Bharat22 ETF – A Balanced ETF – Post Listing Note

  • Date 29th Nov
  • Equity MF- ETF, Diversified
  • Allotment price: Rs. 35.97
  • CMP: Rs. 37.42
  • Advice: Buy with a 3 year perspective

Here is a post listing note on Bharat 22 ETF (BH22).

In this note, we continue from the 13th Nov Note – Bharat 22 ETF NFO Offer – A Balanced ETF 

jainmatrix investments, bharat 22 etf nfo

Subscription, Allotment Price and NFO details 

  • The BH22 is an open-ended index ETF which listed on 28th Nov, 2017. The investment objective is to provide returns like the S&P BSE Bharat 22 Index.
  • The NFO received the highest subscription for any new fund offer (NFO) in the history of Indian MF industry. The ETF was subscribed about 4 times as the amount to be raised was Rs. 8,000 cr. and it received applications for around Rs. 32,000 cr. The NFO attracted 3.35 lakh retail investor applications.
  • Due to the excellent response, the ETF issue size was raised to Rs. 14,500 cr. A NFO discount of 3% was offered to all investors including retail, retirement funds, QIBs and non-institutional investors.
  • Retail investors who applied with Rs. 2,00,000 (Retail cap) were allotted 5,560 units at Rs. 35.97/unit (including the 3% discount). Retail applicants appear to have received 100% allotment this time.
  • Currently the ETF is trading at Rs. 37.42 translating into a gain of 4.03%. This means any retail investor who applied for the max. allowable limit of Rs. 2,00,000 has notionally gained Rs. 8,060. This is because of the discount as well as rise in the S&P BSE Bharat 22 Index.
  • You can check the index value as well as the ETF value using the following link. Bharat 22 ETF Price – http://www.moneycontrol.com/india/stockpricequote/miscellaneous/iciciprudentialmutualfund/ICI15

Overall Opinion

  • This ETF is set to create good value for the investor as profit making PSUs, PSUs undergoing reforms and private sector firms have been bundled together. ETFs are also advantageous in terms of management costs & liquidity. Also with the discounts given in BH22, we feel that this is a good long term buy for low risk equity investor and is comparable to the Balanced MFs.
  • If you have missed out Bharat 22 ETF in the NFO, you can also BUY it from the open market.
  • Investors can BUY with a 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. Punit Jain discloses that he holds a position in BH22 ETF as a successful Retail applicant in NFO. He may also hold positions in some of the constituents of the ETF. Other than this JM has no known financial interests in BH22 ETF or constituent firms. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

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Bharat 22 ETF New Fund Offer – A Balanced ETF

  • Date 13th Nov; ETF Opens 15-17th Nov
  • Product Type: Mutual Fund – ETF
  • Listing: Within 5 days post allotment
  • Raising Fund: Rs. 8,000 cr.
  • Sector: Diversified
  • Advice: Buy with a 3 year perspective 

jainmatrix investments, bharat 22 etf nfo

Summary

  • Overview: The BH22 is PSU heavy open-ended ETF scheme. The BH22 will cover 6 sectors and 22 firms including PSUs, PSBs and a few blue chip private firms. BH22 has a 20% cap on each sector and a 15% cap on each stock. The Rs 8,000 crore NFO is available at a discount of 3% on the Reference Bharat 22 Index. The BH22 appears better than CPSE on several counts like sector diversity, balance and higher mkt cap. firms.
  • Risks: 1) There is no strategic clarity on GoI shareholding in these firms – will they be fully divested, or a strategic sale, or as JVs, or retained with GoI majority holding in the long run.  2) There is Political risk as a surprise election result could affect PSU firms.
  • Opinion: Investors can SUBSCRIBE to this ETF offering with a 3 year perspective.

See our past coverage of CPSE ETF NFO in Mar 2014, review in Sept 2015, the CPSE ETF FFO in Jan 2017 and a Video, and finally the CPSE ETF FFO 2 in Mar 2017.

Here is a note on Bharat 22 ETF (BH22)

Introduction  

  • The BH22 is an open-ended index ETF which is going to be listed on the Exchanges. The investment objective is to provide returns like the S&P BSE Bharat 22 Index. The amount to be raised is Rs. 8,000 cr.
  • The BH22 consists of 22 blue chip Govt. of India (GoI) holdings including PSUs, Public Sector Banks and the strategic holdings of GoI through SUUTI (Specified Undertaking of Unit Trust of India). BH22 is the 2nd ETF from GoI after CPSE ETF launched in 2014. Both these will speed up GoI’s disinvestment plans.
  • The BH22 will cover 6 sectors of basic materials, energy, finance, FMCG, industrials and utilities. The SUUTI firms (L&T, ITC and Axis Bank) have a 40% weight on the index. Other big names include SBI, Power Grid, NTPC and ONGC (5-9% each). The ones which would have a lower weight include NALCO, Indian Oil, Coal India, Bharat Electronics, Bank of Baroda, NBCC, Indian Bank and SJVN.
  • The mechanism of the ETF at launch would be as follows:

jainmatrix investments, bharat 22 etf nfo

Fig 1 – Bharat 22 ETF Mechanism

  • NFO price: The NFO Units being offered will have a FV of Rs. 10/- each and a premium of the difference between NFO Allotment Price and the FV. The NFO Allotment Price would be equal to 1/100th of S&P BSE Bharat 22 Index less discount.
  • In this offer 25% each is reserved for 1) Retail 2) Retirement Funds 3) QIB / NII and 4) anchor investors.
  • Discount: A discount of 3% on the NFO Reference Market Price of the underlying shares of S&P BSE Bharat 22 Index shall be offered to NFO of the Scheme by GOI.
  • The scheme is being managed by ICICI Prudential Asset Management Company Ltd. Asia Index will be the index provider and the index will be rebalanced annually.

Investment Details of BH22

  • The Scheme will invest at least 95% of assets in stocks of the Bharat 22 Index. It may invest in safe Money Market Instruments upto a max. of 5% of assets.
  • The AMC will use a passive or indexing approach to achieve the Scheme’s investment objective.
  • Here are Sectoral Asset Allocation, Historic Returns and Analysis of the 22 companies as part of this ETF.

jainmatrix investments, bharat 22 etf nfo

Fig 2 – Sectoral Allocation / Fig 3 – Performance of Index / Source: Offer Documents 

jainmatrix investments, bharat 22 etf nfo

Fig 4 – Analysis of Companies / Source: Offer Documents

  •  15 of the 22 firms are Large Cap giving some stability to this ETF composition.
  • Dividend: The Trustees may declare Dividend to Unit holders subject to the availability of surplus, at their discretion. If the Fund declares Dividend, the NAV will stand reduced by that amount.
  • Minimum Investment: It is Rs. 5,000 and in multiples of Re. 1 thereafter, with a maximum amount of Rs. 2 lakhs in retail category. Non Institutional Investors and HNIs may apply for over Rs 2 lakhs.
  • How to apply: You can apply via your broker or via the AMC (iciciprumf.com).
  • Listing:The units of the Scheme will be listed on NSE and BSE within 5 days after allotment. The allotment date of Units will be within 5 business days of offer application period. There may be an additional offering depending on NFO response.

How has the CPSE ETF performed so far?

From an issue price of Rs. 17.5/unit in March 2014 (for Retail), the CPSE trades at Rs. 30.4 giving a gain of 21% simple annual. The CPSE ETF FFO 2 launched in Jan 2017 had allotment at Rs. 25.21, giving a gain of 20.6% (in 10 months). So the energy focused ETF has so far generated above Index average returns.

Differences between CPSE ETF and BH22 ETF

  • The CPSE ETF comprised 10 PSU stocks from the Oil & Gas and energy sector. However the BH22 ETF is diversified among 6 sectors and 22 firms with a 20% cap on each sector and a 15% cap on each stock. Hence this ETF is more balanced across sectors and firms.
  • The GoI has cherry picked stocks which are into sectors where large reforms are underway.
  • This fund even includes Private sector firms like L&T, ITC and Axis Bank.
  • The CPSE ETF fund is larger. It has raised Rs 11,500 in 3 offerings from 2014 – 17.

Pros and Positives of BH22

  • This ETF has a lower management charge and the expense ratio is 0.0095% of daily average net assets. Also the maximum recurring expenses that can be charged shall not exceed 1.5% of daily net assets.
  • The fund will offer 3% discount to the NFO subscribers.
  • The 5 year share returns are 13.8% CAGR as against Sensex of 13.9%. See Fig 3. However the 1 year performance has been better at 22.5% as against 20.5% for Sensex.
  • Dividend yield for the stocks is 2.42% which is moderate, but higher compared to Nifty/Sensex, see Fig 4.
  • The constituents of BH22 have a lower P/E & P/B as compared to Nifty 50/S&P BSE Sensex. See Fig 5.

jainmatrix investments, bharat 22 etf nfo

Fig 5 – Valuations and Dividend Yields

  • The BH22 is diversified among 6 sectors with caps by sector and by stock. This gives leverage in the form of both secular & cyclical growth prospects.
  • Like the CPSE, the BH22 may be popular among Pension Funds, new equity investors and retirees.
  • Many of the firms have wonderful assets, the family silver of the GoI. Some even enjoy monopoly status in their sectors. With a resurgence in GoI governance and programs such as ‘Make in India’, Bank Recapitalization and focus on Defense and infrastructure, many firms have good prospects.
  • GoI is asking for higher dividends from PSUs and allowing them operational freedom to exploit assets and be more productive. This will benefits investors also. See report,  A Repurpose for our PSUs.

Cons and Negatives of BH22

  • There is no clarity on the future of GoI shareholding in these firms – will they be fully divested, or sold in a strategic sale, or expanded into JVs, or simply retained with GoI majority in the long run.
  • This BH22 ETF based divestment by GoI, like the CPSE, is likely to be repeated at a future date.
  • We are not sure if the high dividend paid by the PSUs will be passed on to the unit holders (either as NAV gain or Dividend) or used for recurring expenses, as per NFO document. The CPSE ETF 2014 too has not paid dividend for 3 years. The 2.42% dividend yield in BH22 involves substantial monies.
  • The average beta of these stocks is 1.28 indicating higher volatility than indices.
  • These stocks performance depends on revenue growth, which has been inconsistent in recent years.
  • Many of these firms depend on GoI policies and monopoly situations to grow. Some are externally constrained by weak infrastructure that hampers distribution.
  • Any unexpected election results at the State or Center can delay reforms and affect BH22 performance.
  • A few firms are into financing power projects. The power sector is yet to see a revival and NPAs here are a key concern. As long as this problem is not resolved, these firms may face financial troubles.
  • Within the energy basket, there are upstream and downstream oil firms. Upstream firms do well when crude prices rise as their realizations go up, whereas downstream firms do well when crude falls as margins expand. The energy basket might be balanced, but together these firms may do just average.
  • Coal India recently hiked wages by 20%. Also there is a pollution aspect to coal usage. The share has performed badly. Any adverse government reforms could impact its financials in the short term.
  • ITC is a firm that is mainly into cigarette sales. This is a harmful product and in USA the industry players are in a sunset mode due to legal action – class action suits and massive penalties for compensating unwell consumers and their families.

Overall Opinion

  • The BH22 appears better than CPSE on several counts like sector diversity, balance and higher mkt cap.
  • This ETF is set to create good value for the investor as profit making PSUs, PSUs undergoing reforms and private sector firms have been bundled together. Given the advantage of an ETF in terms of cost & liquidity along with the discounts given by the GoI, we feel that the BH22 ETF is a good long term buy for value conscious investors.
  • This product appears attractive to the low risk equity investor and is comparable to the Balanced MFs.
  • Risks – lack of strategic clarity on PSU firms, and Political – a surprise election result could affect PSUs.
  • Investors can BUY with a 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. Punit Jain may hold a position in several of the stocks mentioned in this report. He also holds an interest in CPSE ETF since NFO in 2014. Other than this JM has no known financial interests in BH22 ETF. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Bharat Financial Inclusion – News Based Exit from MSC Model Portfolio

  • Date: 30th Oct 2017
  • Bharat Financial Inclusion is dropped from the JainMatrix Investments – Mid and Small Cap (Multi Bagger) Model Portfolio

News Update

  • The merger of micro finance lender Bharat Financial Inclusion (BFIL) and IndusInd Bank (IIB) was announced on 14th Oct. BFIL will merge into IIB in a swap where BFIL shareholders will receive 639 shares of IIB for every 1,000 shares of BFIL. On the day of announcement, the premium on BFIL was 12.6%. It has now narrowed to 7.4%.
  • The merger offers mutual synergies on network, customers and products. IIB will grow its rural network and increase priority lending. There are synergies with cost reduction and BFIL will lower the cost of wholesale deposits. The merger is mutually beneficial.
  • The merger is expected to complete over the next 6-9 months. The timelines are as follows:

jainmatrix investments, bharat financial inclusion

Source: BFIL News Release

Record of Performance

  • BFIL had entered the MSC at Rs. 427 in Feb 2015. We had reported on BFIL (formerly SKS Microfinance) in Sept 2015, see link SKS Microfinance – A Magical Mix jainmatrix investments, bharat financial inclusion
  • We exited BFIL on 21st Oct at Rs. 995 (entry at Rs. 427 in Feb 2015). It gained 133% absolute and 37.8% CAGR in 2.5 years.
  • The MSC Model Portfolio has a good 4.5 year Track Record 

Opinion and Reasons

  • BFIL would cease to exist post the merger. Hence if investors continue to hold BFIL they will become IIB shareholders.
  • BFIL is a good mid-cap stock with appreciation potential as an independent firm.
  • IIB is 1) a large cap Bank of Rs 97,000 crores mkt cap. 2) It has been a high performance stock in the past 3) However we at JainMatrix do not track IIB 4) It will not meet the objectives of MSC Model Portfolio. So BFIL is dropped from the JainMatrix MSC Model Portfolio.
  • Subscribers may exit BFIL and enter the other BUY rated stocks of the MSC Model Portfolio.
  • They may also, at their own discretion, choose to become IIB shareholders. But JainMatrix is not covering this stock.

Disclaimer

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

Capacite Infraprojects IPO: Play the Trump Card

  • IPO Opens 13-15th Sep at Price range: Rs. 245-250
  • Small Cap: Rs. 1,700 crore cap
  • Industry – Construction
  • P/E 24.4 and P/B 2.37 times (Post IPO)
  • Advice: Investors can BUY this IPO with a 2 year perspective

Capacite Infraprojects IPO, jainmatrix investments

Summary

  • Overview: It is a Mumbai based construction contracting firm started in 2012; makes Residential & Commercial buildings in 7-9 major cities. Income and profit were Rs. 1,166 cr. and Rs. 70 cr. (FY17).
  • Operations: It is into the construction of high rise buildings (> 6 floors), super high rise (> 39), villaments and gated communities. It is building the Trump tower in Mumbai. CIP owns tools, technologies and processes that help it deliver with high quality and on time. CIP stands out as an innovative, aggressive building contractor. It has an excellent client base among Property firms. Given this client base and assuming the relationships stay strong, CIP can look at revenues rising at over 30% annually for 3-4 years which will give it a good size, market share and high return ratios.
  • Risks: The major risks are loss of a top 5 client, and project disruption due to labour or other issues.
  • Opinion: The valuations at the IPO price are average, however we are positive due to strong growth potential. This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is a note on Capacite Infraprojects Ltd. (CIP) IPO.

IPO highlights

  • This IPO opens: 13-15th Sep 2017 with the Price band: Rs. 245-250 per share.
  • Shares offered to public are 1.60 crore at UMP, these are 23.57% of equity. The FV is Rs. 10 and market lot is 60. The IPO will collect Rs 400 cr. by fresh issue of shares. There is no OFS by holders.
  • The IPO shares are available to institutional, non-institutional and retail in ratio of 50:15:35.
  • The promoter group owns 57.2% in CIP while Paragon Partners, Infina and New Quest own 30.7%. Paragon Partners is backed by Siddharth Parekh, the son of Deepak Parekh, the chairman of HDFC. The promoter group holding will reduce to 43.7% (Post-IPO) which is low, see Fig 3.
  • CIP benefits as it is a fresh issue and the proceeds will go to it. See utilization proceeds in Exhibit 1.
  • The unofficial/ grey market premium for this IPO is Rs.110/share. This is a positive.

Capacite Infraprojects IPO, jainmatrix investments

Exhibit 1 – Utilization of IPO proceeds

Introduction

  • CIP is a Mumbai based construction firm focused on Residential and Commercial buildings.
  • Total income for FY17 was Rs. 1,166 cr. and net profit Rs. 70 cr.
  • It has 1,711 full time employees and 10,035 contract workmen across all projects (May ‘17).
  • They provide end-to-end construction services for residential buildings, multi-level car parks, corporate offices, commercial buildings and for educational, hospitality and healthcare.
  • CIP is into the construction of villaments, gated communities, high rise buildings (> 6 floors) and super high rise buildings (> 39 floors). They operate in the Mumbai, NCR, Bengaluru, Pune, Patna, Chennai, Hyderabad, Kochi and Vijaywada, and projects in the West, North and South Zones constituted, 58.9%, 14.2% and 26.7% of total projects, resp. See Fig 2.

Capacite Infraprojects, jainmatrix investments

Fig 2 – CIP Project Portfolio Concentration /Fig 3 – CIP Post Shareholding Pattern

  • CIP works for reputed clients and are associated with marquee construction projects such as Trump Towers Mumbai. Clients include Kalpataru, Oberoi Constructions, Wadhwa Group, Saifee Burhani Upliftment Trust, Lodha Group, Rustomjee, Godrej Properties, Brigade Enterprises and Prestige.

Capacite Infraprojects, jainmatrix investments

Fig 4 – Order book by Project Purpose, and by Project Type – Fig 5

  • CIP had an order book of Rs. 4,602 cr. (May 2017). CIP majorly operates in residential projects space. The order book breakup by project purpose and by project type is in Fig 4 and Fig 5.
  • CIP has received an ISO 9001:2008 certification for their quality management system. They have also received an ISO 14001:2004 for environmental management system and an OHSAS 18001:2007 in respect of their occupational health and safety management systems.
  • Leadership is Deepak Mitra (Ch’man & Director), Rohit Katyal (ED & CFO) and Rahul Katyal (MD).

Business Model and news for CIP

  • CIP has a hub-and-spoke model, with 3 zonal hubs located at Mumbai, NCR and Bengaluru.
  • CIP believes in owning equipment that is required throughout the lifetime of a project, that is, formwork, tower cranes, passenger and material hoists, concrete pumps and boom placers (their core assets) as this allows them to have timely access to key equipment.
  • CIP uses specialised formwork tech., including vertical composite panel system for columns, horizontal composite panel system for slabs, crane enabled composite table formwork, aluminium panel formwork and automatic climbing system formwork. The modern formwork technologies help reduce the construction cycle time of replicating floors in a highrise construction compared to conventional formwork systems, such as cup-lock formwork.
  • CIP have the capabilities to undertake building construction projects using modern tech. including temperature-controlled concrete for mass pours, self-compacting free flow concrete for heavily reinforced pours and special concrete for vertical pumping in Super High Rise / High Rise Buildings.
  • The order book was Rs. 4,602 cr. in May 2017. CIP obtained orders worth Rs. 1,500 cr. from real estate developers like Oberoi, Wadhwa, Rustomjee and Kalpataru in Mumbai, Emaar in Gurgaon and Ozone in Bengaluru after the demonetisation in Nov 2016, an achievement in a tough economy. In addition, CIP received orders worth Rs. 305 cr. as sub-contractors for erecting the Trump Towers in Mumbai’s Lower Parel and 2 orders from Radius Developer worth Rs. 300 cr. in Aug 2017.
  • CIP plans to expand its business operations to Ahmedabad in 2-3 quarters.
  • New Quest, Infina, Paragon and JT HUF invested Rs. 60 cr. in CIP in 2017. They were issued 6,49,332 compulsorily convertible preference shares of FV Rs. 20 each.
  • CIP received the ‘Achievement Award for Construction Health, Safety & Environment’ at the 9th Construction Industry Dev. Council Vishwakarma Awards 2017 for 3 of its ongoing projects. It got the ‘Emerging Construction Company of the Year’ award at the Construction Times Builders Award 2017.
  • Promoter profiles: Mr. Rahul Katyal (age 42) has 16+ years experience in business development. He has been a Director of CIP since Sept 1, 2012. He focuses on Sales and Operations. Mr Rohit Katyal (age 46) has held roles of CFO and ED at CIP since Mar 1, 2014. He has 25 years of experience. He is a BCom from Podar College. Both are brothers. Both had senior/ director level positions in Pratibha Industries Ltd. before CIP.

Industry Outlook

  • The Real estate sector plays a crucial role in the Indian economy, contributing to 5-6% of the country’s GDP. It is the second largest employment generating sector after agriculture.
  • Apart from generating direct employment it also stimulates demand in over 250 ancillary industries such as cement, steel, paint, brick, building materials, furniture, consumer durables, fittings, etc.
  • India’s construction industry is expected to log materially faster growth, fuelled by spends in road, irrigation, rail and urban infra projects over 2016-21. Spending in the period is expected to be Rs. 23-24 tn., translating into a CAGR of 10-12%, way faster than a 2-4% rate observed between 2012-15, when an economic slowdown and attendant sluggish demand had stalled India’s investment cycle.
  • Over 5 years, infrastructure projects will provide construction demand of 92% of overall construction spend, owing to the govt. focus on roads, urban infrastructure and railways.
  • Demonetization may have limited impact on construction as such transactions are cashless.
  • The growth drivers in urban housing and commercial real estate are: Higher urban population, Nuclearisation of families, rising income levels and large working age population. Source: RHP
  • In India, urban housing stock was about 8.9 cr. units and rural stock was 17.9 cr. units as of 2015. It is estimated that the growth in rural housing stock will be at 1.7%-1.9% CAGR of over 2016-19, as compared to a 2-4% CAGR for urban housing over the same period. (Source – CRISIL from RHP).
  • The major competitors of CIP are L&T Construction, Shapoorji Pallonji Construction, Simplex Infrastructures, JMC Projects, and Ahluwalia Contracts. Competition from multinational companies is primarily from Leighton India Contractors, Samsung E&C India and Eversendai Construction.

Financials of CIP

Capacite Infraprojects IPO, jainmatrix investments

Fig 6 – CIP Financials

  • CIP Revenues, EBITDA and PAT have grown at 75.2%, 114% and 157% resp. CAGR in FY14-17, Fig 6. CIP has a ROE of 23.15% and ROCE of 24.15% for FY17 which is excellent.
  • CIP has moderate margins which have been stable over 3 years. The D/E was 0.51 in FY17 which is moderate, but has improved from 2.02 times (FY15). The EPS has risen in the last few years, Fig 6.
  • On May 2017, CIP had an order book of Rs. 4,602 cr. This gives 3.9 years of revenue visibility at the FY17 run rate. This is a positive. In practice, CIP must accelerate growth to deliver on OB.

Capacite Infraprojects IPO, jainmatrix investments

Fig 7 – CIP Cash Flow    

  • CIP had declared a dividend of 20% in FY16; but no dividend was declared for FY17.
  • CIP had positive cash from operations in 4 of 5 years, and has made investments steadily. CIP had positive FCFE in only 2 out the last 5 years, due to debt reduction as well as CAPEX. Fig 7.
  • Management has indicated a 60-90 days’ worth of account receivables on ongoing projects. That is about Rs 291 cr. based on FY17 revenues. Debt is low in comparison at about Rs 120 cr.

Benchmarking

We benchmark CIP against peers, both construction contractors and developers. See Exhibit 8.

Capacite Infraprojects IPO, jainmatrix investments

Exhibit 8 – Financial Benchmarking

  • The FY17 based PE for CIP appears moderate. However the high growth rates make the valuations look attractive for a 2 year holding period. The P/B ratio of CIP at 2.37 times is fair.
  • CIP has excellent Sales and PAT growth compared to peers over 4 years. This is a positive.
  • The D/E ratio at 0.51 is moderate. This has fallen from over 2 times in FY15. So growth has been with improving financials. This may also have come from funds raised from PE investors.
  • Margins are high among the Contractor pack. The RoE at 23.15% makes CIP a leader in this parameter. A lot of other real estate players have low or negative return ratios due to a variety of industry wide challenges.
  • The inventory turnover ratio, fixed assets turnover ratio and margins are average among peers.

Positives for CIP and the IPO

  • The rise and rise of CIP is due to the success of promoter brothers, Rohit Katyal and Rahul Katyal. With rich work experience from Pratibha Industries, they set up CIP together. They also handle different portfolios – Rahul as MD handles Sales and Operations and Rohit is CFO.
  • CIP has a good reputation of doing quality work in a timely fashion, which is delivered by using its proprietary tools and technologies which bring down the construction cycle time.
  • CIP has an exclusive focus on construction of buildings in major cities. The geographical spread of their projects has been limited to major cities in India, with a focus on Mumbai, NCR and Bengaluru.
  • CIP has a marquee client base and a large order book at 3.9 times revenues in May 2017.
  • They have secured repeat orders from some of their clients, like the Lodha Group, The Wadhwa Group, Godrej Properties, Transcon Developers, Ahuja Constructions and Puravankara Projects. In fact clients have taken them to new geographies outside Mumbai, and helped in their growth.
  • CIP has a strong track record of growth and profitability. They have reduced debt over 2 years.
  • The asking P/E at 24 times is moderate. CIP has low debt and a sustainable business model.
  • The IPO is a fresh issue of shares. Hence the promoters aren’t cashing out which is a positive.

Risks and Negatives for CIP and the IPO

  • CIP has risen to today’s strengths in less than 5 years of operations. This sounds incredible, in such a high competition business. However we have found that that the promoters had many years of work experience in a related business (Pratibha Industries) before starting CIP.
  • A revenue growth of 30-50% may be required to sustain high RoE for CIP. The high RoE of CIP is explained by high revenue growth of the firm. Margins are in average range and cannot rise sharply for a construction contractor. On time delivery is a given. To continue this high performance, CIP will need to continue growing at a fast clip, in the chosen high growth cities.
  • The brother promoter relationship must stay strong, for CIP to flourish.
  • To continue its success, CIP’s senior management team will also need to scale up.
  • Client concentration – projects awarded by their top 5 clients represented 38.7%, and top 10 clients have 59.7% of their Order Book, as of May 2017. This is a risk. However conversely we can say that if relationships stay strong, these solid customers can power future growth.
  • Promoters have diluted 43% of CIP pre IPO. This is not worrying as they retain 44% post IPO.
  • Typical Industry risks include 1) manpower shortage issues. 2) Liability claims or claims for damages or termination of contracts with clients for failure to meet project milestones or defective work issues. 3) fluctuating prices of steel, sand and ready-mix concrete. 4) Clients operate in a highly regulated environment, and existing and new laws, regulations and govt. policies can affect the sector. 5) Construction involves physical hazards and risks. 6) A competitive market, CIP must bid for and continue to win construction projects.

Overall Opinion and Recommendation

  • Construction sector is massive in India and likely to witness a revival from increased demand from real estate and infrastructure projects, govt. initiatives and funding and private sector investments.
  • In this massive sector with numerous players and high competition, CIP stands out as an innovative, aggressive building contractor which brings in technologies and processes that helps it deliver with high quality and on time delivery. It has an excellent client base among Property firms.
  • CIP has a professional management team, a reputed PE backing and clear growth strategies which are likely to take the company to new heights in the near future.
  • Given this client base and assuming relationships stay strong, CIP can look at revenues growth over 30% p.a. for 3-4 years which will give it a good size, market share and high return ratios.
  • Major risks are loss of any top 5 client, and project disruptions due to labour or other issues.
  • The valuations at the IPO price are average, however we are positive due to strong growth potential. This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

JAINMATRIX KNOWLEDGE BASE 

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  12. JainMatrix – Track Record – 31 May
  13. IndiGo Airways – Flying High, Wide and Handsome – 30 May
  14. Eicher Motors – It’s Firing on Both Engines – 16 May
  15. Hudco IPO – Sector Uncertainties, AVOID – 09 May
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  17. Vikas Ecotech – Get ‘Vikas’ for your Investments – 24 Apr

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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 known financial interests in Capacite Infraprojects Ltd. 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.

JainMatrix Investments – Track Record

Outperformed all Mid and Small Cap Mutual Funds

Dear Investor,                                                                                                               31st May 2017

JainMatrix Investments is a premium Investment Service for Indian equity. We build wealth through equity asset appreciation over the long term. Its the best way to get great returns, lower costs and yet be in control of your own portfolio. Investors trust our advisory services for stock picks, tracking and personalized support.

We created two Model Portfolios over 4 years ago, with our best picks at that time. One is a Large Cap and one is a Mid and Small Cap Model Portfolio. We monitor these portfolios, removing underperformers and introducing new picks, to give investors a solid Core Portfolio of equity assets.

Today we reach a 52 month or 4 year, 4 months milestone, and share and update the Track Record for the JainMatrix Model Portfolios.

 ..

Performance Tracker

See the compilation of performance of the Model portfolios.
jainmatrix investments, model portfolios
.

Performance Description

The market has been positive since Jan 2017. Broadly in line with this, JainMatrix Investments continues to do well on its recommended model portfolios.
  • We have a portfolio universe of 50 stocks, the finest firms from our research over 3-4 years.
  • From this universe, we created 2 focused portfolios of 7 shares each – a Large Cap and a Mid & Small Cap portfolio

Mid and Small Cap Model Portfolio – MSC

  • The JainMatrix MSC Multi-bagger Model Portfolio gave 40.6% simple annualized returns over 51 months, compared to CNX Midcap (25.8%), S&P BSE Midcap (25.7%) and S&P BSE Smallcap (26.5%) over same period. It outperformed by 14.1% simple annualized.
  • In a similar way, on a CAGR basis the outperformance was 4.4%.
  • The best performing Mid or Small Cap mutual fund gave 35.2% returns in this period. We have outperformed 92+ mutual funds (Source Value Research).
  • Absolute performance levels have improved, and our portfolios offer the best way to invest in the current scenario.

Large Cap Model Portfolio – LC

  • The JainMatrix LC Retirement Model Portfolio gave 16.5% simple annualized returns over 52 months, compared to Sensex (13.8%) and Nifty (14.4%) over the same period. It outperformed by 2.1% simple annualized. On a CAGR basis the outperformance was 0.7%.
  • The best performing Large Cap Mutual Fund in this period gave 20.3% returns, out of 82+ funds. This portfolio is in the top 15% of these mutual Funds. (source Value Research).

Other Valuable Research – IPOs, Stock Ideas, Sector and Trend reports

  • In addition to the Model Portfolios, we also present new stock ideas, make IPO research reports and identify sectoral trends.
  • Our IPO reports have a high success rate and have helped identify winners. Subscribers also receive valuable Listing Day – buying range advise on IPO picks, so that they can take large positions, as allotments may be limited to 1-2 lots.
  • Our sectoral and economy notes help develop long term thinking after events like demonetization, budgets, etc.

Sign up for the JainMatrix Investment Service to take the right decisions, whatever the event, in your investing journey. ..

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See other useful public reports:

  1. IndiGo Airways – Flying High, Wide and Handsome
  2. Eicher Motors – It’s Firing on Both Engines
  3. Hudco IPO – Sector Uncertainties, AVOID
  4. S Chand IPO: An Educational Content Powerhouse
  5. Vikas Ecotech – Get ‘Vikas’ for your Investments
  6. CPSE ETF FFO 2 – An Energizing Offer – BUY
  7. Investment Notes – Euphoria
  8. Avenue Supermarts IPO: The Mart of Choice
  9. Bharat Electronics OFS

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DISCLAIMERS

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. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

IndiGo Airways – Flying High, Wide and Handsome

  • Date: 30th May, 2017
  • CMP: Rs 1,060
  • Advice: HOLD
  • Industry – Airlines
  • Large Cap – 38,500 cr. mkt cap 

Overview:

  • Overview: IndiGo is the market leader in Indian aviation with a low cost carrier model. They have a leading domestic market share of 40.4%. The revenue and profit were Rs 19,370 crores and Rs 1,659 cr. resp. for FY17. The Income, EBITDA and profits have grown 32.7%, 25.6% and 19.4% CAGR over 8 years. Aggressive growth plans are in place for capacity addition.
  • Key risks: 1) Competition has intensified in the domestic market, weakening pricing power 2) A sharp rise in fuel prices is a risk to profitability. As a result EPS has reduced recently.
  • Opinion: The valuations are rich currently and hence investors are advised to HOLD the stock until earnings recovery process begins.

On 5th Feb, 2016 we had published a report for subscribers for a BUY call at Rs. 829 after sharp share price fall on account of a one-time event. The share price is up 21.8% since then and is now being released for public viewing. SIGN UP for the investment service subscription to gain exclusive access to such high quality investment reports.

Here is a note on the IndiGo Airlines (IGO).

Description and Profile

  • IndiGo is a low-cost carrier airline based in Gurgaon, India in operation since 2006,.
  • IGO’s revenue and profit were Rs 19,370 crores and Rs 1,659 cr. resp. for FY17.
  • Market share based on passenger volume was 40.4% in FY17 for the domestic market.
  • Owned by InterGlobe Enterprises, IGO operates 896 daily flights to 44 destinations including 6 abroad of Bangkok, Dubai, Kathmandu, Muscat, Singapore and Doha. It has its primary hub at Indira Gandhi Intl. Airport, Delhi and operates 131 aircrafts all of which are Airbus A320.
  • IGO’s domestic ASKs (Available Seat-Km.) increased from 530 crore (FY09) to 5458 crore in FY17, growing at 33.8% CAGR. It has an aggressive growth plan, with a current order book of 400 A320 neo aircrafts.
  • IGO added 5 new aircrafts in Q4 FY17. It is also venturing into regional routes, and has signed a term sheet for the purchase of 50 ATR’s (small aircraft). Deliveries will start in Q3 FY17, and by FY19, it will be a fleet of 20 ATRs.
  • IGO’s maintenance costs are the lowest among Indian carriers.
  • Leadership team is Aditya Ghosh (President), Riyaz Mohamed (Aircraft Acquisition/ Financing), Ankur Goel (Director) and Rohit Philip (CFO).
  • Shareholding in % is: Promoters 85.88, QFI’s 6.42, DII 1.65, Individuals 3.40 & others 2.65.

Business Notes, Strategies and Events

  • IGO declared a final dividend of Rs 34/share which is a payout ratio of 90% and yield 1.4%.
  • IGO plans to use ATR-72 planes to feed its mainline network in a hub and spoke model. Recently it announced a provisional order for 50 ATR-72 planes valued at $1.3 bn. IGO expects deliveries to commence from 2017-end. The new aircrafts will be used to launch flights under the government’s regional air connectivity scheme, UDAN (Ude Desh Ka Aam Naagrik).
  • IGO reported a 24.6% fall in the Q4 FY17 net profit at Rs 440.2 cr. against Rs. 583.7 cr. posted during the same period last year. Its total income was up 18.5% at Rs. 4,848.2 cr. against Rs 4,090.6 cr. YoY. The PAT fell sharply on account of higher fuel prices.
  • IGO recently partnered with Australian flight training institute, Flight Training Adelaide (FTA), to provide training to its pilot cadets.
  • The management of IGO is looking to convert some of its Airbus A320neo planes to A321neos that will allow it to fly more passengers per flight and increase flight range.
  • Engine Problem: Pratt & Whitney 1100G engines of Airbus A320 neo faced technical issues recently. The engine is facing twin problems. One in the combustion chamber and the other is with the third bearing of the engine. IGO executives expect A320 neo engine-maker Pratt & Whitney to provide a solution to the combustion chamber problem by Q4 2018.

Indian Aviation Industry Review

  • The Indian aviation industry is the 9th largest market globally. Total passenger traffic stood at 22.36 cr. in 2016 and there were 85 international airlines connecting to over 40 countries.
  • In terms of number of seats per capita, India is quite low – India has 0.08 domestic seats per capita, while Philippines (0.29), China (0.31), Indonesia (0.41) and Thailand (0.48) are much higher. (FY15)
  • Domestic air passenger volumes are likely to grow 25% for FY18.
  • The Airline industry is a very tough globally, characterized by high airplane costs (the Airbus and Boeing duopoly), high fuel costs, parking, airport and MRO charges. Costs are largely fixed. On the other hand, demand is cyclical and varies by season & economic cycle.
  • Anecdotal evidence shows that the sector is a destroyer of value. Many countries support their national carriers, even though there are losses, as it may be a matter of national prestige.
  • Industry market shares in Mar 2017 are presented in Fig 2. (Source DGCA).

jainmatrix investments, indigo

Fig 1 Industry Market Shares /Fig 2 – IGO Operational revenues

  • The Indian aviation industry has been aided by a slow moving Indian Railways, that is losing market share, had weak capacity growth, poor passenger service levels and slow trains.
  • Indian aviation is expected to become the 3rd largest market by 2020. Indian carriers plan to increase their fleet to 800 aircrafts by 2020. (Source: GoI/ DIPP).
  • A number of foreign investors are present in India including Airbus, Boeing, AirAsia, Singapore Airlines, Rolls Royce, Frankfurt Airport Services, Honeywell Aerospace, Malaysia Airports Holdings, GE Aviation, Airports Company South Africa and Alcoa Aerospace.
  • Indian aviation is experiencing dramatic growth with the emergence of LCC, as well as new carriers, and a growing middle class ready to travel by air for business and leisure.
  • Growth in airlines is causing demand growth for MRO (maintenance, repair and overhaul) facilities. Indian authorities plan to double the number of airports to 250 by 2030.
  • The failure of Kingfisher Air indicates the market is not ready to pay prices of 2-3X of LCC tickets.

Stock Evaluation, Performance and Returns

jainmatrix investments, indigo airways

Fig 3 – Price History

  • See price history detailed in Fig 3. The IPO was in Nov 2016, at an issue price of Rs. 765, and the share price has appreciated 38% generating good returns.
  • We can see that the share price had an all-time high of Rs 1,396 in Jan 2016 and a low of Rs. 702 in Feb 2016. Today the share price is 31.7% below the peak and 51% above the low.

jainmatrix investments, indigo airways

Fig 4 – Indigo financial performance

  • The annual and quarterly financials of IGO in Fig 4 reveal a steady increase in revenues. Margins and PAT have fallen in FY17 on account of high crude prices.
  • The Income, EBITDA and profits have grown 32.7%, 25.6% and 19.4% CAGR over 8 years.
  • The total debt by end FY17 was Rs. 2,596 cr. The entire debt for IGO is aircraft related. IGO does not have any working capital debt. The D/E of the firm is high at 3.16 times. This is a negative.
  • The margins are moderate with Operating and Profit margins at 15.1% and 8.6% for FY17.

jainmatrix investments, indigo airways

Fig 5 – Cash Flow Position 

jainmatrix investments, indigo airlines

Fig 6 – Price and PE graph / Fig 7 – Price and EPS graph

  • The business has generated free cash flows throughout in the last 6 years. This is a positive.
  • The share has traded at an average PE of 18.12 times since listing. Today it is at 24.70 times, so valuations are above historical average. See Fig 6. However trading history is short.
  • The EPS TTM has fallen in the recent quarters, see Fig 7. This is on account of fall in demand post demonetization, higher fuel costs & engine rentals and greater competition.

jainmatrix investments, indigo airways

Fig 8 – Financial Metrics

  • In the airlines sector, fuel costs are a significant proportion of overall revenues. In this context, we can see IGO’s ratio has been volatile and is high currently. See Fig 8. The aircraft fuel expenses and engine rentals have risen sharply in 2 years. The load factor has been flat over the last 8 quarters.
  • From the chart below we can see that the yield has fallen significantly over the last 8 quarters. In the recent quarter, the yield was impacted on account of fall in consumer spending post demonetization. However the management in confident of fast recovery in yields. See Fig 8.
  • With load factor 86.1% recently and rising, IGO is performing impressively.

Benchmarking

jainmatrix investments, indigo airlines

Exhibit 9 – Benchmarking

We benchmark IGO against listed peers and an Infra asset firm. Based on Exhibit 9, we conclude:

  • Sales and PAT Growth has been impressive at IGO over the last 3 years.
  • Debt is high and that is expected in this industry. With cash flow improving in recent quarters, we can expect that they would be able to control debt while investing in capacities.
  • Margins are moderate, however leading amongst the listed Indian peers. Dividend yield is high. This is positive. The valuations appear expensive, both in terms of P/E and P/B ratio.

Positives of the firm

  • IGO dominates with a large market share in one of the largest & fastest growing aviation markets.
  • It’s a successful implementation of the LCC business model with single aircraft type, high aircraft utilization, high operational reliability, no-frills product, and low distribution & maintenance costs.
  • IGO is a strong brand developed with good advertising & marketing strategies.
  • It has maintained consistent profitability and strong cash flow generation in the last 6 years.
  • By placing a large Airbus aircraft order, IGO has gained a structural cost advantage with favorable terms on aircraft, engines and components, and got a young, modern and fuel-efficient fleet.
  • On delivery, the aircrafts are sold and leased back. This arrangement is efficient as it converts fixed costs into variable. The asset light approach keeps capital expenses under control.
  • Experienced management with US background, has executed well so far in the Indian context.
  • IGO has been fast to plan for UDAN, which is a new opportunity in regional connectivity.

Risks and Negatives

  • The quality issues with newer airplane deliveries can threaten operations and services. The management feedback is that in 1-2 quarters the issues will be handled by the vendors.
  • Depreciation of the INR against USD may have an adverse effect on IGO’s operations and costs. This has worked in favor of IGO with rupee strength in last 1 year.
  • Crude oil prices are a high cost component, that is outside management control. Prices have risen sharply in the last 1 year and they can further rise again. IGO does not hedge for fuel cost volatility, hence if fuel costs rise further, it could further impact financial performance.
  • Competition may intensify with the entry of Air Asia and Vistara, which have strong backgrounds, and capacity expansions of Spice Jet and Jet Air.
  • Any production delays with ordered aircraft would affect IGO’s expansion plans.
  • IGO’s international routes expose them to higher operational risks. However it is believed that these routes have higher profit potential compared to domestic routes.
  • IGO’s financials may fluctuate due to seasonality as well as economic cycles.
  • There may be a skills shortage in areas such as airline pilots, maintenance engineers, etc. In the past airlines needed to hire expatriate staff at high costs to overcome this.
  • Airlines are a cause of pollution due to usage of fossil fuels. There may be increasing pressure on airlines to reduce this in terms of capacity limitations or carbon credit requirements.
  • IGO, like other airlines, faces operational risks such as accidents and terrorism.
  • There are high regulatory challenges for IGO including DGCA and AAI compliances, policies and execution and ATF taxes. However the business climate in India is improving.

Opinion, Outlook and Recommendation

  • There’s no doubt that the Airline industry in India is at a early phase of growth. With high population and weak railways execution, growth will track economic growth and affluence in India.
  • IGO has a strong brand with a commanding domestic market share, consistent delivery and high growth. It has a good track record of profitability and free cash flows. It has executed well on its LCC strategy. IGO has expanded the market with its growth.
  • We feel that IGO will continue to dominate Indian skies due to network effect and good capacity additions. Any fall in crude prices can provide high upside risks to IGO profitability.
  • While IGO has been in profits consistently, the margins depend inversely on crude prices.
  • The valuations are rich currently and hence investors are advised to HOLD the stock until earnings recovery process begins.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports

  1. Eicher Motors – It’s Firing on Both Engines
  2. Hudco IPO – Sector Uncertainties, AVOID
  3. S Chand IPO: An Educational Content Powerhouse
  4. Vikas Ecotech – Get ‘Vikas’ for your Investments
  5. CPSE ETF FFO 2 – An Energizing Offer – BUY
  6. Investment Notes – Euphoria
  7. Avenue Supermarts IPO: The Mart of Choice
  8. Bharat Electronics OFS
  9. Indigo Airlines IPO report Nov 2015 

Search for companies/ sectors of your interest in Search box in the right panel.

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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 known financial interests in IGO or Interglobe Aviation or any related firm. Punit Jain has however flown Indigo Airlines several times as a paying customer. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

S Chand IPO: An Educational Content Powerhouse

  • IPO Open 26-28th Apr at Rs. 660-670
  • Mid Cap: Rs. 2,328 crore Mkt cap
  • Industry – Education Publishing
  • P/E 36.8 times TTM
  • Advice: Investors can BUY with a 3 year perspective

Summary

  • Overview: SCL is a 70 year old firm that delivers books, content and services in education to the K-12, higher education and early learning segments with strong presence in CBSE/ICSE schools. SCL revenues, EBITDA and PAT have grown at 32.6%, 47.5% and 33.9% CAGR from FY12 to FY16. SCL had a strong distribution and sales network across India. SCL has good relationships with authors who create and refine content. Textbook quality is excellent. The recent M&A strategy has given them a strong position across subjects, central and state boards and multiple languages. SCL is a thought and execution leader in this space with good content through authors and reach through distribution networks. It is capturing innovation by buying good education firms to enhance offerings. The IPO will help reduce debt even as operational revenues grow at 32.6% CAGR.
  • Key risks: 1) At a PE of 36.8 TTM, the valuations are expensive. 2) SCL has a seasonal business 3) NCERT provides subsidized textbooks and may prevent usage of SCL textbooks.
  • Opinion:   This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is a note on S Chand and Company Ltd. (SCL) IPO.

IPO highlights

  • The IPO opens: 26-28th Apr 2017 with the Price band: Rs. 660-670 per share.
  • Shares offered to public number 1.08 cr. The FV of each is Rs. 5 and market Lot is 22.
  • The IPO in total will collect Rs 729 cr. while selling 31.34% of equity. Of this, SCL will raise Rs. 325 cr. by issuing fresh shares and the selling shareholders will receive Rs. 404 cr. at the UMP. The promoter group owns 58.33% in SCL which will fall to 46.7% post-IPO.
  • SCL would benefit from the fresh issue of shares and the proceeds of Rs. 325 cr. would be used for:

Exhibit 1 – Utilization of proceeds from fresh issue of shares

  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35. This is good for Retail.
  • IFC holds 9.4% stake in SCL (Pre-IPO) and Everstone Capital Partners holds 32.3% (Pre-IPO). IFC will remain invested, while Everstone is selling half of its current stake in SCL.
  • The unofficial/ grey market premium for this IPO is in the range of Rs. 160. This is a positive.
  • The first day of IPO saw that it is already 52% subscribed, so it looks like it will sail through very successfully.

Introduction

  • SCL is a 70 year old firm that delivers books, content and services in education to the K-12, higher education and early learning segments and has a strong presence in CBSE/ICSE affiliated schools.
  • Revenues for FY16 were Rs. 541 cr. and profit Rs. 47 cr.
  • It has 2,135 full time employees (Dec ‘16.), whereas Chhaya has 309 employees (Dec ‘16.).
  • In Dec2016, SCL bought a 74% stake in Kolkata-based publisher Chhaya Prakashani Pvt. Ltd for Rs. 170 cr. SCL will acquire remaining 26% by Nov2018. In the past S Chand acquired Delhi-based publishers New Saraswati House in 2014 and Vikas Publishing House in 2012.
  • SCL has 55 consumer brands across knowledge products and services including S. Chand, Vikas, Madhubun, Saraswati, Destination Success and Ignitor. It recently acquired 74% of Chhaya Prakashani Pvt. Ltd. and now also offers 4 Chhaya brands including Chhaya and IPP.
  • SCL has a contractual relationship with 1,958 authors (including co-authors) for over 5 years. Additionally, Chhaya has contractual relationships with at 24 authors.
  • SCL had a sales and distribution network of 42 warehouses in 19 states, 4,932 distributors and dealers, and a sales team of 838 working from 52 branches and marketing offices. Chhaya Acquisition has expanded presence in East India to add 771 distributors and dealers.
  • SCL has developed a robust supply chain. In FY16, 85% of printing requirements were met by facilities in Sahibabad and Rudrapur. The paper purchases are integrated, which lowers costs.
  • About 72.5% of SCL’s sales are derived from the K-12 segment (KG to 1st to 12th grade). And 75% of sales of SCL are generated in the 4th quarter every year, at the start of the new academic year. Fig 2.

Fig 2 – a) SCL revenue over the years and  b) FY16 segments

  • Leadership is Desh Raj Dogra (Chairman), Himanshu Gupta (MD), and Saurabh Mittal (CFO).
  • In FY11, SCL’s key subjects were English grammar, Math and Science. It has since made many acquisitions. In 2013, SCL acquired Madhubun and Vikas – to improve its Hindi language titles. In FY15, it acquired Saraswati brand to strength its French, languages, arts and crafts titles.
  • SCL has 12 subsidiaries including Chhaya Prakashini. But 7 of these 12 have incurred losses in FY16.

News, Updates and Strategies of SCL

  • In FY16, SCL sold 3.55 crore copies of 11,144 titles. Additionally, Chhaya sold 98.8 lakh copies of 433 titles. SCL’s top 10 best-selling titles accounted for sales of 29.6 lakh copies in FY16, and 15 of their authors had each sold over 10 lakh copies of their titles during the last 5 years.
  • On the website, schandpublishing.com the firm offers ecommerce services.
  • SCL is looking to acquire firms in the higher education business, particularly in the test prep market. It plans to do so to increase its market share in the State Board segment in attractive markets.
  • SCL invested in online test prep startup Testbook in Mar2016. It is an online test prep platform for competitive exams such as GATE, CAT, SBI PO and IBPS PO, besides others. The platform allows students to simulate an environment similar to the actual examination.
  • SCL invested Delhi-based Smartivity Labs Pvt Ltd, an online venture that deploys augmented reality and robotics for kids learning projects in Oct 2015.

Education Sector Outlook

  • A recent survey by market research agency Nielsen revealed that India’s book publishing market is the sixth-largest in the world at Rs 26,100 crore, and is likely to touch Rs 73,900 crore by 2020.
  • The formal education segment comprises both K-12 schools (including secondary and senior secondary schools) and higher education institutions (colleges, higher education institutes). Whether government or privately owned, this segment is governed by the ‘not for profit’ diktat, meaning that such educational institutions in India cannot be operating on a ‘for profit’ basis.
  • The informal segment comprises test preparation, tutoring, early education and vocational/skill-based training segments. The informal segment does not have restrictions on operating on a ‘for profit’ basis and does not have restrictions on profit distribution.
  • The formal, informal and ancillary segments are collectively estimated at US $90 billion as of 2015 and expected to reach US $188 billion by 2020. India has a large population in the education age bracket of students aged 5-24, which stood at 52 crores in 2016. This may grow to approximately 53.4 crores by 2020. In addition to the growing population, a reduction in drop-out rates is expected to contribute to increase in market size.
  • The K-12 education system in India is one of the largest in the world, with a market size of US $49.5 billion, comprising 11 lakh govt. schools and 4 lakh private schools. Schools have grown from 13.6 lakh (FY11) to 15.2 lakh in (FY15). During 2011-2014, the share of private unaided schools recorded the highest growth rate among other types of schools from 14.2% to 19%.
  • Most schools in India are affiliated to 1 of 3 main governing bodies for K-12 schools: (a) state level SSC education board; the Central Boards of (b) CBSE; and (c) ICSE.
  • CBSE schools have grown at the fastest CAGR of 8.9% during 2011-2015.
  • The growth drivers of the K-12 education segment are: 1) Rising disposable incomes 2) Consumer preference for private unaided schools 3) Government initiatives on promoting primary education
  • SCL is a market leader with a share of 13% in education content. The closest peers are Oxford Publication and Orient Black Swan have a share of 6% each. (source – newspaper reports).

Financials of SCL

  • SCL’s revenues, EBITDA and PAT grew at 32.6%, 47.5% and 33.9% CAGR in 5 years, see Fig 3.
  • FY17 revenues is a projection of 9M FY17 financials, assuming 75% comes in Q4; and adding financials of Chhaya Prakashini. Thus revenue and PAT growth are good.
  • The EPS has risen sharply in 5 years. This is excellent. But there was a fall in FY15. Here SCL witnessed a disruption due to Chennai floods; it also acquired 51% in New Saraswati House.

Fig 3 – SCL Financials/ Fig 4 – SCL Cash Flow

  • SCL has negative cash from operations and FCF in 3 of last 5 years, Fig 4. This is a negative. However this is explained by the vigorous M&A activity as SCL has grown inorganically.
  • SCL has not declared dividend in the last 2 years, however it hadan interim dividend for FY17.
  • SCL has an ROE of 7.8% in FY16 which is low.
  • Operating margins have been flat while profit margins have fallen a little. However with acquisition of Chhaya Prakashini, the margins should improve, it had a net profit margin of 12.4% (Dec 2016).
  • SCL has a cash balance of Rs. 24.4 cr. today which translates into Rs. 7.03 as cash/share which is low.

Benchmarking

We benchmark SCL against peers from education /publishing sector. However the main comparison is with Navneet due to Repro (losses), MPS (technology), CLE (classroom) and others (newspaper publishing). Note that Navneet too has a significant stationary business. See Fig 5.

Exhibit 5 – Financial Benchmarking

  • PE for SCL appears expensive at an FY17P* of 36.8 as compared to Navneet at 25.2 times with better financials. The valuation of SCL is moderate in terms of P/B ratio.
  • SCL has witnessed high sales growth in the last few years. The EBITDA margins are good, while profit margins have dragged.
  • The 3 year PAT growth is moderate at 13.4%. The D/E ratio at 0.82 is moderate, however the highest in the industry. The return ratios are poor. This is a negative.
  • The SCL numbers are consistent with a firm on a growth and acquisition spree that is well on the way to becoming a textbooks and education content leader. In 2-3 years the benefits of this will accrue to shareholders.

Positives for SCL and the IPO

  • The IPO is beneficial to SCL. The fresh issue proceeds will retire some of the debt and improve financials.
  • SCL has strong brand equity with high consumer recall. The IPO and post listing visibility will enhance the brand of SCL as a consumer product.
  • SCL has in the last 4 years followed a coherent M&A strategy – first to expand subjects under coverage, then including state boards, regional languages and education innovation tech firms.
  • SCL is a comprehensive consumer education content player across the education lifecycle.
  • A strong presence in the CBSE/ICSE schools and increasing presence in state board schools.
  • SCL has strong integrated in-house printing and logistic capabilities. In FY16 over 85% of their printing requirements were met by their facilities located in Sahibabad and Rudrapur.
  • SCL has a pan-India sales and distribution network driving deep market reach.

Risks and Negatives for SCL and the IPO

  • SCL has a highly seasonal business of their main K-12 business segment with 75% of their sales generated in Q4 every year. This also means seasonality in working capital.
  • The valuations look expensive in terms of P/E ratio. Debt is high, with ok margins and low RoE.
  • SCL operates in a highly-competitive and fragmented industry. Many of the content providers have strong brand recognition in local markets and long term relationships with schools, school authorities and educational authorities. They also face competition from the govt. National Council of Educational Research and Training (NCERT) and the State Council of Educational Research and Training (SCERT), which publish books for the K-12 market at subsidized costs.
  • For the past 2 years, CBSE board has issued an advisory circular advising CBSE affiliated schools to use only NCERT books for all classes. CBSE issued the circulars in response to reports and complaints from parents that schools were asking them to buy books published by private companies. The CBSE books are much cheaper (subsidy) but there is a big difference in quality and content of these.
  • A large portion of SCL revenues are derived from titles of their top authors. In FY16, their top 20 authors contributed to 48.9% of revenues. The loss of such authors could adversely affect business.
  • SCL has an obligation to acquire the remaining 26% of share capital of Chhaya Prakashani by Nov 2018 which may need to be financed with additional debt.
  • SCL may be impacted by the introduction of the GST. However it is likely that after making the operational alignment changes, it may be beneficial for business and ease distribution and pricing.
  • The presence of 55 consumer brands sounds daunting. It may be a legacy of M&A. It may be necessary for SCL to simplify branding by merging many and focusing on 5-10 key brands.
  • M&A are often risky and SCL needs to ensure success of all acquisitions, and suitable synergy gains.

Overall Opinion and Recommendation

  • India has a very young population that is underpenetrated in terms of education. A lot of govt. focus is already on improving availability and outcomes in K-12 education.
  • Education content continues to be an important aspect of K12 education with textbooks, guides and question papers being key elements.
  • SCL is a thought and execution leader in this space with good content through authors and reach through distribution networks. It is also aggressively growing across subjects and languages, from central to state boards, and from paper to online distribution. It is capturing innovation by buying good education firms to enhance offerings.
  • At a PE of 36.8 TTM, the valuations are expensive. However we feel that debt can be reduced post IPO even as operational revenues gallop forward at 32.6% CAGR.
  • Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

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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 intends to apply for this IPO in the Retail category.  Other than this, JM has no known financial interests in SCL 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.