The Demographic Dividend in India

July 31, 2011December 19, 2017Leave a comment

And how you can profit from it.

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We’re hearing the term ‘Demographic Dividend’ bandied about quite a bit, when describing India. What does it mean, and what are the implications?

What’s happening here?

In the last 10 years India has added 181 million people to its population. The population of India, at 1,201 billion, is almost equal to the combined population of the US, Indonesia, Brazil, Pakistan, Bangladesh and Japan put together (1214.3 million).

A news report – India will account for the highest working age population in the next 10 years, the International Labor Organization (ILO) has said in its report. And … between 2010 and 2020, the working age population between 15 and 64 years in a group of countries will increase by 212 million and “over 64 per cent of the increase will occur in only one country – India.”

India is going to experience this Demographic Dividend (DD) over the next few years. This has a few different forms and implications.

A large number of people will enter the working population age, providing labor availability across skill sets – unskilled to highly skilled industries and jobs
There will be fewer kids per family. This means families will upgrade lifestyles, providing better food, education and medicine to the fewer family members. Also, more women will enter the workforce in this period.
In the working age of 20-60, people save more, and the economy has more resources freed up to invest in productive loans, projects, infrastructure and industrial asset creating.

How do you as an investor gain from this?

The Demographic Dividend in India is both a risk and an opportunity. As an investor, your best way to play this trend is to look for the winners on the economic industrial landscape that will gain from this.

Here is a group of firms – some winners, some not.

Sector/ Stock	Likely Trends and Outlook
Banks	Larger Banks are plays on the overall economy. Reserve Bank of India, the regulatory authority, expects average industry growth rate to be 20% during FY11.The banks sector will gain tremendously from the DD.
HDFC BANK	This fast growing bank combines rapid credit growth with high asset quality, hurtling ahead with 30% year on year growth on key parameters. More people with jobs and salaries and growing businesses means continued growth for HDFC Bank.
ICICI BANK	This bank has emerged from a two-year cleansing up of its balance sheet, and has vowed high growth balanced with better asset quality. It already has the widest reach across India in terms of Bank branches. Looks certain to gain from DD.
Yes Bank	Yes Bank is an aggressive high potential new generation bank. The recent fall in prices by 28% makes this an attractive entry point for long-term investment. See article – Note on Yes Bank
InfoTech/ IT software	Indian software services firms started off looking for business all over the world, riding on technology staff shortages and cost arbitrages. The newer trend is to move up the value chain and strengthen sales & marketing in India, to ride on a maturing domestic industrial and services base.
INFOSYS Technologies	This large, well-managed Indian software services firm will gain from DD in the form of controlling costs of skilled software resources. INFY reaches out far and wide across India, hiring top talent. They also come closer by setting up in smaller towns, offering better working conditions, while servicing global customers.
WIPRO	Wipro reaches out to customers offering the full suite of software services, BPO and engineering solutions. Expected to gain from DD in terms of controlling resource costs and domestic business growth.
(iGate) PATNI COMPUTERS	This firm has been among the larger players in Indian software services, but has not seen the scaling up associated with the other top players. Nor been able to grow fast in new locations in India. But the acquisition by iGate should see a reversal, and improve the long-term prospects. But in the next 1-2 quarters, there will be higher costs of integration and attrition, before the dust settles.
MAHINDRA SATYAM	With a corporate restructuring and change of ownership behind it, this firm will hope to resurrect its battered reputation over the next few years. The wheels of justice grind slowly in India, so there’s still uncertainty in the air.
Others
TATA MOTORS	This India based automobile major has extended its business from trucks and commercial vehicles a decade ago to passenger cars and SUVs, as well as acquired the marquee brands of Jaguar Land Rover. This acquisition looked expensive 2 years ago, but displayed a stunning turnaround last year.The innovative ‘Tata Nano’ project has stabilized and will gain from DD, offering an affordable safe transportation to middle class Indians. Export plans look feasible and profitable.A slew of new product launches in the commercial vehicles in India helps Tata Motors maintain an astonishing 65% market share in the category. DD drives increases in logistics investments, and TTM is the leader here.Global plans, good technologies and the Indian manufacturing base can make TTM an understated global leader of the future.
DR REDDY	DD for the Pharmaceuticals sector is very positive as a lot more people spend a lot more on healthcare & medicines. For RDY, rapid growth in domestic business shows this firm is on top of DD trends. RDY should also gain from M&As in a very fragmented domestic industry.Growth from exports also shows the firm is gaining from Indian industry advantages – like lower cost of manufacture, as well as the market opportunity from a number of blockbuster drugs in developed markets going off patent.Recent acquisitions are aimed at growing the global generics business.
Petronet LNG	Petronet LNG is a gem of a stock that has given equity investors safe and high returns for the last 7 years.See link – Note on Petronet LNG
Bharti Airtel	Bharti is the top telecom company in India by revenues and market share. It has weathered the storm of hyper competition of 2008-10 like a leader, maintaining prices, and signaling the reversal in 2011. It’s a cost and efficiency leader, also pushing into new businesses like DTH, Telemedia (broadband, IPTV and fixed line) and Enterprise (end to end telecom services). With it’s acquisition of Zain, it has now got access to the growth engine of the next decade – Africa. See link – Note on Bharti Airtel

Some of the above firms will certainly continue to win in the next decade.

Happy investing!

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A Titan for the long term

June 18, 2011June 25, 2014Leave a comment

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There is an update of this report dated Nov2012, Titan – The Jewel in the Crown

Titan Industries is a power brand and the largest specialty retail chain in India. It is translating the success in watches into new categories by adding one every 5-7 years, and now also straddles jewellery, eye wear and precision components. Titan is at a very early stage of revenue and profit growth. Invest.

Titan Industries – Description and Profile

Titan Industries is a Tata group company selling watches, jewellery, eye wear and precision components. Titan has built excellent brands that drive sales in these consumer categories.
They have also set up specialty retail chains to display these products and improve the customer experience. This chain is the largest specialty retail chain in India.
Started in 1984 with a joint venture between the Tatas and the Tamil Nadu Industrial Development Corporation for watches, it expanded in 1995 into jewellery and in 2007 into eye wear.
Today the turnover is 6050 crores, PAT 430 cr and sales has grown 35% CAGR over the last 6 years.
Here is a graphic of Titan’s products, distribution, brands and future growth drivers

Fig 1 – A snapshot of Titan’s products, brands, distribution and future growth (click to enlarge)

The demand for Titan products depends on consumer disposable incomes, and straddle the mid to high end segments

In watches, the owned brands are Fastrack, Xylys, Titan and Sonata. High end licensed watch brands include Tommy Hilfiger, fcuk and Hugo Boss.

In eye wear, the three in-house brands are Titan, Eye+ and Dash, while the international and luxury brands include Gucci, D&G, Armani, BOSS, Esprit, Daniel Swarowski and Mont Blanc

There has been a steady growth in consumer demand except for 2008-09. Recovery is complete, and this trend is expected to continue and even accelerate.
Watch parts which were sourced from China, are now being transitioned to production in house in India. This is due to increase in prices from Chinese parts. Even though Titan’s investments requirements and cost of production increase, this gives Titan greater control over the supply chain and quality control.
Titan operates 85–90% of its stores through the franchisee model – this allows flexibility in scale and lower cost expansion

Stock evaluation, performance and returns

The Price and Dividend history of Titan is detailed below:

Price and Dividend History

Fig 2 – Price and Annual dividend history

(Dividend in Rs/share, FV Rs 1) Click to enlarge graphic

Fig 3 – Quarterly revenues and Profits have grown steadily over the last 8 years

EPS and Cash Flow

Fig 4 – Cash Flow and EPS are up substantially

Sales are growing at 35% CAGR over the last 6 years.
Over the same period, EPS (on a steady equity base) has grown 57%. This is remarkable profitability.
However, cash from operating activities is up only 19.8% – this is because Titan is investing in building the retail chain as well as in the manufacturing facilities.
Putting these together, Titan appears to be in a virtuous cycle of investment – growth – profits that (barring any India/ global slowdown) – is a multi year business acceleration.

Price and PE

Fig 5 – Price and PE Graph

Price and EPS

Fig 6 – Price and EPS Graph

Even with the rapid appreciation of Titan’s share price in the last 2 years, the PE is around 46. This is historically in the medium/ average range for Titan over the last 7-8 years. Investors seem to have always expected more from Titan :-)
EPS has increased steadily, barring the 2008-09 period where overall the economy had slowed. Post this period, the earnings have rebounded and caught up with the previous growth path
ROCE has been at an amazing 42-48% in the last 2 years.
PEG is at 0.81 – indicates safety and still undervalued status
Very low debt equity ratio, and good cash position indicates strength in the balance sheet.
The company has recently approved a share split to 1 Re face value (from 10Rs), and a bonus issue of 1 for 1 held. This will reduce market price by 1/20 and boost retail participation (and shareholder returns in the short run).

Risks:

Titan is seen as a proxy for gold. In recent times, Titan has been enjoying appreciation on the inventory due to gold appreciating. A fall in price of gold can be a risk to the gold inventory and the jewellery demand at Titan.
Competition in India is intensifying with a host of jewellery and eye wear brands challenging Titan.
Precision components is a commodity type business, needing volumes, compared to watches, jewellery and eye-care, which are branding, manufacturing and retailing oriented. This business may never reach profitability levels compared to the other three.
So what next after eye care? In the next 2-4 years Titan needs to enter into a new business that falls in it’s sweet spot of takeover of unorganized sector – precision manufacturing – consumer retail where it’s strong brand can be deployed successfully. If it does not, business in India can taper off in the next 7-10 years.

Opinion, Outlook and Recommendation

In India the ‘demographic dividend’ and GDP growth have pulled the per capita income to over Rs 54,000. Experts expect consumption to accelerate now, as consumers have more discretionary spending power, (and spend less of total income on food). Titan’s watch, jewellery and eye care categories will ride this consumption wave.
In Jewellery and eye care, Titan is addressing a relatively unorganized sector, and by leveraging it’s national brand and distribution network, building credibility and loyal consumers. This is a sustainable model, and Titan enjoys a first mover advantage.
Exports too are a big driver of future growth, as the Indian success story is replicated in 26+ countries. In these business categories, margins can be much higher in developed countries, so there is high potential here.
Precision components manufacture, while being a lower margin business, has a very large global potential. Anecdotal evidence from Titan’s procurement for watch parts suggests that Indian parts are gaining in competitiveness compared to Chinese equivalents.
Titan has built capabilities in branding, design and manufacturing that are strong core competencies.
In the last 2 years, share price has appreciated 4 times. For new investors, it may appear to be a case of, closing the stable door after the horse has bolted :-). However, this stock is expected to continue to perform strongly for several years to come.
Invest now and systematically for long term outperformance

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Sparkling Power Finance Corp FPO – May 10-13

May 10, 2011December 19, 20176 Comments

Update on late May 12th!

PFC FPO got over subscribed 3.6 times on Thursday.
While the FII portion was subscribed a healthy 6.9 times, the HNI (0.01 times) and Retail (0.34 times) subscribers are waiting for the last day. This indicates a likely surge tomorrow in the latter two categories.
The maximum subscription amount for Retail is Rs 2,00,000. For Retail, if you want to maximise your subscription, bid for 1064 (28X38) shares at Cut Off (could be as low as 183.35) for an investment of Rs 1,95,084
Good luck !!

FPO Note – May 10th

Power Finance Corp is a power sector PSU available at attractive valuations. Demand in the sector remains robust. Subscribe to the FPO.

Power Demand:

The Indian power generation sector faces huge demand growth. See graph (we are in 11^th Plan now)
Plan vs Achievement has been as low as 51.5% in the 10^th Plan
The shortfall of peak power has been 8-12% in the last decade.
Over 40% of Indian population still don’t have access to electricity

Capacity addition – Power

Power Finance Corp – Description and Profile

PFC is a firm that funds and stimulates power generation capacity in India. It is a Navaratna PSU registered as a NBFC with ‘Infrastructure Finance Company’ status.
PFC has a market share of about 20% in the Indian power lending industry, across all entities, NBFCs/ Banks, private/ public, and Indian/ MNCs.
PFC lends to a number of power generation firms, and is a nodal agency for Ultra Mega Power Projects (UMPPs), and the R-APDRP program (Restructured Accelerated Power Development and Reform Program), and for other government driven power initiatives
It also lends to related sectors like Transmission Projects and Distribution, and runs the DRUM program (Distribution Reforms, Upgrades & Management).

PFC Stock evaluation, performance and returns

PFC first got listed in a Jan 2007 IPO, and got oversubscribed by 75 times; and the IPO price was set at Rs 85.
Investors in the Jan 2007 IPO of PFC have earned a 22% CAGR return to date

PFC investor Returns

PFC has certainly outperformed the NIFTY since it’s IPO.

PFC has outperformed the Nifty

Key financial metrics of PFC are showing a steady uptrend

PFC – financial snapshot

Quarterly profits are showing steady growth (except the last quarter)

PFC – Income and Profits

Lending to Power sector

PFC is a nodal agency to facilitate implementation of Ultra Mega Power Projects; these have a capacity of 4,000 MW. PFC charges consultation fee of Rs 15 crores for accomplishing the legal approvals and consultation for a UMPP, thus acting as a one-stop solution provider.
The Ministry of Power, Govt. of India has launched the Restructured Accelerated Power Development and Reform Program (RAPDRP) in July 2008 with focus on establishment of base line data and fixation of accountability, and reduction of AT&C losses through strengthening and up-gradation of transmission and distribution network and adoption of information technology during XI plan.

PFC – Asset and Borrower profiles

On the Assets side, PFC is primarily into Generation; the borrowers are mostly State Government bodies
PFC is allowed to raise tax-free retail bonds; this has allowed it access to lower cost capital.
PFC’s loan book grew at an annualized rate of 22.8 per cent over the period FY06 – FY11
PFC is also analyzing entry into funding for Nuclear Power plants.

FPO Offer:

The price band is fixed between Rs 193 – 203 per equity share. The offer will be open from May 10-13.
Retail investors are offered a discount of 5 per cent in the issue price
The IPO will raise funds of Rs 4400 – 4,700 crores at the lower and upper ends of the price band.
The follow-on public offer (FPO) comprises a fresh issue of 17.21 crore equity shares by the company and an offer for sale of 5.73 crore equity shares by the Government of India. Currently Government holds 89%. The FPO would result into equity dilution of 14.99%.
The purpose of the IPO is to

Help PFC keep capital adequacy ratio at 15% over the next few years – it has fallen to 16% now after the lending operations of this year.

Strengthen the Balance sheet

At the upper end of FPO pricing, of Rs 203,

P/E will be 8.9 times (Industry average is 12.2)

P/B will be 1.88 times

Dividend rate will be 2.2% – fair returns, and note that dividend payout will continue to increase

Note that Retail may be allotted at 5% below 193 – that makes it quite attractive.

Risks:

Power generation project execution: This was the primary risk a few years ago, with delays and technology challenges. But of late with the opening up to the Private sector, the execution capabilities are improving
Power generation operations – Electricity payments from SEBs. The State Electricity Boards – SEBs cash losses have risen from Rs 6,500 crores in 2006-07 to Rs 28,400 crores in 2008-09. This may affect the payments to electricity plants, which in turn can affect PFC. However SEBs are undergoing restructuring in the States, and these should emerge stronger over the next few years
Power generation operations – Fuel supply linkages

Most power generation projects have Coal as fuel. Coal is generally supplied by Coal India Ltd. – which has not been able to meet production targets in recent quarters.

There have also been supply chain issues with coal – such as inability of Indian Railways to handle transportation.

Coal is also being supplied from Australia. This supply got affected recently due to floods there.

The fuel supply risks are being addressed in new projects by long term commitments from suppliers for new power generation projects.

While PFC’s gross and net NPAs have remained negligible in the last five years, defaults – it does not make provisions for loans turning bad – and higher credit costs could impact its balance sheet and earnings.

Opinion, Outlook and Recommendation

India is a power deficit country and the current growth path will require continued capacity additions and efficiency improvements for foreseeable future.
PFC will see it’s role expanding for facilitating and funding power sector projects
PFC is another monopoly PSU and will execute on government objectives, in an assured returns environment.
The Indian government continues to offer PSUs at attractive valuations in public offerings
PFC can be a Core holding in the Core – Satellite portfolio for investors.
The current FPO offer is at 52 week low of market price. The fall in share price by 45% from the Oct 2010 peak has made current valuations attractive. This reduces the risk of the asset at this price.
Watch for subscription data till May 12th to get a better idea of allotments – or even better, check back on this website www.jainmatrix.com for updates :-)
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Future Ventures IPO note – April 2011

April 23, 2011December 19, 20173 Comments

Update on April 29th

Future Ventures has got a dull response till today. The overall subscription is 1.52 times the offer.
QIB section is oversubscribed 0.26 times, HNI is (strangely) 7.8 times and Retail 0.6 times.
Poor response may be not just because of poor reviews (see my IPO note below) but also concurrent investments in Muthoot Finance IPO as well as the falling Sensex over the last few days.
Good luck with your investments !!

IPO Note – Published on: Apr 23, 2011

Future Group – Promoter

Future Ventures is a part of Future Group, which owns companies like Pantaloon Retail India (Big Bazaar, Food Bazaar), Future Value Retail and NBFC Future Capital Holdings, Future Generali Insurance, Futurebazaar India, etc.
The core business of the Future Group is Retail, but subsidiaries are present in consumer finance, capital, insurance, leisure and entertainment, consumer brands, retail real estate development and retail media and logistics. The key promoter is the well-known Mr. Kishore Biyani.
Two of these group companies are listed entities, Pantaloon Retail India and Future Capital Holdings.
These two have not exactly outperformed in the last few years in the market.

Pantaloon Retail – Financial snapshot

A 5-year view of the share price of Pantaloon Retail. (click on graphic to enlarge)

Chart 1: Pantaloon Retail Share Price

A view of financials of Pantaloon Retail. (click on graphic to enlarge)

Chart 2: Pantaloon Retail financials

While revenues are high/have grown fast, there have not been corresponding EPS growth (due to dilutions), and the P/E still remains very high
Current market cap – 6000 crores

Future Capital Holdings

Had IPO in Feb 2008
The stock has suffered an average 40% fall in share price annually in the last 3 years

Chart 3: Future Cap Shares

A view of financials of Future Capital. (click on graphic to enlarge)

Chart 4: Future Cap Financials

Sales have not increased steadily; Profits have increased, but P/E still remains very high
Current Market cap – 1060 crores

The short profiles of group companies show that while the ‘BigBazaar’ brand is very good, and revenue growth high, the group has not been able to translate it’s ambitious plans into profitable businesses, and benefit shareholders.

Future Ventures – Business Profile

Future Ventures is like a holding company, that invest in and operates businesses in ‘consumption-led’ sectors in India, sectors which will grow as the purchasing power of Indian consumers increases, and caters to their changing tastes, lifestyle and spending habits.
Future Ventures has so far invested around Rs 450 crore in apparel makers, and Rs 250 crore in processed foods and consumer goods space.
The Company has 14 companies in its portfolio, and owns brands in fashion, FMCG, food processing and home products.

Category	Company	Products/ Market	Remarks
Retail distribution	1. Aadhaar Retailing Limited	Rural and semi-urban retail distribution of agricultural and consumer products	Majority stake
FMCG	2. Future Consumer Enterprise Ltd.	Brands such as Tasty Treat, Clean Mate, Care Mate, Premium Harvest and Fresh and Pure, being marketed through Big Bazaar and Food Bazaar.	Majority stake
FMCG	3. Future Consumer Products Ltd	Brand ―Sach.	Majority stake
Fashion	4. Indus League Clothing Limited	Ready-made garments under brands like Indigo Nation, John Miller, Scullers and Urban Yoga	Majority stake
Home Products	5. Indus Tree Crafts Private Limited	Domestic retailing and distribution of a wide range of environmentally and socially sustainable products.	Majority stake
Fashion	6. Lee Cooper India Limited	A manufacturer and retailer of denims, trousers, jackets, shirts and shoes under the Lee Cooper brand.	Majority stake
Fashion	7. Biba Apparel,	Holds 17.3% stake in Biba, which will be upped to 28% soon
Food Processing	8. Capital Foods	A food processing company with brands like Chings Secret, Smith & Jones, Raji, Mama Marie and Kaeng Thai.
Consumer	9. Amar Chitra Katha	Stake to increase to 26% from 13.7% presently
Fashion	10. AND Designs India Ltd; Global Desi	Luxury clothing brands
Fashion	11. Holii Accessories Private Ltd	A joint venture with Hidesign India Private Limited for leather handbags and wallets
Fashion	12. Celio Future Fashions Ltd	A JV with a French brand of men‘s apparel and accessories
Fashion	13. Turtle Limited	Manufacturer, distributor, exporter and retailer of men‘s wear products.
Retail	14. SSIPL Retail Ltd	A retailer of Nike branded products, wholesaler of footwear, sportswear and apparel, and a manufacturer and distributor of footwear.

Strategy

Future Ventures tries to exercise operational control or influence in the business ventures in which it invests
They pursue appropriate longer-term value creation strategies, which may include unlocking value in their business ventures through public market or private sales.
Future Ventures is also looking to invest in more ‘mature opportunities’ in companies which, it believes, have unrecognized growth potentials or are undervalued or in which it can identify hidden assets or recovery potential.

Financials

The company had consolidated net worth of Rs 738 crore as of December 31, 2010, with the value of investments pegged at Rs 112 crore.
For the nine-month period ended in Dec 2010, it had a total income of Rs 399 crore (primarily through retail sales of merchandise from its subsidiaries) with a net loss of Rs 14.67 crore.
Company officials claim that most of the companies that Future Ventures has invested in are breaking even at the EBITDA level and the results will improve going ahead. /This does seem like a tall claim :-).
The company is not expensive at around 1.1x post IPO book value (at upper band).
Market cap after successful listing would be about Rs 1800 crores

Negatives/ Challenges/ Concerns

For many portfolio companies, this is very early in the investment cycle. It is actually Private Equity companies that invest in such early stage, high risk businesses.
Most businesses are small and are many years and crores of rupees away from break-even volumes, a national recognized brand and profitability. Even with Pantaloon’s clout in distribution, it will take many years of investment to start making profits.
Intellectual Property – royalty payments to be made to Future Group for ‘Future’ trademark.
While there is a common ‘consumption‘ theme in the Portfolio companies, there are few synergies among them. Eg. A high-end fashion label from a well-known designer has little rub off on Amar Chitra Katha comics for kids or Chinese food sauces.
It’s possible that Pantaloon Retail may soon launch a number of Retail formats, but Future Ventures is a shaky ‘backward integration’ for Pantaloon Retail.
Maze of portfolio companies, difficult to value and project financials.

Offering

The IPO has been priced at Rs 10-11 a share. It is open for subscription from April 25-28 for Institutional investors and till April 29 for Retail.
The company will raise Rs 750 crore rupees through its initial public offering of shares, of which Rs 120-150 crore will be invested in existing businesses, while the remaining amount will be used for new acquisitions
Besides various privately held group firms of Kishore Biyani, Pantaloon Retail is the largest shareholder of Future Ventures with 18 per cent stake that will fall to 9.5-10 per cent post issue. Promoters’ combined holding will drop down to around 31-32 per cent post IPO while that of Bennett Coleman & Co Ltd (Times of India Group) will see its 12 per cent stake drop to around 6.5 per cent, according to industry estimates.
This is the second attempt by the company to raise money via an IPO. It had earlier filed for an IPO just when the financial crisis began, then cancelled it.

Investment Advice

Avoid the issue for the following reasons:

This is an investment vehicle in a clutch of firms that need heavy investments to grow in terms of brand and scale of business
There is a bad record of profitability in the current business
Poor track record of the promoter, of shareholder value creation in previously listed firms.

Watch subscription figures of IPO till April 28 to set expectations
Check back on the website www.jainmatrix.com for updates.
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This is a good time to add Small Caps

April 7, 2011January 28, 2012Leave a comment

This may be a very good time to add Small Cap stocks to your portfolio.

Let me substantiate the logic and reasoning for this.

If we list out equity-oriented investments in order of Safer to Riskier (and generally Lower to Higher return), they are:

Sensex/ Nifty / ETFs /Large cap Mutual Funds
Mid Cap and Mid cap oriented MFs
Small Cap and Small Cap MFs

Taking this further, there is a pattern to valuations of Large, Mid and Small caps.

Generally, Large Caps will have higher valuations than Mid Caps, whose valuation again is higher than Small Caps. This is because Large Caps are stable, have higher liquidity, and fall lesser in bad times. Large investors (FIIs/ DIIs) prefer this safer characteristic. However, Large Caps also rise lesser in good times.
In bullish times, the Large Caps tend to rise to higher valuations first. Once this happens, the Institutional investors stop investing in them, and the action moves to mid and small caps.
Typically Mid and Small caps ‘catch up’ with large caps with a time lag.

This can be observed in the graph below, which captures NIFTY and NIFTY MIDCAP valuations over a 6 year period. (The period of 2005 to 2007 seems to be an exception as Midcap PE is higher than Large Cap PE).

Table 1 – NIFTY and NIFTY MIDCAP

Further, this cycle has repeated in the last 6 months, where the Sensex/ Nifty fell about 15%, but small and mid caps fell further.

For more on this, see my post Steep Fall in Indices – Stay calm (click on link)

Now the cycle is reversing. I expect that as the larger indices recover their levels, the beaten down mid and small caps will rapidly recover.

In particular, there are some solid stocks in these categories, available at low valuations

Hanung Toys and Textiles

Export oriented Manufacturer of Toys and Textiles
Excellent client roster
EPS growth has been 57% CAGR, but recent fall has resulted in P/E of 4.0
See price Trend chart

Table 2: Hanung Toys and Textiles

Mundra Port and SEZ

Largest private port in India. Recently crossed 50MT of cargo handling
Significant business from Coal, Petroleum and passenger cars.
SEZ includes 14000 + acres land, under development, for an extended port complex industrial area. This will fuel future port operations growth
Growth data: Revenues 28% pa; Cash from Operations 51% pa; EPS 48% pa
Debt equity is at 0.91, reducing every year
Share recently crossed its 200 DMA, at 150 levels. Positive for investors
See Price Trend Chart

Table 3: Mundra Port and SEZ

IRB Infrastructure

Largest domestic Roads and Highways portfolio – as a builder and operator
Is experienced in this since 12+ years. Operates 9.3% of Golden Quadrilateral
Has over 8000 crores of orders on hand. Debt equity is 1.59, not high for an infra focused firm. Good cash flow from Road Tolls.
See price Trend chart

Table 4: IRB Infrastructure

KEC International

A top player in the Power Transmission Engineering Procurement Construction (EPC) space in India. Also executes in 20 other countries.
Of late, has extended offerings to Cables, Railways, Telecom, etc in related spaces.
Order book of 8000 crores ties up 18-24 months of revenues visibility
Recently acquired a US based firm. Debt equity is at 1.6, but has good cash flow from operations
See Price Trend chart

Table 5: KEC International

Yes Bank – see report (click on link)

Binani Industries

Holding company (with 95%) of Binani Cements, which is getting delisted.
Binani Cement is a 1800 crore turnover (2010) cement firm with a market Cap of 1650 crores.
It has over 8 MT cement capacity, with ongoing expansion to 15 MT in 3 years. Excellent growth and profit prospects. DE is 1.46 times, and falling
Binani Industries itself is other than cement, into Zinc, Glass Fiber, composites, etc. Market cap currently of this firm is Rs 620 crores.
Once the demerger of Binani Cement into Binani Industries is complete, the latter’s valuation should reflect the cement business, and the market price should appreciate considerably.
No Price Trend here, but I believe the stock is seriously underpriced

Diamond Power Infrastructure

The company is an 848 crores turnover firm (2010 revenues).
In the business of: manufacture of Power Transmission equipment (cables, conductors, wires and distribution transformers) and turnkey services provider (EPC).
As an EPC player, has the advantage of in house manufacture of high proportion of equipments
Has seen growth of 86% pa of revenues, and 65% pa of profits over the last 4 years. This may may slow going forward, but even so this is a very attractive growth phase for the firm.
Recent equity dilution has allowed capital infusion, so DE ratio has dropped to 0.7, and cash is available for funding growth plans.
See Price Trend chart

Table 6: Diamond Power Infrastructure

BGR Energy

An EPC and power plant services company that specialized in balance of Plant (BOP) services, for Power, Oil and Gas industries.
It has strengthened it’s portfolio with recent JVs and strategic alliances
At 3000 crores of 2010 revenues, it is not really a small company
Over the last 4 years, it has seen growth of 58% in revenues and 72% in profits
The recent bad media reports on BGR energy were overplayed, and this is an opportunity for investors to enter into the stock
See Price Trend chart

Table 7: BGR Energy Systems

Risks:

Investors must note that small caps in general display high volatility compared to the overall market.
High growth rates of small firms typically slow down as they become mid-sized
Economic slow down can affect such stocks more seriously than large caps
Investors are advised to establish targets and exit criteria for investments in Small Caps

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My investment rupee says Yes Bank

March 5, 2011December 19, 20171 Comment

Yes Bank is an aggressive high potential new generation bank. The recent fall in prices by 28% makes this an attractive entry point for long term investment.

There is an updated report of Yes Bank available at link The Brave Warrior of Indian Banks by JainMatrix Investments includes Q1FY13 results, news updates and FY15 projections.

Yes Bank – Description and Profile

Incorporated in 2003, Yes Bank received the only greenfield (Start up/New Bank) license awarded by the RBI in the last 15 years
Founded by bankers Rana Kapoor and Ashok Kapur, (combined stake 32.6%). Other shareholders are Rabobank 18.20%, AIF Capital (private equity), Orient Global (investment firm), Swiss Re, Khazanah Nasional (Malaysia Govt) all 3.5-5% each.
It has 185 Branches currently of which 14 were added in Q3 FY11.
Market cap is at Rs. 9,300 crores, putting it at #12-13 among all Indian banks, and #7 in private sector
The firm has about 4000 employees, including 970 hired already in FY11

Yes Bank has superior strategies

In spite of over a hundred banks as competition, Yes Bank stands out for the following reasons:

Seasoned, capable bankers as Management team
The firm is nimble and agile, and rapidly enters new high potential industries sectors for advisory, loan and banking services
Focus on Knowledge based approach to lending. Loans exposure is to sectors like Food and Agribusiness, Engineering, Infrastructure & Logistics, TMT (Technology, Media & Telecom) and Healthcare.
There are four business verticals in the bank: a) Corporate & Institutional Banking b) Commercial Banking c) Business Banking-SME d) Retail Banking.
The business focus was Corporate banking till now and on select sectors while providing the entire value chain in those niche sectors. Having achieved some scale, the bank is now widening focus into SMEs and Retail.
Aggressive Retail growth plans will help increase low cost CASA deposits, and increase margins. The RBI has granted license for 91 additional branches, so the total may increase to 250 by June ’11
Mistakes are made, but it learns from these, and exits fast (example – in 2007, there were a lot of complaints against complex foreign exchange derivative products sold to SMEs, that turned loss making. There were litigations against Yes Bank (and several other banks too). All these have been resolved.
Growth has been organic, and may remain as such. The executives believe that for Yes Bank, organic growth comes at a lower cost compared to available banking assets

Stock evaluation, performance and returns

It’s IPO in July 2005 was priced at Rs 45. It was 31 times oversubscribed. The maiden dividend was paid in 2010.
At CMP of Rs 277 today, the stock has shown a 33% annualized return over the last 6 years! (See Fig 1)
Income and Profit too have grown steadily (Fig 2)

Fig 1 – Yes Bank stock performance (click to enlarge) Source: JainMatrix graphics

Fig 2 – Quarterly income and Profit have grown steadily over the last 5 years Source: JainMatrix graphics

NII – the difference between Interest from Loans and Cost of loans – has grown at 41.5 % annually over the last 5 years. This is phenomenal, and indicates good margins
NII plus Other Income – Add to this income from fee based services like investment banking, advisory services, etc – have grown at 37%

Fig 3 – Price and PE Graph (click to enlarge) Source: JainMatrix graphics

After IPO, made at a high valuation, the PE stayed high for a few years (fig 3). The patient investor got rewarded in 2008-2011 period, where the share price rose rapidly.
There has been a recent fall, the PE now is low at 14.4 and this gives investors another opportunity to enter

Fig 4 – Price and EPS Graph Source: JainMatrix graphics

EPS (adjusted for equity dilutions) growth has been 36% CAGR over the last 5 years. The EPS quarterly graph (fig 4) shows an amazing parabolic rise. I would say it is a great company just achieving critical mass of size, brand and reach.
PEG is at 0.4 – indicates underpriced status, a very good investment opportunity
RoE is at around 20% – healthy statistic.
Price/Book is 3.08, this is fair for a mid sized fast growing bank.
Gross and Net NPAs are at 0.23% and 0.06%. This shows remarkable credit assessments and good processes
CASA ratio stands at mere 10.1% as on Q3FY11. This is low by general banking ratios, but this is being addressed aggressively.

Opinion, Outlook and Recommendation

India is an underbanked country. The RBI is actively encouraging new banks, and vast swathes of Rural India remain unbanked. The potential for Yes Bank to grow is large.
At the same time, competition in urban areas is high, due to presence of public sector, private as well as MNC banks.
RBI expects average industry growth rate to be 20% during FY11. Yes Bank is expected to grow at a far faster rate than industry. It has well-defined, sustainable growth strategies in place.
Yes Bank will grow at 35-45% in terms of Profits and NII + fee Income for the next 5 years. With this trajectory, Yes Bank will join the ranks of large well managed private banks like HDFC Bank and Axis Bank
The fall in share price by 28% from the Nov 2010 peak to date has made current valuations attractive
However a look at the graph of DMA of the stock (fig 5) shows that the stock stays for long periods of time above or below the 200 DMA. It recently went below the 200DMA, so my advice is to wait for the stock to go above this before investing.
However retail investors can start to Invest systematically.

Fig 5 – Price and DMA chart (click to enlarge) Source: JainMatrix graphics

Risks:

High competition
High interest rates and increased Costs – particularly employee costs
Execution risks in rapid bank branch growth
Current weakness may mean a period of falling prices before the appreciation resumes (fig 5)

Disclaimer:

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

Steep Fall in Indices – Stay calm

February 14, 2011December 19, 20171 Comment

Here is a quick round up – of the bad news:

Sensex is 17% down from November 2010 peaks. Particularly second half of Jan onwards, fall has been steep
Sensex is below its 200 Day Moving Average – DMA
FIIs are withdrawing funds from India. After investing $28 billion plus in 2010 they have now taken off $1.5 billion in 2011
Sensex represents large caps. Mid caps and small caps have fallen harder
A series of scams and bad news has hit us recently.

- Telecom sector scam. Real estate loans scam. MFI sector bad news. Commonwealth Games scam.
- High inflation. Soaring agriculture prices. Rising oil prices. Even other commodities are costlier. Metals. Energy.
- Egypt and Tunisia have erupted and there is unrest here.

So what does an investor do? Calm down. And look at the good news.

India growth rate is as high as ever, at over 8% of GDP.
3^rd quarter corporate results show a steady growth in revenues, and a flat to positive profitability.
The US indices are up right now after a long time of poor performance. FIIs are happy to book some gains in India and invest in their own economy. Some short term money will definitely move away. Some of this money in fact is moving from Indian equity to Indian debt – to take advantage of higher returns.
Periodic scam news in India is only to be expected. Problems will be unearthed. SEBI and authorities will take action. Soon the issues should be ironed out. Whether it is Real estate loans or Telecom.
Definitely the government will not stand in the way of a going, successful business like telecom. But there needs to be a stable policy environment here. And interests of all – government, business and consumers need to be balanced out. A sector that today is 6-8% of the Indian economy in terms of direct & indirect revenues, definitely is important enough to be well regulated.
New sectors like MFI are grey areas where governments have been taken by surprise. Soon monitoring and governance frameworks will emerge, and the panic will be over.
Agriculture is seeing higher demand (and prices) and will respond in one or two seasons with higher outputs.
Very soon, somewhere the Indian Indices and market will find support and strength will emerge again.
A lot of domestic institutions and Indian investors are only waiting to re-enter the market at lower levels

Relook at the big picture

As an investor, you need to have faith in the Indian economy and confidence that these are boom years where India goes from a poor/ emerging to a mid income/ developing economy. This is a 15 year story not a 1-2 year flash in the plan
Given this, any dip in the market is an opportunity to accumulate. The market will surely rise. For you, it is an opportunity to buy cheaper.
Your current portfolio may appear to be losing value, but if you can wait for 6-12 months, the situation will inevitably reverse.
Relook at your portfolio, identify the strongest stocks/ MFs that you have most confidence in, and invest in them at these lower levels.
Invest systematically, with a plan to buy on a monthly basis, spending a comfortable sum of money

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There is an update of this report dated Nov2012, Titan – The Jewel in the Crown

Titan Industries – Description and Profile

Stock evaluation, performance and returns

Risks:

Opinion, Outlook and Recommendation

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Update on late May 12th!

FPO Note – May 10th

Power Demand:

Power Finance Corp – Description and Profile

PFC Stock evaluation, performance and returns

Lending to Power sector

FPO Offer:

Risks:

Opinion, Outlook and Recommendation

Disclaimer:

Update on April 29th

IPO Note – Published on: Apr 23, 2011

Future Group – Promoter

Pantaloon Retail – Financial snapshot

Future Capital Holdings

Future Ventures – Business Profile

Financials

Negatives/ Challenges/ Concerns

Offering

Investment Advice

Disclaimer:

Hanung Toys and Textiles

Mundra Port and SEZ

IRB Infrastructure

KEC International

Yes Bank – see report (click on link)

Binani Industries

Diamond Power Infrastructure

BGR Energy

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Yes Bank – Description and Profile

Yes Bank has superior strategies

Stock evaluation, performance and returns

Opinion, Outlook and Recommendation

Risks:

Disclaimer:

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