Great Investing Wisdom

Here is a brilliant tweet from @jposhaughnessy. With my commentary. Since this is great investing wisdom, I suggest you take a few minutes to read this. 

Jim O Shaughnessy   / My Thoughts

I’m adding a few of my thoughts, and an Indian angle.

jainmatrix investmentsjainmatrix investmentsjainmatrix investmentsjainmatrix investmentsjainmatrix investments
jainmatrix investments

Here are the links that Jim had referred to in case you are interested

Hope you liked this. Do comment below.

Punit Jain

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 Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JM at punit.jain@jainmatrix.com.

Advertisements

Vikas Ecotech – Get ‘Vikas’ for your Investments

  • Date: 22nd Jan 2018
  • CMP: Rs. 40.7

Today we have published an update report on Vikas Ecotech.

  1. To remind you, on 24th Apr 2017, at a CMP: Rs. 21.25, we had published this report on this website.
  2. We had set a Target price of Rs. 52.7 by May 2019, a growth of 143% from then CMP, over 25 months.
  3. The entire report is available on VIKAS ECOTECH – Get ‘VIKAS’ for your Investments
  4. We are happy to note that our Apr 2017 report has given 92% gains in 9 months. 
  5. However, this update report is restricted to our valued subscribers only.

To receive all such reports, SIGN UP FOR – THE INVESTMENT SERVICE SUBSCRIPTION

JAINMATRIX KNOWLEDGE BASE 

See other useful reports – look at the listings on RIGHT PANEL or SEE REPORTS on MENU above.

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer and Additional Details

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain discloses that he has been a shareholder at VET since May 2017. Other than this, Punit Jain and JM have no known financial interests in Vikas Ecotech & Co or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. Equity investments are subject to market risks. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, we recommend that investors looking to invest in equity should take advice from a Registered Investment Adviser. Punit Jain is certified and registered under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Is Investing a Science or an Art – Or Both?

  • Date: 21st Dec 2017
  • Subject: Thoughts around Investing 

What is a Science?

Science as per Wikipedia is a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe. Science is associated with consistent, independent and timeless outcomes.  A science can be studied in a textbook, and when applied in an experiment, it will always deliver an expected result under same conditions.

What is an Art?

An Art can be defined as the ‘expression or application of human creative skill and imagination’. Across painting, music and literature, people find Art as a way to express themselves and create something uniquely different, that communicates to other humans. It somehow combines both technique and emotion.

So is Investing a Science, or an Art?

When I speak of Investing, I differentiate it from Trading and refer to stock purchased for a holding period greater than 1 year, bought based on fundamentals analysis.

The Science: Investing appears to be a Science when we look at the quantitative side of things. The analysis of the balance sheet, income statements and calculation and understanding of the key ratios, as well as interpreting them seems to be a fairly scientific exercise. Companies can fairly quickly be bucketed under Poor, Average and Good using quantitative techniques, based on data about the past.

The Art: However the qualitative side of investing is not so well defined. It is also very important.

  1. Which sector is the firm from? Is this sector doing well overall and are prospects good?
  2. How good is management in this firm?
  3. Is the firm encouraging a second line of leadership and executives?
  4. How are the products of the firm? What is the USP of the firm? The moat? How does it compare with peers?
  5. What’s the future for this firm given these realities? How do we value this firm? If there is a valuation gap (mispricing) when will this gap be filled by the market?
  6. What are the risks, uncertainties and bad scenarios for this firm?
  7. What are the exit criteria for the firm?
  8. As an investor, can I control my emotions like fear, pride, regret, laziness and greed? The psychological part of investing, that which involves your emotions, your expectations, your attitudes and your habits, is a crucial part of the recipe for success. How does one react to market news and fluctuations? Can I generate and stick by my ideas long enough to find success? Or would I prefer to follow the herd?
  9. Finally with so many complex inputs, and unknowns, I feel intuition plays an important part in key decisions. This too is more Art than Science as it is more judgement and not quantifiable.
  10. In addition each investor brings to the table his own set of strengths and biases. This helps him identify successful investing ideas only in certain situations. This can be a core strength of an investor if it is well understood.

So we can see that this part of Investing certainly has a technique, involves a lot of judgments and interpretations and is quite an Art. The objective of course is to protect and grow wealth, so its an applied Art.

The Brain – 

jainmatrix investments

Conclusion:

So we can see that while the core of Investing is scientific and quantitative, this has over it a thick wrapping of human judgement, emotion and real life uncertainties.

Can a Computer Do Good Investing?

Here is a famous quote by the legendary investor Peter Lynch. “Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.”

My feeling is that computers can handle the quantitative side of investing well. This is of course based on the fact that computers are powered by good programming and applications.

The Art or qualitative part of investing is very hard to program and incorporate into a computer.

However there are a bunch of newer technologies such as Machine Learning, fuzzy logic and Artificial Intelligence. It’s quite possible that some of these techniques can be adapted to help in Investing and may even become quite good.

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 Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Vikas Ecotech – Get ‘Vikas’ for your Investments

  • Date: 24th Apr 2017
  • CMP: Rs. 21.25
  • Small Cap – Mkt Cap is 610 crores 
  • Industry: Specialty Chemicals
  • Target price is Rs. 52.7 by May 2019, a growth of 143% over 25 months 
  • A High Risk but High Gain opportunity for aggressive investors

Summary

  • Overview: Vikas Ecotech is engaged in mfg. and trading of specialty chemicals. It has factories in Shahjahanpur (Raj.) and J&K. The FY’16 revenues and profits were Rs 312 cr. and 26 cr. and these have grown 21% & 29% CAGR over 6 years. Products are niche, high value and eco-friendly, many are import substitutes. Exports are growing and are 49% of revenues. Current operations are lean.
  • Why buy now: VET is commissioning new plants in Noida SEZ, Kandla SEZ and Dahej (Guj) as well as extensions at Shahjahanpur. It expects a revenue growth of 35% CAGR in the next few years as outlook is strong.
  • Key risks: 1) Competition from large Indian players or Chinese firms can affect business. 2) The raw materials for VET are crude derivatives and any rise in crude oil prices will increase input costs. 3) VET has been free cash flow negative for 5 of the last 6 years. This has raised debt.
  • The Target Price is Rs. 52.7 by May 2019, a growth of 143% over 25 months. This is a High Risk but High Gain opportunity for aggressive investors.

Here is a note on Vikas Ecotech Ltd. (VET).

VIKAS ECOTECH – DESCRIPTION AND PROFILE 

  • VET does mfg. and trading of specialty polymer compounds & additives like Polymer compounds, Organotin stabilizers, Plasticizers and Flame retardants.
  • The FY’16 revenues were Rs 312 cr., profits Rs 26 cr. and market cap is Rs 610 cr.
  • Located in Delhi, VET has factories located in Shahjahanpur (Raj.) and Samba (J&K).
  • VET started as a trader/ agency for chemical products, then expanded into mfg.
  • VET has 250+ work force and products are exported to 20 countries, like B’desh, Pakistan, Sri Lanka, China, UAE, Turkey, Spain, S’pore, Germany, Ukraine and USA.
  • VET makes chemical products used in Agricultural Pipes, Auto Parts, Wires & Cables, Artificial Leather, Footwear, Organic Chemicals, Polymers, Pharma and Packaging, and distributes specialty chemicals and polymers of MNCs. 3 categories:
    • Specialty Additives – toxin free high perf. additives for mfg. applications.
    • Plastic Compounds – polymer compounds like Thermoplastic Rubber (TPR), Thermoplastic Elastomer (TPE) and Specialty compounds of PVC, PET and EVA.
    • Recycling – It recycles material to create virgin-grade PVC compounds.
  • Clients – RR Kabel, Relaxo F’wear, Liberty, Escorts, KEI, Havells, Apollo Pipe & SRF.
  • In FY15, VET sold stake (and exited) from a subsidiary, Moonlite Technochem. It also acquired the balance 25% stake of Sigma Plastic Industries thereby having 100% stake. By Q4FY15, VET became a standalone firm without any Subsidiary. In 2015 the firm rebranded itself from Vikas Globalone to Vikas Ecotech Ltd.
  • Leadership team is Vikas Garg (MD), Vivek Garg (Dir.), Ashutosh Verma (CEO), and Pankaj Gupta (CFO). Vikas Garg has been with VET (group) for 18 years and provides hands on leadership.
  • Shareholding % is: Promoter and Group-41.6%, Institutions-29.25%, individual-8.9%, others-20.25%.

JainMatrix Investments, Vikas Ecotech

Fig 1 – Segment and Geographic Revenue

Recent Events, Business Plans and Strategies

  • VET commenced construction of a mfg. plant and R&D center at Dahej, Gujarat. It will provide import substitution for additives and stabilizers. The plant will add capacity and produce 6,000 MT of organotin stabilizers (methyl tin mercaptide or MTM) and 5,000 MT of specialty polymer compounds annually. The plant cost is Rs. 30 cr. Production was to start by Apr2017, but a delay in environmental clearances may delay it by 6 months.
  • VET is also setting up plants at Noida SEZ and Kandla SEZ Guj. as well as extensions at Shahjahanpur (Raj.) to handle higher volumes and get exports benefits at SEZs.

JainMatrix Investments, Vikas Ecotech

Fig 2 – VET Capacity Growth  

  • Prince Pipes and Fittings Pvt Ltd’s CMD, Jayant Chheda, and his associates have acquired, in their individual capacity, 2.63 crore shares of VET or over 8%. PPF is a strategic customer of VET. The funds received of Rs 34 cr. are to be utilised for expansion of R&D facilities, new plants and marketing for domestic and exports.
  • VET formed a strategic tie up with PPF, India’s 3rd largest PVC pipes mfg. firm for supply of specialty chemicals to replace current with eco-friendly variants.
  • VET produces Organotin Stabilizers which are required to produce Lead free non-toxic, safe and eco-friendly PVC pipes. It’s a valuable tech. available with only few producers worldwide.
  • VET aims to produce bio plastic by using waste cooking oil through a technology called Wastol-P, and grow as one of India’s leading eco-friendly firms. It has entered into a contract with Haldiram, the large snack mfg. for supply of waste cooking oil.
  • Exports may grow around 30-40% for FY17. VET expects revenues to grow 35% CAGR for a few years, as per management.
  • VET’s mfg. plant in Raj. was affected by a fire in Apr2017. But damage was limited to only one building that housed the polypropylene section and a material warehouse; 4 other units in the same factory are safe and fully operational. The unit contributes 3% to sales. It may take 4 months to restore full production. According to estimates, damages could be Rs. 15-20 cr. but the factory is fully insured.
  • During the current year VET’s market share in India for Organotin Stabilizers was 10%. Their vision is to attain 25% share of the expanded market in the near future.
  • VET allotted 2.56 cr. equity shares of Re 1/- each at a premium of Rs. 16/- in Mar2017 to non-promoters on preferential basis. Promoter holding fell 4% in the Company.
  • Crisil rated VET a BBB for long Term Borrowings; A3+ for Short Term in Feb2017.
  • In Feb2016 Merrill Lynch Capital Markets bought 19 lakh shares of VET.
  • Employee strength has grown rapidly from 63 (FY15) to 81 (FY16) and 250+ today.

Industry Outlook

  • The Indian Specialty Chemical Industry is experiencing a good growth and is fast emerging as global specialty chemicals mfg. hub. Total production was 2.1 crore tons in FY’16. Industry delivered 13% growth over the 5 years led by domestic consumption; more recently it was 30% growth over FY13-15 to $2.67 bn.
  • India is 3rd after China & Japan in Asia and 6th globally in volumes.
  • The Industry is expected to grow at CAGR of 15% for next 5 years.
  • Indian specialty chemicals firms will gain over China due to strict implementation of environmental norms & safety standards there, which may lead to closure of many firms. Exports have already slowed. This may help boost exports from India.
  • Make in India initiative will facilitate growth and flow of FDI to this sector.
  • Indian specialty chemical firms will have 6-7% share globally by 2023, double the current level.
  • The India demand for Organotin Stabilizers at 6,000 MT p.a. (growth 20%) and PVC heat stabilizer (60,000 MT p.a.); and global PVC heat stabilizer market demand are growing fast, and VET expansion plans are in line with domestic and int’l. demand. This year VET’s market share in India for Organotin Stabilizers was 10%. The vision is to attain 25% share of the expanded market in the near future.

Stock Evaluation, Performance and Returns

JainMatrix Investments, Vikas Ecotech

Fig 3 – Price History

  • See VET’s 5 year price history in Fig 3. Investors for 5 years gained by 51.4% CAGR.
  • The share price shot up sharply in 2015. The recent one year low is Rs. 10.85 in Jun 2016, and the high was Rs 23.3 in Mar2017. The share price is 9% below this high.
  • Dividends have been consistent for 4 years at 5% giving 0.24% yield. This is low.
  • The Revenues, EBITDA and Profits have grown 21%, 35% and 29% CAGR over 6 yrs.
  • In Q3 FY17 VET had revenue of Rs. 84.8 cr. and growth of 0.3% YoY due to demonetization and fall in trading. But the mfg. revenue grew 17%. See Fig 4.
  • DE ratio is 1.41 which is high. VET will fund expansions through internal accruals.
  • Note: VET data in Fig 4 is consolidated until Mar 2015 and standalone thereafter.

JainMatrix Investments, Vikas Ecotech

Fig 4 – Quarterly Financials/ Fig 5 – Cash Flow  

JainMatrix Investments, Vikas Ecotech

  • VET has weak cash flow position. It has been FCF positive only in 1 of last 6 years. This is a negative. See Fig 5. However the reason is investments in R&D and mfg. capacities. The firm raised funds through preferential stock issue and promoter holding dilution. As a result the debt position is still moderate.
  • In Fig 6a, the 6 year PE chart for VET has a historic average PE of 15. Current P/E is 15.74 times (TTM earnings), while the P/B is 8.25 times. In Fig 6b we see that EPS TTM had an upward trend in last 2 years in a channel. But in Q3FY17 there was a drop due to challenges like demonetization.

JainMatrix Investments, Vikas Ecotech

Fig 6 – a) Price and PE Chart Above and b) Price and EPS Chart 

  • The DE ratio reduced in Mar’16, Fig 7. Interest coverage ratio improved. The inventory turnover ratio rose, operating & profit margins are higher, ROCE doubled to 32%. Similarly RoNW. These are positive.
  • Beta of the stock is 0.93 (Reuters) which is indicates low volatility.

JainMatrix Investments, Vikas Ecotech

Fig 7 – Financial Metrics

Benchmarking and Financial Estimates

Exhibit 8 – Financial Benchmarking

In a benchmarking exercise we compare VET with listed peers in similar businesses.

  • In terms of valuations, VET has a low PE ratio in spite of a recent rise in the share price. However P/B is high at 8.25 times. VET has the lowest dividend yield, however this is OK for a high growth company. D/E ratio is high among peers, however it is at manageable levels.
  • VET’s 3 year CAGR PAT has grown at 86.8%. This is good, but on a small base. VET has return ratios over 35%, that are likely to sustain. This is excellent.
  • The numbers show that the firm that is moving to a high growth / high profit phase.

Exhibit 9 – Projections  

The financial projections have been made based on following assumptions.

  1. Production starts at Dahej plant in mid FY18 and ramps up to full capacity in 2 years. Noida and Bhuj plants too start contributing to revenues in FY18.
  2. Exports and domestic demand continue to grow at a combined 30-35%.
  3. R&D continues to develop new products; demand for lead free chemicals grows; eco-friendly mfg. processes for PVC compounds from recycled materials gain in visibility and demand.
  4. Analyst judgement.

Strengths of Vikas Ecotech

  • Good R&D that works with prospects and customers to develop new products & solutions. The recent revenue upswing was the result of years of R&D work.
  • Capacity additions will start from Dahej, Noida and Bhuj plants in FY18.
  • A domestic focus on substitution for expensive imported niche chemicals.
  • Exports focus will continue and build on the current 49% share of revenues.
  • There exists a good synergy between trading chemicals business and mfg.
  • Remarkable cost consciousness including salaries for promoters and employees.
  • Current customer base is derisked across a large number of firms and industries, providing stability.

Weaknesses and Risks

  • The raw materials used by VET are crude oil derivatives. Any rise in crude oil prices will increase the input cost and margins. However crude is in a 45-55 $ range.
  • VET has weak cash flow position. It has been FCF negative. The D/E ratio at 1.4 times is moderate, but any further capital raise can push D/E to excessive levels.
  • Promoter shareholding is low at 42%. However the promoter has sacrificed holdings to raise funds for expansion. He may be in a position to raise this in a few years. He still has sufficient holdings today that provide him a good incentive to grow and develop the firm VET.
  • In terms of valuation, the P/B ratio looks expensive.
  • VET’s mfg. plant in Raj. suffered in a fire in April 2017. The damage could be Rs. 15-20 cr. But these assets were insured. One plant in J&K is in a sensitive area, there have been terrorist attacks recently.
  • Chinese chemical producers can be competitive on price and volume. The other massive player in the sector is Reliance Industries. VET has potential as a niche chemicals player as long as other larger players do not enter these segments. However these segment volumes may not be attractive for RIL.
  • VET can in future be a takeover target by large players. But it will benefit investors.
  • VET sales are B2B, used as raw material, so it’s difficult for analysts to verify & validate output.

Opinion, Outlook and Recommendation

  • The chemicals sector is a massive market, and specialty chemicals can be a valuable and large niche within this. India offers many competitive advantages to this sector.
  • VET has taken this strategy and has ample room to grow in this niche.
  • VET is rated highly on lean business operations, aggressive growth – both mfg. capacities and workforce, good R&D team, eco-friendly products and growth in domestic & export markets.
  • Valuations are reasonable as VET is a largely undiscovered firm. With a turnover of Rs 312 cr., VET has ample room to grow in domestic and exports markets.
  • Key risks are: 1) As VET is a small firm, competition from larger players or Chinese firms can affect business. 2) The raw materials are crude derivatives and any rise in crude oil prices will increase input costs. 3) VET has been free cash flow negative for 5 of the last 6 years. This has raised debt.
  • The target price is Rs. 52.7 by May 2019, a growth of 143% over 25 months.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer and Additional Details

The target price basis is 1) Financial projections – Exhibit 9, 2) A target P/E of 20 times, higher than current 15.74 times 3) Analyst judgement.

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain and JM have no current shareholding, and no known financial interests in Vikas Ecotech & Co or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. Equity investments are subject to market risks. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, we recommend that investors looking to invest in equity should take advice from a Registered Investment Adviser. Punit Jain is certified and registered under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Balmer Lawrie – An Update

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

Dear Readers,

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

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

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

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

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

JainMatrix Investments, Balmer Lawrie

Balmer Lawrie – 6 month price history

We hope you make handsome gains on BLC.

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

Happy investing,

Punit Jain, Founder, JainMatrix Investments

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

Disclaimers

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Balmer Lawrie & Co or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

PNB Housing Finance IPO: A Transformed Lender

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

Summary

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

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

IPO highlights

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

Introduction

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

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

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

Promoter (Punjab National Bank) – Snapshot and Financials

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

Fig 4 – PNB financials

News and Updates for PHF

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

Indian Housing Finance Industry Outlook

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

Financials of PHF

JainMatrix Investments, PNB Housing Finance

Fig 5 – PHF Financials

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

Benchmarking

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

JainMatrix Investments, PNB Housing Finance

Exhibit 6 – Benchmarking

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

Positives for PHF and the IPO

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

Risks and Negatives for PHF and the IPO

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

Overall Opinion and Recommendation

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

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in PNB Housing Finance Ltd. or any group company. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Balmer Lawrie – Is Traveling Fast Now

  • Date: 17th Oct 2016
  • CMP: Rs 677
  • Industry: PSU, diversified
  • Small Cap with Mkt Cap 1980 crores
  • Advice: BUY with a target price of Rs 1057 by Mar 2019, a 56% upside 
  • Overview: Balmer Lawrie & Co is a diversified PSU firm into Travel and Tourism, logistics, Industrial packaging, greases, lubricants and Leather chemicals. In each of these areas it occupies good niches. The FY16 revenues were Rs 3,229 cr. and profits 179 cr. The Revenues, EBITDA and Profits of BLC are up by 7%, 6.8% and 7.3% CAGR over 7 years. The balance sheet is strong and RoCE is over 21%. Investors have got a return of 34% CAGR over 8 years.
  • Why Buy Now: 1) It has been restructuring and strengthening operations by exiting weak segments and undertaking investments in logistics, warehouses, distribution, manufacturing and lubricants. Cash with the firm will be deployed very productively over 2-3 years. 2) The share price has fallen 7% from a recent high of Rs 748. This gives investors an opportunity to enter at lower prices. 3) The cash on balance sheet* is high (Rs 161/sh.), so BLC operations are available for Rs 516. Buy with a target price of Rs 1,057 by Mar 2019, a 56% upside from current price levels.
  • JainMatrix Investments had reported on Balmer Lawrie in Nov-2013 with CMP of Rs 306. Since then, the stock is up 121% in 3 years. See link – Balmer Lawrie – A Steady Boat. We continue to be positive.

Here is a note on Balmer Lawrie & Co (BLC).

BLC – Description and Profile

  • BLC is a 150 year old firm, and is a PSU under Ministry of Petroleum and Natural Gas. Based in Kolkata, this is a Mini-Ratna I public sector enterprise.
  • The FY16 revenues were Rs 3,229 cr., profits 179 cr. and market capitalization today is 1,980 cr.
  • It has 5 JVs and the global operations have about 1,729 employees.
  • BLC is the market leader in steel barrels, greases and oilfield services in India. Its logistics division is the profit driver. BLC is into many business segments: (See Fig 1)
    • Travel & Tours – Travel (Ticketing), Vacations & Money Changing Activities.
    • Greases & Lubricants – Globally BLC is a top grease maker, and its brand is Balmerol.
    • Logistics infrastructure and Services
    • Industrial Packaging – barrels and Drums made of Plain Steel and many variations.
    • Leather Chemicals, Refinery & Oil field Services, etc.
  • Travel: BLC is one of the oldest IATA accredited travel agencies in India. The travel segment operates in 88 locations in 19 cities in the country with a good clientele.
  • Greases & Lubricants: BLC is the largest grease producer in India having 3 mfg. plants in Chennai, Kolkata and Silvassa. It also focuses on R&D with an applications research laboratory in Kolkata. The firm is aggressively marketing its Balmerol brand and continues expanding its distribution network of 20 strategically located stock points, 250 distributors & 4,500 dealers in the country.
  • Logistics: BLC has three state-of-the art Container Freight Stations located at Nhava Sheva, Chennai and Kolkata and offers a wide range of logistics solutions for ocean, air & road freight.
  • These three ports do account for 54% of the total container traffic handled in Indian Ports.
  • BLC is an established player in the Indian industrial packaging industry with 35% share in the 200 liter capacity steel drum segment. It holds the leadership position in this segment, market size of which is estimated to be 12 mn. units. It has a pan-India presence with over 6 drum mfg. facilities in Taloja (Mah.), Asaoti (Haryana), Chennai, Kolkata, Chittoor (AP) & Silvassa.
  • Leadership is Prabal Basu-CMD, D Sothi Selvam-Dir mfg, K Swaminathan-Dir Services
  • Shareholding % is: GoI 61.8, DIIs 10.9, FIIs 2.9, Individuals 18.3, Corporates 3.5, Others 2.6%.
JainMatrix Investments, Balmer Lawrie

Fig 1 – BLC Business Segments/ Geographical Segments

Recent events, Business Plans and Strategies

  • BLC has a focus on in-house R&D for all its manufactured products.
  • Travel: In Feb 2014, BLC acquired the holidays brand “Vacations Exotica” (VEX) for Rs 20 cr., and became one of the top five leisure travel companies in India. VEX has been growing at 25% with revenues of Rs 120 cr. and a potential to rise to around Rs 450 cr. over 3-4 years (per management). BLC can now offer holiday packages and corporate travel services to its portfolio of corporate and govt. clients which number 7.5 lakh. The acquisition is yet to add to the bottom-line, and the accumulated loss is Rs 8-9 crore, but this year BLC will minimize loss and in FY18 is expecting profit.
  • Currently, 90% of BLC’s travel business is from the central govt. and 10% from the private sector. This year BLC has targeted to increase the pvt. sector proportion to 25% over 2 years.
  • BLC has embarked on a major technology upgrade for the travel segment, which will help to improve its service levels and reduce overheads.
  • Greases & Lubricants: It launched the new TechTonic Pack for diesel and 4T oils for the auto sector.
  • AVI-OIL India Pvt. Ltd is a JV between BLC, Indian Oil and NYCO France established in 1993 where BLC is a 25% partner. It is involved in indigenous production & supply of aviation lubricants to defense services & aircraft operators in India and manufactures aero engine oils, hydraulic fluids, greases, protectives & other specialty products for the aviation sector.
  • Application Research Laboratory (ARL) has focused towards the R&D of high performance greases for steel and heavy duty open gear grease for sponge iron plants, engine oil for new generation passenger cars, power sector, fine blanking & cold forging (auto) and hobbling (gear mfg. industry).
  • The ARL located in Kolkata, developed tribological solutions using “DEKATROL technology” which is eco-friendly, helps reduce frictional losses, enhance fuel economy and also life of the product.
  • Logistics: During FY16 Logistics Services achieved a growth of 8% in topline which is on account of a surge (20% growth YOY) in air freight services activity.
  • BLC plans to invest Rs 400 crore over the next two-three years, including Rs 60-70 crore during the current fiscal. Most of the investment would be in logistics business. BLC is setting up 3 cold chain facilities in Hyderabad, Delhi NCR and Mumbai and a multimodal logistics park at Vizag Port in JV with Vizag Port Trust (VPT). The project will be built over 53 acres of land. In this Hub, facilities will be created for handling Exim and Domestic Cargo.
  • BLC is searching for a strategic partner to sell its loss making subsidiary Transafe Services Ltd. engaged in the business of container leasing and logistics services.
  • Industrial Packaging: The new state-of-the-art barrel mfg. plant at Navi Mumbai has stabilized and being close to the large consumption centers in the Western Region, has a competitive advantage.
  • There is a fall of available market size for BLC to an extent of 2 million drums per year due to GoI policy on procurement of Drums from MSME manufacturers. Also there are new entrants in Gujarat, Taloja and Chittoor (in and around the Fruit-pulp Market).

Industry Views:

Indian Travel and Tourism Industry: India has moved up 13 positions to 52nd rank from 65th in Tourism & Travel competitive index. Total contribution by travel and tourism sector to India’s GDP is expected to increase from US$ 136.3 billion in 2015 to US$ 275.2 billion in 2025. The number of Foreign Tourist Arrivals has grown at a CAGR of 3.7% to 5.29 lakh YoY in May 2016. Forex earnings during May 2016 grew at a rate of 8.2% YoY to Rs 10,285 cr. (US$ 1.52 billion). Tourists arriving on e-Tourist Visa during June 2016 totaled 36,982 registering a YoY growth of 137.7%. The industry may see good growth on the back of visa reforms. The rupee depreciation against major currencies has improved demand and positively impacted foreign arrivals as India becomes an affordable destination. The medical tourism market in India is projected to reach US$ 3.9 billion in size having grown at a CAGR of 27% over the 3 years, and is expected to clock over 20% gains annually through 2017.

Indian Logistics Industry: India’s logistics sector is set for accelerated growth, led by GDP revival, ramp up in transport infrastructure, e-commerce, impending GST rollout, and ‘Make in India.’ Indian logistics market is expected to grow at a CAGR of 12.17% till 2020. Empirical evidence indicates that Indian logistics industry grows at 1.5-2 times the GDP growth. A large number of upcoming SEZs have necessitated the development of logistics for the domestic market as well as for global trade. Mumbai has emerged as the preferred location for the development of logistics parks with an investment of approximately $200 million. The development of seven to eight logistics parks are in pipeline on 600 acres around Mumbai. Poor Infrastructure, warehousing & storage and trade Regulations have been hindering growth. The proposed new GST regime and e-commerce will together alter the landscape in warehousing, supply chain management and third party logistics business particularly for organized sector.

Indian Lubricants & Leather Industry: India is the 5th largest lubricant market in volume terms behind the US, China, Russia and Japan. In terms of revenue, the lubricants market size was valued at USD 37 billion in 2014, which is expected to surpass USD 74 billion by 2022, at a CAGR of 8.5%. Increasing automobile sales is expected to drive lubricants market size over the forecast period. India’s leather industry has grown well, transforming from a raw material supplier to a value-added product exporter. Today, around 50% of India’s leather business comes from international trade. The GoI had identified the Leather Sector as a focus sector in the Indian Foreign Trade Policy in view of its immense potential for export growth prospects and employment generation.

Indian Industrial Packaging Industry: The packaging industry in India should reach $73 billion in 2020 from $32 b (FY15), per FICCI and TSMG. The Indian packaging industry constitutes about 4 % of the global packaging industry. (Source IBEF). Indian packaging industry is anticipated to register 18% annual growth, with the flexible packaging and rigid packaging expected to grow annually at 25% and 15%, respectively. Germany & Italy are the main suppliers of packaging machinery but emerging are Taiwan, Korea, China. There are about 600-700 packaging machinery manufacturers, 95% of which are from SMB. Competition is from alternative packaging like PE Drums, IBC/ISO Tankers/ Flexi – Tanks, etc. BLC indicated that sales volume in FY16 were marginally less than FY15 in spite of shrinkage of demand due to GoI directives to procure MS Drums only from Small & Medium Enterprises.

Stock evaluation, Performance and Returns

  • BLC’s price history is detailed in Fig 2. The share price shot up sharply in 2014.
  • Investors in BLC over 8 years got a return of 34% CAGR including bonus and dividends.
  • Dividends have been generous, and are currently 180% or Rs 18/share giving 2.6% yield.
JainMatrix Investments, Balmer Lawrie

Fig 2 – Price History

  • The recent low is 491 in Feb 2016, and the high was Rs 748 in Sep 2016, so BLC has risen sharply this year, but is currently 7% below the highs.
  • Revenues, EBITDA and Profits of BLC are up by 7%, 6.8% and 7.3% CAGR over 7 years.
  • BLC has EBITDA and profit margins of 9.9% and 5.5% resp., which are good, see Fig 3.
  • Current P/E is 11.86 times (of trailing twelve months earnings), while the Price/ Book is 1.71 times. The current valuations look reasonable, which is a positive.
  • The Q1 every year (Apr-June) is the best by revenue. This may be due to the holiday season. But In Q1 FY17, revenues fell due to fall in aviation fuel price and austerity measures from the government.
  • Debt equity ratio is 0.11 which is low. This is a sign of a healthy balance sheet.
  • BLC has positive free cash flows over 8 years, and it has been investing this in assets, a positive. Fig 4.
  • BLC balance sheet* has cash & equivalent (Rs 457), which is Rs 161/sh., so BLC operations are available for (677-161) = Rs 516.
JainMatrix Investments, Balmer Lawrie

Fig 3 – Quarterly Financials (click to enlarge)

JainMatrix Investments, Balmer Lawrie

Fig 4 – Free Cash Flow

  • In Fig 5, the 8 year PE chart for BLC has historic avg PE of 8 times, a range of 4-12 times.
  • Today it is at 11.86 times. The PE has recently fallen from a high of 13.66 times. With good cash levels and a healthy balance sheet, we expect PE levels to rise further.
  • In Fig 6 we can see that the EPS TTM is rising in a steady fashion over the last 8 years within a channel.
  • Beta of stock is 0.9 (Reuters) indicates lower than Sensex volatility, which is good.
JainMatrix Investments, Balmer Lawrie

Fig 5 – Price and PE Chart (click to enlarge)

JainMatrix Investments, Balmer Lawrie

Fig 6 – Price and EPS Chart

JainMatrix Investments, Balmer Lawrie

Fig 7 – Financial Metrics

  • From Fig 7 we can see that the debt equity ratio has been reduced and is currently low. This is positive. The interest coverage ratio has improved. Dividend yield is healthy at 3%. The inventory turnover ratio improved, implying efficient inventory management. Operating & profit margins are flat to positive.
  • BLC’s ROCE fell in the last five years, but it is still high at 21.1% in FY16. Similarly RoNW.

The picture that emerges of BLC is a healthy balance sheet, conservative financials and improving cash.

Benchmarking and Financial Estimates

In a benchmarking exercise we compare BLC with listed peers in similar businesses. See Exh 8.

JainMatrix Investments, Balmer Lawrie

Exhibit 8 – Financial Benchmarking

  • From the exhibit, we can see that BLC has low valuations and high dividends.
  • Margins are low but steady. Similarly the 3 year growth numbers.
  • Return ratios are high for the peer group. Debt is low. Interest coverage is good.
  • This is consistent with its conservative PSU character and steady performance so far. If we bring together the solid past with the recent good growth initiatives, a positive picture emerges.
JainMatrix Investments, Balmer Lawrie

Exhibit 9 – Financial Projections

  • The financial projections for 3 years for BLC in Fig 9 are based on conservative assumptions of investments in operations, stability in crude prices at current levels and no dilution of equity base.
  • Based on projections and a target PE of 12, we project a Mar 2019 price of Rs 1057, a 56% upside from current levels.

Strengths of BLC

  • It has diversified businesses and even during poor economic cycles, BLC has not been hit. The BLC stock has low beta, with stability of a large cap, and the returns, growth potential and upside of a small cap.
  • Strong balance sheet, low debt and good cash balance provides stability and room for growth.
  • BLC has been consistently generating high dividend yields and has robust ROCE numbers.
  • Many of the BLC businesses are high potential with good growth prospects, including Travel & Tourism, logistics, lubricants and industrial packaging.
  • With good investment plans across businesses, BLC is showing a new found aggression. BLC also has exited some legacy businesses with bad returns, such as tea. This too is a bold step.
  • As a Mini-Ratna I PSU, BLC can invest up to Rs. 500 crore or equal to their net worth, whichever is lower without explicit government approval. This allows BLC to move fast on investment plans.

Weaknesses and Risks

  • A likely partial disinvestment in future could give a temporary downside pressure on the stock price.
  • In the import-export trade, there is an ongoing reduction in volumes through ports due to slowdowns in developed economies and China. This may affect the logistics business.
  • BLC may face competition from packing products like PE Drums, and IBC/ISO Tankers/FlexiTanks.
  • BLC profitability is exposed to volatility in commodity prices, especially crude oil & steel, which impact the industrial packaging and oil & lubricants divisions.
  • The travel business faces low entry barriers, threat of govt./PSUs withdrawing the preferred travel agency status and efforts from airlines for direct sale of tickets. BLC will mitigate this by distribution on online portals and focus on value added segments of leisure travel.
  • BLC is over dependent on GoI/ PSEs for its ticketing business as around 90% comes from public sector.
  • There is competitive pressure for Balmerol with established brands such as Castrol, Veedol & Gulf enjoying a lion’s share in the retail lubricants business.
  • BLC is facing challenges with delayed payments from public sector customers.
  • Shipping lines/ CHAs & Forwarders continue to exert pressure for payment of increased incentives for moving their boxes to a particular Container Freight Stations (CFS) & demand more storage free days.
  • Being a small cap share, there can be low trading volumes on the exchanges.

Opinion, Outlook and Recommendation

  • At first glance BLC looks like a small cap that is a complex conglomerate with legacy issues.
  • However on closer analysis we can see that it is into 4-5 high potential segments which together give it a stable portfolio. BLC is shedding / closing down the weak businesses, and investing in the potentials.
  • The balance sheet of BLC is excellent with low debt, good cash and is strengthened by free cash flows.
  • With a small and stable equity base, it appears likely that BLC will reward shareholders with higher dividends, splits and bonuses in the next few years.
  • BUY Balmer Lawrie with a Mar 2019 target price of Rs 1057, a 56% upside from current levels.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer and Notes

Note on * – we made an edit to this report on 19th Oct, removing an erroneous calculation.

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same JM has no known financial interests in Balmer Lawrie & Co or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from your Investment Adviser. Punit Jain is certified and registered under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com