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

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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.
JainMatrix Investments

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%.
JainMatrix Investments

Fig 2 – Petronet LNG stock performance – Click to expand

JainMatrix Investments

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
JainMatrix Investments

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.
JainMatrix Investments

Fig 5 – Price and PE Graph

JainMatrix Investments

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

JainMatrix Investments

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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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/

Bharti Airtel – Take the call

  • Date: November12, 2011
  • CMP: Rs 396; Large Cap
  • Advice: Safe long term investment
  • Target: 18 month – 800

There is an update on this report called Bharti Airtel – This is a year of consolidation (Aug 2012) available for readers. 

Bharti Airtel is a large telecom player. The market leading India business is seeing high competition, but going forward the profitability will stabilize and improve. The next growth engines are Indian 3G and the 16 country African acquisition.  Invest for the long term in this Indian – going – MNC Blue Chip.

Bharti Airtel – Description and Profile

  • Bharti Airtel is the market leader in the Indian telecom sector. Incorporated as recently as 1995, it is a global telecom operator ranked #5 today in terms of customers.
  • Standalone turnover is Rs 38,000 crores (FY’11), and the Market Cap at Rs 1,50,000 crores ranks it #7 in India.  Consolidated revenues in Q2FY12 was Rs 17,200 crore (annualized Rs 61,000 crore)
  • Other than India, Operations are spread over 18+ countries including Bangladesh, Sri Lanka and the African continent. Airtel has an aggregate of 237 million customers as of September 2011.

Businesses are classified as B2C and B2B

  • B2C operations include Mobile, Telemedia (broadband, IPTV and fixed line), and Digital TV (DTH)
  • B2B operations are Enterprise services (end to end telecom services) and Passive Infrastructure Services (Telecom towers)
  • Africa for Airtel is essentially a market for mobile services and Passive Infrastructure Services (Telecom towers)
Bharti Airtel, JainMatrix Investments

Fig 1 – The revenue proportions from business segments (click graphic to enlarge)

  • Strategic Partner – Singapore Telecom is a key Partner and investor in Bharti Airtel.
  • Equipment and Technology Partners – excellence from specialists
  1. For network and telecom equipment, the partners are Ericsson, Nokia Siemens Networks (NSN), Huawei, Alcatel Lucent, ECI, Tejas Networks and Cisco
  2. IBM is the partner for all business and enterprise IT systems, across geographies
  3. The Call Center expertise is from partners like IBM Daksh, Mphasis, Firstsource, Aegis, Tech Mahindra Teleperformance, and HGSL
  • Shareholding pattern is: Promoters 45.5%, Foreign Strategic Partner 22.8%;  FIIs 17.1%;  DII 8.7%; Bodies Corporate 4.1 %; Individuals – retail and Other 1.8%

Industry Snapshot

  • The total number of Indian subscribers of telecom services– wireless & wire line – is 88.6 crores. The tele-density is 73.97% (on 30/06/11), an increase of 4.69% over the previous quarter
  • Gross Revenue during the quarter was 46,891 crores, an increase of 3.03% over the previous quarter
  • The policy environment for Telecom is driven by TRAI, DoT and the Ministry of Communication & IT
  • There are 15 players in the telecom operator space, including PSUs. Here is a comparison of the larger players

Company

Subscribers

millions

ARPU

Rs/ month

MoU

minutes

ARPM

Rs/minute

Market Share %

3G licenses won

3G Bid

Rs Billion

Bharti Airtel

172.51

192

454

0.42

19.91

13 circles

122.95

RCom

144.51

105.8

240

0.44

16.77

13 circles

85.85

Idea

95.11

165.2

413

0.40

11.12

11 circles

57.68

Industry

885.99

93.44

329

100

7 private firms have won 71 circles among them

506

Above telecom data is from April and June 2011 quarters, from TRAI and public reports

Key challenges for Bharti Airtel and strategies being followed:

Bharti Airtel, JainMatrix Investements

  • Focus on network improvements, customer support and new service launches, so Airtel is seen as a stable, technically superior and quality service provider

2.       The draft National Telecom Policy 2011 attempts to ease conditions for M&A in the telecom sector, promote the ‘One Nation-One License’, and possibly infrastructure status for the industry

  • These policies are seen as boosts for the sector, particularly the larger players like Airtel
  • It will hasten the end of the intense competition phase and, through alliances and M&A, lower the number of players to 6-8. This can permit profitable telecom operations for most players.

3.       Airtel won a number of 3G licenses in important circles, but at a high price

  • 3G is the next big thing for Indian telecom players. Driven by a growth in smartphone sales, enabled by the telecom operators, a whole new ecosystem of content, services and functionality is being set up. This includes internet browsing, entertainment services, application stores, video calling, enterprise services, m-Heath, m-Education, m-Commerce, e-governance, etc.  These will drive usage, 3G penetration, subscriptions and ARPU, and help monetize the 3G license assets.

4.       Regulatory uncertainties on issues like Excess spectrum charge, license renewal fees, formation of 3G roaming alliances

  • By working with the industry bodies such as COAI, Bharti Airtel is defending its position on these issues. Many of these new conditions impose additional costs on the Telecom operators, which are unplanned for.

5.       Airtel acquired the African telecom assets of Zain in 2010, for USD $9 billion in cash.

  • This purchase is of a high growth franchise. As per Airtel estimates, Africa will eventually overtake India and China as a telecom market – as population of Africa will peak at 1.8 – 2.0 billion. By leveraging the balance sheet and sound financial engineering, Airtel was able to service this loan for only $200m per year in 2010.

6.       Mobile Number Portability was perceived as a threat for Airtel. However, the first year of experience of this consumer facility shows that it has not materially reduced market shares.

Stock valuation, performance and returns

  • CMP is 395. In the last 7 years, the market price has appreciated at 21% per annum CAGR.  It is below the all time high of 565 in Oct 2007. See Fig 3.
  • However, prices are on an uptrend in the last year or so. PE at 21.5 is still well below the 7 year range of 27.5

Bharti Airtel, JainMatrix Investements

  • EPS growth in the last 7 years has been 35% CAGR. Even so, we can see the trends – EPS had a rapid expansion from 2005 to 2009, but has fallen off in the last 2 years.
  • The Good News? Expectations now are that the period of falling consumer prices in telecom are over. The hyper competition phase has played out, and EPS will stabilize and start their climb once again for Airtel.
Bharti Airtel, JainMatrix Investments

Fig 4 – Price and EPS Trends

  • Sales have grown steadily at 23.4% over the past 7 years. Net profits have also appreciated at 21.3%. We can see however, that profits which were rising rapidly till 2009, have tapered down recently. This is due to industry hyper competition.
Bharti Airtel, JainMatrix Investments

Fig 5 – Sales and Profits Trends (click to enlarge)

  • Telecom is a very resource intensive business. Airtel has managed this well, and has grown the Cash generated from operations at 28% CAGR over the last 7 years. EPS growth has been higher at 35%.
Bharti Airtel, JainMatrix Investments

Fig 6 – Cash Flow and EPS Trends

  • RoCE is at 16% – healthy statistic; RoNW is 17.6%; Price/Book is 3.42
  • Debt / Equity is 0.7 for the consolidated entity. This is a comfortable level for a telecom player.
  • PEG is at 0.61 – indicates it is underpriced, and a good investment opportunity, especially given it’s Blue Chip status

Risks:

  • Poor regulatory conditions in India. The telecom sector continues to be buffeted by ad-hoc ism in policy matters, and overlapping jurisdictions of TRAI, DoT and the Ministry. The revenue short government may exert additional pressure to raise receipts, sacrificing industry growth.
  • The current policy directive is to allow M&As and reduce competition intensity in the sector. If this is not implemented, or even reversed in some way, the hyper competition environment may continue to haunt this sector, affecting profitability and margins.
  • The interest rate has risen in India. This increases debt servicing costs. Expectations are that rates have peaked in India, and should fall going forward.
  • Revenue and capital leakage into unrelated diversifications of Bharti group like Retail, Insurance, foods, etc. However this risk is fading as Bharti Airtel corporate governance standards are high, and investments are being made independently by the holding company, Bharti Enterprises.

Opinion, Outlook and Recommendation

  • Airtel essentially has two large businesses, India (mature asset) and Africa (growth).
  1. In India, the major investments have been made; the revenues are large and growing, and the high competition is expected to ease up. Over the next few quarters, all metrics will point up – Cash flow, operating margins and net profits, in addition to revenues which has held up well.
  2. In Africa, we will see Airtel slowly establish itself, move from #3, 4 or 5 in the market to #1 or 2. In country after country, it is engaging with the government, trade and consumers, to roll out its ‘minutes factory’, ‘network infrastructure sharing’ and ‘partner with the best vendors’ approach.  The 2013 target for Airtel Africa is $5 billion of revenues.
  • The recent bottom of the Airtel share was Rs 255 in June 2010. The share has been moving up thereafter and has appreciated 55% to today’s 396. The stock will continue its upward march, as it continues to deliver on stated corporate goals.
  • At current levels, Airtel share is above 20, 50 and 200 DMA levels. See Fig 7. This indicates the share is likely to continue to move up.
Bharti Airtel, JainMatrix Investments

Fig 7 – Airtel stock is above 20, 50 and 200 DMAs

  • I recommended the Airtel stock in my report in December 2010. See Link.
  • I reiterate my recommendation to Buy.  My 18 month target for this stock is 800.

……………………………………..

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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

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Mundra Port: Infra play at good valuations

………………………………………………………………………………….

There is an update to this report. Read this latest Sept 2012 update called ‘Adani Port – The Great Australian Adventure’. Click this LINK

Introduction

  • Mundra Port and SEZ (MPSEZ) is a Gujarat based infrastructure and exports play. Promoted by Adani Group, it includes the following businesses –
  • India’s largest private port, with volumes having recently crossed 50 MT (FY11) and 15.08 MT in Q1 FY12
  • An SEZ area adjacent to the port, which is being developed on an area exceeding 100 sq km
  • The port has got ranked 5th in India among all ports, major, public and private. The port deals in a number of container and bulk products.
Mundra Port and SEZ

Fig 1 – Mundra Port – Cargo details

Fig 1 – Business Segments in Q1 2011.  MPSEZ handles a broad range of products. A broad-based customer group means lower business risks.

  • Connectivity and logistical facilities extend the Port, berthing and storage to Roads, Rail connection, Air strip and Pipelines based evacuation
  • Port has also recently added specialized car exporting facility
  • The SEZ facility enjoys a series of Indirect and Direct Tax benefits designed to encourage industrialization by the Gujarat Government
  • Power supply will be by a plant being set up by Adani group, that will meet all the SEZ needs
  • The SEZ area is organized into Industrial clusters that include – Engineering, Auto & Auto Ancillaries, Textile & Apparel, Chemicals & Pharma, Plastic Processing, Stone & Minerals, Food & Agro, Global Trading Hub, Timber & Furniture and Metals and minerals

Current Business Outlook

  • The port has rapidly increased business throughput over the last 5 years, venturing into new categories of goods, and working closely with manufacturers and exporters to improve infrastructure
  • Capacity building is ongoing including ICDs under development
Mundra Port and SEZ

Fig 2 – Mundra Port – Quarterly Sales and Net Profits

Fig 2 – Mundra has shown steady revenue and profit growth.

  • Sales have grown by 32% over the last 5 years
  • Profits have grown an astonishing 128% CAGR over this period
  • Major competition to MPSEZ is from Kandla, JNPT and Pipavav on the Western shores. Mundra is able to provide port access to North India based industry. Additionally
  • Kandla and JNPT have not invested sufficiently in infrastructure due to government constraints.
  • Pipavav is at an early stage of development. Also it is in South Gujarat and logistically more remote.
Mundra Port and SEZ

Mundra Port in Gujarat Map

Additional Developments include:

  • MPSEZ is also developing Dahej Port and Mormugao Port in terms of terminal creation or port operator.
  • Acquisition of Australia Queensland based Abbot Point Coal Terminal (APCT). The coal terminal, has capacity of 50 MT a year, will facilitate the transport of coal from Australian mines to India.

Overview of Share IPO and Stock performance

  • The IPO in Nov 2007 was amazingly successful. It was oversubscribed 115 times, and eventually provided huge listing gains. However it was aggressively priced.
  • Business performance over the last 4 years has justified investor confidence in this stock
Mundra Port and SEZ

Fig 3 – Mundra Port Valuations and stock performance

Fig 3 – IPO investors have received a 12% CAGR return over the four years since listing

  • Debt-equity is 0.94 as of Mar’11 (down from 1.7 at IPO time). This is good, for an infra company.
  • Healthy return Ratios. Return on Capital employed – ROCE is 15.4%; Return on Equity – ROE is 23.4%
  • PEG is in the range of 0.84, indicating indicates safety and undervalued status
Mundra Port - EPS and Cash Flow

Fig 4 – Mundra Port – EPS and Cash Flow

  • For an infrastructure company, cash is critical. MPSEZ comes out excellent on this count as it has improved Cash flow from operations and EPS (Adjusted for stock split) rapidly in recent years
Mundra Port and SEZ

Fig 5 – Mundra Port – Price and PE chart

  • Fig 5 – PE has fallen to attractive levels, and combined with robust business performance gives us a very good entry point for long term investments
Mundra Port and SEZ

Fig 6 – Mundra Port – Price and EPS chart

  • The chart – Fig 6 plots the adjusted market price against the EPS over a 4-year period.
  • EPS shows us a steady quarterly increase indicating stable business improvement

Projections and Investment Advice

  • EPS may slow a little to 40-50% growth range over the next 3 years as competition intensifies and an interest rate driven domestic slowdown takes shape.
  • Even this is very high. Also, MPSEZ is well placed to capture market share from the increase in Indian exports (oil, containers, manufactured goods and minerals) as well as imports (Coal, oil, commodities).
  • SEZ revenues are lumpy, driven by sale of land to industries. However the infrastructure provided and industrialization will drive this business.
  • The recent fall in prices has not affected MPSEZ, and it is expected to ride out this slowdown
  • As long as it stays over 150, MPSEZ share price is in positive territory. Invest

Risks

  • Adani group is a complex group of interconnected firms with cross holdings in group companies like Adani Power, the holding company Adani Group, Adani Enterprises Ltd. and MPSEZ.
  • Recent shareholding reports for MPSEZ indicate the Promoter group has 77%, Institutional is 15% and Public Retail has 7%. Thus unless the Promoters sell more holding soon, it is possible that the promoters may try to buy-back from others and de-list this firm.
  • Intensifying competition. It is possible that Indian government may finally able to grow capacities at Kandla and JNPT (they have both been running close to 100%), overcoming the current lethargy.
  • Pipavav Port is owned by A.P. Moller-Maersk Group, is one of the largest container terminal operators in the world. Over the next few years, APM Terminals will transfer a lot of India business from other ports to Pipavav, and also build good infrastructure here.
  • Recent rumours against Adani Group were that it has powerful political linkages, and interests in illegal mining in Karnataka/ Andhra Pradesh. These rumors affected investor sentiment in Adani Industries. This could also affect MPSEZ in the future. However MPSEZ is a different business, and the possibilities of this are remote.
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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/