Tag: equity research

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 

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

  • 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.

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.

CPSE ETF FFO – An Energizing Offer – A Video

Hi Investors,

We present here a short video on the CPSE ETF FFO offer.

To read a detailed report, see CPSE ETF FFO – An Energizing Offer 

Happy investing,

Punit Jain

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. Balmer Lawrie – An Update
  2. Why Stocks, and Investment Outlook – Dec 2016
  3. Investment Outlook – Short Term Pain, Medium Term Gain
  4. The Natural Quotient: A Sustainability Metric for Business
  5. PNB Housing Finance IPO: A Transformed Lender
  6. Endurance Technologies IPO 
  7. ICICI Prudential Insurance IPO – An Expensive BUY
  8. GNA Axels IPO
  9. RBL Bank IPO 
  10. New Banks: Big Changes in Small Change 
  11. Equitas IPO – Leader in SF Banks
  12. Do you want to be a value investor?
  13. Mahanagar Gas IPO 
  14. A Repurpose for our PSUs
  15. How to Approach the Stock Market – A Lesson from Warren Buffet
  16. Announcement – SEBI approval as a Research Analyst

DO YOU FIND THIS SITE USEFUL?

  • 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.

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 an ownership in CPSE ETF 2014 units as a Retail application in NFO 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 .

CPSE ETF FFO – An Energizing Offer

  • Date: 14th Jan 2017
  • FFO Application: 18-20th Jan and Listing by 10th Feb, 2017
  • Amount to be raised: maximum of Rs. 6,000 cr.
  • Managed by Reliance Nippon Life Asset Management
  • Central PSEs, Exchange Traded Fund, Further Fund Offer
  • Buy with a 1 year perspective.

Overview: The Scheme is a follow on issue after the 2014 offer which was quite 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 19.8% CAGR over 33 months. A discount of 5% on the “FFO Reference Market Price” of the underlying shares of Nifty CPSE Index shall be offered to FFO of the 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 Offer 2017.

Offer Description

  • The Scheme is an open-ended index scheme, listed on the Exchanges in the form of an Exchange Traded Fund (ETF). The investment objective of the Scheme is to provide returns that closely correspond to the returns of the Nifty CPSE Index, by investing in the constituents of the Index in the same proportion as in the index.
  • The CPSE ETF 2017 is an instrument created to help the GoI in the disinvestment of PSUs. Post listing, there is a facility that further disinvestment can also be done through this vehicle.
  • Ten leading PSUs’ will be included in this ETF. Typically these are fairly well known high dividend, low capital gains but asset rich companies.
  • FFO Price: The FFO Units being offered will have a face value of Rs. 10/- each and will be issued at a premium equivalent to the difference between FFO Allotment Price and the face value of Rs. 10/- each. The FFO Allotment Price would be approximately equal to 1/100th of Nifty CPSE Index and would be calculated considering discount offered by GOI pursuant to FFO of the Scheme for buying underlying Nifty CPSE Index shares out of the FFO Proceeds.
  • Discount: A discount of 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.
  • Retail gets at least 70% quota of entire Offer. Anchor investors + QIB + NII will get the remaining available 30% quota of offer.
  • The scheme is being managed by Reliance Nippon Life Asset Management Limited (RNLAM)

Investment Details of the Scheme

  • The Scheme will invest at least 95% of its total assets in the stocks of the Nifty CPSE Index.
  • The Scheme may invest in Money Market Instruments upto a max of 5% of its assets which could include T-Bills, commercial paper of public private sector corporate entities, etc.
  • Amount to be raised: Rs. 6,000 cr. includes Initial Amount of Rs. 4,500 cr. and Addl. Rs. 1,500 cr.
  • 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 – Source: Reliance MF FFO document
JainMatrix Investments, CPSE ETF

Table 1 – Sector allocation/ Table 2 – CPSE ETF 2014 returns inc. Dividend

  • Portfolio Turnover: With Subscriptions and Redemptions on a daily basis and tracking error, Portfolio Turnover Ratio is expected to be 0.15 as on Dec 31, 2016.
  • 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 Feb 10, 2017.
  • RGESS Eligibility: Investments made by a Retail Investors in the RGESS Scheme will qualify for a 50% deduction of the amount invested from the taxable income of the financial year.
  • 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 Ltd recent report by JainMatrix Investments is available on LINK
  • Note 2: When we say price is high, it is relative to 5 year historical prices. We have not done valuation exercises on these firms.

The ETF structure is explained below.

JainMatrix Investments, CPSE ETF

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

Past Performance

The CPSE ETF 2014 was listed in April 2014, and has been able to give original NFO investors an absolute 64.24% returns over 33 months. This includes a 1 year bonus for Retail, which is not available in CPSE ETF 2017. The returns for Retail are 19.77% CAGR, higher than those in Table 2 published in FFO. Also see reports made by JainMatrix:

JainMatrix Investments, CPSE ETF

Table 5 – Past Performance of CPSE ETF 2014

PROS

  • This ETF offering has a lower management charge as stock selection and portfolio changes are automatic. The expense ratio is just 0.065% annualized.
  • The fund will offer 5% discount to the FFO subscribers.
  • The 5 year share returns are 8.05% CAGR, see Table 4. This is fair but below Sensex of 10.59%.
  • The dividend yield for these stocks is 5.24% today which is good, Table 4.
  • The average beta of these stocks is 1.16 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 4.
  • GoI is asking for higher dividends from PSUs and also allowing operational freedom to exploit assets and be more productive. This is positive. See report, A Repurpose for our PSUs
  • The crude oil price fell last year from USD 100+ levels to sub 50 per barrel. The fall looks complete for now. While prices are volatile, crude in next 1 year should be in USD 40-60 range. If it does, the Oil & Gas (O&G) sector overall can perform well.
  • This fund is O&G heavy with 57% weightage. However it does have a mix of upstream, mid and downstream O&G firms, which together can derisk the portfolio against commodity volatility.
  •  Employees’ Provident Fund Organisation decides to invest Rs2,800 crore in CPSE ETF. This surely meas that the institutional quots will be over subscribed.

CONS

  • While the expense ratio of the ETF is low, the high dividend paid by the PSUs may not be 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 2.5 years. The 5.4% dividend yield this year involve 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/ O&G 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 O&G sector, the upstream Oil Exploration firms have been hit by falling crude oil prices.
  • 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.
  • 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).
  • 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.
  • 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 19.8% CAGR over 33 months.
  • Retail gets at least 70% of CPSE ETF offer, so it is skewed in their favour.
  • There are high sectoral risks with a commodities play. Also typically the asset rich legacy 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. Balmer Lawrie – An Update
  2. Why Stocks, and Investment Outlook – Dec 2016
  3. Investment Outlook – Short Term Pain, Medium Term Gain
  4. The Natural Quotient: A Sustainability Metric for Business
  5. PNB Housing Finance IPO: A Transformed Lender
  6. Endurance Technologies IPO 
  7. ICICI Prudential Insurance IPO – An Expensive BUY
  8. GNA Axels IPO
  9. RBL Bank IPO 
  10. New Banks: Big Changes in Small Change 
  11. Equitas IPO – Leader in SF Banks
  12. Do you want to be a value investor?
  13. Mahanagar Gas IPO 
  14. A Repurpose for our PSUs
  15. How to Approach the Stock Market – A Lesson from Warren Buffet
  16. Announcement – SEBI approval as a Research Analyst

DO YOU FIND THIS SITE USEFUL?

  • 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.

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 an ownership in CPSE ETF 2014 units as a Retail application in NFO 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 .

Balmer Lawrie – An Update

  • 19th Dec 2016
  • CMP Rs 1085
  • Advice: SELL – It has achieved its price target and is Overvalued 

Dear Readers,

We had published a report on Balmer Lawrie and Co (BLC) on 17th Oct, 2016. This is a follow up report where we have changed our recommendation due to significant recent events.

  • We had recommended a BUY at a price of Rs 677 with a Mar 2019 price target of Rs 1,057. We had also predicted a bonus/ split because of the small equity base. This has come true. Details of this report are available on link – Balmer Lawrie – Is Traveling Fast Now
  • The share price is now Rs 1,085 giving our investors a 60% return in a span of 2 months.
  • The sharp rise is due to a bonus issue declared. The firm approved on Nov 10, bonus shares in the proportion of 3:1, giving 3 new Equity Bonus Shares for every 1 share held as on the record date. BLC fixed Dec 27, 2016 as the Record Date for Issue of Bonus The share will quote ex-bonus thereafter. The share is likely to fall by 75% ex bonus.
  • The main reason the share has risen so sharply is that there is high interest from traders to purchase the share before bonus, which may later be sold ex bonus to book a loss on short term capital gains. This is also called Bonus Stripping. (to find out more about this, visit LINK. To do this yourself, please also consult your Chartered Accountant and Investment Adviser).
  • There is no other significant event in the firm (it continues its steady progress).
  • We expect selling in this share to intensify post bonus ie after 27th Dec.
  • The current PE is 18.7 times, much above the 5 year historical average of 8 times and above the Oct 2014 peak of 14 times.
  • Hence we recommend investors in Balmer Lawrie to SELL, as the valuations have shot up sharply and it has moved into overvalued territory.

Additional details: Here is the brief on the company and the price history.

Overview: Balmer Lawrie & Co is a diversified PSU firm into Travel and Tourism, logistics, Industrial packaging, greases, lubricants and Leather chemicals. In each of these areas it occupies good niches. The FY16 revenues were Rs 3,229 cr. and profits 179 cr. The Revenues, EBITDA and Profits of BLC are up by 7%, 6.8% and 7.3% CAGR over 7 years. The balance sheet is strong and RoCE is over 21%. Investors have got a return of 34% CAGR over 8 years.

Price History: Here is a chart of the recent 6 month share price performance.

JainMatrix Investments, Balmer Lawrie

Balmer Lawrie – 6 month price history

We hope you make handsome gains on BLC.

Visit and bookmark www.jainmatrix.com for such valuable investment reports and updates.

Happy investing,

Punit Jain, Founder, JainMatrix Investments

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. Why Stocks and Investment Outlook Dec 2016
  2. Investment Outlook – Short Term Pain, Medium Term Gain
  3. The Natural Quotient: A Sustainability Metric for Business
  4. PNB Housing Finance IPO: A Transformed Lender
  5. Endurance Technologies IPO 
  6. ICICI Prudential Insurance IPO – An Expensive BUY
  7. GNA Axels IPO
  8. L&T Technology Services IPO 
  9. RBL Bank IPO 
  10. New Banks: Big Changes in Small Change 
  11. Equitas IPO – Leader in SF Banks
  12. Do you want to be a value investor?
  13. Mahanagar Gas IPO 
  14. How will Brexit impact Indian investors?
  15. A Repurpose for our PSUs
  16. How to Approach the Stock Market – A Lesson from Warren Buffet
  17. Thyrocare IPO – Wellness for your Wealth
  18. Announcement – SEBI approval as a Research Analyst
  19. Alkem Labs IPO
  20. Goods And Services Tax (GST): Integration And Efficiency
  21. Syngene IPO: Good Pharma R&D spinoff from Biocon

DO YOU FIND THIS SITE USEFUL?

  • 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. JM has no known financial interests in Balmer Lawrie & Co 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.

Why Stocks and Investment Outlook Dec 2016

Hi Investors,

In this short video of 10 minutes, we share the simple concept of Compounding, showcase our services at JainMatrix Investments, and present the Investment outlook for the next quarter.

Please share forward if you Like it.

Happy Investing,

Punit Jain

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. Short Term Pain, Medium Term Gain
  2. The Natural Quotient: A Sustainability Metric for Business
  3. PNB Housing Finance IPO: A Transformed Lender
  4. Balmer Lawrie – Is Traveling Fast Now
  5. Endurance Technologies IPO 
  6. ICICI Prudential Insurance IPO – An Expensive BUY
  7. GNA Axels IPO
  8. L&T Technology Services IPO 
  9. RBL Bank IPO 
  10. New Banks: Big Changes in Small Change 
  11. Equitas IPO – Leader in SF Banks
  12. Dilip Buildcon IPO 
  13. Do you want to be a value investor?
  14. Mahanagar Gas IPO 
  15. How will Brexit impact Indian investors?
  16. A Repurpose for our PSUs
  17. How to Approach the Stock Market – A Lesson from Warren Buffet
  18. Thyrocare IPO – Wellness for your Wealth
  19. Announcement – SEBI approval as a Research Analyst
  20. Alkem Labs IPO
  21. Goods And Services Tax (GST): Integration And Efficiency
  22. Syngene IPO: Good Pharma R&D spinoff from Biocon

DO YOU FIND THIS SITE USEFUL?

  • 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.

Investment Outlook – Short Term Pain, Medium Term Gain

  • 22nd Nov 2016
  • Report Type: News Analysis

Recently the global markets have been very volatile and the same is being witnessed in the Indian markets as well. The Sensex has fallen around 12% from peak of 29,045 on 8th Sept, after a 26% rise since the 2016 budget. Here are the key events which have likely affected the mood of the market.

I) Demonetization:

The high value currency notes of Rs 500 and Rs 1000 were demonetized on the 9th of Nov, 2016. Just overnight 86% of cash in INR has become obsolete. This measure was taken by the govt. to 1) tackle the widespread presence and hoarding of undisclosed (black) money and 2) destroy the counterfeit notes in the economy. A 50 day window till 30th Dec was given by the govt. to public to deposit or exchange these high value notes.

  • Per estimates about Rs 14.73 lakh crores is in the form of 500/1000 Re notes, and these will be replaced with new Rs 500/2,000 notes which are being distributed by bank branches /ATMs.
  • On 22nd Nov, the RBI eased NPA recognition norms as many SMEs, Agri and other business making cash based settlements/transactions could face repayment issues. RBI has given additional 60 day limit for Banks and NBFCs to recognize loans as NPA over and above standard regulatory limits for dues payable between 1st Nov – 31st Dec 2016 in cases where sanctioned limit is below Rs 1 crore.

The Cash categories are:

  1. Daily cash for individuals and businesses: There is a short term pain as people have to wait in queues outside banks and ATMs to deposit, withdraw or exchange money. We expect this to continue in urban areas for 10 days and semi-urban/ rural for another 2 weeks. Already limits are being raised for individuals & businesses. Online /mobile payments are gaining acceptance. New bank accounts will grow; usage of Jan Dhan Yojana accounts has begun.
  2. Black/ undisclosed cash: Over many years, cash has become a massive store of wealth in India. The reasons were convenience and lack of bank accounts on one side, and to avoid tax, under-declare property values, run illegal business, naxalite movement, etc. on the other. It is estimated that 25-40% of above 14.73 lakh crore of cash is undisclosed. This money is expected to either 1) be deposited in bank accounts and declared, accruing taxes and converting to white, 2) Some of this may leak out to other asset classes like currency, gold, real estate, forex and other people’s bank accounts 3) Be destroyed so as not to leave a trail.
  3. Counterfeit / fake currency: There is a reported presence of fake currency in the system, which is debasing the banking operations. By collecting all high value notes and issuing new ones, these will be flushed out of the system. It’s difficult to estimate this type of cash.
JainMatrix Investments

Fig 1: Ring out the Old, Ring in the New

Impact: For individuals and in business, there will be some disruption before we limp back to normalcy. This will be worse in rural areas with poor banking penetration.

  • But 30 years of cumulative black money will in one stroke be converted or destroyed.
  • This cash exchange, coupled with GST, may radically alter consumer behavior. Bank accounts usage will multiply, as also money transfer facilities and transparency.
  • The govt. is trying to switch from equilibrium in Tax Non-compliance to one in Compliance. In other words break a vicious circle of saving in black money to a virtuous circle of white money.
  • The market sentiment in the short term is affected as several cash oriented sectors may be impacted. Real estate, jewellery, microfinance / NBFC and retail operations may be affected. However the new 22nd Nov rule will ease liquidity for NBFCs and allow operations to stabilize.
  • Data available today indicates the money deposited with banks by customers crossed Rs 6 L crore from Nov 10, after demonetization. Withdrawals, including exchange of old notes, were above of Rs 1.35 L crore (per IBA). We estimate that in another 10 days, the depositing should be complete. The withdrawal / exchange of notes may take 2-3 weeks more to meet daily cash needs.

II) US election results:

Donald Trump won the 45th US Presidential elections on the 9th Nov, 2016. This was against the market consensus of various polls indicating a win for Hillary Clinton, thus shocking many Americans and investors worldwide. After the initial surprise, the US markets stabilized.

Impact: We expect the US policies to change once Trump takes over presidency in Jan 2017. The immigration, foreign business treaties, tax rates and a host of domestic policies may change. The impact on Indian investors too will unravel over 6 months. There is a higher uncertainty in US markets. Some FIIs are pulling out funds from Emerging Markets in a Risk off move. However after an initial knee-jerk reaction, this may not continue.

III) Tension along the India – Pak Border:

Indian stock markets fell almost 2% on 29th Sept, 2016 after the Indian army conducted “surgical strikes” on terror launch pads across the Line of Control (LoC) in Jammu and Kashmir amidst rising tensions between India and Pakistan. Thus the Indian side has taken a firm stand against terror from Pakistan. This event has been followed up with many incidents of firing on both sides and disruptions along the border.

Impact: We feel that there will be ongoing tensions between India and Pakistan. However a war like situation might not come up. Though the issues are unlikely to be solved soon, negotiations and dialogues should happen. Any aggressive attacks from either side could lead to a short term fall in markets. There is a higher uncertainty.

IV) Tata Group Clash:

The Chairman of the Tata Group, Cyrus Mistry was ousted from his post. The past Chairman Ratan Tata took over and will appoint a new Chairman within 2-3 months. The main reason for this was stated to be a loss of confidence in Mistry. This sounded like a painless coup for investors but the spat between the two has gone public, and it may be some time before the changes are rolled out across the group.

Impact: We feel that the operations of most companies will not be affected in the near term. Some strategic direction may be changed. The aggressive and combative stand of Tata group seen in recent cases like Tata Corus and Tata Docomo may soften in line with group philosophy.

Indices movements: Sensex, Nasdaq, S&P 500 and Dow Jones

JainMatrix Investments

Fig 2 – Index movements – 1 year

  • We can see that there has been a fair correlation between Indian and USA markets over 1 year.
JainMatrix Investments

Fig 3 – Index movements – 1 week

  • But over the last week, perhaps thanks to demonetization and the Trump election, Sensex has fallen relative to other markets.

Conclusions

  • There has been a sharp fall in Indian indices and many stocks from recent peaks. The fall reflects a break in the positive run, an increase in uncertainty and sudden unexpected events. It’s not all bad news. We feel that most of the events are short term disruptions, with a recovery possible in a period of 2 weeks to 3 months.
  • This is a correction in an overall bull run as we are seeing a lowering of interest rates, positive moves on GST and 7th pay commission and until recently, steady investments from FIIs and domestic retail. The IPO market too has been euphoric with a lot of pent up demand from retail investors.
  • This short term fall is a buying opportunity if you have a time horizon of a period longer than 3 months.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. The Natural Quotient: A Sustainability Metric for Business
  2. PNB Housing Finance IPO: A Transformed Lender
  3. Balmer Lawrie – Is Traveling Fast Now
  4. Endurance Technologies IPO 
  5. ICICI Prudential Insurance IPO – An Expensive BUY
  6. GNA Axels IPO
  7. L&T Technology Services IPO 
  8. RBL Bank IPO 
  9. New Banks: Big Changes in Small Change 
  10. Equitas IPO – Leader in SF Banks
  11. Dilip Buildcon IPO 
  12. Do you want to be a value investor?
  13. Mahanagar Gas IPO 
  14. How will Brexit impact Indian investors?
  15. A Repurpose for our PSUs
  16. How to Approach the Stock Market – A Lesson from Warren Buffet
  17. Thyrocare IPO – Wellness for your Wealth
  18. Announcement – SEBI approval as a Research Analyst
  19. Alkem Labs IPO
  20. Goods And Services Tax (GST): Integration And Efficiency
  21. Syngene IPO: Good Pharma R&D spinoff from Biocon

DO YOU FIND THIS SITE USEFUL?

  • 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.

PNB Housing Finance IPO: A Transformed Lender

  • Date: 25th Oct 2016; IPO Period: 25-27th Oct
  • IPO Price: Rs. 750-775; P/E 39.2 and P/B 2.45 times
  • Mid Cap: Rs 12,800 crore Mkt cap
  • Industry – Housing Finance NBFC
  • Advice: Investors may BUY with a 1 year perspective

Summary

  • Overview: PHF is the 5th largest housing finance company by loan portfolio. Over 5 years, PHF has implemented a business process transformation and re-engineering program, which contributed to them becoming the fastest growing large HFC in India. PHF’s revenue and PAT have grown 55.6% and 43.4% CAGR from FY12 to FY16. PHF’s loan portfolio also grew at 61.8% CAGR in this period. The operations have become broad based and cover North, West and South India quite equally.
  • At a FY16 P/B post IPO of 2.45 times, the valuations are reasonable. The P/E at 39 (ttm) does look stretched but with good growth and margin expansion, this will stay in a good range.
  • The risks that must be understood include high competition and a flat housing market.
  • Opinion: As an investment, the PHF IPO is rated a medium risk, high return type of offering. Investors may BUY PHF with a 1 year perspective.

Here is a note on PNB Housing Finance (PHF).

IPO highlights

  • This IPO opens: 25-27thOct 2016 with the Price band: Rs.750 – 775 per share.
  • Shares offered to public number 3.87 cr. (UMP). The FV of each is Rs. 10 and market Lot is 19.
  • Shares offered are 23.4% of equity. The IPO will collect Rs 3,000 cr. with a fresh issue of shares. The IPO shares are available to institutional, non-institutional and retail in ratio of 50:15:35.
  • PNB Bank holds 51% stake of PHF, and 49% is held by Destimoney Enterprise Ltd (DEL). DEL got sold to Quality Investments Holding in Feb2015, an affiliate of the Carlyle Group, a global investment firm. Post IPO s’holding will be PNB 39%, DEL 38%, QIB 12%, retail 8% and NIB 3%
  • PHF would benefit from the IPO as it is a fresh issue of shares. The IPO proceeds of Rs 3,000 cr. would improve capital adequacy of PHF and help fund the growth for the next few years.

Introduction

  • PHF is the 5th largest HFC in India by loan portfolio and 2nd largest by deposits. PHF offers “housing loans” for the purchase, construction, extension or improvement of residential properties or for the purchase of residential plots, and “non-housing loans” in the form of loans against property.
  • Over 5 years, PHF has implemented a business process re-engineering (BPR), and transformation program, which helped them become the fastest growing large HFC in India.
  • Total income for FY16 was Rs 2,697 cr. and profit Rs 326 cr. The HFC’s AUM was Rs. 27,000 cr.
  • PHF’s loan portfolio was at Rs 27,177 cr. in FY16, a 61.8% CAGR in 4 years. By June 2016, it further increased to Rs 30,900 cr.
JainMatrix Investments, PNB Housing Finance

Fig 1 – Loan Portfolio / Fig 2 – Housing Loan Portfolio / Fig 3 – Non Housing Loan Portfolio

  • PHF’s has an operating model which includes branches (47) across the north, west and south of India, processing hubs (16) which include three co-located zonal offices and one central support office in New Delhi.
  • Branches act as the primary point of sale and assist with origination, collection processes, sourcing deposits and enhancing customer service. The processing hubs and zonal offices provide support functions, such as loan processing, credit appraisal and monitoring, and their CSO supervises their operations nationally. There are totally 847 employees.
  • In FY16, the sources of funds were NCD’s (33.5%), deposits (27.2%) and comm. paper (19.2%).
  • Regional: the loan portfolio origination is from north – 39.7%, west 30.4% and south 29.9%.
  • Leadership: Sanjay Gupta is MD; Jayesh Jain (CFO) and Shaji Varghese (Business Head).

Promoter (Punjab National Bank) – Snapshot and Financials

  • PNB is a full service public sector bank. It provides a wide range of banking services such as digital banking, personal banking, social banking, micro, small and medium enterprises banking, etc.
  • PNB operates through 4 segments: Treasury, Corporate/Wholesale, Retail and others.
  • Income grew by 8.5% CAGR over 5 years. But PAT and EPS fell due to losses in Q4 FY16.
  • Major cleansing had happened in the NPA books of PNB. The gross NPA of the bank increased by Rs. 30,000 cr. in 2015-16 to Rs. 55,818 cr., which was 12.9% of its gross advances. Net NPAs jumped to 8.61% as against 4.06%. The share price also corrected sharply. See Fig 4.
  • There was a weakening in the balance sheets of many banks over FY11-15. Some of this was RBI driven, as the policy focus was to clean the books of all banks.
  • However post this IPO PHF will no longer be a subsidiary of PNB, so we downplay the influence and effects of PNB as a promoter. In fact PNB products portfolio does overlap with that of PHF already.
JainMatrix Investments, PNB Housing Finance

Fig 4 – PNB financials

News and Updates for PHF

  • The BPR undertaken by PHF over 4-5 years included investments in a scalable operating model, an integrated infotech platform, centralization and standardization of back-end processes, the hiring of experienced personnel and subject matter experts, hikes in salaries and other employees benefits, the refurbishment of offices, and repositioning of the “PNB Housing” brand.
  • PHF has a strong distribution network with over 7,110 channel partners across different locations in India, including the in-house sales team, external direct marketing associates, deposit brokers and national aggregator relationships with reputed brands. In recent months they sourced 56.5% of new loans from their in-house channels and the rest from external sources.
  • Currently PHF’s housing loans constitute 70.3% of total loan portfolio and retail constituted 86.5% of the housing loan portfolio. The average loan size (at origination) of the retail housing loans was Rs 31.8 lakh, with a weighted average loan-to-value ratio of 66.1%. The loan size of retail non-housing loans is Rs 56.8 lakh, with a weighted average LTV ratio of 46.5%.
  • Total borrowings are Rs 30,045 cr. and average cost of borrowings was 8.65%. During the same period the spread was 1.93% and the cost to income ratio stood at 25.03%.
  • PHF’s gross NPAs as % of total loan portfolio were 0.2% in FY15 and 0.27% as of June 2016, which was the lowest among the leading HFCs in India. Also the overall Capital to Risk (Weighted) Assets Ratio (“CRAR”) and Tier I Capital CRAR were 13.04% and 8.4%, resp.
  • PHF is planning to grow in Indian tier-II and tier-III. From the present 48 branches at 28 locations, they will expand to 60 more locations with a population of more than 80-90 lakhs.
  • PHF received high credit ratings for deposits, long-term loans, NCDs (secured & unsecured) and commercial paper from agencies like CRISIL, ICRA, CARE and India Ratings (Fitch). This helped raise low cost deposits in high volumes.
  • PHF had raised Rs.500 cr. in April 2016 from International Finance Corporation (IFC) by issuing secured fixed rate non-convertible debentures (NCDs) to fund green residential projects.
  • As of June 2016, 12.6% & 87.4% of the portfolio were fixed & variable interest rate loans, resp.
  • PHF selected AuthShield in Aug 2016 as a security installation to safeguard customers accounts. With hacking cases, better security has become vital for financial service providers.
  • The unofficial/ grey market premium for this IPO is in the range of Rs 50 – 52. This is a positive.

Indian Housing Finance Industry Outlook

  • In India, the housing industry is significant contributor to the country’s development and GDP.
  • Total outstanding housing loans in FY15 were Rs 11.3 lakh crores, a 17.7% increase since FY11.
  • Still, India has a low mortgage-to-GDP ratio. As of FY15, India’s mortgage-to-GDP ratio was 9% compared to China 18%, Thailand 20%, Germany 45% and USA 62%. (CRISIL/ RHP).
  • Banks held 63% of the housing finance market in FY15, based on loan assets. The higher market share of banks is due to big networks, broad customer bases and relationships.
  • The key growth drivers in the housing finance industry in India include:
    • Low mortgage penetration and housing shortage;
    • Urbanization; Population growth and changes in demographics.
    • Slowing average loan ticket size growth; Tax benefits and
    • Government implemented schemes (including Smart Cities and Housing for All by 2020)
  • The NHB was established pursuant to the NHB Act to operate as a principal agency and statutory body to promote housing finance institutions and to provide financial and other support to such institutions. The NHB is wholly-owned by the RBI. Under the provisions of the NHB Act, it regulates how HFCs conduct business in India. Through its refinance schemes, the NHB has made cumulative disbursements (from its inception until June 2014) of Rs 1,204 bn.
  • In the last 15 years, the total outstanding housing loans of HFCs and banks has increased at a CAGR of 23.4% from Rs 439 bn in FY00 to Rs 10,205 bn in FY15.
  • Among lenders, HFCs have better capitalised on the demand in non – metro cities, and grew their disbursements by 20.1% YoY. By contrast, banks’ advances grew at 14% YoY.
  • The distinguishing feature of the housing loan portfolio in India is the low NPA level, which is partially the result of financiers’ adequate appraisal systems and effective recovery mechanisms, as well as greater information availability. In FY15, the gross NPA level for HFCs in housing loans was estimated at 0.5% while it was slightly higher for banks, at 1.6%.
  • NPAs are likely to decline marginally in FY16 and FY17 owing to economic recovery, lower interest rates, better control, system checks, follow-ups, and improvement of job security.
  • The housing finance market in India is forecast to grow 20-22% over FY15 to FY20.

Financials of PHF

JainMatrix Investments, PNB Housing Finance

Fig 5 – PHF Financials

  • PHF’s revenue and PAT have grown 55.56% and 43.41% CAGR from FY12 to FY16. (Note: The projected FY17 data is a simple extrapolation from the Q1 FY17 results, see Fig 5).
  • The revenue growth is high, as is absolute PAT over FY12-16. We can see that the diluted EPS has grown at a slower pace. This is because of a flat to falling NII and Profit Margins in this period. In addition, there have been several dilutions to the equity base since FY12.
  • PHF has a ROE of 17.6% (FY16) which is good, however not the best in the industry.
  • We have assumed an IPO dilution of equity base to 16.56 crore shares to recalculate EPS in Fig 5. In addition, since the IPO premium will flow into the balance sheet of PHF, we recalculated the Book Value post IPO at the upper end of price band. The BV increases to Rs 316/share. Basis these, the P/E will be 39.19 times FY16 earnings and the P/B will be 2.45 times.
  • The dividend has been rising – PHF declared dividend of Rs 3.4 in FY16, a yield of 0.44% which is low. The dividend growth rate has been moderate at 11.5% CAGR from FY12 to FY16.
  • Net interest margin has improved from 2.93% (FY14), 2.94% (FY15) to 2.98% (FY16).
  • The NHB directions require HFCs to comply with a CRAR where an HFC’s Tier I and Tier II capital may not be less than 12% of sum of HFC’s risk-weighted assets and the risk adjusted value of off-balance sheet items. As of June 30, 2016, PHF’s CRAR was 13.04%. This is low, but will be boosted by the IPO.

Benchmarking

We benchmark PHF against listed housing finance, microfinance and BFSI peers. See Fig 6.

JainMatrix Investments, PNB Housing Finance

Exhibit 6 – Benchmarking

  • PHF appears to have high valuations in terms of PE. But in terms of P/B, the IPO will add to the net worth of the company and make the P/B very reasonable at 2.45 times.
  • PHF has the highest sales and PAT growth among peers, a positive. EBITDA margins are high.
  • But profit margins are on the lower side. RoE too looks low. Dividend yield is low too.
  • PHF will use the IPO to augment its capital base so post IPO capital adequacy will improve.
  • PHF has moderate margins. PHF has a low RoE in the industry. PHF has a low dividend yield (0.44%) amongst its peers which is a negative.

Positives for PHF and the IPO

  • High growth in revenues & profits for PHF combined with low NPAs is a wonderful combination.
  • PHF is the 5th largest HFC in India and the fastest growing among large HFCs. It has also broad based its growth equally across North, West and South India.
  • The Punjab National Bank brand is strong and rubs off feelings of confidence and trust. PHF has a PSB brand but is a well-managed private sector HFC, so it may have the best of both worlds.
  • PHF has a strong distribution network with penetration of key Indian urban centers. It also has a very efficient employee workforce with just 847 employees.
  • It has a scalable operating model and centralized and streamlined operational structure.
  • It is managed by experienced and qualified professionals with strong industry expertise. Many from top management have held senior positions at leading banks and NBFCs.
  • The 5 year financial performance of the company is outstanding with strong revenue, EPS and PAT growth. Clearly it is a growth stock and is placed well in a high potential industry.
  • The RBI has reduced interest rates in recent quarters. In this scenario, with transmission to home loan customers, the loan products become more attractive and demand grows rapidly.
  • The weak performance by PSBs in the last year was due to high NPAs and an attempt by the regulator to clean the books of banks. PSBs look weak, loss making and undercapitalized, and GoI is not in a position to fund them back to health. We may actually be seeing a massive permanent loss of market share by PSBs to private – banks, HFCs and NBFCs. This of course benefits PHF.

Risks and Negatives for PHF and the IPO

  • The recent crackdown by GoI on black money and tax evaders has resulted in housing prices going flat to negative across India. Its possible that housing prices are artificially high in relation to income levels and the related housing rental market. We may be at the start of a multi-year price correction. This could affect housing loan demand for PHF.
  • The pricing and valuations of PHF look stretched in comparison to peers. The P/E of 39 times (of post IPO capital base and FY16 EPS) is high. However a more critical parameter is P/B and at 2.45 times post IPO, this is reasonable. See Exhibit 6.
  • The growth rate of PHF over the past 5 years may be difficult to continue over the next 5 due to high competition from banks and HFCs, and the natural high base effect.
  • Margins appear low for PHF compared to peer group. This is acceptable with high revenue growth rates, but if growth slows down, PAT will slow sharply and affect perceived valuation.
  • The banking sector offered limited competition to HFCs with few new licenses given by RBI. However this is changing with RBI doling out 20+ new licenses to Payment Banks and Small Finance Banks. See article New Banks: Big Changes In Small Change. RBI is also moving towards Bank licenses on tap in future. This can intensify competition over the years for PHF.
  • A slowdown in economic growth in India or global economic instability could result in an adverse effect on their business, financial condition and results of operations.

Overall Opinion and Recommendation

  • India’s housing sector will remain high growth for many years given low penetrations. The best way for investors to play this opportunity has been through HFCs. Their stocks have done exceedingly well over the last decade. Regulatory, tax and interest environments are also benign for HFCs.
  • The BFSI industry is a proxy to the overall economy, and one can expect, as a thumb rule, the industry to grow at 2-3 times the GDP growth. The Indian economy is growing at 7-7.5%, so the HFC sector may see a 20%+ p.a. growth over the next few years.
  • In this space, PHF has over the last five years implemented a business process transformation and re-engineering program with very strong growth from a small base. The firm looks quite capable of expanding to new locations and continuing the high growth momentum.
  • At a FY16 P/B post IPO of 2.45 times, the current valuations are reasonable. The P/E parameter at 39 does look stretched but with good growth and margin expansion, this will stay in an acceptable range.
  • There are a few risks that must be understood, like higher competition and flat housing prices.
  • We feel this offering is attractive for investors. As an investment, the PHF IPO is rated a medium risk, high return type of offering.
  • Investors may BUY PHF with a 1 year perspective.

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 PNB Housing Finance 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.