Tag: equity research

Fundamental Thoughts – The Search for Stability

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Dear Investor,

One of the biggest challenges for investors is to find a few valuable firms out of the 5000+ listed companies on the Indian stock exchanges.

This search is not easy; it cannot be done very fast; I would say it is a multi-year process.

Many great investors have suggested and used many criteria, but one simple important one I have is STABILITY.

What does this mean and how does an investor implement this in his portfolio?

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Stability for me means a firm that:

  1. Shows a steady pattern

    on its key financials such as Revenues, EBITDA and Net Profits. This does not mean micro level steadiness such as quarter to quarter improvements. I would be more concerned about year to year steadiness, and a sense of expected things happening.

  2. Does not dilute its Equity Share Capital much

    While 10-15% dilution every 3-4 years is ok, anything much more is a worry point. All dilutions affect older investors as EPS will fall to the extent of dilution. Dilutions by Rights issue are good for shareholders as they can participate in this corporate growth. Aggressive dilutions for new acquisitions or excessive ESOPs have to be assessed for stockholder benefits. PSUs typically have Share Capitals that do not change at all over the years. Banks are an exception to this rule as they are in the business of loans and the cheapest funds are available through equity dilutions.

  3. Has Low Debt

    For a firm, an important source of funds is debt. It does not involve equity dilution. However if things are going badly for the firm, it excesses on Debt, or is unable to repay. Sectors in India like Insurance, Telecom and Infrastructure (that are at an early stage of growth) suck in cash and need a lot of debt to develop their operations and may over-leverage and have to pay high finance charges that depress profits. Check the Debt Equity ratio for your target firm. A ratio higher than 2.0 for Infrastructure firms and over 1.5 for other sectors is a Red Flag. Unless its a rare turnaround situation.

  4. No Pledging of Shares

    Promoter stability is an essential to a good equity investment. A promoter that pledges his shares exposes his firm to a situation where a fall in share price (for any reason) will trigger a sale of his shares by the lender that will accelerate the fall of prices. The possibility of this happening may be low, but the consequences are bad, so investors should check the shareholding pattern of a firm before investing.

Remember as an investor, the advantage you have is you can walk away from a share investment if it does not meet your criteria. There are many fish in the sea. And Stability is an important concept in my search for great investment ideas.

Hope you liked the idea !!

Happy investing,

Punit Jain

Founder, JainMatrix Investments

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Godrej Properties – A Towering Success

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  • Date: 12th Jan 2015
  • CMP: 253, PE: 28.4 times
  • Mid Cap with mkt cap 5,080 cr.
  • Advice: Medium Risk. Buy for minimum 2 year holding.

Overview:  GPL is a premium end player in housing, commercial and township real estate with a national footprint. It has a good record of projects, and a lean, asset light and productive business model. Revenues, EBITDA and Net Profit have grown by 37%, 25% and 16% CAGR over the last 6 years.

Why Buy Now: 1) The sector is emerging from some poor sentiment and is likely to benefit from economic revival. 2) GPL is a sector leader in terms of transparency, low debt and an asset light model. 3) There are signs of business acceleration at GPL which will be visible over the next two years. 4) GPL is currently at low historical valuations, and a likely mean reversion also points to a share appreciation

Godrej Properties – Description and Profile

  • Godrej Properties Limited (GPL) is a Mumbai based real estate firm and part of the Godrej Group.
  • Established in 1990, GPL had FY2014 revenues of Rs 1254 crore and profits Rs 154 cr.
  • It is developing residential, commercial and township projects across 9.3m sq.m. (100 m sqft.) in 12 cities.
  • Leaders are Adi Godrej (Chairman) and Pirojsha Godrej, MD & CEO.
  • It has 601 employees, an increase of 40% in FY14.
  • GPL has an asset light and capital efficient development model. It owns only 15% of the land it is developing, and partners with land owners by sharing in either revenues, profits or the constructed area, in a JV model.
  • In its commercial portfolio, it builds office space catering to blue-chip Indian and international companies and IT parks catering to the requirements of IT/ITES companies and retail space.
JainMatrix Investments

Fig 1 – GPL operations and Bookings, Source: GPL website (click on image to expand)

  • ICRA has upgraded long-term rating of GPL to AA- from A+.
  • Shareholding pattern in percentage is Promoter 75, MFs/DII 1.5, FIIs 11.5, Individuals 8.1, Corporates 3.1 and Others 0.8

Business Strategy

  • The GPL strategy is detailed in Fig 2, with which they have created a unique business model. Land ownership is mostly with partners, so operations are asset light.
  • GPL carries out project level equity dilution to mitigate risk and remain capital efficient.
  • Outsourcing of architecture and construction to good vendors ensures a lean structure and operations.
  • The strong Godrej brand is utilized and extended by GPL. The Corporate Governance is strong too.
Godrej Properties, JainMatrix Investments

Fig 2 – Business Strategy, Source: GPL website

  • The CII – Sohrabji Godrej Green Business Centre (a group company) has expertise in offering advisory services to the industry in the areas of green buildings, energy efficiency, water management, environment management, renewable energy, green business incubation and climate change activities.
  • GPL is also tasked with developing the large land bank of the Godrej group. They are among the biggest land owners in Mumbai.

Recent Events and Awards

  • GPL’s blended average selling price of real estate all India in Q4FY14 was Rs 8000 psf.
  • Business acceleration: GPL has started 18 projects in the last 10 quarters with 23.8m sqft. saleable area. In Q4FY14, it saw the highest ever sales in a single quarter – of over Rs 1,000 cr. Further, GPL may launch 15-16 residential projects in FY15, a good acceleration.
  • GPL successfully concluded a rights issue in Aug 2013 to raise Rs 700 cr. It issued 8 shares for every 29 shares held by shareholders at Rs 325 apiece, a discount of about 30% to the then market price.
  • GPL is the first real estate company in India to have ISO certification.
  • They have received over 50 awards received in the past 5 years. The Godrej Garden City project of GPL is one of only two projects in India and 16 worldwide to be chosen by The Clinton Foundation to partner with them in the goal of achieving climate positive development.
  • Great Places To Work – GPL was ranked 1st in the Real Estate and Construction sector in 2014; Ranked amongst top 25 companies to work for in India for the second consecutive year in 2014; The Aon Hewitt Employee Engagement Study measured that the GPL employee engagement score increased to 81% in 2013, from 79% in 2012 and 67% in 2011.
  • GPL has entered into an agreement with a land owner to develop an affordable housing project at Badlapur, near Mumbai. The project will have 1.3 million sq ft of saleable area.

Industry Notes

  • Real estate sector plays a crucial role in the Indian economy, contributing to 5-6% of the country’s Gross Domestic Product (GDP). It is the second largest employment generating sector after agriculture.
  • Apart from generating direct employment it also stimulates the demand in over 250 ancillary industries such as cement, steel, paint, brick, building materials, furniture, consumer durables, fittings, etc.
  • Rapid urbanization, positive demographics, growing nuclear families, infrastructure development, rising income levels and growing housing demand so far have driven real estate development in India.
  • There will be a shortage of 7.55 cr. residential units by 2014 end (CRISIL). Commercial demand is highly correlated to the GDP of the country, with recent falls in growth adversely affecting demand.
  • In current Industry scenario, the decline in demand is due to deteriorating macro-economic factors such as increasing prices, and recent regulatory changes (pertaining to development control rules), have led to prolonged period of lull for the sector.
  • Despite these headwinds, the $70-75 billion Indian real estate market size is expected to touch $180 b by 2020, while FDI in the sector is expected to increase to $25 b in 10 years from present $4 b.
  • GPL is fourth ranked of 26 listed Real Estate – Construction & Contracting firms (on NSE) by market cap. Further, its market cap gives it a 5% share of this universe. (Note – this does not include Civil and Housing focused Construction and Contracting firms, and also unlisted firms).
  • Budget 2014: the govt. announced relaxed norms for FDI in real estate, which will give a huge boost to housing projects. The Centre eased criteria for FDI by reducing the minimum size of projects from 50k sq. m. to 20k sq. m. and investment in projects from US$ 10m to US$ 5m (Rs 30 cr.)
  • The budget also allowed (tax) pass-through status to real estate investment trusts (REITs). REITs allow small investors to own a share in big expensive commercial properties. This is expected to drive substantial investment demand into commercial property.
  • The industry is overall poorly regulated and there are few norms around housing project launch, sale and execution by developers. Bank funding for developers has been a challenge, due to poor loans performance (by the sector) in the past. Hence debt costs are higher for developers.
  • The Real Estate Regulation and Development Bill, 2013 aims to bring in a high level of transparency in real estate transactions and projects in India. It proposes setting up a Real Estate regulator to cover commercial and residential real estate segment. It is being piloted by the ministry of GoI.

Stock Valuation, Performance and Returns

JainMatrix Investments, Godrej Properties

Fig 3 – Pricing History

  • Pricing history – Since the IPO in Jan 2010 at Rs 245 (adjusted for a split), the share price of GPL rose to a peak of 393 in July 2011. It then fell to a bottom of 154 in Jan 2014, helped along by a rights issue in Aug 2013 and share split in Nov 2013, before rising sharply to today’s CMP of 253. See Fig 3.
  • Investor returns for the IPO investors is +1.0% of IRR over 5 years. However IPO investors who added shares in the Rights issue of 2013 have a slightly better IRR.
  • But the GPL financials show a fine growth with Revenues, EBITDA and Net Profit growing by 37%, 25% and 16% CAGR over the last 6 years. EPS has also grown by 17% in this period. This lower growth is explained by the dilutions and capital raising undertaken to fund the growth. See Fig 4.
  • Annual revenues peak in Q4. As volumes increased, the Operating margin has shown a dip. But even as the EPS has increased, the Debt / Equity ratio has been in control, even improving.
JainMatrix Investments

Fig 4 – Quarterly Financials

JainMatrix Investments

Fig 5 – Cash Flow and Financial Ratios

  • FCF (Free Cash Flows) has mostly been negative except in the FY13. See Fig 5. This business definitely needs cash up front and is a long gestation projects business.
  • The Price and PE Chart Fig 6, shows that the PE has historically been in a range of 25-65 times over the last 6 years. This area can be broken into 4 quartiles.
  • Today the valuations for GPL are attractive as the PE is in the lowest quartile. The PE (TTM) is 28.4 times.
JainMatrix Investments

Fig 6 – Price and PE Chart

JainMatrix Investments

Fig 7 – Price and EPS Chart

  • Price and EPS chart Fig 7, shows that inspite of some volatility in EPS, the overall trend is a rising channel with some recent acceleration.
  • The Orders Booked to Billings ratio has stayed over 2, indicating a good pipeline of Orders. Fig 8.
  • The Beta of GPL is 0.86 which shows the low volatility as compared to the indices (Reuters).
  • The company has an interest coverage ratio of around 65 times which is good.
  • ROCE and RONW are in 7.7 and 9.9 respectively, which is an average level.
  • PEG is at 1.2 – indicates it is currently fairly valued.
JainMatrix Investments

Fig 8 – Orders Booked to Billings

Peer Benchmarking and Financial Projections

Here is a benchmarking exercise of GPL with its peer companies DLF, Oberoi Realty and NBCC.

  • The PE comparison indicates relative undervaluation. The Price To Book value however is high, as its book value is low due to the asset light model.
  • GPL is also higher in terms of 3 years CAGR sales, 3 years CAGR Profit and ROE among its listed peers, which is a positive sign.
  • NBCC shows some good metrics but signs of being overvalued.
Fig 9, 10 – Peer Benchmarking and Financial projections

Fig 9, 10 – Peer Benchmarking and Financial projections

We have projected the 2 year financials for GPL.

Risks:

  • Sector risk: The Real Estate industry in India is a high risk sector due to poor land records, opaque land use conversion rules and process, and multiple development approval requirements. GPL has however reduced these risks by an asset light partnering approach.
  • Business Model risk: There is high volatility in funding and cash flows for GPL. Real Estate project investments are front ended, while revenues are back ended for the 2-4 year project life cycle. Risks here include cash flow challenges, project funding availability and high cost of unsold inventory.
  • Economy risk: Demand is dependent on GDP growth, but the economy has slowed over 3-4 years.
  • Outsourcing risk: By outsourcing the construction activities, the final product quality depends upon the vendors. Thus vendor execution standards & consistency (risk) needs constant monitoring.
  • Regulatory risk: The central government is making attempts to govern, monitor and regulate the real estate sector for project transparency, public launch requirements, complaint monitoring, delays, etc. Any new rules, regulations and compliance requirements will affect the business of GPL.
  • Competition is intense, particularly in high end residential real estate sector.

Opinion, Outlook and Recommendation

  • There will continue to be a shortage of housing from a 10 year perspective. The regulatory environment for this sector will improve over the next 2-3 years, as the new government at the center brings in reforms and improves the ease of doing business. The economic cycle in India too is recovering from a bottom of 4.6% GDP growth recently. This will have a positive effect on GPL.
  • GPL is expanding its execution capabilities and brand strength in an all India manner, by both exploiting the land assets of the Godrej group, as well as partnering with land owners for projects.
  • The asset light, and partnering with the best vendors, approach is proving to be a good strategy.
  • GPL is in the midst of a business acceleration that will be seen over the next 2-3 years.
  • GPL is a BUY. Invest now and systematically to gain from long-term outperformance.

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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. 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 Financial Expert/Advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it. Punit Jain has owned (long only) GPL since Mar 2014. JM and employees do not seek or receive remuneration in any form for any service from the firms researched. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

V-Guard Industries – Electrifying Growth

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

We first published this for Subscribers on 10 Sept 2014. The share has appreciated 38% in 3 months. Sign up for the Investment Service to get the latest valuable reports. 

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

V-Guard Industries – Profile

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

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

Product Notes

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

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

Fig 2 – V-Guard Product Revenues

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

Business Notes

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

Fig 3 – Sales Distribution

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

Business Challenges:

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

Stock Evaluation, Performance and Returns

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

Fig 4 – Quarterly Financials, by JainMatrix Investments

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

Fig 5 – Cash Flow and Dividend, by JainMatrix Investments

Price, PE and EPS, JainMatrix Investments

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

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

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Benchmarking and Financial Estimates

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

VGuard Benchmarking, JainMatrix Investments

Fig 9 – Benchmarking, by JainMatrix Investments

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

Financial Projections

We have carried out a financial projections exercise for VGI.

Fig 11 - VGuard Projections, JainMatrix Investments

Fig 11 – Financial Projections, JainMatrix Investments

Risks and Challenges

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

Overall Opinion, Outlook and Recommendation

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

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Disclosures and Disclaimer

  • This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation.
  • JM has been publishing equity research reports since Nov 2012.
  • Punit Jain has been a long term investor in VGI since Oct 2014. Other than this JM and its promoters/ employees have no financial interest in VGI and no known material conflict of interest as on date of publication of this report.
  • This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.
  • The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same.
  • Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.
  • Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.
  • Any questions should be directed to the director of JainMatrix Investments at jain@jainmatrix.com

Monte Carlo IPO – Visit here for the Short Term

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  • Price range: Rs 630-645
  • Date Dec 4th 2014 and IPO Period:  03-05 Dec
  • Industry – Textile and Apparel
  • Small Cap with 1370 cr. mkt cap
  • Advice: Buy for the short term

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Summary:

Monte Carlo Fashions is a player in woolens, apparel and home furnishings. The financial data available indicates good margins but uneven growth. The IPO valuations look reasonable compared to peers. The brand is strong. Growth plans include a thrust in South and West markets. Negatives and risks include only 3 year financial history available due to recent demerger, significant related party transactions in the supply chain, negative Free Cash flow over the last 3 years and weak Promoter group track record in terms of rewarding shareholders. BUY but with a short term perspective. 

Here is a note on Monte Carlo Fashions Ltd (MCF) IPO.

Monte Carlo Fashions – Description and Profile

  • Monte Carlo Fashions (MCF) is an apparel firm based out of Ludhiana, Punjab.
  • The FY14 revenues were Rs 519 crores and profits 55 cr.
  • It commands under 1% market share in Indian apparel, but has a strong and premium brand, ‘Monte Carlo’ established over 30 years. We can see the product segments in Fig 1a.
Monte Carlo Fashions IPO, JainMatrix Investments

Fig 1 – Product Segments and Shareholding Pattern

  •  Product distribution is through 196 ‘Monte Carlo Exclusive Brand Outlets’ and 1300 Multi Brand Outlets (MBO). Of these 196, 18 are owned and operated by MCF, and the rest run by franchisees.
  • The shareholding pattern post IPO is displayed in Fig 1b.

IPO Offering Outline and Valuations:

  • The offer is of 54.33 lakh shares in price range Rs 630-645 available from Dec 03-05.
  • This 25% dilution will raise Rs 350 cr. at upper end, and value the firm at 1400 cr market cap.
  • The offering is at a PE range of 24.8-25.3 times FY14 earnings. This compares favourably with:
PEs

Fig 2 – PE range of Peers

MCF – Financial snapshot

  • Only 3 years data is available as MCF was demerged from group firm Oswal Woollen Mills Ltd. on 1st April 2011.
  • FY 2013 was a flattish year for MCF, followed by a good year of FY14. See Fig 3.
Monte Carlo IPO, JainMatrix Investments

Fig 3 – Monte Carlo Fashions Financials

  • The leadership team is Jawahar Lal Oswal, CMD and Sandeep Jain, ED.

Cash Flow

  • The Free Cash flow has not been positive for MCF in the last 3 years.
Monte Carlo IPO, JainMatrix Investments

Fig 4 – Free Cash Flow

Why Is Monte Carlo Fashions going for an IPO?

The objects of the IPO are:

  • Partial exit of Samara Capita, a Mauritius based Private Equity firm, that will reduce shareholding from 18.5% to 10.9%
  • Reduction in Promoter holding from 81% to 63.6% that will comply with SEBI rules for Promoter holding below 75%.
  • Visibility and marketing for the Monte Carlo brand and firm.

Industry

  • The Indian Textiles Industry accounts for 4% of GDP, 14% of industrial production; it directly employs 3.5 cr. people (highest after agriculture) and accounts for 17% of all exports.
  • The size of the domestic readymade apparel industry is expected to double within 5 years due to prosperity, better government policy, fashion and brand trends and consumer expectations.
  • Government Policy Support: The Indian government supports the textile industry by investment promoting schemes like TUFS (Technological Upgradation Fund Scheme) and SITP (Scheme for Integrated Textile Parks).
  • MCF too has availed the low interest TUFS loans for its funding needs.

Key Strengths of MCF and IPO offer

  • Strong Monte Carlo brand. MCF was spun off from the older firm, Oswal Woollen Mills. Brand strengths in woolens and warm clothing, and a higher end / premium positioning.
  • Strong presence in North and Eastern parts of India.
  • It rides the key investment theme of “consumption” that is reflected in high valuations for firms from apparel, food and FMCG sectors.
  • MCF has already raised Rs 105 cr. through issue of shares to anchor investors – Aditya Birla Private Equity Trust, DB International (Asia) and Birla Sunlife Trustee Company Pvt Ltd.
  • There is cash on the books of MCF and even the current loans taken are concessional/ low interest govt TUFS loans.
  • It has an asset-light model by outsourcing the apparel production to third-party manufacturers.

Key Weaknesses/ Issues/ Challenges of MCF and IPO offer

  • Weak presence in South and West regions of India. Here MCF plans to widen distribution and push the non-woolen product range like cotton and blended apparel, kids wear and home furnishings.
  • Negative Free Cash flow over the last 3 years. It is investing in its operations.
  • There is only a short financial history of MCF, not enough is known of this company.
  • This business group has not established a track record for rewarding shareholders. Group companies Nahar Spinning and Punjab Woolcoombers (listed in 2007) are today trading below their IPO prices while one, Nahar Capital (listed in 2008), has barely made it to the IPO price level. Another, Nahar International (earlier known as Punjab Concast) is no longer traded on the bourse.
  • High proportion of related party transactions. Complex web of group companies are part of MCF’s supply chain in terms of raw materials, apparel manufacturing, etc. This is seen as a financial uncertainty in terms of related party transactions and potentially notional / temporary profits.

Opinion, Outlook and Recommendation

  • The organisation is rated average in terms of overall offering.
  • The IPO was subscribed 61% of its entire offering till EOD 3rd Dec. This included Institutions 74% and Retail 79%. This is a good sign, and the firm may be able to ride the very positive current investor sentiments and elevated index levels to generate interest.
  • Retail investors may apply for the MCF IPO but should not hold for the long term.

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. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. JM and its promoters/ employees have no financial interest in Monte Carlo Fashions and no known material conflict of interest as on date of publication of this report. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Balkrishna Industries – Nov 2014

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Dear Investor,

I’m quite proud of my Sept 2013 report on Balkrishna Industries. (link) We found this interesting Small Cap stock early. The share price was Rs 238. It had all the ingredients we look for in our investment research.

Small cap. Undervalued. Unknown. In the right sector. Good management.

We made this report public on this very website.

On 12 Nov 2014, this share touched Rs 855.

And we were staring at a 259% gain in a mere 14 months.

 

As usual, Mr Market threw in a googly.

On 13 Nov, Balkrishna came out with its Q2FY15 results. Next day, the share plunged by 16%. One day later it dropped further. A total of 29% wiped out in 2 days.

Investors are nervous about this firm. Perhaps even panicking. Naturally. Who likes to lose 30% of one’s investment in 3 days? So should one exit quickly? Or buy more of Balkrishna? Or just do nothing?

Subscribers of JainMatrix Investments aren’t worried. They’ve just got our follow up report on Balkrishna Industries. They know what to do.

 

JainMatrix Investments is today one of India’s best Equity advisory Investment Services in terms of quality of research, track record and reasonable costs.

JainMatrix Investments is the essential service for the Indian equity investor. 

 

Subscribe now to navigate the profitable but tricky Indian equity markets.

But hurry. There are just a few more subscriptions available. Join this select group of informed investors. 

 

This is an opportunity for you.

Punit Jain

Founder, JainMatrix Investments

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High Risk and High Return in Equity

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Here is a short article that re-examines the myth of High Risk and High Return in Equity.

What is Risk?

Risk defined by Investopedia is “The chance that an investment’s actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment”.

One of the rules that is commonly believed is that ‘higher risk needs to be taken in order to earn higher returns’. This is intuitively obvious. The entrepreneur invests in a new business knowing that there is a probability of failure. The Venture Capitalist invests in a portfolio of businesses knowing that some may give him 30X returns and others may fail.

But lets review this in the context of Equity investments.

Asset Classes

In investing, this risk-return rule is true across asset classes. The following graphic Fig 1 illustrates the Risk and Return rankings across different asset classes. Fig 1.

JainMatrix Investments

Fig 1 – Asset Classes (click to enlarge) JainMatrix Investments

  1. Here we can see that Cash is the safest asset.
  2. FDs come next, as they are of fixed duration and fixed returns, guaranteed by a Bank.
  3. Next come Debt, Bonds, and Endowment Life insurance. Insurance of course is a very high gestation investment product.
  4. Debt and Bond MFs are products packaged by the Mutual Fund industry into Units.
  5. Gold and Gold ETFs are another investment option.
  6. Real estate may come next. It of course varies by location, and commercial/ residential.
  7. Equity ETFs and Equity MFs.
  8. Direct equity is the highest risk investment product. It also provides potentially the highest returns of these asset classes.

Note that these are strictly the author’s personal views of the most likely scenarios, and these may vary under different circumstances. The graphic Fig 1 is only a conceptual map, and indicates relative values.

Risk in Equity

Direct Equity as an asset class has two types of Risk:

  1. Systemic risk is applicable across all sectors. A significant political event, for example, could affect your entire equity portfolio. It is virtually impossible to protect yourself against this type of risk.
  2. Unsystematic risk is sometimes referred to as “specific risk”. This kind of risk affects a few of the assets. An example is news of a sudden strike by employees, that can only affect a specific stock. Diversification is the only way to protect yourself from unsystematic risk.

Even equity can be split into equity classes, where the risk profiles are different, see Fig 2. Speaking in general, Large Caps are most stable, and have lower risk, next are Mid-caps and next Small caps.

JainMatrix Investments, Equity Risk

Fig 2 – Equity Risk (click to enlarge) JainMatrix Investments

The Risk-Return Relationship

However, once we look at individual stocks for investing, higher risk may not give higher returns.

  1. The high performing firms in the stock exchange over longer periods are those that are more predictable in terms of growth, costs, investments, new projects and brand strength.
    • Example – HDFC Bank over the period of 2009-13 has given fairly predictable 30% YoY growth in profits. As a result investors gave it a superior valuation and it became the bank with the highest market capitalization, even though it was smaller than peers on other parameters.
  2. Sharp swings for a firm from profit to loss and the reverse too are not seen positively, especially if these happen unexpectedly.
  3. The ability of growth companies to execute on new initiatives is very important. Such firms need to launch in new markets, create new products or set up new manufacturing plants. Here the track record of such firms in these initiatives is important.
  4. Monopolies are seen as very positive situations for firms.
    • Example – ITC has for several decades dominated the Indian cigarette industry with 75-80% market share. This is a profitable and steady growth industry and so the ITC share has performed well over 10-15 years.
  5. Typically the fundamentals based approach to the stock market involves projecting financials for a company over 1-3 years, assigning target prices and identifying high potential investments.
  6. Warren Buffet has taken predictability to the extreme by investing in a bunch of consumer companies (Coca Cola, Procter & Gamble, Kraft Foods, Wal Mart, etc.) where these products are strong brands that are daily consumption habits and so growth is quite predictable over decades rather than years.

The Role of the Equity Researcher

It is the task of an equity researcher to identify, prioritize and assess the risks associated with an investment in a firm. Thus a good equity researcher is actually able to lower the ‘specific risk’ of making an investment, identify potential situations of a company’s future and increase the chance of profitable investments.

JainMatrix Investments approach to Investing

  1. The JainMatrix Investments approach to investing is to start with a top down approach to first identify the attractive sectors that are likely to outperform the next 1-3 year perspective.
  2. Next we drill down to the company level to analyse the fundamentals of firms and identify outstanding Large, Mid and Small cap firms. This research is published periodically.
  3. From this universe of good firms, a few are hand-picked and sorted into Model portfolios. By aligning the portfolios with their risk appetites, we help investors invest better.

Large Cap Model Portfolio

  • The objective of the LCMP is to outperform the Sensex and Nifty by 5-10%.
  • It consists of 7 large cap shares which are the current or future leaders from attractive sectors of the Indian economy.
  • This is a low risk portfolio.

Mid and Small Cap Model Portfolio

  • The objective of the MSCMP is to outperform the Mid and Small Cap indices by large margins.
  • It consists of 7 mid and small cap firms that are emerging out-performers from identified 3-5 high potential sectors.
  • This is a medium to high risk portfolio.

The performance of these portfolios over the last 20-21 months has been excellent –

JainMatrix Investments Model Portfolios

Fig 3 – JainMatrix Investments Model Portfolios

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Shemaroo Entertainment IPO – Skip this movie

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_____________________________________________________________________________

  • Price range: Rs 155 – 170
  • Date Sept 17, 2014 and IPO Period:  16-18 Sept 2014
  • Industry – Media & Entertainment
  • Small Cap with 457 cr. mkt cap
  • Advice: Avoid IPO

logo

 

Summary:

  • Shemaroo is engaged in entertainment media content aggregation and distribution.
  • It has a good library consisting of more than 2,900 titles.
  • While there is Growth in overall financials, we are concerned about rising debts, negative cash flows and a stressed balance sheet.
  • Funds from the IPO will be aimed more at working capital rather than growth opportunities.
  • Avoid this IPO. It may be better to revisit this company after a few quarters to see performance before investing. 

Here is a note on Shemaroo Entertainment Ltd (Shemaroo) IPO.

IPO Highlights

  • Shemaroo plans to raise 120-132 cr from the IPO market through an issue of new shares at a price range of 155 – 170. There are 77.4 lakh shares on offer. Period of offer is 16 – 18th Sept 2014.
  • Of these 50% is allocated to Institutions, 15% to non-Institutions and 35% to retail.
  • There is a 10% discount for retail investors, so their price band is Rs 139.5-153/ share.
  • Objects of the fundraising – Shemaroo will use 106 cr. for working capital and the rest for general corporate purposes. It plans to use 80 cr. in FY15 and Rs 26 cr. in FY16.
  • Valuation – the P/E range is 11.3-12.4 times its FY14 EPS, at the Lower-Upper of IPO price range.
  • Price to Book Value is at 1.8-1.9 times for FY14, which is fair.
  • Subscribers may bid for a minimum 85 shares or thereafter in multiples of 85 shares.
  • News – the company has raised 36 cr. from two anchor investors — Birla Mutual Fund and HDFC MF. Anchor investors were allotted 21.17 lakh shares at Rs 170 apiece.

Introduction

  • Shemaroo is a Mumbai based firm engaged in media content aggregation and distribution. It started as a book circulating library in 1962, then Video cassettes and DVDs, and has evolved into its current form over the last 52 years.
  • Revenues in FY14 were Rs 266 Crores with a net profit of 27.1 Cr.
  • It has a content library of 2,900 titles with segments like Hindi Film Titles, Regional Film Titles and Special Interest Contents such as Kids documentary, devotional contents, etc. See Fig 1. This content is distributed and sold over TV, mobile, Internet, DTH, home entertainment and other media.
  • The leadership team is Buddhichand Maroo – Chairman and Raman Maroo – MD.
  • It has recently become a channel partner for Google’s You Tube and manages 32 channels.
JainMatrix Investments

Fig 1 – Content Library, JainMatrix Investments

Business and Industry Notes

  • Shemaroo’s Media content library creation and distribution processes are mapped in Fig 2.
JainMatrix Investments

Fig 2 – Content Business Processes, JainMatrix Investments (source prospectus)

  • Shemaroo is engaged in aggregation, Production and Co-Production of Cinematograph Films, Dramas etc., and subsequently exploiting and distributing rights of Films, Dramas across the world through various medium such as television licensing, DVD and VCD release.
  • The company’s activities spans across content acquisition, value addition to content and content distribution. Apart from home video the company is providing content for partners such as –
    • Airtel digital television with an interactive devotional service, namely ‘iDarshan’
    • British Telecom’s (UK) IPTV service BT Vision for their South-Asian content pack and
    • Tata DOCOMO’s video platform for 3G services.
  • Industry Notes: The Indian Media and Entertainment (M&E) industry is one of the fastest growing industries in the country. The size of the Indian M&E sector increased to almost Rs 82,050 crore in 2012 from about Rs 72,840 crore in 2011, representing year-on-year growth of 12.6%.
  • This growth was driven by cable TV digitization, growth of regional media, continued strength of the filmed entertainment sector, fast increasing new media businesses and new levels of transparency.
  • The industry is projected to grow at a CAGR of 15% between 2012-17 to reach INR 1,66,100 crores.
  • The recent 74% FDI in broadcast may be a game-changer for M&E sector. Fig 3.
JainMatrix Investments

Fig 3 – M&E sector revenues in India, JainMatrix Investments   

Financials

  • The financials are described in Fig 4. We can see that it has grown rapidly in the last 5 years.
  • Revenues and EBITDA have grown 27% and 36% CAGR over last 5 years. But FY10 was a poor year for profits. In last 3 years Revenues, EBITDA, Profits and EPS are up by 19%, 13%, 12% & 14% CAGR.
  • The margins are fair with Operating and Profit margins at 24.7% and 10.2% for FY14.
  • The Cash Flow diagram Fig 5 shows that in the last two years, FCF has turned negative.
  • The company has been paying a token dividend of 5 percent since FY 2012.
JainMatrix Investments

Fig 4 – Financials, JainMatrix Investments

JainMatrix Investments

Fig 5 – Free Cash Flow, JainMatrix Investments  

Positives for the IPO and Shemaroo

  • M&E is one of the fastest growing industries in India. Demand is likely grow fast in the near future.
  • They say that in modern society, ‘Content is King’, and Shemaroo is a leader in content with its vast library of digital assets.
  • If Shemaroo is able to align with the right platforms and distribute its content well while keeping costs in check, there is a big demand for the uniquely Indian content with Indians, NRIs and Indophiles globally.
  • Shemaroo has grown at a good rate over the last 3-5 years.
  • Shemaroo’s tie up with Google Inc.’s You Tube puts it at the cutting edge of new technologies and quality distribution partners.
  • Their films like ‘Omkara’ and ‘Anuranan’ were awarded National Film Awards; the ‘Baghban’ DVD made by the company won the ‘Best DVD Creation for Telecine and Authoring Excellence’ award at the DVD Disc – Tech Awards.
  • Shemaroo is a good old Indian media brand and the firm has a fair reputation in the industry.
  • The equity market is doing well, and investor sentiments for IPOs are positive after the success of recent offering like Wonderla Holidays, Snowman Logistics and Sharda Cropchem.
  • Retail investors have been offered a 10% discount on the issue price.

Risks and Challenges

IP and legal issues:

  • The M&E industry has a lot of piracy and IP related challenges. Film related piracy is rampant with grey markets releasing movies very quickly after official launches. Numerous websites, and Peer-to-Peer content sharing sites like the Pirate Bay are rapidly distributing movies without charge, undermining the assets.
  • Shemaroo is an applicant for several trademarks, copyrights, and design patent applications, which are pending registration. A delay in, or failure to obtain, registration may result in company’s inability to adequately defend the Intellectual property rights (IPRs).
  • The legal and policing system are important for protection of Shemaroo assets. The legal system in India is slow and still has antiquated laws. This is a challenge for Shemaroo.
  • Criminal proceedings are pending against the Company. Any adverse order or direction in these cases could have adverse an impact on Company’s business and reputation.

Content Challenges: 

  • The revenues and profitability are linked to the growth and exploitation of the Content Library. Any failure to source new content could adversely affect profitability and business growth.
  • Every distribution platform /channel has to be evaluated for costs, revenues and security. Many platforms are avoided after such evaluation. Shemaroo can be adversely affected by rapid technological changes with respect to distribution platform.
  • Intensified competition may result in content cost escalation which may restrict company’s ability to access content at favorable terms. Direct competition in India is high from Hungama Digital and Moser Baer, which will limit Shemaroo’s ability to price its subscription higher.
  • Potential entry of Netflix into India. They are a very successful subscription model internet content provider successful in USA and elsewhere.
  • Changing consumer tastes can have the negative impact on the business of the company.

Financial Issues: 

  • Shemaroo’s inventories have risen to over ₹200 crore in 2013-14, which is a burden on the balance sheet. The piling inventories and high trade receivables have necessitated higher working-capital requirements for content acquisition.
  • Shemaroo has availed secured working capital / term loans of 101 cr and unsecured loans for 91 cr. This is a visible stress on the balance sheet of the company. Consolidated finance costs have ballooned to Rs 19.2 crores in FY14. This is high.
  • Shemaroo has not shared the revenue break up segments for last few years or growth rates of the same, in the Red Herring Prospectus.

Benchmarking

JainMatrix Investments

Fig 6 – Benchmarking, JainMatrix Investments

Shemaroo does not stand out from the peer group, and actually looks like it has low valuations.

Overall Opinion

  • We like the M&E industry and its potential, especially in new media. However the challenges here are tough with piracy, archaic laws and difficult implementation.
  • Shemaroo appears to have weak financials and balance sheet challenges.
  • Complexity of evaluating content assets and future costs and revenues of library.
  • Too many IP and legal issues as detailed earlier.
  • The IPO has been 0.28 times subscribed on the first day itself, mostly by Retail. This is not a very clear signal or sign of popularity.
  • Avoid this IPO.

 

Instead invest in the secondary market, where better information is available, with JainMatrix Investments that offers a high quality subscription based Investment service.

JainMatrix Knowledge Base:

See other useful reports. We have had wonderful success in our IPO/ FPO/ NFO reports.

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  • Visit the SUBSCRIBE page to find how you can get more. 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. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com