Tag: investing

RBL Bank IPO – A Grand Revival

  • Date: 18th August 2016
  • IPO price range Rs 224 – 225, Apply from 19-23rd Aug 2016
  • Advice: BUY with a 2 year holding perspective
  • Mid Cap: Rs 7,700 crore Market Capitalization
  • Industry: Bank – Private Sector
  • PE 25.9 times and PB 2.45 times

JainMatrix Investments, RBL Bank IPO

Summary

  • Overview: RBL is a Kolhapur (Mah.) based private sector, universal, full service bank.
  • Total Income in FY16 was Rs 3,235 cr. Topline and PAT grew 57% and 45.6% CAGR over 5 years.
  • RBL occupies several valuable niches such as (50%) Maharashtra operations; agriculture, rural and microfinance focus; a startup focus in Bangalore.
  • The strategy of high growth, aggressive deposit & loan rates, and low margins is sustainable.
  • With new management since 2010, RBL is in a Grand Revival and a good business trajectory.
  • Why BUY: 1) RBL has a good record of business so far in terms of growth, nimble business focus, and differentiation. 2) In terms of valuations, RBL has priced the shares moderately.      3) High quality institutional & PE investors and good management.
  • Key risks: Rural slowdown in Maharashtra and intense competition in BFSI sector.
  • Retail Investors can BUY this IPO with a 2 year holding perspective.

Here is a note on RBL Bank Limited (RBL).

IPO highlights

  • The IPO is open from 19-23rd Aug 2016 with Issue Price band: Rs. 224-225 per share
  • The IPO will raise Rs 1,213 crore totally, as Offer for Sale (Rs. 380 cr.) and fresh issue (Rs 833 cr.)
  • Shares offered to public are 5.39 cr. of Face Value: Rs.10. The IPO offers 14.58% of the post IPO equity base, including OFS from shareholders (1.69 cr. shares) and fresh issue (3.7 cr.). Fig 4.
  • Market Lot: 65 shares and in multiples of 65 shares thereof
  • Objects of the issue are – 1) Two existing PE funds and several smaller investors exit with Rs 380 crores 2) Rs 833 cr. will augment RBL’s Tier-I capital base to meet future capital requirements, loans/advances & investment portfolio, and compliance with Basel III norms and RBI guidelines.
  • Valuations are P/E 25.9 times and P/B 2.45 times at the upper end of price band.
  • The Grey Market Premium for this IPO is Rs 40-50 (on 17th Aug).

Introduction to RBL Bank

  • RBL is a Kolhapur (Mah.) based private sector bank with operations in 16 states and UTs.
  • Total Income in FY16 was Rs 3,235 cr. and Profits were Rs 292 cr. RBL topline and PAT has grown CAGR 57% and 45.6% respectively over the last 5 years.
  • It offers banking to companies, SMEs, agricultural, retail and low-income customers, Fig 1.
RBL Bank IPO, JainMatrix Investments

Fig 1 – Business Segments (FY16) and Fig 2 – Segments Growth (click to view)

RBL Bank IPO, JainMatrix Investments

Fig 3 – RBL Branch Network  and Fig 4 – RBL post IPO shareholding (click image to view)

  • It has 3,871 employees, 201 bank branches & 365 ATMs. See Fig 3.
  • Leaders are N. Ramachandran (Ch’man), Vishwavir Ahuja (MD-CEO) & Naresh Karia CFO
  • RBL has a 73-year operating history. They have transformed in the past 6 years with a new management, from a traditional to a ‘new age’ bank. RBL has expanded presence across India through a new network of branches and ATMs, and upgraded the delivery channels with modern tech-enabled channels like phone banking, internet banking and mobile banking.
  • RBL’s business segments consist of corporate and institutional banking (C&IB), commercial banking (CB), branch and business banking (BBB), agribusiness banking (AB), development banking and financial inclusion (DB&FI) and treasury and financial markets operations.
  • RBL’s capital adequacy ratio (CAR) was 12.94% compared to the RBI mandated CAR of 9.625%. The minimum CAR will increase from 9.625% (FY16) to 11.5% (FY19); an increase of 0.625% every fiscal.
  • In addition RBI requires banks to have an additional capital buffer for absorbing risks so the capital requirement for FY17 would be around 12-12.5%.

Business News and Updates

  • SEBI had provided a conditional go-ahead for the IPO of RBL. It had violated the Companies Act when it made 2 rights issues, allotting shares to 2,591 investors (Feb 2003), and 1,969 (Mar 2006). As per the earlier Companies Act of 1956, an unlisted company is not allowed to allot securities to more than 49 investors in a financial year. In order to fast track the IPO process, RBL has given the exit option to its existing shareholders via buyback offer.
  • RBL is looking to grow 10% above the industry average. Under the new leadership during the last 5 years, deposits and loan book rose 20 and 8 times to Rs 17,099 cr. and Rs 14,450 cr. resp. The operating profit rose 19 times from Rs 19 cr. to Rs 360 cr., and the customer base jumped from 1.5 lakhs to 17+ lakh currently. RBL Bank is aiming for a 1 crore customer base by 2020.
  • RBL launched an exclusive branch for start-ups in Bangalore. It was launched to assist entrepreneurs in setting up new companies/enterprises and offer banking services like FOREX, remittances, cash management and other value-added services with affiliates and partners.
  • Beacon and GPE are the only category 2 (PE) selling shareholders in the proposed IPO.
  • In FY14, RBL bought the credit card & home loan groups of RBS India, with 1.2 lakh customers.
  • The loan portfolio is Rs 21,229 crores. We can see that RBL has a diversified loan book. Fig 5.
JainMatrix Investments, RBL Bank IPO

Fig 5 – Loan Book Industry wise

  • RBL had signed up with IBM for their MobileFirst Platform to build, deploy and manage applications to improve the customer experience & stickiness, and employee engagement.
  • Strategy: RBL, with 60% branches in rural and semi-urban areas, is well-suited to serve the bottom of the pyramid where a slew of new payments banks and small finance banks are also expected to operate. In the past, RBL hired talent from microfinance companies for self-help group, joint liability lending and micro-lending businesses. It also has an expert team for rural agriculture, which involves lending for drip irrigation, cultivation, warehousing and transportation.
  • Personal Visit: A visit to RBL Bank branch was useful. The bank was on a main road, and visibility & location were excellent. The branch layout was good. The sales rep. was polite and helpful. All queries were addressed and there was an effort to cross sell other related products. The bank FD rates were attractive, and overall the urban bank branch had a high-end appeal. Perhaps in future we may become customers …..

Industry Outlook

  • The Indian banking sector remains under-penetrated in comparison to other countries. Even though banking industry has increased reach and scope, there is unmet demand for services.
  • Only 40% of the adult population (45% urban and 32% rural) had bank accounts in 2014.
  • Indian banking grew at a healthy pace, as deposits with banks grew at 16.6% CAGR during FY 07-15 to reach Rs 89 lakh cr. But growth slowed to 10.9% (Mar’15) from 14.6% in Mar’14.
  • Deposit accounts with banks per 1,000 adults increased from 734 in 2012 to 1,358 in 2014. Banking assets increased 14% CAGR from Rs 40.7 lakh cr. (Mar’11) to Rs 68.7 lakh cr. (Mar’15).
  • There was a slow growth in the balance sheets of banks witnessed over FY11-15, mainly due to tepid growth in loans and advances at below 10%. Investments also slowed. The decline in credit growth reflected a slowdown in industrial growth, poor corporates earnings growth, risk aversion from banks due to rising bad loans and governance related issues.
  • RBI & GoI are setting up new policies to expand and strengthen banking infra. Banks in India need to capitalize on these to support economic activity and meet financial needs of all sections of society.
  • PSB’s NPA problem: The PSB loans write-offs jumped sharply in recent years, with the state-owned banks writing off the highest-ever amount of Rs 59,547 cr. in FY16. State-owned banks’ gross NPAs by end FY16 were Rs 4.77 lakh cr. or 9.32% of the total advances. RBI has estimated that this ratio may rise to 10.1% by Mar 2017. PSB’s have recorded NPAs across the board, with corporate loans having for NPA of 11.95%, MSE had 11.13% and agriculture and allied were 6.39% of advances.
  • Recapitalisation of PSBs: The govt. proposed a recapitalization plan for the PSB’s to infuse Rs 25,000 cr. in FY16-17, followed by Rs 10,000 cr. each in FY18-19. This is aimed at shoring up the PSBs lending capacities, currently restricted by poor asset quality and weak capitalization. Moody’s has said that the 11 PSBs would need capital of about Rs 1.2 lakh cr. until 2020.
  • Market share: PSBs account for about 70% of the total banking system assets, down from 75% a few years ago. Robust growth for aggressive private banks happened in parallel to weakening of PSBs.
  • Payment Banks: The RBI in Aug 2015 granted approval to 11 entities to open PBs. PBs are tech enabled new stripped-down banks that will reach customers mainly through mobile phones rather than bank branches. PBs will provide basic savings, deposit, payment and remittance banking services, and will target like migrant workers, low-income households and tiny businesses.
  • SFBs: In Sep 2015, the RBI granted approval to 10 entities to convert to small finance banks.  The aim was to upgrade microfinance firms. SFBs would be similar to the existing commercial lenders and can undertake basic banking activities of accepting deposits and lending. The GoI and RBI have created a policy and regulatory framework for MFI to operate in the country, by setting up MUDRA for refinancing and regulating the MFI sector.
  • All universal banks (including RBL) are of course free to offer similar services as PBs and SFBs.
  • Given the large market share of PSBs, their structural issues, capitalization challenges and high NPAs we feel there is a permanent market share shift taking place to private sector banks & NBFCs. Dynamic banks & NBFCs are seeing ample scope to grow business and provide banking services.
  • The banking 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 GDP is growing at 7% and  this should improve over the next few years. Basis this, the sector should grow at 14-16% p.a.

Financials of RBL

JainMatrix Investments, RBL Bank Financials

Fig 6 – RBL Financials

  • RBL Total Income, Net Interest Income (NII) and PAT/EPS have grown 57.0%, 56.1% and 45.6% CAGR over the last 5 years. These are very high growth rates. See Fig 6.
  • Profit margins have not suffered during this growth, and have recovered to 9%.
  • RBL has been paying dividend and also increasing this every year, a good sign. The dividend rate has improved over the years from 3% to 15% on FV Rs 10. The dividend yield is still low at 0.07%.
JainMatrix Investments, RBL Bank IPO

Fig 7 – Key Financial Metrics

  • In Fig 7 we map financial metrics of RBL over 3 years. NIM’s have improved marginally and the CAR has fallen marginally. The IPO proceeds should arrest the fall in CAR ratio.
  • ROA and RoNW is low. However RoNW has improved sharply in the last few years. The Gross NPAs to advances were 0.98% and Net NPAs were 0.59% for FY16, these look OK. CASA is low.

Benchmarking

We compare RBL with peers in the banking space (See exhibit 8).

JainMatrix Investments, RBL Bank IPO

Exhibit 8 – Benchmarking

  • RBL leads on 3 year sales growth and 3 year PAT growth.
  • The P/E, P/B and net NPA’s are in the mid-range amongst its peers.
  • RBL has the lowest margins among peers. It also has the lowest RoE in the industry. But this has risen sharply in 2 years. Dividend yield is low, but growth in dividend rate is also good.
  • PAT margin at 9.04% is the lowest among its comparable peers.

Our conclusion is that RBL is combining high growth and low margins. This is in sync with reports that RBL is addressing the semi urban and rural markets. It can prosper as a low-cost leader.

Positives for RBL Bank and the IPO offering

  • RBL is focusing on niche high growth areas. In the semi-urban and rural areas it has a MFI, agro and small business approach. In Bangalore, it has a start-up focused branch for new entrepreneurs.
  • The greatest potential sector within Indian BFSI is microfinance. RBL has focused sharply on the rural sector to combine high growth and low cost leadership. This is a sustainable success strategy.
  • The financials growth rates have been good over the last 5 years. Given this growth rate, the valuations of the IPO of a P/E of 25.9 and P/B of 2.45 do not look excessive.
  • With almost 50% of its 202 branches in Maharashtra, it has a high regional focus and visibility. Mah. is one of the fast progressing, high potential states and RBL is well placed in this region.
  • RBL has a good management team of experienced banking executives built since its 2010 revival. Mr. Vishwavir Ahuja is a post-graduate diploma from IIM-A and has about 35 years of experience in BFSI. The second rung of management too is impressive.
  • RBL uses M&A to grow rapidly. This can be a good means as long as they do not overpay for assets. Successful acquisitions lead to faster growth and improvement in bottom-line.

Internal Risks

  • Banking sector is competitive, with 120+ banks – PSBs, MNC & private Banks, SFBs, PBs, etc.
  • RBL has a concentration risk with exposure to certain industries, and if such sectors experience any sustained difficulties then RBL business would suffer. There are 3 sectors with >5% exposure, see Fig 5.
  • RBL has a concentration risk in loans to customers. Loans advanced to 20 largest borrowers were Rs 4,635 cr., representing 14% of advances. However this to be expected in a small bank.
  • Inorganic growth involves a number of risks. Additionally many M&A opportunities may be overpriced or of over-hyped assets, something RBL has to be careful about.
  • The 45-57% CAGR growth in financials over last 5 years may be unsustainable over the next 3 years as RBL has transitioned from small to midcap. Post IPO we expect a 28-40% growth.

External Risks

  • Our economic outlook is that India is recovering from a 2013 bottom in terms of GDP growth, with lower inflation, lower CAD & fiscal deficit and stable rupee against foreign currencies. However a continued recovery depends on the government policies, good execution and governance by RBI.
  • RBL is an aggressive player that has entered several new potential sectors and can make mistakes that can affect the growth trajectory and brand.
  • RBL is quite rural focused. India is recovering from 2 consecutive drought years that slowed rural demand. This year so far the rains have looked good. However good rains for the rest of this season remains an uncertainty that can affect rural farming output and demand.
  • RBL operates in a highly regulated banking industry and any changes in the regulations or enforcement initiatives may adversely affect their business.
  • RBL is operating in a good environment of falling interest rates. However recently CPI and WPI index rose to outside the comfort zone of RBI, which may trigger a reversal of this environment.
  • RBI has performed well over 3 years under the leadership of Raghuram Rajan. With his term at an end, we worry that in future RBI may not continue successfully on the reform & improvements, rupee defending and inflation control path seen so far.

Overall Opinion

  • India remains underbanked and in fact a number of NBFCs, MFIs and dynamic private banks are seeing an amazing growth in recent years, trying to fill these spaces. Private banks will grow fast and gain market share over PSB’s in a growing economy.
  • RBL has a good record of business so far in terms of growth, nimble business focus, and differentiation. The strategy of high growth, aggressive rates and lowest margins is sustainable.
  • Given the high growth, in terms of valuations, RBL is not expensive. However there is not much on the table for immediate gains.
  • Since the new management took over in 2010, RBL has seen A Grand Revival and entered a good business trajectory.
  • The key risks are rural slowdown in Maharashtra and high competition in the BFSI industry.
  • The IPO is rated a medium risk, medium return offering.
  • Retail Investors can BUY this IPO with a 2 year holding perspective.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. New Banks: Big Changes in Small Change 
  2. Yes Bank – A Rediscovery – April 2014 report
  3. Equitas IPO – Leader in SF Banks
  4. Dilip Buildcon IPO 
  5. Do you want to be a value investor?
  6. Mahanagar Gas IPO 
  7. How will Brexit impact Indian investors?
  8. A Repurpose for our PSUs
  9. How to Approach the Stock Market – A Lesson from Warren Buffet
  10. Thyrocare IPO – Wellness for your Wealth
  11. Announcement – SEBI approval as a Research Analyst
  12. Alkem Labs IPO
  13. Goods And Services Tax (GST): Integration And Efficiency
  14. Syngene IPO: Good Pharma R&D spinoff from Biocon

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in RBL Bank or any related group. 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.

Source for Data – RBL Bank Ltd – RED HERRING PROSPECTUS dated August 4th, 2016, company website, news reports, etc.

Technology, Long Term Investing and a Poll

Leave a comment

——————————————————————————————————-

I read an article on another forum, An Ode to the Short-Term Trader (details in PS at the end). In essence it talks about how short term equity trading is a tough profession; technology advancements in the last decade have in fact loaded the dice further against these professionals.

I turned my thoughts to Technology in Long Term investing, and if long term investors are facing such challenges from technology, HFT, investing ideas distribution, etc….

 Great Investors:

On one side, I don’t think the Warren Buffets of the world are at all worried by or about technology. I have heard that instead of maintaining cupboards of hardcopy annual reports, he now checks financial data online. But that’s about the only major technology oriented change he may have faced in 40+ years of investing……?

Individual Investors:

In fact, the investment transaction has become easier for individuals in India with de-materialization of shares and online trading websites that have reduced commissions, delays and errors. Investing is now as easy as operating a Bank Account.

On the other hand, the amount of information available to an investor has switched from too little, long back without internet, to too much right now. There is so much information at a company level, and so many options while looking for good companies to invest in. An individual investor has become like the modern supermarket buyer, overwhelmed by options. The challenge has now shifted to discerning the good advice, information and data, from the endless stream.

We at JainMatrix Investments hope to become an investment resource of choice for Indian Investors. :-)

The institutional investor versus Individual investor for Long Term investment was never a big issue. People like Peter Lynch have explained the advantages Individual investors have, especially with ‘invest in what you know’ and ‘the flexibility to look at any market capitalization, unlike Institutions’. So while the deep pockets from National and International Institutions will mostly look at Large Caps, the Individuals can invest more flexibly, and look for bigger gains in Mid & Small Caps (if they have the risk appetite).

High Frequency Trading:

My personal opinion is that HFT is no good, for trader or investor. It favors the institutions as only they can do it, it causes flash crashes and higher trading volatility (when unexplainably many supercomputers simultaneously do similar trades), and empowers individual firms while weakening the system. It’s sort of like giving an AK47 to everyone in the country to defend themselves. It’s bound to instead cause more shooting deaths.

Readers, any thoughts on this? You can respond in comments section below or by email to me. 

A Recent Poll

On 26th Nov, I asked readers their opinion on a few subjects. I get this question a lot: What’s your outlook on the Indian markets? I thought I would try to gauge the mood of readers themselves. See LINK. Here are the results:

Outlook for Indian equity markets

Fig 1 – Sensex 12 month Outlook, JainMatrix Investments

Fig 1 – Sensex 12 month Outlook, JainMatrix Investments

  • It’s wonderful to see the optimism from readers.
  • Also we are not yet in an exuberant mood with 30% getting zero votes.
  • Note that we are already up 4.8% today from Nov 26 levels.

Equity Research Report size

On a different note, we at JainMatrix Investments are keen to respond to subscriber requests and tweak the services as required.

We Polled subscribers on the size and format of the equity research reports we create. Should they be shorter and very pointed, or should we retain the current 7 page exhaustive information and template. Here are the results:

Fig 2 – Equity Research Report Size, JainMatrix Investments

Fig 2 – Equity Research Report Size, JainMatrix Investments

  • The maximum people are of the opinion that we retain the current 7 page size
  • I will modify the report so that busy readers need to read only the first page which is an executive summary.

Thanks to readers who took the trouble to answer these Polls.

PS – The link to the article “AN ODE TO THE SHORT-TERM TRADER” is available at: http://www.zenpenny.com/an-ode-to-the-short-term-trader/

 SUBSCRIBE

The Investment Advisory Service from JainMatrix Investments is still open for Subscriptions. For Offerings details, go to SUBSCRIBE on the website.

JainMatrix Knowledge Base

See other useful reports

Disclaimer

These reports and documents are 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/

NBCC: Small PSU Construction Sub-Contractor IPO, Avoid

Leave a comment
  • Report Date: 27th March
  • The updates of 26th EOD are: Overall 58% subscription with Retail 93% and Institutions 52% with FIIs also stepping in. HNIs are at only 3%. These  are not great numbers.
  • My sense is that HNI will dive in today only, and with Retail and Institutions doing their bit, subscription may go to 2-3 times. Of course this is crystal ball gazing :-)
  • If limited to 2-3 times, then the IPO may list at the lower end of range.
  • Retail applicants can apply accordingly.

Report Date: 24th March ’12

  • Offering: Price Range Rs 90-106, available  from Mar 22-27
  • Opinion: Government dependent,  long term outlook poor , Avoid

NBCC – Description and Profile

  • National Building Construction Co is owned by GoI /Ministry of Urban Dev.
  • It provides Project Management Consultancy (PMC) for civil construction projects for Central and State Govt, civil infrastructure for power sector and real estate. Nationwide spread of projects address sectors like Hospitals (customer ESIC), Education Institutes, roads, irrigation, border fencing, etc.
  • FY11 Revenues were Rs 3,127 crores, with Net Profit 140 cr and EPS 15.6. The net worth is 728 cr and it has an order book of over ~10,000 cr. Dividend yield is about 3-4% at current IPO pricing.
  • However NBCC is a small PSU as it is a Nodal agency that essentially subcontracts work to contractors like L&T, Ramky Infra, etc. Here NBCC has back to back payments to contractors  so that payments from customers are disbursed less margins. So debt is zero. Free cash on the books is 450 cr (35/share).
  • NBCC has maintained ROE and ROCE of about 20% & 33%, in the last 3 years.

Key Strengths of NBCC and IPO offer

  • The 3 years revenue visibility due to the order book is fine, and debt is zero.
  • All India presence, with some international operations starting up too.
  • The construction /infrastructure sectors are in a boom phase with terrific multi decade growth. The Indian government has placed infrastructure spending at a high importance, per Budgets/ Plans.
  • A number of government depts are comfortable dealing with a PSU, and place their orders with NBCC.
  • A discount of 5% on the Offer Price is being offered to Retail Bidders

Key Weaknesses of NBCC and IPO offer

  • As a nodal Agency, NBCC itself does not possess project execution capabilities.
  • The quality of output of NBCC is dependent upon subcontractors. In this current competitive phase for construction, top firms are ready to work for NBCC. Once these pressures ease up in the next 2-3 years, the quality will fall.
  • In the medium term current subcontractors will themselves take up projects directly from govt departments, and NBCC will lose business.
  • NBCC can be compared/ benchmarked against a number of firms. In Building construction, private sector firms are available at PEs ranging from 2-20 times with only larger high profile firms going over 6 times. In Civil Construction sector, large firms are in a range of 6-20 times, with the average at 14 times. Many firms in this sector are available cheaper than NBCC, offering ownership of a better business operation.

Strategic Thoughts around this IPO

  • My worry is whether the good-looking NBCC financials will hold up once it is a listed firm. The QoQ requirements of transparency of a listed firm are challenging, particularly for a govt department run PSU.
  • Why does the government need to do an IPO for NBCC? This Nodal agency for construction should continue doing its good work for government departments. Why should the unsuspecting public be offered ownership in this business? (One rumour is that the Indian Government is testing waters before larger IPOs. This firm is then a bad choice in my opinion).
  • In the 60s, the Indian government owned/ nationalized firms like Banks, LIC, SAIL, BHEL, BEL, Indian Railways etc. so that they can manage them and invest large amounts in new capacity (no one else could). Today the Indian government suffers from a monopolistic, legacy oriented thinking, and a mistrust of the private sector.
  • In these modern times, private operators are far more efficient, capable and technologically advanced than PSUs in the same sector. Private sector can invest in heavy industry. The government should in fact vacate from sectors where private sector can do a better job. NBCC is clearly in one such sector.
  • NBCC has a poor competitive position in the industry. In the next 5-10 years, it will lose its relevance, unless it learns to compete against the private sector firms, and execute projects end to end.
  • See my reports of other firms in this space – BGR Energy Systems and A Roads and Highways Developer (please Subscribe to receive this)

IPO Offering Outline:

  • Offer is of 1.2 crore equity shares for 10% of the firm’s equity, in price range Rs 90-106, available from Mar 22-27th.
  • At the upper end, this values the firm at P/E of 6.8 times, and it will collect 127 crores, and the market cap of the firm will be 1200 crores.
  • Rating agency CARE has assigned a grade 4/5 to the IPO.
  • As on 24th Mar, the issue is 23% subscribed, primarily by Domestic Institutions. One hopes this firm is not another one headed for LIC :-)

Opinion, Outlook and Recommendation

  • NBCC IPO is not for the long term investor
  • It is of course possible that NBCC may offer a listing pop.
  • Conservative investors looking for PSU firms and safety for next 1-2 years may like to Subscribe. Interested investors should watch the subscription numbers on 26 Mar and take their decision.
  • And check back on this website www.jainmatrix.com for updates :-)

Public Reports

For the benefit of my readers, I will share public reports on this IPO by brokers. Note that their opinions may be different from mine :-)

No   Report Link Opinion
1 Aditya Birla Money Link Subscribe for Short Term Gains
2 Hem Securities  Link Subscribe for limited upside
3 Edelweiss Subscribe
4 Swastika Investmart Link Subscribe for the long term
Do you find this site useful? You can:
  1. Subscribe to be the first to receive new posts. Enter your email on the ‘Subscribe’ box at the top right of this page
  2. Or Click on this Signup Form CLICK
  3. Socialize with us – Like on Facebook
  4. Follow on Twitter
  5. Add your comments/ queries below

Disclaimer:

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it. And vice versa.

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/

MCX – 800 pound Gorilla of Commodities; Invest

Leave a comment

Update on Feb 28th – Stunning demand, low allotment, bullish signs

  Update: MCX got subscribed 54 times (4.5 till 2nd day), with QIB 49 times (3.68); HNI 150 (1.9) and Retail 24 (6.9). Allotment price has been fixed at 1032.

  • From a target of 663 crores, the process has generated 36,000 crores !!
  • I have to admit to readers that the response to the IPO was beyond my expectations. Particularly in HNI category, where everyone seems to have jumped in on the last day. This is bad news – as share allocation will vary from 10% to 0, giving very small absolute gains to investors.
  • Bullish sign: This late surge reminds me of the frothy periods in 2007 and 2010 when many IPOs were heavily oversubscribed. MCX shares is definitely going to take off on listing. This IPO will be remembered for signalling the start of the 2012 revival of Indian markets.

Update on Feb 24th

  • Today is the last day to apply for this IPO.
  • Update: MCX got subscribed 4.5 times till yesterday evening, with QIB 3.68 times; HNI 1.9 times and Retail 6.9 times.
  • My prediction that this offering will be oversubscribed seems to be true :-)
  • Strategy: Based on this data from yesterday, there are better chances of getting more shares in the HNI category than Retail. (Risk: this situation can reverse today)
  • The subscription limit  for Retail  is 2 lakhs; and >2L is category HNI.
  • I do not think there are any other issues/ challenges with applying under HNI. While applying, ensure you tick this category in the form. Before you proceed, do check if your Trading account supports HNI.
  • For Retail, to maximize subscription, bid for 192 shares at cut off (likely 1032) for a total application cost of Rs 1,98,144.
  • For HNI, work backwards from the total amount you wish to invest, over 2L, and calculate your number of shares applied for.
  • With high oversubscription, allotment expectations need to be lowered also :-(
  • Good luck !!

————————————————————

Report Date: 21st Feb ’12

  • Offering: Price Range Rs 860 to Rs 1032/-, available from Feb 22-24
  • Opinion: Very attractive offering, is likely to be oversubscribed, apply at upper end of range

Multi Commodity Exchange of India – MCX – Description and Profile

  • The MCX is an electronic commodity futures exchange, currently the largest Commodities Trading (CT) platform in India, with an 82% market share. MCX offers more than 40 commodities across segments such as bullion, ferrous /non-ferrous metals, energy, and a number of agri-commodities, for CT on its platform.
  • The Exchange is the world’s largest exchange in Silver, the second largest in Gold, Copper and Natural Gas and the third largest in Crude Oil futures
  • MCX has over 2,100 registered members operating over 247,000 terminals across India. MCX is the fifth largest CT exchange globally.
  • Other Indian exchanges are National Commodities & Derivatives Exchange (NCDEX), National Multi Commodity Exchange (NMCE), Indian Commodity Exchange (ICEX) and ACE Derivatives & Commodities Exchange.

Promoter – Financial Technologies – Snapshot

  • Financial Technologies – FT – is a software/ exchanges/ ecosystem company promoted by Jignesh Shah. It is listed (Financial Technologies), and Market Cap is 4200 crores.
  • FT has started, promoted and spun off MCX, and is the largest shareholder. It also supports, maintains and develops the current software based platforms. About FT:
MCX IPO, JainMatrix Investments

Fig1 – Price 5 year view of MCX (click to enlarge)

  • The FT stock has been very volatile, rising to over 3000 compared to today’s 910, due to the excessive excitement around MCX, as well as the general market euphoria in FY 2007.
  • FT stock also fell in Dec 2011 to a low of 518, before recovering.  Revenues have been inconsistent also. But current price reflects a P/E of 53 times.
MCX IPO, JainMatrix Investments

Fig2 – Financials snapshot of FT (click to enlarge)

  • The PE is high because FT has been a very innovative company, to have created the MCX platform, and taken leadership position in a very knowledge intensive, and high potential industry of CT.
  • FT has also taken its capabilities to new markets, to set up a network of 10 exchanges and 5 ecosystem ventures, connecting growing economies of Africa, Middle-East, India and SouthEastAsia.

MCX – Financials

MCX IPO, JainMatrix Investments

Fig3 – Financials snapshot of MCX (click to enlarge)

  • A quick view of figures 2 & 3 reveals a transfer of business from Promoter FT to spin-off MCX. This is positive for the new entity.

IPO Offering Outline:

  • The MCX IPO is of 64.27 lakh equity shares (dilution of 12.6% post issue) for subscription during February 22-24, 2012. The exchange could raise Rs 663 crore at the upper end of the price band. (Mkt Cap 5100 crores)
  • IPO shares sale is by shareholders like FT, State Bank of India, GLG Financials Fund, Alexandra Mauritius, Corporation Bank, ICICI Lombard Gen. Insurance Co and Bank of Baroda.
  • There is no fresh issue of equity, so MCX will not get any money through this IPO.
  • CRISIL has assigned a grade 5/5 to the IPO, indicating strong fundamentals.
  • By current projections, IPO pricing PE ratio is 15 to 18 times of FY12 earnings.

Why does MCX need to do an IPO?

  • FT, the promoter, holds 31% in MCX, and has to dilute its stake to 26% in MCX to conform to guidelines prescribed by the commodity markets regulator, Forward Markets Commission. FMC is part of Ministry of Consumer Affairs, Government of India.
  • Other shareholders mentioned above are early investors looking for an exit route.

Was there any legal issue/ court case around MCX or FT?

  • FT/MCX have faced a series of litigations from SEBI, FMC, etc on aspects like corporate structure, Promoter holding and Trading permits. However these are mostly resolved. They were also necessary as a Commodities Trading platform in India is a critical infrastructure that can affect (and of course improve :-)) lives of crores of farmers/ agro based workers, commodity consumers, etc.
  • Other litigation pertain to transaction level issues, which are inevitable as trading and discipline are introduced into new sectors, new commodities and new producers and consumers.

Investors should look at the MCX IPO because:

  • MCX is available to investors at a PE of 15-18 compared to FT PE of 53. This is a massive discount. It is reasonable to expect the high PE of FT to rub off on MCX.
  • This is among the largest IPO offers in the last year. There has been an improvement in investment climate & sentiment in India from Dec’11. The IPO is testing this new investment climate.
  • It is believed that Retail as well as Institutional investors are waiting in the sidelines for good investment and entry opportunities.
  • MCX is a pioneer in a new industry, provides a critical infrastructure and is a good independent business opportunity. It has an innovative, fast growing platform that not just dominates India but also is in global top 3 in several commodity categories.
  • MCX has good management with global ambitions; firm is cash positive, profitable and growing fast. As a standalone entity it is attractive.

Risks:

  • FT should stay at arms length away from MCX and allow this firm to develop independently.
  • Government controlled sector. There are periodic bans on commodity exports. The Indian Govt should allow CT exchanges and market to grow.
  • Competition can intensify as some other firms have the backing of government, NSE, BSE, PSUs, etc.
  • My opinion is that Commodities trading should be restricted to Producers, Consumers, Institutions and professional / specialist investors. Retail investors without specialized knowledge may burn their fingers, and give the CT business bad publicity.

Opinion, Outlook and Recommendation

  • MCX is part of a new agri /commodities revolution in India, where trading can ‘disintermediate’ the commodities supply chain, reduce price inflation, enable better price realization for producers and reduce costs (and risks) in the system. That is if markets develop as expected :-).
  • MCX is the dominant leader in this emerging business. It has a good management with global ambitions.
  • The only reason for these discounts to be available to IPO investors is because MCX is testing troubled waters, as market sentiments have been poor in the past and some IPOs have even been cancelled recently. Also public resentment is high as IPOs from 2010/11 are running at discounts to IPO pricing.
  • This is a very attractive investment opportunity. I expect this IPO to be a big success and get heavily oversubscribed. Also there should be a good appreciation of the share on listing.
  • Conservative investors should watch subscriptions on 22-23 Feb and take a decision by 24th.
  • And check back on this website www.jainmatrix.com for updates :-)
  • More on the 800 pound gorilla ;-)

Do you find this site useful? You can:

  1. Subscribe to be the first to receive new posts. Enter your email on the ‘Subscribe’ box at the top right of this page
  2. Or Click on this Signup Form CLICK
  3. Socialize with us – Like on Facebook
  4. Follow on Twitter
  5. Add your comments/ queries below

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/

Indian Equity – Winds of Change

Leave a comment
  • December 16th 2011

The Indian Stock market has been buffeted by a lot of changes in the last few quarters. As a long term investor, one needs to track the key moves and tweak the overall outlook and investment strategy in line with these. While there is a lot of noise and headline grabbing information flying around, there are three key themes that are re-shaping the economy and markets right now:

Inflation is starting to fall, and Interest rates are peaking

The economy has been attacked by inflation that has been eating away at cash in hand and fixed investments. Inflation definitely impacts corporate results.

Cost of input like raw materials and services rises, and corporates need to raise prices to protect margins. Inflation tests corporate pricing power, and on an overall basis depresses earnings.

JainMatrix Investments

Inflation and Interest Rates - JainMatrix Investments

RBI tries to fight inflation, by raising interest rates, which slows economic growth. As we can see, the interest rates have been raised sharply by RBI. I believe from here on, the inflation rates will start to fall. And RBI will arrest the rise, and even start to drop interest rates.

  • This situation is good for Interest rate sensitives in our economy, such as Banks, NBFCs, Automotives and Real Estate. These businesses prosper as interest rates fall.
  • Infrastructure sector is also debt intensive, and may stabilize (it has fallen sharply in the last year) on lower Interest rates.

Some of my reports in these sectors are:

  • Yes Bank (see link to report).
  • Mundra Port and SEZ (see link to report).
  • L&T Finance (see link to report). It has fallen since the IPO, but should recover in a better environment
  • Muthoot Finance (see link to report). Same as above.
  • Bharat Forge (see link to report)

INR has weakened against the USD

The persistent inflation, trade deficit and increasing fiscal deficit are taking their toll on the INR. The rupee has weakened against the USD, and currently is in the 52-53 range. India has a trade deficit,  and the situation is worsened when inward flow of FDI/FII capital stops. In response, we have to recalibrate our sectoral expectations.

Petrol and imported goods will get expensive. Exports in unhedged USD denominations will get more lucrative. The gainers will be exporters, like IT services, Gems & Jewellery, Auto exporters, Engineering exporters and Petroleum.  The losers will be importers, as well as firms with large USD (or foreign currency) denominated debt.

Some of my reports in these sectors are:

  • eClerx Services (see link to report). A good buy at these levels.
  • Bharti Airtel (see link to report ). This firm is a good long term buy, but may suffer in short term due to USD denominated debt

The Power sector is in trouble

The power sector extends across generation, transmission, distribution, power focused lenders and EPC firms focusing on these sub sectors. The power sector is a key driver of GDP, as most firms depend on the Utilities for supply. There is an overall 9-15% shortage of power generated, and demand is growing at 5-6% per annum.

The State Electricity Boards face a complex situation of supply shortfall, political pressure to provide free power to Agriculture, Transmission and Distribution losses and thefts. In addition, the power price has to be approved by State level Tariff Boards.

  • The current situation is that many of the Indian SEBs are in crisis due to losses and Cash Flow problems. They are unable to pay for the fuel, or pay the EPC contractors of new plants.
  • Another issue is the supply of fuels. There is a Coal shortage as Coal India Ltd is unable to produce enough. Many utilities have been forced to procure Coal from Australian and Indonesian mines at higher tariffs. Gas too is in short supply. The Reliance wells have underperformed

Until the Central and State governments free up the market, and restructure loans and help clean up this mess, investments in this critical sector will dry up and suppliers / EPC players will face financial pressures.

  • Except Fuel suppliers

The only sub-sector in Power that may remain in good shape would be the Upstream resource rich companies. These firms either produce raw fuels domestically or import this. The sheer demand growth will ensure that this subsector will be protected and be a defensive play within Power.

Some of my reports in these sectors are:

  • BGR Energy (see link to report).
  • Coal India (see link to report).
  • Petronet LNG (see link to report)

As a long term investor, it does not make sense to react to short term events. But if a theme is to pan out over 1-2 years, it makes sense to adjust the portfolio weightages accordingly.

In depressed times, I recommend that retail investors should choose a safe, large cap portfolio and invest in a SIP fashion. See link to report.

Gold also is both a good protector of wealth as well as a hedge against global financial uncertainties. See link to report.

Good luck with your choices.

:-)

  • Socialize with us  Like on Facebook
  • Check back on the website www.jainmatrix.com for updates.
  • Do you find this site useful? Please comment below. You can also subscribe for my posts by filling the ‘Sign me up’ box on top right of this page.

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/

Hanung Toys and Textiles – Look for the rebound

1 Comment
  • Date: October 24, 2011
  • CMP: Rs 109; Small Cap
  • Advice: High Risk, High Gain stock at attractive entry point
  • Target: 9 month – 200; 24 month – 290

Hanung Toys and Textiles is a small but fast growing manufacturer of textile furnishings and toys. The business performance has been robust. A series of news disappointments has depressed prices. But today it is an attractive contrarian pick.

Hanung – Description and Profile

  • HANUNG Toys & Textiles Ltd is a niche player in Soft Toys, Decorative Cushions & Children’s Room Furnishings. Turnover is Rs 1160 crores (last 4 quarters). The Market Cap is Rs 274 crores.
  • The revenue breakup by category is 65% textile furnishing and 35% soft toys.
  • The CMD of HTTL, Mr. Ashok Kumar Bansal, is a Chartered Accountant who started this company in the 80s.
  • The financial management of this company appears to be conservative and understated; while the business plans are aggressive.
  • HTTL had exports of 75% of sales. See Sales break-up by geography in Fig 1.
Hanung Toys Textiles, JainMatrix Investments

Fig 1 - Hanung - Sales by Geo (click to enlarge)

  • The key facilities consist of toys manufacturing facility, home furnishing production facility and textile processing facility, 3 located in Noida and one in Uttaranchal. The toys manufacturing unit is established in the Noida SEZ wherein the benefits of duty free imports and single window clearance for imports/exports are available.
  • Internationally, products made by HTTL are available on the shelves of Bloomingdales, William-Sonoma Group, Macy’s, JC Penney, Target Stores, Home Depot, Wal-Mart, Anna’s Linens, Ikea, Homebase, Argos, etc
  • In India, HTTL owns ‘Play-n-Pets’ and ‘Muskan’ brands in stuffed toys and ‘Splash’ in Home Furnishings. They have more than 100 distributors for the stuffed toys across the country, including multi-brand outlets like Lifestyle, Shopper’s Stop, Westside, Big Bazar (Pantaloon group), Pyramid, Globus, Landmark, etc. Its ‘Splash’ range of home furnishings is available at 600 stores across the country.
  • The current order book is estimated at Rs 1500-1900 crore, which is about 1.5 years of Sales.
  • Shareholding pattern is: Promoters 65%; FIIs 1%; Bodies Corporate 12 %; Individuals – retail 19%; Other 3%
  • HTTL exports are positioned in the Mid-Market range, making the business less sensitive to Chinese exports.
  • Business potential is very high. In toys, the demand is large in current markets. Quality and price matter here. Competition is mostly from China. In home furnishings, the demand, particularly abroad is very high.
  • In effect, the addressable market for HTTL is 100s of times its current Sales.

Stock evaluation, performance and returns

  • The IPO in Sept 2005 was 8.6 times oversubscribed. Pricing was at Rs 95
  • HTTL has been paying Dividend for last 4 years, which increased from 15% to 20% of late.
  • The price has fallen from Nov 2010 highs of 410, to a CMP today of 109. The volatility is high, see fig 2.
Hanung Toys; JainMatrix Investments

Fig 2 – HTTL stock price – shows high volatility

  • Sales and Profit have however grown very steadily (Fig 3)
  • Sales have grown at 42% CAGR over the last 5 years
  • Profits have grown faster at 44% in this period
Hanung Toys; JainMatrix Investments

Fig 3 - Quarterly income and profits have, however grown steadily. (click to enlarge)

Price Action and Events

  • Price of HTTL peaked in Oct 2010, and then dropped sharply. There was some negative news and bad publicity:
  1. The high interest rates regime has taken a toll on HTTL. Costs have risen, as there is debt on the books of Rs 1000 crores. Debt equity ratio currently is 1.74
  2. Overall the Sensex fell sharply. The Small Cap shares fell faster than large cap shares. HTTL due to it’s volatile nature suffered even more.
  3. A GDR plan – to raise capital and fund growth plans – was dropped due to low share prices.
  4. Textiles sector has not done very well in the last year. Cotton prices have risen sharply.
  • However, HTTL has made several smart moves that are improving prospects
  1. In March 2011, HTTL acquired a controlling stake in the US-based Cody Direct Corp. This firm deals in marketing and distribution of home furnishings. This acquisition will not contribute to topline, but to profitability and operating margins, as some of the middlemen will be removed from the sales cycle.
  2. Plans are on to ramp up capacity, and also a backward integration by setting up spinning plants. A capex plan for the next 2-3 years is in place of Rs 720 crores. This will be raised from cash from operations as well as loans from banks.
  3. The firm is rationalizing interest costs by switching over from the existing Indian Rupee loans to ECB (European Central Bank) or similar, where they can save 3-4% of interest.
  • Another near term trigger is the recent appreciation in the US$ – INR rates. This will boost USD earnings for HTTL, and should reflect in quarterly earnings for Q3 and Q4.

Graphics:

  • The Price and PE graph Fig 4 – shows that valuations are bottoming out and are near all time lows of 2008.
  • The Price and EPS graph Fig 5 – shows that EPS is at all time highs.
  • Put together, we can see that this is a very attractive time to enter the stock as a long-term investor.
Hanung Toys; JainMatrix Investments

Fig 4 - Price and PE Graph (click to enlarge)

Valuations and Financial metrics

  • EPS (adjusted) growth has been 44% CAGR over the last 5 years. The EPS quarterly graph (fig 4) shows a steady rise. This is a small but stable company in a good market that is establishing base and will achieve critical mass of size, brand and reach over the next 5 years.
  • PEG is at 0.05 – indicates underpriced status, a very good investment opportunity
  • RoE is at around 17-20% – healthy statistic.
  • Price/Book is 0.54, this is very attractive.
  • Management has projected 20% revenue growth for the next 2 years.
Hanung Toys; JainMatrix Investments

Fig 5 - Price and EPS Graph (click to enlarge)

Opinion, Outlook and Recommendation

  • This is a volatile small cap stock. There has been a large fall in share price since Oct 2010, by 75%. There is of course a possibility that this falling trend will continue.
  • However, business performance has been excellent. After this recent fall, HTTL now has a PE of 2.26. This is an opportunity for investors to average down their cost of holdings, or enter afresh.
  • The stock may be waiting for a trigger to reverse the price downtrend. Once this happens, the upside is high.
  • Our projection is a Rs 200 price level in 9 months (Aug 2012) and a Rs 290 price level in 24 months (Nov 2013).
  • Retail investors with a risk appetite can start a systematic investment (monthly) at current levels.
Hanung Toys; JainMatrix Investments

Fig 6 - Price Projections (click to enlarge)

Risks:

  • Small size; it is a volatile stock. It falls hard in poor sentiment periods and rises rapidly in good.
  • Current price fall may continue for an unpredictable period, till investor sentiment recovers.
  • Being a small firm, can be affected badly by a single accident, strike or untoward incident
  • Recent GDR was cancelled due to unfavorable market conditions, causing a further fall in price
  • Debt equity is rising, and is at 1.74 as of now.

 Notes

  • Check back on the website www.jainmatrix.com for updates.
  • Like my posts on Facebook
  • Do you find this site useful? Please comment below. You can also subscribe for my posts by filling the ‘Sign me up’ box on top right of this page.

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/

Bharat Forge – the Forging Giant Returns

Leave a comment

CMP: 291          Date: 12-08- 2011          Advice: Invest in SIP fashion

  • Till 2006 Bharat Forge (BF) was primarily an auto components firm. A number of mergers and acquisitions in the 2004-07 periods saw BF also enter in several new geographies. Manufacturing is in 11 locations and 5 countries: India (4), Germany (3), China (2), Sweden (1) and USA (1).
  • In the last 3 years, BF has executed a de-risking plan and enter into new verticals. For BF the focus in the Non-Auto business is on growing sectors like Power Plants, Marine, Construction & Mining, Oil & Gas, Energy, Aerospace and Railways, and Import substitution for BHEL.  JVs are with respected partners, like NTPC for power, Alsthom for Thermal/ Nuclear turbine/ generation sets and UK based David Brown for gear box manufacturer
Bharat Forge

Change in Revenue Segments

Fig 1 – Business Segments in 2011 (click chart to expand)

 Bharat Forge has successfully diversified from Auto into other verticals, de-risking their overall business profile

Current Business Outlook

  • The fall in auto demand in 2007-09 saw cost cutting measures rolled out to lower the break even for manufacturing facilities. Capacity utilization improved from 53% in 2009, to 70% for standalone and 45% for international entities in 2010. Additional improvements have contributed significantly to profits. All overseas subsidiaries, including its JV in China, FAW Bharat Forge, have see a turnaround and have started contributing to the bottom line, a year ahead of the 2012 target.
  • The auto market began to revive in 2009, and BF was best placed to take advantage of this trend.
  • In June 2011, Bharat Forge quarterly revenues surged to 857 crores, an all time high.
  • The Business environment and demand situation has now become very positive. BF is able to take advantage of surging demand due to spare capacities, low cost production, global presence and nimble design capabilities. Also a series of well timed entries into new non-automotive markets.
Bharat Forge

Quarterly sales and Net Profits

 Fig 2 – Quarterly revenues have surged (click chart to expand)

 Business is surging, in both Auto and non-Auto segments. Profit growth follows in a phased manner, as investments in new businesses break even

Valuations are low, growth is high

  • The stock price peaked in 2006 and has not touched those levels since. But BF has seen a dramatic business recovery in the last two years in terms of Earnings per share – EPS, which has already risen to all time highs.
  • While the BF stock has given investors only 11% CAGR returns over a 7-year period, the aggressive nature of this firm means that the initial period of rapid gain was followed by a period of restructuring and consolidation. The expectation now is another period of rapid gain on all parameters.
  1. Adjusted EPS has seen a recovery post ‘09 and is now into all time high territory
  2. Debt-equity is 0.74 as of Mar’11 (down from 1.21 in ‘10). This is comfortable, and safe.
  3. ROCE and RONW are in 15-17% range indicating healthy returns.
  4. PE has fallen to reasonable levels (compared to historical) indicating safety in investments at this level.
  5. PEG is in the range of 0.3, indicating indicates high safety and undervalued status
Bharat Forge

Fig 3 - EPS and Cash Flow

Bharat Forge

Fig 4 - Price and PE

Fig 4 – PE has fallen to attractive levels, and combined with robust business performance gives us a very good entry point for long term investments – (click chart to expand)

Bharat Forge

Fig 5 - Price and EPS

Fig 5 – Adjusted EPS has retraced rapidly and is into all time high territory

Projection

  • Bharat Forge has been in a period of consolidation, and will see a break out soon
  • EPS has moved to all time highs. With a suitable lag, this will be followed by stock price also moving into new highs. The stock will appreciate to Market Price of 700 in 12-14 months. This is based on an expected PE of 30 range and continued EPS growth seen since the bottom of June 2009.
  • This is an excellent entry point for this stock as it is currently underpriced and ‘out of favour’. The current market weakness has dragged down the market price of the stock. With overall Sensex / market recovery expected in 6-9 months, this share price is expected to recover rapidly.

Risks

  • Auto sector demand in India has been tapering off in recent months. It is expected to have lower growth for 2-3 quarters before recovering. Auto Exports however from India are accelerating.
  • Headwinds, such as Higher raw-material costs like steel and power may restrict margin expansion and EPS growth. The rising commodity costs have hit manufacturers like Bharat Forge.
  • In recent months the increase in interest rates and slowdown in the economy has slowed the growth of the auto industry, particularly in India.
  • However, both these events appear to have played out/peaked, and will stabilise/ reduce in the near future.
  • Business complexity has increased due to addition of a number of new verticals. However, BF is already seeing exciting success from the new ventures.
  • An increase in working Capital in the firm in 2011 saw the Cash Flow fall this year. This stems from investments in new businesses as well as new investments in the Auto business to increase capacity and de-bottlenecking.
  • External factors like stock market sentiments. However our current view is that this will revert to a positive state over the next 9-12 months.
  • Check back on the website www.jainmatrix.com for updates.
  • Like my post on Facebook
  • Do you find this site useful? Please comment below. You can also subscribe for my posts by filling the ‘Sign me up’ box on top right of this page.

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/