A View on the Sensex

Date: 28th Nov 2021

The Sensex Returns V/S GDP Growth chart

Chart Explanation

  1. Chart Notes: 2021SF is 2021 So Far. CY is calendar year. Also a positive ‘High-Low Return’ number indicates that intra-year high was after intra-year low and vice-versa. Data Sources: wikipedia, Bloomberg, Credit Suisse.
  2. The CY Sensex returns reflect key events – 1999 dot com up; 2000 crash, 2008 crash etc.
  3. The average CY Sensex return over 20 year period is 18%.
  4. The High Low Return is the intra CY volatility. The GDP real growth line largely runs similar to Sensex return while being mostly positive and smoothened out. Except 2020.

Key Observations

  1. The CY Sensex return over 2018-2021SF isn’t very high. It looks like just average returns. The volatility is high with higher highs and lower lows. GDP growth has fallen in 2020 and now looks in recovery mode.
  2. It does appear that the GDP fall is not reflected in the Sensex returns.

Conclusion

  • Sensex returns have been low to average, contrary to public opinion. Volatility has been high.
  • A good GDP recovery in CY21-23 can raise Sensex returns to above average levels.

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. Punit Jain has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

New into Equity Markets? Consider the Large Cap Portfolio from JainMatrix

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  • Its a concentrated 7 company portfolio of Blue Chip, well known and well respected large caps
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DISCLAIMER

This service and related documents have been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. These documents are 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. 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 (SEBI Registration No. INH200002747) 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.

Retirement Planning: a Poll and some Radical Thoughts

Dear Reader,

I came across this interesting article recently, and would like to share it with you.

The inglorious goal of doing nothing – LiveMint, April 21st 2015. 

In short the article describes a person who retired at 40 and is living in a remote location and doing nothing – just enjoying his peaceful retired life. The author proceeds to comment on this and sees it as a poor choice in life.

As an analyst, I would say that …. Its a choice the person in Goa has made, and the best he could do. I may or may not make the same choices, and I may or may not be able to achieve as much as this person at 40.

Which moves me to a question for my readers:

What is your ideal retirement dream?

In fact, I will ask you to take a Poll below and let me know what your dream is …..  Remember, you can answer this Poll only once.

Thank you in advance for your answer.

The Importance of Investing

The point of my exercise is to understand you, my reader. It is also related to this important thing in life called MONEY. Our entire work life is devoted to earning it.

There’s an almost equally important aspect of our life, often neglected, called INVESTING. Most people realize its importance, but are not able to act on it. Investing is a wide term, and there are a number of asset classes, see this chart.

Untitled

Within Direct Equity there are a few options, detailed below:

Equity Risk

My opinion on Retirement Planning:

  • Its not important to retire. Instead its important to be able to make work and lifestyle choices where you are free from financial pressures.
  • Free yourself from financial pressures by building your own financial assets.
  • Assets owned by you depend not just on income earned, but also on your making the right investments.
  • Equity as an asset class is highly recommended for long term wealth and asset building, and retirement planning.

Sign up with JainMatrix Investments as a subscriber. Build and protect your capital through equities, and let the money set you free to pursue a passion, a hobby or a peaceful life.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

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

IT sector stocks – The Elephant can Dance V2

Date: 24th May 2012

This update of the April 19 article by JainMatrix Investments includes FY12 results of all three firms.

A comparison of top Indian IT stocks, Infosys, TCS and Wipro throws up some interesting insights. Infosys, the long time leader and IT bellwether, is losing its pace of growth. It is still ahead in terms of Valuations and Margins. However, TCS has handled the difficult business environment the better, and has accelerated EPS in the last 3 years.  The Elephant can Dance – Hail the new leader – TCS

Query

One of the Subscribers on JainMatrix Investments raised a query – here it is:

Hi Punit, I have a question about the IT sector stocks. I own Infy, TCS and Wipro. How can I evaluate which one is better? From the share price trend over few years, TCS has performed the best. What are the other parameters to check and which is best according to you? I would ideally want to sell two of them and have only one, so not sure which is the best. Regards, S.

I would like to dedicate this post to answering this question.

Introduction

Of these three, Infosys is of course the bellwether – the traditional indicator of the health of the sector. TCS in the 8 years since the Aug 2004 IPO has shown healthy growth, and finally Wipro, the soaps to software conglomerate is also a top player. Today’s Market Prices of these are: Infosys 2380, TCS 1221 and Wipro 392

1.     Five year snapshot of key financials

Let us first look at a 5-year snapshot of financials of the three. This can give us good visual feel of the relative and absolute financials of the three.

Infosys: 

Infosys Financials - JainMatrix Investments

Infosys Financials – JainMatrix Investments – Click to enlarge

TCS:

TCS Financials - JainMatrix Investments

TCS Financials – JainMatrix Investments

Wipro:

Wipro Financials - JainMatrix Investments

Wipro Financials – JainMatrix Investments

2.    Detailed Comparison

Next we will look at a detailed comparison of the firms in terms of valuation, growth characteristics, debt, shareholding pattern, etc.

See LINK (thanks to Edelweiss Financials for the excellent data). We can see from this analysis that on 5 important parameters:

  • Valuation – Wipro is now the cheapest, TCS most expensive
  • Growth – TCS is better of our three
  • Management effectiveness – TCS clearly leads
  • Solvency and Margins – Infosys clearly leads
  • Market performance – TCS clearly leads of our three

A copy of this data is available below – dated 24th May ’12.

IT Sector Performance Snapshot - JainMatrix Investments

IT Sector Performance Snapshot – JainMatrix Investments

3.     Key Trends in Price and Earnings 

Finally, let us look at a 5-year snapshot of Price, P/E and EPS of the three stocks, from my charts.

The Infy Price and PE Chart indicates that the PE has averaged 21 in the last 5 years. After the recent results, it has fallen sharply. Currently it is at a discount to this average.

Infosys:

Infosys Price and PE Chart - JainMatrix Investments

Infosys Price and PE Chart – JainMatrix Investments

Infosys Price and EPS - JainMatrix Investments

Infosys Price and EPS – JainMatrix Investments

TCS:

TCS Price and PE - JainMatrix Investments

TCS Price and PE – JainMatrix Investments

TCS Price and EPS - JainMatrix Investments

TCS Price and EPS – JainMatrix Investments

Wipro:

Wipro Price and PE Chart - JainMatrix Investments

Wipro Price and PE Chart – JainMatrix Investments

Wipro Price and EPS Chart - JainMatrix Investments

Wipro Price and EPS Chart – JainMatrix Investments

The Decision Table:

Finally, the decision is made by comparing the 5-year CAGR growth on key parameters:

IT Sector Decision Table - JainMatrix Investments

IT Sector Decision Table – JainMatrix Investments

Notes: PE is as on 24th May

Conclusions:

1.      The Elephant can Dance – Hail the new leader – TCS

  • The largest player, TCS, leads on Growth, Management Effectiveness and Market Performance. In the Decision Table, it leads on EPS, Revenues, EBITDA and PAT. Market Price and Valuations reflect this leadership.
  • Valuations wise TCS is more expensive than Infosys, but note that the consistent leader will always command premium valuations, as Infosys had till 3 years ago.
  • The past 3 years have not been the best of times for the IT industry, but the performance from TCS should get better as the developed economies recover
  • Clarity in leadership plan and strong leaders helps in many softer aspects such as Acquisitions, new business lines and corporate aggression. TCS also scores here.

2.      Infosys remains a defensive play

  • Infosys leads on parameters like Valuations and Solvency & Margins. In the Decision Table on Valuations, it is the cheapest of the three.
  • Perhaps the superior margins that Infosys commands has clashed with poor market conditions in the developed economies.
  • It does not help that there seems to be a lack of top-notch leaders in the firm. This is a legacy issue, with the old promoters team calling the shots, rather than proven professionals.
  • Infosys does not have a good record in acquisitions.

3.      Wipro is recovering from a couple of top management changes

Wipro has not yet shown clear directions and results. It is neither a growth not a margins leader. This may change soon, but until then, it will be rated third of these three.

Dear S,

Based on the analysis done, I would put my money on TCS.

My recommendation is to transition smoothly, so try to switch from others to TCS over a period of 3-6 months, selling others monthly and simultaneously buying TCS.

Warm regards and profitable investing,

Punit Jain

JainMatrix Knowledge Base:

See other useful reports in related sectors

eClerx Services, A Profitable Process – Click LINK

………………………………………………………………………………………………………..

Disclosure and Notes: 1) It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it. 2) The above financial investigation is not comprehensive, but a short and sufficient study.

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/

IT sector stocks – The Elephant can Dance

Viewers may prefer to see the latest May 2012 version of this report at LINK

Date: 19th April 2012

One of the Subscribers on JainMatrix Investments raised a query – here it is:

Hi Punit, I have a question about the IT sector stocks. I own Infy, TCS and Wipro. How can I evaluate which one is better? From the share price trend over few years, TCS has performed the best. What are the other parameters to check and which is best according to you? I would ideally want to sell two of them and have only one, so not sure which is the best. Regards, S.

I would like to dedicate this post to answering this question.

Introduction

Of these three, Infosys is of course the bellwether – the traditional indicator of the health of the sector. TCS in the 8 years since the Aug 2004 IPO has shown healthy growth, and finally Wipro, the soaps to software conglomerate is also a top player. Today’s Market Prices of these are: Infosys 2380, TCS 1091 and Wipro 421

1.     5-year snapshot of key financials

Let us first look at a 5-year snapshot of financials of the three. This can give us good visual feel of the relative and absolute financials of the three. (Note that as of today we do not have Q4 FY12 data for TCS and Wipro, so I have only included the data till Q3 FY12 for all shares, for the comparison)

Infosys: 

Infosys Financials, JainMatrix Investments

Fig1 – Infosys Financials, Click on image to enlarge

TCS:

TCS Financials, JainMatrix Investments

Fig 2 – TCS Financials, Click on image to enlarge

Wipro:

Wipro Financials, JainMatrix Investments

Fig 3 – Wipro Financials, Click on image to enlarge

2. Detailed Comparison

Next we will look at a detailed comparison of the firms in terms of valuation, growth characteristics, debt, shareholding pattern, etc.

See LINK (thanks to Edelweiss Financials for the excellent data). We can see from this analysis that on 5 important parameters:

  • Valuation – Infosys clearly leads
  • Growth – TCS is better of our three
  • Management effectiveness – TCS clearly leads
  • Solvency and Margins – Infosys clearly leads
  • Market performance – TCS clearly leads of our three

A copy of this data is available below – dated 20 April ’12.

Performance snapshot, JainMatrix Investments

Fig 4 – Performance snapshot, (Edelweiss), Click on image to enlarge

3.     Key Trends in Price, P/E and EPS

Finally, let us look at a 5-year snapshot of Price, P/E and EPS of the 3 stocks, in my charts.  (As of today, we do not have the Q4 FY12 data for TCS and Wipro, so I have projected approximately the EPS for Q4 ’12. This data may change in a few weeks).

Infosys:

Infosys Price and PE, JainMatrix Investments

Fig 5 – Infosys Price and PE, JainMatrix Investments

Infosys Price and EPS, JainMatrix Investments

Fig 6 – Infosys Price and EPS, Click on image to enlarge

TCS:

TCS Price and PE, JainMatrix Investments

Fig 7 – TCS Price and PE

TCS Price and EPS, JainMatrix Investments

Fig 8 – TCS Price and EPS

Wipro:

Wipro Price and PE, JainMatrix Investments

Fig 9 – Wipro Price and PE

Wipro Price and EPS, JainMatrix Investments

Fig 10 – Wipro Price and EPS

The Decision Table:

Finally, the decision is made by comparing the 5-year CAGR growth on key parameters:

IT Sector Decision Table, JainMatrix Investments

Fig 11 – IT Sector Decision Table, JainMatrix Investments

Notes: PE is as on 17th April

Conclusions:

1.      The Elephant can Dance – Hail the new leader – TCS

  • The largest player, TCS, leads on Growth, Management Effectiveness and Market Performance. In the Decision Table, it leads on EPS, Revenues, EBITDA and PAT. Market Price and Valuations reflect this leadership.
  • Valuations wise TCS is more expensive than Infosys, but note that the consistent leader will always command premium valuations, as Infosys had till 3 years ago.
  • The past 3 years have not been the best of times for the IT industry, but the performance from TCS should get better as the developed economies recover
  • Clarity in leadership and strong leaders helps in many softer aspects such as Acquisitions, new business lines and corporate aggression. TCS also scores here.

2.      Infosys remains a defensive play

  • Infosys leads on parameters like Valuations and Solvency & Margins. In the Decision Table on Valuations, it is cheaper than TCS.
  • Perhaps the superior margins that Infosys commands has clashed with poor market conditions in the developed economies.
  • It does not help that there seems to be a lack of top-notch leaders in the firm. This is a legacy issue, with the old promoters team calling the shots, rather than proven professionals.
  • Infosys does not have a good record in acquisitions.

3.      Wipro is recovering from a couple of top management changes

Wipro has not yet shown clear directions and results. It is neither a growth not a margins leader. This may change soon, but until then, it will be rated third of these three.

Dear S,

Based on the analysis done, I would put my money on TCS.

My recommendation is to transition smoothly, so try to switch from others to TCS over a period of 3-6 months, selling others monthly and simultaneously buying TCS.

Warm regards and profitable investing,

Punit Jain

………………………………………………………………………………………………………..

Disclosure and Notes: 1) It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it. 2) The above financial investigation is not comprehensive, but a short and sufficient study.

Do you find this site useful? You can:

  1. Check back on this website www.jainmatrix.com for updates.
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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/

Bajaj Finance, Auto-matic Growth

___________________________________________________________________

This report was updated on 23rd Jan 2014, find the new report on Link.

  • Date: 31st Jan 2012
  • CMP: Rs 723                     Mid Cap with Market Cap Rs 2534 crores
  • Advice: Invest                  Target: 1750 by 03/13 and 2700 by 03/14

Bajaj Finance is an NBFC on a growth path. It is a leader in auto and consumer durables loans, but customers are spread across Retail 60% and SME/ Corporate 40%. Key strengths are all India reach; strong ‘Bajaj’ brand and rapid entry into new growth segments. Revenue, NII, Net Profit and EPS have grown at 28-41% CAGR over 7 years, and performance did not slow in 2011. Gains can accelerate in a falling interest rate scenario. Invest in this potential multi bagger.

JainMatrix Investments published this report to Subscribers (31/01) and all readers (1/03)

Bajaj Finance – Description and Profile

  • Bajaj Finance (BF) is a NBFC promoted by Bajaj Auto over 23 years ago. Post a 2008 restructuring, Sanjiv Bajaj is handling the financial services business of Bajaj Auto group, including Bajaj Finance.
  • BF was set up as a captive financier of Bajaj Auto’s 2 & 3 wheelers. It has now expanded to related areas such as loans for Consumer Durables, Against Property, Small Business, Construction Equipment, Against Securities, Personal Loans, and Insurance Services, see Fig 1.

JainMatrix Investments

Fig 1 – Bajaj Finance – Business Segments (click to enlarge)

  • About 60% of its business is consumer oriented – B2C, while rest is B2B, with a SME focus. The largest Segments are Consumer durable and 2/3 wheelers. BF is diversified across customer segments and geographies; this de-risks operations and inspires a confidence in continued growth.
  • BF has a network of 4000 distribution partners/ dealers and 225 points of presence. It has 5 million customers across the country.
  • In 2011, BF added 603 permanent employees, taking total employees to 1657. This is a sign of business confidence and investments in expected growth.
  • Funds sourcing – CRISIL has rated it at FAAA/Stable for FDs, indicating a high safety with regard to timely payment of interest and principal.
  • The company has just launched a new loan product specially designed for SMEs, called “flexisaver”. This could be an excellent offering for this segment.
  • BF has a capital adequacy ratio at 17.5%. This is good. Even so, to fund rapid growth, BF is expected to raise Rs 750 crores in 2013 through a QIP or Private equity route.
  • Management intends to raise its equity holding to 75% from the current levels. This indicates high ownership, which is good. See Fig2.

JainMatrix Investments

Fig 2 – Bajaj Finance – Shareholding Pattern (click)

  • Another positive is the stake holding from Mutual Funds, FIIs and DIIs.

Industry Note

  • There are a large number of NBFCs in India (>10,000). These are relatively unregulated companies, unlike Banks that are governed by RBI. In this fragmented market, there is tremendous opportunity to offer Loans and Financial services in a fast growing economy of India, to Individuals (Retail), SME and Corporates.
  • RBI has projected a 16% growth in loans for Banks; NBFCs should have higher industry growth rates.
  • Current projections – of fall of interest rate cycle, and lower inflation, is positive for this sector. See article on this Trend.

Unique strengths:

  • Strong ‘Bajaj’ brand; BF also shares in the growth of Bajaj Auto through the Auto loans service. Also a leader in Consumer Electronics/ durables loans with presence in showrooms of top Retail chains.
  • With Sanjiv Bajaj at the helm, there is clarity in management succession. He is also a talented and ambitious finance professional and promoter.
  • A strong distribution network, spread nationally with presence across customer segments, industries and geographies. The BF strategy is to diversify loans with a 30% segment cap. This will provide a de-risked business model.
  • The group financial services ambitions and new initiatives are going to be routed through BF.

Stock Evaluation, Performance and Returns

  • Listed long back, BF has shown excellent performance over the last 5-7 years, as seen in the charts.
  • The Net Profit, Net Interest Income and NII plus Other Income have grown at 28-38% CAGR over 7 years. Growth has really accelerated since 2008. See Fig3.

JainMatrix Investments

Fig 3 – Chart with Quarterly Net Income, Profit

  • Revenues rose over a 7 year period at 41% CAGR; and EPS at 28% CAGR, see Fig 4.
  • The share has appreciated by 22% CAGR over 7 years. However, post the 2009 fall, the appreciation has been very steep at 112% CAGR.

JainMatrix Investments

Fig 4 – Chart with Quarterly Income, EPS

  • In 3 years, Share Price & dividends have appreciated (Fig 5); P/BV is not too high

JainMatrix Investments

Fig 5 – Chart with Price, Dividends, P/BV

  • Price and PE chart shows that PE is currently at all time lows even though the Price has risen to 700+ levels. It seems the full effect of the Earnings improvement is not yet reflected in the Price, see Fig 6.

JainMatrix Investments

Fig 6 – Price and PE Chart

  • ROCE is 12% and ROE is 19.7%, these are good ratios.
  • The EPS growth has accelerated since 2008, (Fig 7). This is an excellent chart of the firm’s growth.
  • Its asset under management stood at Rs 11,919 crore as in Dec’11; as against Rs 6,868 crore a year back (up 74% YoY). The overall credit growth of the company is significant at a time when the entire industry is experiencing a slower credit off-take.

JainMatrix Investments

Fig 7 – Price and EPS Chart

  • Of late, BF has improved asset quality. Its net non-performing asset (NPA) ratio stood at 0.25% in FY12 Q3 as against 0.33% in Q2. Current net NPA is the lowest for the company in the last five years.
  • PEG is at 0.29 – indicates undervalued status

Peer Benchmarking and Financial Estimates till FY14

  • BF in this comparison shows better growth characteristics. See Exhibit 8.

JainMatrix Investments

  • BF is also superior due to multiple customer segments – a de-risked business model.
  • Three-year projections of BF financials indicate a robust ramp up of revenues and profits, Exhibit 9.

JainMatrix Investments

Risks:

  • Interest rates unpredictability. This will affect our growth projections for BF.
  • Hyper competition.  An excessive ramp up/new entrants of NBFCs & Banks can affect BF performance
  • Promoter driven consolidation. Bajaj group has financial firms like Bajaj Allianz (Insurance), Bajaj Financial Solutions (Wealth mgt) and Bajaj Finserv (Holding Co). Consolidation will change the outlook.
  • Unpredictable events like a European sovereign default, some new media issue/ bad publicity or any governmental charge sheet, etc. can occur that can mar equity performance for short periods.
  • Past performance is no indication of future results

Opinion, Outlook and Recommendation

  • Indian market is underserved for loans and financial services. Quick calculations show BF has 5-7% market share among listed Indian NBFCs (non Bank). While small, this indicates a big market for BF to grow.
  • In the last three years, BF has embarked on a business trajectory that, if sustained, can make it a top 3 NBFC in 4-6 years. In essence it may move from mid-cap to large-cap, and shareholders could be holding on to a ten bagger.
  • Invest now and systematically for long-term out-performance.

The projection/ targets for Bajaj Finance are

  • March 2013   –  1750  –  140% appreciation
  • March 2014  –  2700  – 270% appreciation

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Petronet LNG – entering a new Orbit

This report has been updated in June 2012 – see Petronet LNG – A Solid Gas Company

  • Date: 19 December, 2011
  • CMP: Rs 157, Large Cap with Market Cap Rs 11,883 crores
  • Advice: Invest, Target: Mar 2013 – 250 and Mar`14 – 301

Petronet LNG is doubling capacities in the next two years. It provides a clean fuel, Liquefied Natural Gas to an energy starved country. Being a PSU JV, business risks are lower. The operational performance and capacity addition projects in the last few years have been excellent. It is a gem of a stock that will continue to give equity investors safe and high returns for the next few years.

Petronet LNG – Description and Profile

  • Petronet LNG imports, processes and sells LNG in India, and is a JV of GAIL, ONGC, Indian Oil & BPCL.
  • Turnover in 2011 was Rs 13,197 crores with PAT at 620 crores. PLNG owns and operates a LNG terminal at Dahej, Gujarat that imports 10 mmtpa (Million Metric Tonne Per Annum) of LNG.
  • LNG is sourced through long term contracts (with 7.5 mmtpa from RasGas-Qatar, 1.44 mmtpa from Exxon Mobil-Australia and 2.5 mmtpa from Gazprom) and also spot cargoes (sourcing 0.6MT in ’12 from Gaz De France) that boost volumes and utilize capacity. These contracts indicate stable supplies.
  • Imported LNG is regassified and supplied to customers in pipelines – generally operated by GAIL and GSPL. The customer base includes power plants, household and commercial piped gas, fertilizer plants, Industrial boiler fuel, etc. Most sales are through GAIL, IOCL & BPCL
  • Operational performance was excellent, with the FY11 LNG volumes at 11 mmtpa, a 110% capacity utilization at Dahej.
  • The global prices of LNG have been rising. It depends on location, and today varies from  4$/mmbtu in USA to 15$/mmbtu in Japan. However, PLNG is protected from these prices, as it ensures back to back buying arrangements with customers. It earns a Rupee denominated marketing margin.

The current projects include:

  • PLNG is 26% promoter of a JV with Adani Enterprises, called Adani Petronet (Dahej) Port Pvt Ltd.  This is a bulk Solid Cargo Port of capacity 12 mmtpa that has started operations this year at Dahej.
  • Construction has started of an additional LNG jetty at Dahej which will take the terminal capacity from 10 to 15 mmtpa by Sept ’13.
  • Construction of a new LNG terminal at Kochi, Kerala of 5 mmtpa, which will start by Sept 2012.
  • Started LNG Supply in Cryogenic road Vehicles – for supply to isolated customers without pipelines
  • Direct Marketing of LNG  in coastal & industrial areas, will develop the market /boost demand

 Future Plans

  • Plan for forward integration into a power plant of 1200 MW capacity at Dahej using LNG fuel.
  • A plan for building a LNG Terminal on the east coast of India. Location to be decided.
  • Once the Kochi terminal is ready, PLNG may also invest in a power plant here, using LNG fuel.
  • By FY16, total capacity could increase to 25 mmtpa, which is 2.5 times current capacity.

Industry Note:

  • Gas is a cleaner fuel than Coal and Oil. It burns completely. Usage of Gas is better environmentally than other fuels.
  • Gas consumption in India is low compared to global patterns. PLNG is a pioneer that is creating the infrastructure that will improve gas usage and meet demand.

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Fig 1 – Energy consumption – World and India – Click to expand

  • Today India is energy hungry, and raw fuel deficit, with supply issues:
  1. Coal – while there are enough Coal reserves, Coal India has not been able to meet production targets. Their constraints are environmental clearances, logistic challenges, recent heavy rains in mining areas and labor issues. Other mine owners in India are also not producing enough; so many customers need to import coal. Also Coal is a dirty fuel.
  2. India is a crude oil importer and 70% of demand comes from this route. Oil prices are high.
  3. Nuclear energy has suffered a setback in India due to the Japan disaster. New plant construction is a political hot potato. Hydro and Renewables have a high cost of capacity setup.
  • Indian gas demand is expected to reach 381 mscmd by 2015, compared with a current supply trajectory of 202.9 mscmd. There is definitely a huge demand for gas.
  • Domestic supply of Natural gas from Reliance (Krishna Godavari), ONGC and Oil India wells has not scaled up and will not be able to meet above demand.
  • Other LNG terminals are Hazira (Shell owned, 3.5 mmtpa) and Dabhol (GAIL/NTPC, ready by 2012).
  • GAIL also procures LNG in long term contracts, and used the available terminal capacity (including PLNG) to import this.

Stock evaluation, performance and returns

  • PLNG had its IPO in March 2004 priced at Rs 15. It was oversubscribed 4.2 times.
  • The maiden dividend of Rs 1.3 on FV Rs 10 was paid in 2007. Thereafter dividend has shown a steady to increasing trend (See Figure 2)
  • At CMP of Rs 157 today, the stock has shown a 42% annualized return over the last 8 years!
  • Revenues have grown steadily at 37% CAGR, (Fig 3), along with EBITDA – 35% and Profits 29%.

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Fig 2 – Petronet LNG stock performance – Click to expand

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Fig 3 – Quarterly revenues have grown steadily

  • Cash flow and EPS are showing a robust growth rate – see Fig 4. A dip in 2010 was temporary, with a substantial recovery in 2011.
  • With the excellent capacity utilization in 2011, PLNG has partially repaid debt and D/E ratio is 1.0

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Fig 4 – Cash Flow and EPS have grown substantially

  • Price and PE chart shows that PE has fallen recently close to the 5 year mean of 14 times. (Fig 5). PE today is 13.3 and has fallen 43% from 23 levels. During this fall, the price has only fallen 14% from the recent peak of 183 in Aug 2011. The rest of the fall comes from EPS growth, see fig 6.

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Fig 5 – Price and PE Graph

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Fig 6 – Price and EPS Graph

  • Price and EPS quarterly graph shows that EPS growth has accelerated in recent quarters. This elevated EPS will stabilize in 2012, and any further gains will come from interest cost reductions. Volume growth will happen in 2013 with additional capacity coming on stream in Kochi and Dahej.
  • ROCE is between 15 – 25%
  • PEG is at 0.46 – indicates safety and undervalued status

Financial Projections, with FY14 estimates

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Exhibit 7: Financial Projections – (Click to expand)

Risks:

  • A global recession, perhaps involving a European country debt default, will depress the equity market overall, and PLNG also. But this even if it happens, will be a temporary condition.
  • There has been a recent spurt in spot LNG price. This was largely due to the March 11 Japan earthquake and nuclear disaster; Japan has started idling their nuclear plants, and turned to LNG in a big way. In India, LNG demand is high, but may drop if prices exceed 18$/ mmbtu. However, spot prices in USA are at <4 $/mmbtu, so this is unlikely. US has low prices as they have started producing LNG from non conventional sources.
  • Pipeline infrastructure from Dahej to customers is a constraint. However this is being aggressively addressed by GAIL and GSPL. Similarly pipelines to demand centers around Kochi have to be set up to evacuate gas. This being addressed by Kerala Government and GAIL
  • Currently, LNG charges regasification tariffs are not under the purview of the regulator. Any policy decision to regulate the tariff may affect the valuation of the stock.

Opinion, Outlook and Recommendation

  • PLNG has an excellent track record of investing in LNG assets and utilizing/ operating them well.
  • In the last 8 years, all performance metrics of revenues, profits and EPS have improved to a new orbit every time capacity was added. Imminent capacity addition will replay this characteristic.
  • Demand is huge in India, and as of now, all LNG import for the next 6 months are booked by customers.
  • My opinion is that Petronet will continue down the path of solid stock performance and dividends over the next decade .
  • Invest now and systematically for long term outperformance
  • The projection/ targets for PLNG are
    • March 13 target is 250 (a 60% appreciation from current levels)
    • March 14 is 301 (a 92% appreciation)
  • The projections are based on PE expectations of 18 times.

:-)

This report is an update on a Feb 2011 report I had shared, available on Link

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .  Also see: https://jainmatrix.wordpress.com/disclaimer/