CPSE ETF FFO 2 – An Energizing Offer – BUY

  • FFO Applications: 15-17th Mar; Listing by 7th Apr 
  • ETF has 10 PSUs; Oil and Gas heavy
  • Raising amount: Rs. 2,500 cr. 
  • Managed by Reliance Nippon Life Asset Management
  • Central PSEs, Exchange Traded Fund, Further Fund Offer 2
  • Buy with a 1 year perspective

Overview: The Scheme is a further follow on issue (FFO 2) after the January 2017 offer which was successful. CPSE ETF facilitates GoI’s initiative to disinvest stake in CPSEs through the ETF route. Past performance of CPSE ETF 2014 has been good with 19.2% CAGR over 3 years. A discount of 3.5% on the “FFO Reference Market Price” of the Nifty CPSE Index shall be offered in this Scheme. There are high sectoral risks in Oil and Gas sector with a commodities play. Also typically the asset rich PSUs are slow moving firms with a poor, lethargic culture. However overall the offer is attractive and rated a BUY with a 1 year perspective.

Advice: This is a medium risk, medium return offering suitable for conservative investors. Buy with a 1 year perspective.

Here is a note on the CPSE ETF FFO 2 offer 2017.

Offer Differences

  • This is a smaller offer, of Rs 2,500 crores compared to Rs 6,000 crores FFO earlier in Jan 2017
  • Very similar product, with CPSE ETF as benchmark
  • The retail discount on offer is 3.5% this time compared to 5% in the first FFO in Jan 2017
  • There is a small change in the allocation to the 10 companies of the Index, with PSU firms having more central govt. holdings getting a few % higher allocations.

Description

  • The Scheme is an open-ended index scheme, listed on the Exchanges in the form of an ETF. The investment objective is to provide returns like the Nifty CPSE Index.
  • In this offer 70% is reserved for Retail and QIB, while max 30% is for Anchor investors.
  • The CPSE ETF 2017 has been created to help in GoI disinvestment of PSUs. The Further Fund Offer (FFO) launched in Jan 2017 received good response; collections were Rs.13,742 cr., out of which Rs.7,742 cr. was refunded to investors due to limited issue size of Rs.6,000 cr.
  • The ten PSUs’ included in the ETF are known high dividend, low capital gains, asset rich firms.
  • FFO Price: The FFO Units being offered will have a face value of Rs. 10/- each and a premium equivalent to the difference between FFO Allotment Price and the FV . The FFO Allotment Price would be equal to 1/100th of Nifty CPSE Index less discount.
  • Discount: A discount of 3.5 % on the FFO Reference Market Price of the underlying shares of Nifty CPSE Index shall be offered to FFO of the Scheme by GOI. A discount of 5% was offered to retail investors in the first FFO in Jan 2017 which has been reduced to 3.5% this time.
  • The scheme is being managed by Reliance Nippon Life Asset Management Ltd.

Investment Details of the Scheme

  • Amount to be raised: Rs. 2,500 cr. The Scheme will invest at least 95% of assets in stocks of the Nifty CPSE Index. It may invest in Money Market Instruments upto a max of 5% of assets which could include T-Bills, commercial paper of public private sector corporate entities, etc.
  • The AMC will use a passive or indexing approach to try and achieve Scheme’s investment objective. Unlike other Funds, the Scheme does not try to beat the markets they track and do not seek temporary defensive positions when markets decline or appear overvalued.
  • Sectoral asset Allocation and historic returns:

jainmatrix investments, CPSE ETF

Table 1 – Sector allocation           Table 2 – CPSE ETF 2014 returns including Dividend

Source: Reliance Mutual Fund FFO 2 document

Analysis of the ten PSUs as part of this ETF:

jainmatrix Investments, cpse ETF

Table 3 – CPSE ETF FFO PSUs analysis

  • Note 1: The Engineers India report by JainMatrix Investments is available on LINK
  • Note 2: The Bharat Electronics report by JainMatrix is available at LINK
  • Note 3: When we say price is high, it is relative to 5 year historical prices. We have not done valuation exercises on these firms.
  • Portfolio Turnover: It is expected that there would be a number of Subscriptions and Redemptions on a daily basis. Portfolio Turnover Ratio of the Scheme is 1.02 as on Feb 28, 2017.
  • Dividend: The income received by way of Dividend shall be used for recurring expenses and redemption requirements or shall be accumulated and invested as per the investment objective of the Scheme. The Trustees may declare Dividend to the Unit holders under the Scheme subject to the availability of surplus, and at the discretion of the Trustees. If the Fund declares Dividend, the NAV of the Scheme will stand reduced by that amount.
  • Listing: The units of the Scheme will be listed on NSE and BSE by maximum April 7, 2017.
  • RGESS Eligibility: Investments made by a Retail Individual Investor in the RGESS Scheme will qualify for a 50% deduction of the actual amount invested from the taxable income of the financial year.

The ETF structure is explained below.

JainMatrix Investments, CPSE ETF

Table 4 – Nature of ETFs             Source: Reliance Mutual Fund FFO 2 document

Past Performance since launch in March 2014

jainmatrix investments, cpse

Table 5 – Performance of CPSE ETF since 2014 (as on 13th Mar 2017)

The CPSE ETF 2014 was listed in April 2014, and has been able to give original NFO retail investors an absolute 69.4% returns over 36 months. This includes a 1 year bonus for Retail, which is not available in CPSE ETF 2017. The CAGR returns are 19.2%, higher than those in Table 2 published in FFO. See reports:

  • JM Investments Mar 2014 report – CPSE ETF 2014 – New Fund Offer report
  • JM Investments Sept 2015 performance review – Review Sept 2015 of CPSE ETF 2014
  • We had published a report on the FFO (Further Fund Offer) of CPSE ETF on 14th Jan, 2017. And recommended a BUY with a 1 year perspective. You can have a look at the report on the following LINK and the video on this LINK.
  • Subscription response: The Reliance Mutual Fund managed CPSE ETF opened for applications from 17-20th It was subscribed by 2.30 times, with bids worth Rs13,802 cr. coming in against the issue size of Rs 6,000 cr. The FFO received 250,000 applications, with good demand across investor segments.
  • FFO Price: The FFO Allotment Price is approximately equal to 1/100th of Nifty CPSE Index minus discount. The allotment price was Rs 25.21 and this tranche was listed on 31st
  • Performance: The EOD closing price on the exchange was Rs. 27.71 today, i.e. 13thMar, 2017. This translates into a gain of 9.9% in 1.5 months.

PROS

  • This ETF has a lower management charge as this automatic. The expense ratio is 0.065% annualized.
  • The fund will offer 3.5% discount to the FFO 2 subscribers.
  • The 5 year share returns are 7.47% CAGR, see Table 3. This is fair but below Sensex of 10.63%.
  • The dividend yield for these stocks is 5.18% today which is good, Table 3.
  • The average beta of these stocks is 1.15 indicating higher volatility than indices.
  • Many of these firms own wonderful assets, the family silver of the GoI. Some of these firms also enjoy monopoly status in their sectors. See our opinions in Table 3.
  • GoI is asking for higher dividends from PSUs and allowing operational freedom to exploit assets and be more productive. This will benefits investors also. See report, A Repurpose for our PSUs
  • The crude oil price fall from USD 100+ levels to sub 50 per barrel is complete. While it is volatile, crude in next 1 year should be in USD 40-60 range. If it does, the Oil & Gas sector can perform well.
  • This fund is Oil and Gas heavy with 57% weightage. However it does have a mix of upstream, mid and downstream O&G firms, which together can de-risk the portfolio against commodity volatility.

CONS

  • This third fund raising is an opportunistic attempt by GoI to raise funds in FY17 based on the good market conditions and the success of the Jan 2017 offer. However every successive offer dilutes incremental gains and novelty of the offer. This dilution is being run in parallel with stock level dilution efforts like the Offer for Sale (OFS) with Bharat Electronics and Engineers India.
  • 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.
  • While the expense ratio of the ETF is low, the high dividend paid by the PSUs is not being passed on to the unit holders, but used for recurring expenses, as per FFO document. The CPSE ETF 2014 too has not paid dividend for 3 years. The 5.18% dividend yield involves substantial monies. It’s not clear if dividends have contributed to the NAV of the CPSE ETF 2014.
  • This fund is O&G heavy with 57% weightage. If one extends the description to Energy/Coal/ Power/ Oil & Gas and related financing, it increases to 90%. These sectors are essential to the economy, but are typically operationally constrained and not shareholder friendly. They are dependent upon global prices, and so even well managed firms can swing to losses with a fall in commodity prices.
  • In Oil & Gas sector, the upstream Oil Exploration firms have been hit by falling crude oil prices. The CPSE ETF is upstream Oil & Gas heavy with ONGC having 25% weightage.
  • Even though Gail India has a monopoly, it has been hit in pipeline construction by interstate politics, farmer /social pressures and weak infra execution environment.
  • PFC and REC are executors of GoI programs in power sector. Their returns are sometimes guaranteed by GoI but when the entire sector gets stressed, they can suffer poor performance.
  • 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 (Railways for coal, pipelines for gas).
  • This CPSE ETF 2017 offering is managed by Reliance Mutual Fund.

Overall Opinion

  • The current govt. is focusing on good execution and better administration with a series of reforms. The environment is more result oriented with less political interference in PSUs.
  • The outlook for Oil & gas sector is stable this year. Domestic demand is high.
  • Past performance of CPSE ETF 2014 has been good with 19.2% CAGR over 3 years.
  • There are high sectoral risks with an Oil & Gas heavy commodities play. Also typically the asset rich PSUs are slow moving firms with a poor, lethargic culture.
  • However overall the offer is attractive and rated a BUY with a 1 year perspective.
  • This is a medium risk, medium return offering suitable for conservative investors.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. Investment Notes – Euphoria
  2. Avenue Supermarts IPO: The Mart of Choice 
  3. Bharat Electronics OFS
  4. Whats different about the Investment Service from JainMatrix? – A video
  5. Why are Indian stock markets attractive for Investments? – A video
  6. BSE IPO: Put this Exchange on Hold – Report plus Video
  7. CPSE ETF FFO – An Energizing Offer – Report plus Video
  8. Balmer Lawrie – An Update
  9. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  10. Investment Outlook – Short Term Pain, Medium Term Gain
  11. The Natural Quotient: A Sustainability Metric for Business
  12. PNB Housing Finance IPO: A Transformed Lender
  13. GNA Axels IPO
  14. RBL Bank IPO 
  15. New Banks: Big Changes in Small Change 
  16. Equitas IPO – Leader in SF Banks
  17. Do you want to be a value investor?
  18. Mahanagar Gas IPO 
  19. A Repurpose for our PSUs
  20. How to Approach the Stock Market – A Lesson from Warren Buffet
  21. Announcement – SEBI approval as a Research Analyst

DO YOU FIND THIS SITE USEFUL?

  • Visit the Investment Service page to find how you can get more. Or Click LINK
  • Register Now to get our Free reports and much more, on the top right of this page, or by filling this Signup Form CLICK.

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 holds CPSE ETF units since NFO in 2014. Other than this JM has no known financial interests in CPSE ETF / Reliance Mutual Fund or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst 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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Investment Notes – Euphoria

Three positive events have occurred. Demonetization is over; the Feb 2017 budget was good, and the 5 state elections threw up BJP as a likely winner in 4. At this point, we are overwhelmingly positive on the investment outlook.

Investment Notes

It was 18th Feb 2015. The Sensex had just closed at 29,320. It had been 9 months since the Modi led BJP won the parliamentary majority – they got 272 seats – to form a government. In the last one year, the Sensex had jumped from 20,536 to these levels, a gain of 43%.

An investor asked me a simple question: So what has changed on the ground and among the companies that has resulted in a 43% jump in Sensex? I just nodded, unable to express the reasons. I’d like to try to answer this today. The simple answer – NOTHING !! Most of the companies were 5-10% up on financials/ EPS in the last one year. Nothing special to report here.

So what gives? What explains the big jump? The answer is optimism and sentiment. Just like most things in life, people act on the basis of heart (emotions) and head (rationality). The Modi govt. won a resounding victory, after a bitter, negatively fought election. A lot of people now looked to the future with renewed hope and optimism, and felt we have a govt. that is cleaner, more decisive and which is thinking long term.

The positivity changed the outlook of investors. Retail bought Mutual Funds. Investors took fresh 2-3 year, long term positions. FIIs entered and took new 10+ year investments on the basis of longer term trends like consumption and housing shortages. Sensing all this, traders bet positively.

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham

So while nothing changed on the ground, the 2 year forward outlook changed sharply. The stock market always tries to look a few years ahead. At a stock level, most large caps have 1-2 year financials baked into the prices. Mid-caps are divided into the well-known and the lesser known. The well-known firms too have 1-2 year financials baked into the prices. Since growth rates are higher here, valuations parameters like P/E and P/B can look expensive. The lesser known mid-caps and small caps can flounder at low valuations until they get discovered. Many opportunities are available here for investors to find high quality firms that can be great investments.

So what happened after Feb 2015? The 43% jump due to euphoria and positivity gave way to rationality. Whats really happening on the ground? Is business looking up? What big bang reforms are the govt. conducting?  The answers were not immediately obvious. The parliament became a logjam – the lower house had things easier but the upper house blocked new initiatives.  Massive industry specific issues such as coal and power can’t be wished away with a govt. owned magic wand. It takes time and resolve and good administration.

Post Demonetization Post Budget 

By Feb 2016, the Sensex had fallen to 23,154, a fall of 21%. Post budget, once again there was optimism. The govt. has given a positive budget. No major worries. Toward Nov 2016, we had demonetization. There was confusion, discomfort and a cash shortage. Recovery from this started by end Dec. The cash shortage now looked likely to be resolved in a few months with few residual issues. Recovery was sharp, aided by another good budget in Feb 2017.

The Budget 2017 was overall positive. Small sops for the people included lower tax at entry levels. There were benefits for real estate transactions and Industry status for affordable housing. There were no major negatives, and fears dissipated. GST is likely in 2017-18.

The direction from the govt. is very clear. Black money is to be legalized and cleansed, and black money sources are to be capped. Cash and real estate cannot be a store of ill-gotten wealth. Taxation and compliance has to go up. Big ticket reforms are to be made, opening up new sectors. Foreign and local investors must be encouraged. Abject poverty has to be eliminated. The average man is honest, hard-working and follows the rules. Lets make life easier for him. Plus big changes have to be made to make the country a better place. All subsidies must be targeted using Aadhar to avoid waste. We hope that tax rates – both direct and indirect, are peaking now, and as compliance improves, rates should ease.

The FIVE State Elections

The 5 state elections of Uttar Pradesh, Uttarakhand, Punjab, Manipur and Goa have just concluded. Its been a strong victory in the biggest state, UP, and Uttrarakhand, for BJP. Manipur and Goa may also go BJP way per latest reports. So even the tricky UP population is convinced. In a delayed fashion, BJP will also get more seats in the Rajya Sabha. While it is unclear when BJP will get majority, but certainly over time the statewise support for BJP will increase.

These three big positives combined makes things look good for a 3-6 month period.

We signal a new euphoria for the Indian market

jainmatrix Investments

We welcome – the Bull

India and USA markets:

Just like in India, there appears to be an election led upswing in the USA. The Trump administration too is looking to take bold steps. The focus is on domestic improvements. Jobs, some elements of domestic protectionism, better healthcare, etc. Optimism has shot up in USA. Rather than fearing the world, USA may move to strengthening its own country.

jainmatrix investments

A quick look at Sensex and Dow Jones over the last 2 years indicates a good correlation. See figure – thanks Google Finance. Barring some big local events like demonetization, the two markets are moving in sync. This is another factor that makes me positive about Indian market outlook – its difficult for Indian indices to outperform year after year unless at least some of the global markets are also moving in a similar way.

The potential Risks or negatives that I see now are – 1) Fed rate hike expected this week – will it affect Indian Indices? 2) INR strengthening against USD – is this even possible? 3) Higher inflation – we have early signs of increase 4) Bad monsoon in 2017.

There are always risks and negatives. But at this point, we are overwhelmingly positive on the investment outlook.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. Avenue Supermarts IPO: The Mart of Choice 
  2. Bharat Electronics OFS
  3. Whats different about the Investment Service from JainMatrix? – A video
  4. Why are Indian stock markets attractive for Investments? – A video
  5. BSE IPO: Put this Exchange on Hold – Report plus Video
  6. CPSE ETF FFO – An Energizing Offer – Report plus Video
  7. Balmer Lawrie – An Update
  8. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  9. Investment Outlook – Short Term Pain, Medium Term Gain
  10. The Natural Quotient: A Sustainability Metric for Business
  11. PNB Housing Finance IPO: A Transformed Lender
  12. GNA Axels IPO
  13. RBL Bank IPO 
  14. New Banks: Big Changes in Small Change 
  15. Equitas IPO – Leader in SF Banks
  16. Do you want to be a value investor?
  17. Mahanagar Gas IPO 
  18. A Repurpose for our PSUs
  19. How to Approach the Stock Market – A Lesson from Warren Buffet
  20. Announcement – SEBI approval as a Research Analyst

DO YOU FIND THIS SITE USEFUL?

  • Visit the Investment Service page to find how you can get more. Or Click LINK
  • Register Now to get our Free reports and much more, on the top right of this page, or by filling this Signup Form CLICK.

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 any company mentioned here. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any equity 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.

Avenue Supermarts IPO: The Mart of Choice

  • Date 7th Mar 2017, IPO Open 8-10th Mar at Rs. 295-299
  • P/E 39.9 times TTM
  • Large Cap: Rs 18,660 crore Mkt cap
  • Industry – Retail 
  • Advice: Investors can BUY with a 2 year perspective

jainmatrix investments, dmart supermarkets

  • Overview: D-Mart is an emerging national supermarket chain, with a focus on value retailing. Total income for FY16 was Rs 8,606 cr. and net profit Rs 319 cr. Its revenues, EBITDA and PAT have grown at 40.3%, 45.5% and 51.6% resp. CAGR over 5 yrs. It has 118 stores with total retailing area of 35.9 lakh sq.ft. It has a low employee count and uses contract staff to contain costs.
  • Operations: D-Mart has a cluster based growth strategy which has allowed it to extend reach in areas where it has a presence. The store expansion strategy and cost control techniques are good. D-Mart has a professional management team, a respected promoter and clear vision and growth strategies which are likely to keep the company on the successful path. At a current P/E of 39.9, the asking price is fair, considering that DMT is the leader in its segment.
  • Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Most good IPOs get oversubscribed and few applicants get share allotments. Subscribe to JainMatrix Investments to get their pre-listing IPO notes, and invest successfully.  

Here is a note on Avenue Supermarts Ltd. (DMT) IPO.

IPO highlights

  • This IPO opens: 8-10th Mar 2017 with the Price band: Rs.295-299 per share.
  • Shares offered to public number 6.25 cr. The FV of each is Rs. 10 and market Lot is 50. These shares are 10.02% of equity. The IPO will collect Rs 1,870 cr. with a 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.
  • DMT was incorporated in the year 2000 by Mr. Radhakishan Damani. He is also a well known Stock market Investor, Stockbroker and a Trader. He owns 43.8% in DMT while his investment vehicle Bright Star owns another 15.8%. His brother and several family trusts own the remaining shares. The promoter group holds 91.36% stake, which will fall to 82.2% post-IPO.
  • DMT will benefit from the fresh issue of shares as the proceeds will go the company.
  • Utilization of IPO proceeds: Repayment of loans / redemption of NCDs Rs. 1,080 cr., construction and new stores Rs. 366.6 cr., and general corporate purposes Rs. 423.4 cr.

Introduction

  • DMT is an emerging national supermarket chain, with a focus on value-retailing.
  • Revenue in FY16 was Rs. 8,606 cr. and profit Rs. 319 cr. It has 4,738 full time employees.
  • According to Technopak, DMT was among the larger and more profitable Food and Grocery (F&G) retailer in India in FY16. DMT offers a range of products like Foods, Non-Foods (FMCG) and General Merchandise & Apparel. See Fig 1.
  • For FY16, sales were from Mah. (62.6%), Guj. (18.8%), Telangana (10.15%) and Kar. (6.14%).

jainmatrix investments, dmart superstores

Fig 1 – D’Mart Segment revenues

  • DMT opened its first store in Mumbai, Mah. in 2002. By Jan 2017, they had 118 stores and retail area of 35.9 lakh sq.ft, located across 45 cities in Mah. (59), Guj. (27), Telangana (13), Kar. (7), AP (4), MP (3), Chhattisgarh (1), NCR (1), Daman (1) and Raj. (2).
  • DMT will expand store network in south & west India, and follows a cluster-based expansion.
  • Leadership is Ignatius Noronha (MD), Ramakant Baheti (CFO), Udaya Yarlagadda (COO Retail).

News, Updates and Strategies of DMT

  • DMT operates and manages all its stores. They operate mostly on an ownership model (incl. long-term lease, with lease period over 30 years and building is owned by the company).
  • DMT opens new stores using a cluster approach on the basis of adjacencies and focuses on an efficient supply chain, targeting densely-populated residential areas with middle class consumers. It operates distribution & packing centers that form the supply chain backbone for stores. They have 22 dist. centers and 6 pack. centers in Mah., Guj., Telangana and Kar.
  • DMT’s approach is to retail quality goods at competitive prices. The majority of products stocked are everyday basic products rather than discretionary items. They minimize operating costs by procuring goods directly from vendors /manufacturers, having an efficient distribution system, minimize inventory build-up, and good store operations.
  • DMT is piloting a project to open delivery centers or pick-up points in catchment areas where it has a store, for online customers. The 150-250 sq. ft. centers named “D’Mart Ready” and will be package pick-up points for eCommerce.
  • DMT plans to add 60% more store space in 3 years, about 21 lakh sq. ft. by FY20.
  • A high proportion of DMT staff are employees on contract. As of Dec 2016, they had only 4,738 full-time employees compared to a high number of employees on contract.
  • The grey market premium for the IPO is about Rs. 227-228. This is a positive.
  • A personal visit to the store was interesting. There were discounts on most products, and on some very good deals. The store location was good, and it was in a busy area. The parking space was ample for customers. There were a range of products under various categories, and in one section DMT had its own private label products with brand names like “D Homes” and “D Premia”. One had to search a little to find shop assistants. There were long queues, even though there were many cashiers counters, indicating popularity at 9.30 pm on a weekday. Overall the experience was good because of the location and deals.

Retail Sector Outlook

  • While organized retail, primarily brick & mortar, has been in India for more than two decades, its contribution to total retail is still low at 9% (USD 55 bn.) as of 2016, a modest increase from around 7% in 2012. This is expected to become 12% (USD 115 bn.) by FY20.
  • Share of urban retail is expected to grow from 49% in FY16 to 52% in FY20 due to increasing urbanization, a higher urban household income, rural distress due to erratic monsoons and increasing penetration of organized retail in urban centers.
  • Currently, the food and groceries (F&G) segment constitutes a majority share of retail (67%). According to Technopak, F&G will have a share of 66% in 2020. Apparel & accessories and consumer electronics categories account for another 8% and 6% of the the retail market.
  • 16 Indian states contribute 85% of the total retail spend. Retail opportunity in three south states – Kar., AP and Telangana is currently USD 100 bn. According to Technopak, these three south states will witness robust growth. Mah. with 19% and Gujarat will grow steadily.
  • Footwear has the highest penetration in organised retail at 40%; apparel & accessories, jewellery and CDIT have penetrations of 22%, 27% and 25%, resp. whereas F&G has just 3%.
  • The implementation of GST will benefit the retail industry over the next 1 year. Source: RHP
  • At present, the organized general merchandise players in India occupy around 40-45 million sq. ft. area. This requirement of retail space is estimated to grow to 60-65 mn. sq. ft. by 2020.
  • Supermarkets have been observed to garner higher levels of productivity amongst the general merchandise focused formats. The store productivity of a supermarket is typically 20-25% higher than that of a hypermarket. Though the efficiencies are higher for supermarkets, the margins are lower as compared to hypermarkets due to F&G category accounting for a greater portion of the product mix, in which the margins are lower as compared to other non-FMCG categories.

jainmatrix investments, dmart superstore

Exhibit 2 – Sales PSF of Supermarket Firms

  • We can see in Exhibit 2 that DMT has superior sales psf. The profit drivers of this industry are 1) Growth of Private Label 2) Optimum Store Size and 3) Growth in Food Processing.
  • Organized retail at a national level opened up only 10-15 years ago in India. On introduction, there were worries that a lot of labor intensive small retail businesses will be affected, so it will have negative social impact. However quite quickly we saw that 1) the sector has taken off rapidly and consumer habits have changed fast 2) small retail has not been much affected 3) political opposition has eased. However there are still restrictions on Walmart or other MNC chains with multiple brand retail business directly entering India without local partners.
  • Market shares – Per reports, in F&G, Future group holds the largest market share with 13% followed by D’Mart at 10% and Reliance at 8%. Together, they contribute 31% of F&G segment. Additionally, the overall organised retail market in India is $60 billion in size. With DMT revenue for FY16 = Rs. 8,606 cr., DMT has a 2.11% in the total organized retail market.

Financials of D-Mart

  • DMT’s revenues, EBITDA and PAT have grown at 40.3%, 45.5% and 51.6% CAGR from FY12-16, see Fig 3. (FY17 data is a projection of 9M FY17 financials). Thus revenue & PAT growth is good.
  • The EPS has risen sharply in the last 5 years. This is excellent.

jainmatrix investments, dmart superstores ipo

Fig 3 – D-Mart Financials

jainmatrix investments, dmart superstores, IPO

Fig 4 – D-Mart Cash Flow

  • DMT has positive cash from operations, see Fig 4, but it has been investing into fresh capacities and hence the company has negative FCF.
  • DMT has an ROE of 21% and ROCE of 23.7% for FY16 which is excellent.
  • DMT has not declared dividend in the last 5 years though the promoter has 91.4% stake. The firm has instead reinvested funds generated into capacity expansion.
  • DMT has good margins. The PAT margin for FY16 stood at 3.7% and for 9M FY17 at 4.4%. The margins will improve as the company reduces debt. DMT has a bank balance of Rs. 351 cr. which translates into Rs. 5.6 as cash/share which is low. So cash is being managed efficiently.

Benchmarking

We benchmark DMT against other retail majors and global retail giant Walmart. See Fig 5.

jainmatrix investments, dmart superstores IPO

Exhibit 5 – Financial Benchmarking (click image to enlarge)

  • PE for DMT appears average compared to listed Indian retail firms. (TTM is trailing 12 months). However it is high as Trent and Shoppers Stop are recovering from losses till 2 years ago.
  • DMT has witnessed excellent PAT growth compared to peers in the last few years. The 3 year PAT growth over 50% makes it the leader. The D/E ratio at 0.74 is moderate. This will fall after the IPO and so it’s a positive. The inventory turnover ratio at 14.2 times makes DMT leader on this parameter too. The ratio indicates how quickly inventory is sold / rotated.
  • The return ratios are best in the industry. Majority of the retail players are stressed.
  • Notes: Revenues, EBITDA and PAT values for Walmart are for CY15/CY16. Operating Margin (EBIT)/Operating Income is used interchangeably with EBITDA Margin/EBITDA for Walmart. Exchange rate of 1USD = Rs. 67.8

Positives for DMT and the IPO

  • DMT is good at offering value retail to the cost conscious consumers. The consumption story in India is robust with a rising aspirational urban middle class. This sector has potential.
  • DMT has taken up its footprint expansion using a distinct store acquisition strategy and ownership model. Business has grown rapidly in recent years, and there is ample opportunity in current presence states in West & South, as well as growth in Central, North & East regions.
  • DMT as high operating efficiencies and a lean cost structure through stringent inventory management and good IT systems. DMT has a strong track record of growth and profitability.
  • DMT enjoys a strong promoter background and an experienced & entrepreneurial management team and high of employee ownership.
  • DMT can aspire for high valuations given that they are growing steadily, profitably and organically. It may soon reduce debt, and has a sustainable business model.
  • The IPO is a fresh issue of shares. Hence the promoters aren’t cashing out, this is positive.
  • With just 9% penetration in retail, the organized sector has massive room to grow.
  • The company has been conservatively managed financially with a D/E of 0.74 this year.

Risks and Negatives for DMT and the IPO

  • The valuations look expensive in terms of P/B ratio. However DMT is able to ask for a premium because of its leadership position.
  • Warren Buffet sold off his stake in global retail leader Walmart last quarter. This is partially due to fierce competition from eCommerce, like Amazon. However USA is at a very different stage of development compared to India. Organized retail dominates there; it is at an early stage of penetration here. eCommerce is well established there; it is at a nascent mostly PE stage here.
  • Having said this, well-funded eCommerce firms are offering good discounts and rapid delivery in urban regions thus grabbing volumes and market share, and changing buying habits.
  • In many pockets in India real estate development is restricted by hidden forces like local politician fiefdoms, administrative permit raj and corruption. Any of the retail firms can be victims of this.
  • Future Retail is a fierce competitor with all India presence, and both organic and acquisition based growth with brands like EasyDay, Nilgiris and Heritage retail. Reliance Retail too is a very big player with Reliance Fresh and vertical chains. Several MNC firms are keen to enter.
  • With stake of 82% post IPO, the promoters will need to reduce to 75% within 3 years of listing.

Overall Opinion and Recommendation

  • Organized retail in India has a good future, and will offer consumers better services and range of products. We can certainly expect multi-year growth, new formats and innovation.
  • DMT has managed current operations and growth very well, and built up a loyal customer base. It has good performance metrics and should grow well organically.
  • The IPO is going to benefit the company in terms of premium inflows that will help reduce debt and grow the network/ operations. Repayment of debt will reduce finance costs.
  • DMT has a professional management team, a respected investor promoter and clear vision and growth strategies which are likely to take the company to new heights in the near future.
  • At a current P/E of 39.9, the valuations are good, considering that DMT is the leader in its segment.
  • This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. Bharat Electronics OFS
  2. Whats different about the Investment Service from JainMatrix? – A video
  3. Why are Indian stock markets attractive for Investments? – A video
  4. BSE IPO: Put this Exchange on Hold – Report plus Video
  5. CPSE ETF FFO – An Energizing Offer – Report plus Video
  6. Balmer Lawrie – An Update
  7. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  8. Investment Outlook – Short Term Pain, Medium Term Gain
  9. The Natural Quotient: A Sustainability Metric for Business
  10. PNB Housing Finance IPO: A Transformed Lender
  11. ICICI Prudential Insurance IPO – An Expensive BUY
  12. GNA Axels IPO
  13. RBL Bank IPO 
  14. New Banks: Big Changes in Small Change 
  15. Equitas IPO – Leader in SF Banks
  16. Do you want to be a value investor?
  17. Mahanagar Gas IPO 
  18. A Repurpose for our PSUs
  19. How to Approach the Stock Market – A Lesson from Warren Buffet
  20. Announcement – SEBI approval as a Research Analyst

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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 DMT 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.

Bharat Electronics – Post OFS Note

  • 1st Mar 2017, CMP: Rs 1,518
  • Large Cap – Mkt Cap 33,900 crores
  • OFS Retail Cut off Price: Rs 1,557/share plus a 5% discount
  • Advice: Buy now from the secondary market at CMP

jainmatrix investments, bharat electronics

Here is a post Offer for Sale (OFS) note on Bharat Electronics Ltd (BEL).

About the OFS Offer

OFS Application dates were from 22-23rd Feb with only the second day for Retail. Govt of India sold 1.11 cr. equity shares – 5.0% of stake in BEL, through the OFS route. This was done to meet FY17 divestment targets. The shareholding was 74.4% which has come down to 69.4% after the OFS. The OFS floor price was Rs 1,498; 20% of OFS offer was reserved for Retail, who also got 5% discount. See detailed OFS report: Bharat Electronics – A Value BUY

jainmatrix investments, bharat electronics

Post OFS applications and allotment

  • The Retail quota got subscribed 3.67 times; overall the issue was subscribed 5.3 times. Due to high demand, the actual allotment price/ cut-off was fixed at Rs. 1,558 for retail. After a 5% discount this translates into a price of Rs. 1,479.
  • Many investors lost out on allotment due to 1) sudden OFS announcement 2) confusion around floor price v/s cut off price 3) High cut off price.
  • The share is trading at Rs. 1,518 which is 2.6% higher than discounted OFS price. See Figure above. BEL stock is also 7% below the all-time high of 1,624 of 30th Jan 2017, and 50% above the 1 year low of 1,009 of 1st Mar 2016, reflecting a sharp price uptick in the recent past.
  • We had also written about a transformation in the public sector – A Repurpose for our PSUs 

Opinion

  • BEL is still a value stock for investors who may buy the shares from the open market.
  • IPOs, OFS and FFOs focus attention of investors on a particular stock. However far better bargains are available in the listed company/ secondary markets.

JainMatrix Knowledge Base

See other useful reports:

  1. Whats different about the Investment Service from JainMatrix? – A video
  2. Why are Indian stock markets attractive for Investments? – A video
  3. BSE IPO: Put this Exchange on Hold – Report plus Video
  4. CPSE ETF FFO – An Energizing Offer – Report plus Video
  5. Balmer Lawrie – An Update
  6. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  7. Investment Outlook – Short Term Pain, Medium Term Gain
  8. The Natural Quotient: A Sustainability Metric for Business
  9. PNB Housing Finance IPO: A Transformed Lender
  10. Endurance Technologies IPO 
  11. ICICI Prudential Insurance IPO – An Expensive BUY
  12. GNA Axels IPO
  13. RBL Bank IPO 
  14. New Banks: Big Changes in Small Change 
  15. Equitas IPO – Leader in SF Banks
  16. Do you want to be a value investor?
  17. Mahanagar Gas IPO 
  18. A Repurpose for our PSUs
  19. How to Approach the Stock Market – A Lesson from Warren Buffet
  20. Announcement – SEBI approval as a Research Analyst

Do you find this site useful?

  • Visit the Investment Service page to find how you can get more. Or Click LINK
  • Register Now to get our Free reports and much more, on the top right of this page, or by filling this Signup Form CLICK.

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 current holding in BEL, and JM has no known financial interests in BEL or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any equity 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 JM at punit.jain@jainmatrix.com

Why are Indian stock markets attractive for Investments?

In this 5 minute video, JainMatrix Investments founder Punit Jain presents a few reasons for investing in Indian stock markets. This is part of the Investor Education section of http://www.jainmatrix.com.

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  • Visit the Investment Service offering page to find how you can get more.
  • Register Now to get our Free reports and much more, on the top right of this page, or by filling this Signup Form CLICK.

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.

CPSE ETF FFO – An Energizing Offer – Post Listing Note

Date: 3rd Feb 2017 

Hi investors,

Introduction: We had published a report on the FFO (Further Fund Offer) of CPSE ETF on 14th Jan, 2017. And recommended a BUY with a 1 year perspective. You can have a look at the report on the following LINK and the video on this LINK.

Here is an update about the offer and about the performance of the CPSE ETF FFO.

  • Subscription response: The Reliance Mutual Fund managed CPSE ETF opened for applications from 17-20th It was subscribed by 2.30 times, with bids worth Rs13,802 cr. coming in against the issue size of Rs 6,000 cr. The FFO received 250,000 applications, with good demand across investor segments.
  • Allotment: Retail investors were favoured in this offer. It seems that full allotment has been made to all retail applicant applying up to Rs. 2 lakh worth of this Fund. Investors may also get a rounding off amount credited as refund.
  • Discount: A discount of 5 % on the FFO Reference Market Price of Index was offered to retail.
  • FFO Price: The FFO Allotment Price is approximately equal to 1/100thof Nifty CPSE Index minus discount. The allotment price was Rs 25.21 and this tranche was listed on 31st  Jan.
  • Performance: The EOD closing price on the exchange was Rs. 27.88 today, ie. 3rd Feb, 2017. This translates into a gain of 10.6% in 14 days.
  • Advice: (We stay with our recommendations) that this is a medium risk, medium return offering suitable for conservative investors. Buy with a 1 year perspective.
  • News: Based on the success of this second tranche of CPSE ETF, the Union Budget for FY 2017-18 announced that the government will continue to divest stake in state-owned companies in FY18 in the form of variations of CPSE ETF.

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 an ownership in CPSE ETF 2014 units and CPSE ETF 2017 as a Retail applicant in NFO/ FFO only. Other than this JM has no known financial interests in CPSE ETF / Reliance Mutual Fund or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

BSE IPO: Put this Exchange on Hold

  • Date 20th Jan 2017 
  • IPO Opens 23-25th Jan at offer price range: Rs. 805-806
  • Its a Mid Cap with Rs 4,400 crore Mkt cap
  • Industry – Stock Exchange 
  • P/E 35.9 and P/B 1.80 times (based on FY16)
  • Advice: the IPO is rated AVERAGE

bse_logo

Overview: BSE is a stock exchange platform which is the first stock exchange in Asia and the world’s largest exchange by number of companies. Income for FY16 was Rs 658 cr. and profits Rs 123 cr. It offers a wide range of trading related services and monitors the listed companies, Sensex index and market activities. New product offerings, start of operations at GIFT city and stake divestment via CDSL IPO are likely to boost financials in the medium term. However it is an OFS, so BSE doesn’t benefit in IPO. Market shares are low at 39% in currency derivatives and 14% in equity cash. At FY16 P/E of 35.9, and a FY17E forward PE of 21.0, the valuations are high. NSE is a fierce competitor, and is ahead in terms of volumes, growth and profits, reducing BSE to a niche player.

Opinion: This offering is rated AVERAGE, and investors may look elsewhere for long term gains.

We present here a short video on the BSE IPO.

A VIDEO on BSE IPO 

Here is a note on the Bombay Stock Exchange Ltd. (BSE) IPO.

IPO highlights

  • This IPO opens: 23-25thJan 2017 with the Price band: Rs.805-806 per share.
  • Shares offered to public number 1.54 cr. The FV of each is Rs. 2 and market Lot is 18. These shares are 28.26% of equity. The IPO will collect Rs 1,243 cr. (UMP) under the OFS route.
  • The IPO shares are available to institutional, non-institutional and retail in ratio of 50:15:35.
  • Trading Members hold 44% stake of BSE, and 56% is held by institutions & investors. Singapore Exchange, Atticus Mauritius Ltd and Quantum Ltd. are completely exiting through this IPO offering.
  • BSE would not benefit from the IPO as it is an offer for sale (OFS).

Introduction

  • BSE is a stock exchange platform, the first stock exchange in Asia, formed in 1875. It is the world’s largest exchange by number of listed companies, and India’s largest and the world’s 10th largest exchange by listings market cap, with US$ 1.7 tn. in total market cap of listed companies.
  • Total income for FY16 was Rs 658 cr. and net profit Rs 123 cr. It has 513 employees.
  • As a platform, it regulates listed issuers and provides a market for listing and trading in various types of securities as allowed by SEBI. The primary operating businesses of BSE are as follows: (See Fig 1)
    • Listing business: called the primary market, which relates to the issuance of new securities. It also has a platform for listing and trading in equities of small-and-medium enterprises (SME).
    • Market business: which consists of trading of listed securities, MFs, OTC corporate bonds, membership of depository participants in CDSL depository and providing post-trade services.
    • Data business: which consists of the sale and licensing of information and trading products.
    • Their operations also include IT services and solutions, the setting up of indices and training. They offer equity and currency derivatives, securities lending and borrowing, and platforms to facilitate buyback and sale of securities by substantial shareholders of listed companies.
  • BSE has listed 5,868 companies and 1,446 members across all segments, and in FY16 it took 28.49 crore orders and executed 15.5 lakh trades in equity shares average per trading day, making it the 12th most active trading exchange in the world.
  • BSE extensively monitors the listed companies and market activities to minimize the risk of default, promote market transparency and integrity, contributing to growth of the Indian capital markets.
  • Deutsche Borse, Singapore Exchange, SBI, LIC, and GKFF Ventures hold 4.75%, 4.75%, 4.75%, 4.68% and 4.58% respectively.
JainMatrix Investments, BSE IPO

Fig 1 – BSE FY16 Segment Revenues

JainMatrix Investments, BSE IPO

Fig 2 – BSE revenue growth

  • BSE has a market share of 39% in the currency derivatives segment and 14% in equity cash segment whereas NSE remains the leader with shares of 56% and 86% respectively. In the profitable equity derivatives segment, BSE market share has dropped to almost zero.
  • In April 2012, the SEBI board passed regulations limiting stock exchanges from owning more than 24% of the share capital of a depository and gave 3 years to comply. BSE was not compliant and SEBI extended its deadline to FY17. To meet this requirement, BSE divested 4.15% stake in CDSL to LIC in Oct 2016, but still holds 50.05%. BSE will dilute the excess stake in CDSL in the IPO of CDSL.
  • Leadership Sudhakar Rao-Ch’man, Ashish Kr. Chauhan-MD/CEO, Nehal Vora-CRO, Nayan Mehta CFO

News and Updates for BSE

  • BSE’s index – the S&P BSE Sensex is India’s most widely tracked stock market benchmark index.
  • India International Exchange (IIE), a subsidiary of BSE, commenced trading at Gujarat International Finance Tech (GIFT) city on 16th Jan, 2017. Tech offerings by IIE will facilitate co-location of members in its center at GIFT IFSC as well as algo trading including high frequency traders. The high speed platform will provide cross-border opportunities of investment with a supportive regulatory framework, and many infra and tax benefits. NSE is also expected to launch here soon.
  • SEBI announced a reduction of 25% in the fee payable by brokers and also decided to amend regulations to enable them to make payments through digital mode. This is a positive for the sector.
  • BSE discontinued lump sum transactions through paperless SIP facility for MF investors in Jan 2017. It introduced iSIP to help set up a SIP without documents, and ‘BSE StAR MF’ mobile app for android.
  • BSE was caught in two legal disputes just before the IPO. A contempt of court petition was filed in the high court because of irregularities in the Corporate office building, where a legal notice has challenged the launch of the IPO for BSE. The contempt petition has been filed by Yogesh Mehta against city officials, highlighting their inaction against illegalities in the building. The stock exchange lost the case right up to the Supreme Court, while another PIL in the case was dismissed by the HC.
  • BSE introduced new interest rate futures (IRF) contracts from Dec 30, 2016 on 6-year govt. bonds. The contract is based on 6.84% central govt. security maturing in 2022. An IRF contract is an agreement to buy or sell a debt instrument at a specified future date at a pre-determined price.
  • BSE announced in Jan 2017 that it will conduct periodic call auction for illiquid securities of 335 illiquid stocks. The auction would be based on trading activity during the period July–Dec 2016.
  • BSE shares 85% of profits as dividend, and plans to continue with high dividend in future
  • Subsidiary CDSL has filed papers for IPO with SEBI. BSE would dilute 26% stake in this IPO.
  • The unofficial/ grey market premium for this IPO is in the range of Rs. 128-130. This is a positive.

STOCK Exchange Sector OVERVIEW

  • Globally, there are over 70 major stock exchanges with a listings market cap of more than US$5 bn each. The total global market cap of WFE member exchanges (World Federation Exchanges) aggregated to US$68 tn. Of these stock exchanges, 16 had a market cap of above US$1 tn. each. Market cap of these stock exchanges taken together account for 86% of the total global market cap.
  • The NYSE dominates with a market cap of about US$18.2 tn. In terms of turnover, Shanghai SE topped the list with a turnover of about US$21.3 tn. in 2015. BSE was the largest in the world in terms of number of listed companies at the end of Oct 2016, with 5,868 companies.
  • Global exchanges derive revenue from transaction fees, listing, clearing and depository services. For both exchanges, BSE and NSE, revenue mainly comes from securities. Services to corporates, like listing income makes a significant contribution to revenues.
  • Equity as a percentage of financial savings in India is just 5%, compared with 14% China, 15% (Brazil), 20% (Indonesia) and 42% in USA. Growth for equity should grow and BSE will surely gain from this.
  • The key growth drivers for the exchange sector in India are as follows:
    • Demographic: India’s working age population is more than 60% of the population. A rising working age population results in a boost to consumer spending in the economy.
    • Awareness and participation by retail investors: In recent years, equity investments by Indian investors is slowly increasing due to specific tax breaks for equity investors and financial awareness programs conducted by MF houses and stock exchanges.
    • Initiatives by the GoI: Last year, GoI allowed the Employee Provident Fund Organisation (EPFO) to invest in equity markets. The state-run pension fund had a retirement corpus of Rs 8.5 lakh crore in 2015. It made a small investment of Rs 6,577 cr. in FY16, which may increase.
    • FIIs: The FIIs are significant players in Indian capital markets, and constitute 18% of turnover in cash market, and 10% of client turnover in derivatives. FII flows will be a key driver of growth.
  • From FY12 to FY16, the no. of shares traded on BSE & NSE combined grew by 30%. However, in H1 FY17, the shares traded on BSE declined by 9% YoY, while those traded on NSE increased by 22%.
  • Information and data services contribute just 4-5% compared to 10-25% in other economies. They grew at 14% CAGR over 5 years. However, the base is low, so they should grow annually by 15-20%.
  • India had an IPO revival recently, driven by strong economic fundamentals, favorable policy climate and strong investor confidence. Listing fees should grow at 15-20% over the next 5 years.
  • Revenues from index services can further grow for the Indian market by expanding product offerings beyond equities. Revenues from index services should grow at 15-20% over the next 5 years.
  • Source: BSE –RHP, NSE – DRHP

Financials of BSE

  • BSE’s revenues, EBITDA and PAT have grown at 3.28%, -4.4% and -8.2% resp. CAGR from FY12 to FY16, see Fig 3. (Note: FY17 data is a simple doubling of H1 FY17 financials). Thus revenue growth is flat while profits have fallen, with NSE fast gaining market share in various segments. But we can see there is a recovery in earnings in H1 FY17.
  • BSE has an ROE of 5% and ROCE of 8.2% for FY16 which is poor.
JainMatrix Investments, BSE IPO

Fig 3 – BSE Financials

JainMatrix Investments, BSE IPO

Fig 4 – BSE Cash Flow

  • BSE has robust margins that are improving. Even a small revenue growth will see improvements.
  • The current dividend yield is 1.86% which is moderate. BSE distributes 85% of its profits as dividend and plans to continue with the high dividend in the future.
  • The top 5 subsidiaries of BSE are CDSL, ICCL, Marketplace Technologies, CDSL Venture and BSE Institute. It has 50.1%, 100%, 100%, 100% and 100% stake in them resp. and all are profitable.
  • BSE has a bank balance of Rs. 1,692 cr. which translates into Rs 310 as cash/share. With an IPO pricing of Rs 806, we can buy the operations of BSE for Rs 496. BSE has been generated free cash flows from FY12 through FY16. This is a positive. However it may be negative in FY17. See Fig 4.

Benchmarking

We benchmark BSE against NSE, MCX and other listed global stock exchanges. See Fig 5.

JainMatrix Investments, BSE IPO

Exhibit 5 – Financial Benchmarking (click on image to enlarge)

  • The FY16 based PE for BSE appears to be high. P/B is lower and looks reasonable.
  • BSE has the witnessed low sales and PAT growth compared to its peers. NSE has performed far better in the same macroeconomic conditions. BSE is debt free which is good. However low/no debt is common across all exchanges globally. BSE margins are high, which is a positive. However it appears low compared to its peer group. BSE has low return ratios, but moderate dividend yield.

Notes to financial benchmarking: Revenues, EBITDA and PAT values have been ascertained using the latest financial data/information available for global exchanges (CY15, Jun 16). Operating Margin (EBIT)/Operating Income has been used interchangeably with EBITDA Margin/EBITDA for global stock exchanges. Exchange rate of 1USD = Rs. 68, 1HKD = 8.77, 1SGD = 47.8, 1Euro = 72.5, 1AED = 18.51

Positives for BSE and the IPO

  • BSE has strong brand recognition with a track record of innovation. According to CARE Research, BSE ranks third globally in terms of currency options and futures contracts traded in 2015.
  • BSE has a diversified & integrated business model and good relationships with market participants. Revenues are more broad based with lower risk. With the largest number of listed firms, BSE provides critical listing infra for many firms.
  • The valuations are moderate in terms of P/E and P/B. The company is debt free and has generated free cash flows from FY12 through FY16. This is good for investors looking for stable companies.
  • Due to a good cash position, we can buy the operations of BSE for Rs 496, which is quite low.
  • The IT platform of BSE is robust and high speed, which can be a valuable asset.
  • BSE is nimble in its offerings and services, and has grabbed new opportunities, including the IIE.
  • There has been a spate of IPOs in Indian markets in recent times, and they have almost all sailed through, some with massive over subscriptions. Listing revenues segment can be quite positive.
  • In H1FY17, margin improved due to healthy growth in transaction charges and higher other income. In the near term, earnings may be boosted by changes in settlement guarantee fund (SGF) norms.

Risks and Negatives 

  • The IPO is an OFS, so BSE does not benefit. It is a liquidity event for past investors.
  • The BSE is very weak in the profitable equity derivatives segment.
  • Stock exchanges are the basic infrastructure for the trading industry. With higher volumes there can be a sharp rise in profits. However we see a flat revenue growth and falling profits at BSE. Even though H1FY17 results were good, we cannot say that this trend has been reversed yet. It’s likely that NSE will dominate the high volume and profitable segments, and BSE will remain a niche player.
  • BSE operates in a highly regulated industry and may be subject to censures, fines and other legal proceedings if they fail to comply with their legal and regulatory obligations.
  • BSE has received certain complaints from the public after filing of the DRHP with SEBI, with many allegations. Any litigation arising on account of such complaints, if adversely determined, could materially affect its businesses and financial condition.
  • BSE isn’t loss making per se, however there hasn’t been real growth in the last 3 years. In spite of double digit margins, the bottom-line may not improve if there is no sales growth.
  • Unconfirmed reports suggest that investors in BSE over the past few years are exiting with flat gains.

Overall Opinion and Recommendation

  • Post demonetization, we feel Indian households will increasingly channel savings to equity markets, as will FIIs and DIIs. BSE should benefit from this.
  • Not just historically but also in terms of market breadth, BSE is a leader and should be able to consolidate its position financially over the next few years.
  • More product offerings, commencement of operations at GIFT city and stake divestment via CDSL IPO are likely to keep BSE financials healthy in the medium term.
  • However NSE is a fierce competitor, and is way ahead in terms of volumes, growth and profits.
  • At a FY16 P/E of 35.9, and a FY17E forward PE of 21.0, the valuations are average.
  • This IPO offering is rated AVERAGE, and investors are advised to look elsewhere for long term gains.

JAINMATRIX KNOWLEDGE BASE 

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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 BSE 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.