

jainmatrix investments, happiest minds

Fig 3 – Benchmarking (clickable)

While the other firms are larger than HMT, we can draw some parallels:

  • The valuations of HMT are higher than all the others.
  • Sales growth has been good a leader in HMT. Profits cant be measure as HMT was loss making to years ago.
  • D/E ratio is highest here. One of the objects of the fresh issue in IPO is to reduce debt.
  • Margins are still on the lower side as HMT is building scale for its operations.
  • Return ratios are high while not being highest.
  • The Revenue per employee is low, indicating that HMT is investing in employees for growth.

Positives for HMT and the IPO

  • Ashok Soota is the promoter, he has a great track record as a software executive at Wipro, and serial successful entrepreneur who started (and created great value with) Mindtree and now Happiest Minds. He has built great teams in these firms. He is well known also due to several books he has written on entrepreneurship. Many investors will be drawn in by him, to buy into this, his next firm. However at 77, he may be unlikely to be able to take an active / executive role in the firm.
  • However there is a solid next line of management team in place at HMT.
  • HMT says it is “Born Digital, Born Agile” and has over 90% of revenues from digital services, quite higher than most other Indian services firms. There is no doubt that digital services are a high demand, cutting edge space with better growth prospects.
  • The Indian IT services firms are generally debt free, high cash and RoE generating firms once they stabilize operations. HMT should be able to do this in 1-2 years post IPO.
  • The philosophy at Happiest Minds is simple yet powerful – that happy employees ensure happy customers. While this is well known, there appears a special focus on this at HMT.
  • In just 9 years the firm has gone from startup to $100 million of revenues, and Rs 100 crores of EBITDA, is a good achievement.
  • The covid pandemic offers an opportunity to grow faster as customers are forced to work remotely and need more solutions and support.

Risks and Negatives for HMT and the IPO

  • Valuations at PE of ~34 times and PB of ~7.6 times (FY20 trailing basis) are expensive. However a premium is usually demanded by good quality firms in their IPOs.
  • While HMT may present a digital focus, and a large percentage of business from digital, most Indian software services firms have a digital business segment, and their significant legacy businesses may actually offer an opportunity to add a digital layer. So competition is intense for HMT and the key in IT services has always been to adopt and absorb new technologies fast and roll these out to clients.
  • HMT appears to be just another vanilla 1st generation IT services firm, when we are already seeing the 2nd generation services firms focused on Engineering R&D, Pharma R&D, legal, etc.
  • The 79% tilt to USA of business can be a constraint if visa availability declines there.
  • The financial performance of HMT has been uneven, and there’s no certainty that the solid FY19 and FY20 will be followed by a good FY21 post IPO.
  • While Covid offers some opportunities, there is no doubt that many economies are entering a recession and corporate spending for the most part may reduce over the next 1-2 years.
  • IT services are facing competition from 1) the enterprise Product firms 2) the large application and product firms dedicated to Google Android, Apple and Microsoft platforms and 3) the Social Media firms.
  • The INR:USD is at 73.3 today. After many years of 5% a year average weakening of INR against USD, in the last few months the trend appears to have reversed. Indian economic factors such as lower crude prices, lower gold imports, international trade surplus, large forex reserves, falling fiscal deficits and USA Fed policies all point to a stable or strengthening of INR against USD. We expect INR to be in a 70-75 range against USD over the next year.

Overall Opinion and Recommendation

  • IT services are always going to be needed to stitch together solutions for their clients, and to help them navigate, evaluate and deploy the complex IT landscapes and technology options. Indian IT services companies have time and again proven their mettle and have the skilled resources and project management skills to deliver successfully.
  • Happiest Minds as a small-cap firm has many of the quality ingredients required to succeed including great management, new digital tech focus and good employee policies.
  • If HMT continues its growth story over 5 years, this IPO entry price will look quite reasonable.
  • Risks: 1) Valuations at PE of 34 times and PB of 7.6 times (TTM) are expensive. 2) Intense competition 3) Covid induced challenges – demand from customers as well as employee health 4) Rupee strengthening against USD
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2-3 year perspective.

Disclaimer

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

 

 

 

Rossari Biotech IPO – Growth and Good Chemistry

  • Date 11th July; IPO Opens 13-15th July at ₹423-425/share
  • Small Cap: 2,200 Mkt cap
  • Sector – Specialty Chemicals
  • Valuations: P/E 30.7 times TTM, P/B 6.9 times (Post IPO)
  • Advice: SUBSCRIBE

jainmatrix investments, rossari

Summary

  • Overview: Rossari Biotech is a leading Indian textile and specialty chemical firm. Revenues, EBITDA and profit for FY20 were ₹ 603.8 cr., ₹ 105 cr. and ₹ 65 cr. resp., and grew at 32.3%, 67.6% and 66 % resp. over the last 3 years. Rossari has seen a rapid growth in recent times, and has a balanced product portfolio and a large number of domestic customers. Growth plans look promising with the planned Dahej plant. The debt is low, and balance sheet looks healthy with good return ratios. Expansion plans have been funded mostly from internal cash generation. The firm is small but looks nimble in terms of product formulations, R&D, new export markets, etc. At a P/E of 30.7 times FY20 earnings, the valuation is expensive. However the current growth rates justify this valuation.
  • Risks: 1) Valuations look expensive 2) delay in new Dahej plant could affect growth 3) Covid19 infection can affect Revenues. It can also affect manufacturing operations.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Here is a note on Indian Rossari Biotech (Rossari) IPO.

IPO highlights

  • The IPO opens: 13-15th July 2020 with the Price band ₹423-425 per share.
  • There is a Fresh issue of ₹ 50 crore, and an Offer for Sale of 10,500,000 shares by promoters. The FV is ₹ 2. The IPO in total will collect ₹ 500 cr.
  • The IPO share quotas for QIB, NII and retail are in ratio of 50:15:35.
  • The unofficial, grey market premium is ₹125-130 /share, indicating a 30% upside. This is a positive.

Introduction

  • Rossari Biotech is a leading Indian textile and specialty chemical firm with over a decade history of innovative, agile, and rapid growth. They provide customized solutions to industrial and production requirements of customers through a diversified chemical products portfolio. Building upon expertise in textiles sector, they have successfully diversified into the home, personal care, animal health and nutrition and performance chemicals markets.
  • Revenues, EBITDA and profit for FY20 were ₹ 603.8 cr., ₹ 105 cr. and ₹ 65 cr. resp.
  • It has 3,783 employees. The Silvassa (in UT of Dadra & Nagar Haveli) mfg. facility has a capacity of 120,000 MTPA. They have a dedicated team of 22 employees in R&D facilities situated at Silvassa mfg. facility and another one in Mumbai.
  • Rossari relevant market includes following Segments – Home Care, Personal Care, Textile Chemicals, Construction Chemicals, Paints & Coatings, and Water Treatment Chemicals.
  • Promoters of the company are Edward Menezes, 59, and Sunil Chari, 54. They started together in 2003, and are career technocrats having 45 years of experience cumulatively in specialty chemicals industry.
  • The two Promoters hold about 82% pre IPO and 62% shares post IPO and are the primary sellers.
  • On 10th July, Rossari raised Rs 149 cr. from anchor investors, with top 3 MFs as key investors.

Financials of Rossari

jainmatrix investments, rossari biotech IPOFig 1 – Financials

  • The 4 years financials shows rapid revenue growth, and improving EBITDA and profit margins. The Revenues, EBITDA and Profits grew at 32.3%, 67.6% and 66 % resp. See Fig 1.
  • The firm has grown Operating Profits sharply, but the working capital has grown in FY20, reducing the final Cash from Operations, see Fig 2. The firm is also making significant investments into a new manufacturing facility at Dahej, so the Free Cash Flow has turned negative in FY20.

jainmatrix investments, rossari biotech IPOFig 2 – Free Cash Flows

  • The firm has in recent years grown its offering in the Home, personal care and performance chemicals (HPPC) segment and this is 47% of its revenues, see Fig 3.
  • Per news reports, Rossari seized the opportunity after Covid19 to make Hand Sanitizers and Disinfectants, which saw a massive demand spurt in recent months.

jainmatrix investments, rossari biotech IPOFig 3 – Key Product Segments

  • The firm has also grown its exports pie and now exports to 18 countries including Vietnam, Bangladesh and Mauritius. It plans to grow the international business in future. See Fig 4.

jainmatrix investments, rossari biotech IPOFig 4 – Exports

  • The firm has grown its manufacturing capacity steadily at the Silvassa plant, see Fig 5.
  • The Capacity utilization has been over 80% for the last 2 years.
  • Rossari is setting up a new plant at Dahej (Gujarat) of 1,32,000 MTPA. This is expected to go on stream in FY21. There is no expansion planned at Silvassa, as the plant area is saturated.
  • Funding for this plant has been from internal cash generation as well as loans.
  • The rapid revenue growth has come at the cost of slightly lower average realizations from products.

jainmatrix investments, rossari biotech IPOFig 5 – Manufacturing

Chemicals Industry Outlook in India

  • The outlook can be seen in Indian Specialty Chemicals Sector – A Spotlight. Do read this.
  • In brief, we are positive on Chemicals and particularly Specialty Chemicals sector. There are good opportunities around replacement of Chinese supply for domestic and global demand.

Benchmarking

We compare Rossari to Chemical industry peers in India. See Fig 6.

jainmatrix investments, rossari biotech IPOFig 6 – Benchmarking

  • It’s the smallest firm by revenues in this group. In terms of valuations, ie P/E and P/B, it is on the higher side. The margins are also on the lower side, both Operating and Profit.
  • Growth numbers are leading, both Sales and Profits, indicating a good burst of recent success.
  • In terms of ROE it’s a leader, and on RoCE above average. Post IPO there is some 5% dilution to equity, so the number may be reduced to that extent.
  • The D/E looks healthy, even though the company is in expansion mode. This is good.
  • In a growth phase, one does not expect dividends from small cap firms, so its not an issue.
  • Plans are afoot around growing exports, and this should help Rossari improve revenues and realization.

Risks and Negatives for Rossari and the IPO

  • Valuations at PE 30.7 times of FY20 earnings looks expensive. However the PEG is 0.46, indicating undervalued levels.
  • Any delay in the Dahej plant in terms of commissioning and a start of production in FY21 will slow the revenue momentum at Rossari as the current plant is running close to capacity.
  • The IPO is primarily an offer to sell by promoters, so the firm gains only by Rs 50 crores of capital raised by fresh issue of shares. Conversely the equity capital will not be much diluted.
  • In FY20 domestic sales were 86% of revenues, a low ratio, so exports is an opportunity.
  • When we see a sharp burst of growth in financials in 2-3 years before an IPO, we worry that such growth may not be sustained in the next 5-10 years after a successful listing.
  • The promoter owned firm has not benefited from the oversight, partnership and approval of Private Equity or other investors, so future success of Rossari is highly dependent on them.
  • This is the first IPO after a pause of several months. It’s possible that demand from hurt investors for this IPO may be low. But this may be to the benefit of investors in this IPO.
  • Covid19 epidemic is still gathering momentum in India, and till we see a fall in infection numbers, both investors and overall demand in the economy may be subdued. However the firm has grabbed the opportunity by making Covid safety products such as d Sanitizers and Disinfectant liquids.
  • This is a B2B space, so verification and confirmation of customers, brands and quality is difficult.

Overall Opinion and Recommendation

  • Specialty Chemicals sector is a high potential growth sector.
  • Rossari Biotech has seen a rapid growth in recent times, and has a balanced product portfolio and a large number of domestic customers. Growth plans look promising with the planned Dahej plant.
  • The debt is low, and balance sheet looks healthy with good return ratios. Expansion plans have been funded mostly from internal cash generation.
  • The firm is small but looks nimble in terms of product formulations, R&D, new export markets, etc.
  • At a P/E of 30.7 times FY20 earnings, the valuation is expensive. However the current growth rates justify this valuation.
  • Risks: 1) Valuations look expensive 2) delay in new Dahej plant could affect growth 3) Covid19 infection can affect Revenues. It can also affect manufacturing operations.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

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 no stake ownership or known financial interests in Rossari Biotech or any group company. Punit Jain intends to apply for this IPO. 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.