In this article, we examine data from three recent listings, of subsidiaries of reputed, large-cap firms. We come up with some general observations and a broader pattern. The analysis can be seen in the context of the listing of Bajaj Housing Finance Ltd.
Three Recent IPOs
We have collected data from the listings of following firms, observe Fig 1:
(1) Bharti Hexacom (Bharti Airtel), from telecom
(2) Jio Finance (Reliance Industries), a conglomerate
(3) Tata Technologies (Tata Motors), from Automobiles sector
We note the market cap of the parent company before listing, and their combined market cap a month after listing
We can see that the combined market cap listings gave 9%, 4% and 21% gains for these firms respectively within a month
Clearly, there were substantial gains in a short period, so there was good value unlocking.
Further, we also note the gains in the new listed firm in the period from listing to today.
The subsidiary firms gained 87%, 41% and 142% in terms of market caps after listing, in 4, 12 and 9 months, respectively.
It appears that the subsidiary firms here made substantial market cap gains in the subsequent period, much larger than the gains of their parent firms.
The combined market caps of the three gained by 39%, 34% and 108% in this period.
Fig 1 – Data from 3 recent Subsidiary IPOs
Was this just a good period in the market, or particularly for these 3 firms?
Since these are 3 recent listing events, from 3 different industries, at different valuations, we cannot generalize with high confidence, but we can still come up with observations:
Observations and Pattern
The IPO market is doing very well right now, listings have been by and large successful, no recent failed listings of note
The listing of subsidiaries happens at current market valuations and can unlock good value immediately for the parent firm, which may have a conglomerate discount applicable or a complex structure, not so for the subsidiary.
The reputational rub-off on the subsidiary is massive, and these being much smaller firms, often mid-caps, the upside potential is higher, and in these cases, they have been well received by the market.
There may not be any direct correlation between these 3 successful listings from the past, and the Bajaj Housing Finance Ltd. IPO, but it does appear to indicate a positive pattern.
Punit Jain discloses that he has a shareholding in Bajaj Finance since April 2003 (<1% stake). Other than this, he has no other financial interest or transactions with Bajaj Finance, or any group company. In addition, JMI and its promoters/ employees have no direct or financial interest in these companies, and no known material conflict of interest as on date of publication of this report. Punit Jain intends to apply in this IPO in line with his IPO research note opinion.
This document has been prepared by JainMatrix Investments Bangalore (JMI), 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. This report 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, JMI has not independently verified the accuracy or completeness of the same. Neither JMI 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. Investment in the securities market are subject to market risks. Read all the related documents carefully before investing. 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 a RIA Registered Investment Advisor. JMI has been an equity investment adviser commercially since Nov 2012, and a SEBI certified and registered since 2016, under SEBI (Research Analysts) Regulations. Registration granted by SEBI, and certification from NISM in no way guarantee the performance of the Research Analyst or provide any assurance of returns to investors.
Any questions should be directed to punit.jain@jainmatrix.com. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logo/brand name –
IPO of ₹ 6,560 cr., Large Cap with ₹ 58,300 cr. Mkt cap
Sector – Housing Finance
Valuations: P/E – 33.7 , P/B 3.83 times post IPO
Opinion: It is a BUY. Investors can SUBSCRIBE for the Long term
Summary:
Bajaj Finance Ltd. has transferred its mortgage loans business to BHFL. Growth in Home loans AUM has been excellent over 3 years at 42% CAGR. As the #2 largest HFC NBFC, BHFL looks set to grow and expand this market with competitive and innovative offerings. The BHFL vision is to build a reputation in mortgages on par with HDFC group. Its systems look excellent as its loans have the lowest GNPA & NNPA in this sector. It’s adopted the digital path with mobile applications, website and loan processing apps, which should drive new business. The IPO valuations look reasonable adjusted for growth, quality and top notch Bajaj Group backing, as the P/B of BHFL is 3.8 times versus Bajaj Finance-5.6. The leadership & brand of Bajaj Finance should rub off on BHFL.
Risks: 1) Regulatory risk and control of RBI 2) Economic & cyclical risk – we can expect a Real Estate slowdown in 4-6 years 3) mortgage loan competition from banks, NBFCs & fintechs 4) Deterioration of asset quality 5) interest rate sensitive sector 6) Some overlap in business with BajFin.
Opinion: The BHFL IPO is a BUY, and Investors can SUBSCRIBE for Long term.
Here is a note on Bajaj Housing Finance Ltd – BHFL.
IPO highlights
The IPO opens from 9-11th Sep’24 in a Price Band of ₹ 66-70 per share.
The IPO is a Fresh Issue of ₹ 3,560 cr. and ₹ 3,000 cr. of Offer for Sale totalling ₹ 6,560 cr.
The main reasons and objects of the IPO are:
RBI identified BHFL as an “upper layer” NBFC, and mandated it to list by Sep’25. It is early in this.
BajFin will use the IPO to boost BHFL’s capital base, enabling it to fund expansion of lending operations and capitalize on future growth opportunities in the housing finance sector.
BajFin too in the OFS will raise funds that will help in future growth.
The lot size is 214 shares and Face Value is ₹ 10 per share.
The IPO share quotas are QIBs: Non-Institutional Investors: Retail is 50:35:15%. In addition, BHFL has reserved shares worth ₹ 200 cr. for eligible employees, and shares worth ₹ 500 cr. for shareholders of BajFin and Bajaj Finserv. (The Record Date was 30 Aug’24.)
The unofficial/grey market premium of BHFL is ₹ 50/share over the IPO price. This is a positive.
The IPO allotment is likely to be finalized on 12th Sep., refunds will be on 13th Sep., and also crediting of shares to eligible allottees. BHFL shares will be listed on BSE and NSE, on 16th Sep.
Punit Jain discloses that he has shareholding in Bajaj Finance since April 2003 (<1% stake). Other than this, he has no financial interest or transactions with Bajaj Finance, or any group company. In addition, JMI and its promoters/ employees have no direct or financial interest in these companies, and no known material conflict of interest as on date of publication of this report. Punit Jain intends to apply in this IPO in line with this research note opinion.
This document has been prepared by JainMatrix Investments Bangalore (JMI), 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. This report 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, JMI has not independently verified the accuracy or completeness of the same. Neither JMI 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. Investment in the securities market are subject to market risks. Read all the related documents carefully before investing. 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 a RIA Registered Investment Advisor. JMI has been an equity investment adviser commercially since Nov 2012, and a SEBI certified and registered since 2016, under SEBI (Research Analysts) Regulations. Registration granted by SEBI, and certification from NISM in no way guarantee the performance of the Research Analyst or provide any assurance of returns to investors.
Any questions should be directed to punit.jain@jainmatrix.com. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logo/brand name –
Opinion: High-risk takers can buy with a 2-year perspective
Summary
Ola Electric is a startup by serial entrepreneur Bhavish Agarwal for Electric two Wheelers. With a good brand drawn from Ola Cabs, Ola Electric has created the products, factories and sales network, and grabbed a 35% market share in India in E2W. Revenue grew 88% in FY24, indicating that Ola may have hit the ‘growth inflexion point’ in the hockey stick formation. The organization and structure set-up looks good to handle the possible growth. The overall 2W industry size and growth offer a massive opportunity for disruption. The products are beneficial to reduce pollution from fossil fuels and are aligned with electrification & renewables initiatives. Govt. of India policies are helpful with Ola using FAME and PLI incentives. E4W adoption in China is a good early indicator of possible E2W adoption in India. Our analysis indicates Ola can hit profitability by FY26, in two years.
Risks: 1) Typical startup risks of small possibility of success of massive disruption and ambitious goals; Typical IPO risks of undiscovered firm 2) currently cash-burning business 3) Dependence on China for RM – is being overcome through R&D and new mfg. facilities 4) Competition – Entry of new startup players and E2W plans by current ICE players 5) support drying up from GoI policies as industry accelerates 6) Volatility in RM prices
Opinion: High-risk takers can buy with a 2-year perspective
Here is a note on Ola Electric Mobility Ltd (OLA).
IPO highlights
IPO application dates: 2nd – 6th Aug’24, with Price Band: range of ₹72 – 76 per share, of FV: ₹10.
IPO Size is of ₹ 6,150 cr. – Offer for Sale 8.49 cr. shares (₹ 645 cr.) and Fresh Issue 72.3 cr. (₹ 5,500 cr.)
Lot Size: Investors can bid for a minimum of 195 shares and in multiples of this.
The promoter is serial entrepreneur Bhavish Aggarwal who owns 36.94%.
The main objectives of the IPO Issue are
From the Fresh Issue, Capex is to be incurred for expansion of capacity of its cell mfg. plant from 5 GWh to 6.4 GWh, classified as phase 2 of expansion plan, reduction of debt; Investment into R&D and product development; Expenditure for organic growth initiatives, and General corporate purposes.
From OFS, the Promoters and some of the prior investors get a chance to exit.
The IPO share quotas are QIBs: NIIs: Retail is 75:15:10. (Qualified, Non-Institutional Investors)
The unofficial/ grey market premium of Ola is ₹ 9/share over IPO price. This is a positive.
The IPO allotment is likely to be finalized on Aug 7th, refunds will be on Aug 8th, and also crediting of shares to eligible allottees. Ola Electric shares will list on BSE and NSE, on Aug 9th.
All assumptions are mentioned in main body of report along with Fig 7 Financial Projections.
Punit Jain discloses that he has no shareholding in Ola Electric Mobility, or any group company. He was not involved in the IPO preparation. In addition, JMI and its promoters/ employees have no direct or financial interest in these companies, and no known material conflict of interest as on date of publication of this report.
This document has been prepared by JainMatrix Investments Bangalore (JMI), 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. This report 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, JMI has not independently verified the accuracy or completeness of the same. Neither JMI 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. Investment in the securities market are subject to market risks. Read all the related documents carefully before investing. 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 a RIA Registered Investment Advisor. JMI has been an equity investment adviser commercially since Nov 2012, and a SEBI certified and registered since 2016, under SEBI (Research Analysts) Regulations. Registration granted by SEBI, and certification from NISM in no way guarantee the performance of the Research Analyst or provide any assurance of returns to investors.
Any questions should be directed to punit.jain@jainmatrix.com. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logo/brand name –
Date 08th May; IPO Opens 8-10th May, at ₹ 300-315/share
Mid Cap: ₹ 13,500 cr. Mkt cap
Sector – NBFC, Affordable Housing
Valuations: P/E 18.4, P/B 2.9 times
Opinion: Subscribe
Summary: Aadhar Housing Finance is a leader in independent affordable housing finance firms. The industry has high growth and AHF is likely to grow in line. Post covid, AHF has enjoyed high growth and improved metrics. It is the largest affordable HFC in India in terms of AUM. The company also has a geographically diversified AUM. The IPO has a fresh issue part, which will strengthen the balance sheet and support loan growth. The firm is professionally run.
Risks: 1) micro home loans can be affected by political, social and weather disruptions 2) Blackstone as promoter is an asset manager, and can exit its holdings over the next few years 3) Regulatory risks like RBI norms compliance and policy changes 4) rising interest rates can put pressure on margins 5) Housing is a cyclical industry
Opinion: Subscribe to Aadhar Housing Finance IPO.
Here is a note on Aadhar Housing Finance IPO – AHF.
IPO highlights
The IPO opens from 8-10th May 2024 in a Price Band of ₹ 300-315 per share
It is a Fresh Issue of ₹ 1,000 cr. & OFS ₹ 2,000 cr., total ₹ 3,000 cr., which is 22.3% of share capital post IPO. (OFS – offer for Sale by the promoter of existing holding).
Promoter is Blackstone Asset’s fund BCP Topco VII Pte whose 98.7% will fall to 76.5% post-IPO.
The main objects of the OFS part of IPO are 1) ₹ 750 cr. towards maintaining higher Tier 1 capital towards lending and 2) Rest for General Corporate purposes.
The lot size is 47 shares and Face Value ₹ 10 per share.
The IPO share quotas are Institutional: Non-Institutional Investors: Retail of 50:15:35%.
The unofficial/ grey market premium of AHF is ₹ 90 /share over IPO price. This is a positive.
The IPO allotment is likely to be finalized on 13 May, refunds and crediting of shares will be on 14 May. AHF shares will list on BSE and NSE, on 15 May.
Introduction
AHF is a retail-focused affordable housing finance company, serving economically weaker and low-to-middle-income customers, who require small-ticket mortgage loans.
Revenue from operations grew from ₹ 1,575 cr. in FY’21 to ₹ 2,043 cr. in FY’23 at a CAGR of 13.89%, PAT CAGR was 26.56% and EBITDA CAGR was 10.44% over last three years.
It is the largest affordable HFC in India in terms of AUM.
The firm has been operational since Feb 2011, but underwent a transformation when it merged into DHFL Vysya in Nov’17. Subsequently, it was rebranded as AHF Ltd.
BCP TOPCO VII PTE. LTD. (a Blackstone Group Company) is the holding company of AHF Ltd. Blackstone is the world’s largest alternative asset manager, with more than $1 trillion in AUM based in New York City.
AHF has a total of 3,885 employees and its 100% owned subsidiary has a total of 1,875 employees.
The company has solidified its position as the leading housing finance company in India’s low-income housing market (ticket size less than ₹ 15 lakhs), due to good metrics in this fast growing sub-segment.
AHF has the most geographically diversified AUM and the highest operating expenditure ratio efficiency. The company has a network of 487 branches including 109 sales offices (Dec’23), with branches spread across 20 states and UTs. During the year, 59% of the total loans disbursed were through in-house channels.
No single state accounts for more than 15% of the gross AUM. See Fig 1.1.
Management – Rishi Anand (MD/CEO), Rajesh Viswanathan (CFO) and O. P. Bhatt (Chairman). The firm is professionally run, and management is impressive in terms of work experience. See Fig 1.2.
Fig 1.1 – AUM by States / Fig 1.2 – Key leaders
Industry Outlook of Indian Housing Sector
Affordable home loans is nothing but a form of microfinance but secured against housing collateral.
High Growth: Post Covid in 2020, the housing sector has emerged with high growth. The pandemic established the importance of owned housing, and also drove the Work From Home habits that are widely accepted in the software and tech industry, and have made inroads across the industrial landscape. Its helped by the GoI focus on housing. Following a period of subdued growth in FY20 through FY22, AHFCs experienced good growth during FY23, expanding by 27% year-over-year. This growth trajectory is expected to continue, with CareEdge Ratings forecasting a 29% growth in FY24 and 30% in FY25 for AHFCs.
Contribution to Economy: The Indian housing sector is a crucial aspect of the country’s economy, contributing nearly 11% to the GDP and providing employment opportunities to millions of people. However, in the last decade, the sector has faced various challenges such as a shortage of affordable housing, a lack of adequate funding for developers, and limited access to mortgage finance for consumers.
Industry data: public sector and private sector banks held the largest market share in housing loans, with a share of 69%. Housing finance companies had 29%, followed by a 2% market share by Affordable Housing Finance companies. Although affordable housing loans constitute around 6% of the overall housing finance industry (Dec’22), the market remains severely underpenetrated. (ICRA, April 2023).
Priority Sector Lending Benefits: The RBI has also provided incentives to the housing finance industry by extending priority sector status to housing loans. In addition, pursuant to Section 36(1)(viii) of the Income Tax Act, 1961, up to 20% of profits from eligible business computed under the head “profits and gains of business or profession”, may be carried to a “Special Reserve” and are not subject to income tax.
Pradhan Mantri Awas Yojana: The Indian government has initiated a Housing for All scheme by 2022 to promote affordable and low cost housing in the country. To achieve this objective, the government has introduced several measures, including the PMAY for rural and urban regions aims to provide affordable housing for lower-income groups and economically weaker sections of society.
Relaxed ECB guidelines: The GoI has also relaxed External Commercial Borrowing (ECB) guidelines to help finance homebuyers. In addition, GoI has announced tax incentives to promote the housing sector. The RERA has been implemented to improve transparency, timely delivery, and organized operations in the sector. GoI also announced a last-mile affordable housing funding package to complete ongoing housing projects in affordable and middle-income categories.
Increase in Non-Housing Portfolio Share: Amidst intense competition and the imperative to maintain margins, the share of the non-housing portfolio among AHFCs has risen from 17% as of March 31, 2019, to 26% as of March 31, 2023. This trend is anticipated to persist, with the non-housing portfolio share projected to reach 27% by March 31, 2024. (CareEdge ratings report).
Gruh Finance, an affordable housing finance subsidiary of HDFC was acquired by Bandhan Bank in October 2019. It used to enjoy excellent valuations, and can be remembered as an excellent industry case study.
NBFC Share Steady: NBFCs have grown at 16-18% overall, see Fig 2.1.
Fig 2.1 NBFC Industry
Aadhar Housing – Financials
AHF Revenue, EBITDA & PAT grew by 13.89%, 10.44% and 26.56 % resp, see Fig 3.1.
The chart indicates high growth in the last three years from AHF. Margins too are improving.
EBITDA Margin is for 3 years ranges between 75% to 80% and PAT margin around 21%-27% for 3 years.
The EPS for the company has increased from 8.62 in FY21 to 13.80 in FY23.
Gross NPAs and Net NPAs are – 1.4% and 1.0 % (of AUM) in FY23.
Loan services offered are-
Home Loan for Salaried Employees, Self-Employed
Loan for Purchase of Non-Residential Property, Loan for Plot Purchase & Construction, Composite Loan
Balance Transfer and Top-Up
Home Construction Loan, Loan for Construction of Non-Residential Property, Home Improvement Loan, Home Extension Loan, Loan Against Residential and Commercial Property (LAP)
Aadhar Gram Unnati
Fig 3.1 – Financials
Fig 3.2 – Product-wise Revenue, Fig 3.3 Assets under Management
Fig. 3.4 – Shareholding pattern pre and post IPO
The Fig 3.2 shows Customer Wise Revenue; and Fig 3.3 Assets under Management. As of Dec’23, salaried customers accounted for 57.2% and self-employed for 42.8% of Gross AUM, resp. and the company had 255,683 live accounts (including assigned and co-lent loans).
We can see that Blackstone which was the dominant shareholder is selling some stake in the Offer for Sale, and taking the firm public through the IPO process. See Fig 3.4 Shareholding pattern.
For Blackstone / Topco, the average cost of acquisition per Equity Share in AHF was ₹ 80.54 (RHP). This indicates a 3.9X gain for promoter in the OFS part of IPO.
News, Updates and Strategies
IPO resurgence: Indian IPO market has been buoyant over 2-3 years, and most mid/large offerings have been successful. We now worry about excessive valuations and demand in IPO offerings.
In Nov 2023, AHF announced its AUM had crossed the $2 billion (₹16,300 cr.) milestone.
07th May – AHF has raised ₹898 cr. from anchor investors a day ahead of the IPO, to 61 anchor investors at the upper price band. Morgan Stanley Asia, Amundi Funds, Neuberger Berman Emerging Markets Equity Fund, Theleme India Master Fund, SBI Life Insurance, ICICI Prudential Life Insurance, HDFC MF, ICICI Prudential MF, Axis MF and Quant MF are among the anchor investors.
Blackstone-backed AHF decided to reduce the size of its initial public offer to ₹ 3,000 crore from the originally planned ₹ 5,000 cr. (Source- April, Money Control)
This week, primary market is abuzz with anticipation as 3 prominent firms, AHF, Indegene (₹ 1,800) and TBO Tek (₹ 1,500) will launch IPOs to raise nearly ₹ 6,300 cr. (Source- May, Republic World)
Mar 2023 – Yes Bank and AHF ink co-lending partnership, in accordance with the co-lending framework of the RBI that enables banks and non-banking companies to jointly bring forth financial solutions that cater to the requirements of the unserved and underserved sections of the society.
June 2022 – AHF awarded an IT deal to TCS for an end-to-end business process transformation project, which will use the integrated and collaborative blockchain-based cloud platform.
The IPO is for selling 22.3% of the stake of AHF. However a SEBI mandate is that minimum 25% of the listed company should be available to public and institutions in a few years after IPO. Thus we feel that AHF may have a QIP or Follow-on Public Offer (FPO) in a year or two.
Benchmarking
Fig 4.1 – Benchmarking
In a benchmarking exercise we compare AHF to industry peers, to understand it better. See Fig 4.1.
Positives: AHF has achieved robust sales growth, outperforming the industry average of 6.08%. While AHF profit growth of 10.4% is respectable, it falls slightly below the industry average of 14.21%.
AHF maintains a lower D/E ratio (3.10x) compared to the industry average (4.14x), indicating lower reliance on debt financing and better financial stability. This is positive.
AHF demonstrates a strong net profit margin of 26.7%, exceeding the industry average of 21%, indicating efficient cost management and operational efficiency.
On Returns parameters of RoE and RoCE, AHF is excellent, while not leading the peers. A positive.
Negatives: In terms of Valuation, PE of AHF is on the high side, so it’s expensive. AHF’s price-to-book value ratio of 2.93x, a premium over the industry average of 2.05x. This is also true for EV/EBITDA.
EBITDA margin of 75.19% is lower than the industry average of 81.42%, suggesting lower operating profitability.
AHF hasn’t stood out as either very good or bad on the benchmarking section. It appears to be stable and improving steadily on current performance. The high valuations can be interpreted as the cost of quality.
SWOT Analysis
Fig 4.2 – SWOT
Risks
Similar to microfinance, micro-home loans can be affected by political, social and weather disruptions, which can affect customers’ livelihoods and their ability to repay loans.
Blackstone is the promoter and asset manager and may be interested in exiting its holdings in AHF over the next few years. If this happens, it may be an unstable promoter, and there may be pressure on share prices on every exit, or until the firm is taken over by a stable new promoter.
Regulatory risks include RBI intervention, changes in Priority Sector policy, KYC issues, etc.
Window dressing: Many companies present improved financials pre-IPO, and these unwind after listing. We are unable to ascertain if AHF has done this, but it remains a risk.
AHF is a party to certain legal proceedings and any adverse outcome can be an issue.
An increase in the NPA will adversely affect the company and its financials. NPA resolution can be long drawn out and involve litigation and friction.
AHF is exposed to adverse fluctuations in interest rates and credit spreads. Inflation too can affect demand for loans from this firm.
Overall Opinion and Recommendation
The Real Estate & housing industry is now in a multi-year upcycle, following a downcycle from 2010-20.
Microfinance has been a high-performing sector but affected by political & social disruptions.
AHF has been sharply focused on rural Housing finance and is structured to grow in this segment.
AHF has a high expertise in the low-income housing segment which makes it the largest player in the low-income housing market in India. It enjoys a Pan India presence, so extensive branch networks, geographical penetration, and good sales channels contribute significantly to loan sourcing and servicing. The company posted steady growth in its top and bottom lines for the reported periods. AHF is well placed to leverage its dominance to tap the growth potential of the industry.
The future growth of the affordable housing finance market looks positive aided by government policies, an increased supply of affordable homes, rising demand in tier 2/3/4 cities, and fair home loan interest rates.
Key Risks – 1) micro home loans can be affected by political, social and weather disruptions 2) Blackstone as promoter is an asset manager, and may exit its holdings over the next few years 3) Regulatory risks like RBI norms compliance and policy changes 4) rising interest rates can put pressure on margins 5) Housing is a cyclical industry
Opinion – Subscribe to Aadhar Housing Finance IPO
Disclaimer
Punit Jain discloses that he has no positions in Aadhar Housing Finance or Blackrock Asset as on date of this report. But inline with this report, he intends to subscribe to the Aadhar Housing Finance in the IPO.
This document has been prepared by JainMatrix Investments Bangalore (JMI), 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 JMI. 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, JMI has not independently verified the accuracy or completeness of the same. Neither JMI 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 a RIA Registered Investment Advisor. Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. Registration granted by SEBI, and certification from NISM in no way guarantee performance of the RA or provide any assurance of returns to investors. JMI 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 Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logo/brand name –
JainMatrix Investments presents an Investment Report on RACL Geartech Ltd.
03rd May 2022
Sector – Life Insurance
IPO Opens 4-9th May
Price range ₹902-949 /share; discount for policyholders is ₹60, and for employees is ₹45
Large Cap: ₹ 6,00,000 crore Mkt cap
Summary
Positives: 1) High life insurance market share 2) massive Assets Under Management and equity market ownership 3) LIC is a solid brand 4) low operating cost 5) good all India sales presence 6) the IPO can be transformative to make LIC more flexible, competitive and profitable.
Risks: 1) govt. initiatives and directives that are unprofitable 2) capital and profit ratio restructuring makes financials unpredictable 3) competition from private players and falling market share 4) High NPA ratio 5) attrition in sales agents team 6) Periodic FPOs can subdue the share price.
Opinion: Conservative Investors can SUBSCRIBE to this IPO with a 2 year perspective.
LIC IPO will have a price band of ₹ 902-949 and will open from May 2 for anchor investors and May 4-9 ‘22 for others.
The firm will raise ₹ 21,000 cr. by selling 3.5% stake sale through Offer for Sale (OFS) by promoter. LIC market cap at this pricing is ₹ 6 lakh cr.
Promoters of LIC are the President of India, acting through the Ministry of Finance, Government of India. Currently GoI holds 100% stake and post-IPO this will come down to 96.5%.
The IPO quotas are: Policy Holders 10%, employees 0.7%, QIB 44.6%, Non Institutional 13.4% and retail 31.25%. The total number of shares in IPO are 22.14 crore shares. This discount for policyholders is ₹60, and for employees is ₹45.
Objects of the issue: GoI unloads stake to list LIC. Since it is an OFS, it will not receive any funds in IPO
The grey market premium (GMP) of LIC is ₹85 as of today.
One lot is 15 shares and Face Value is ₹10. Retail investors can bid for 1 to 14 lots i.e. 210 shares.
The anchor investor portion of Life Insurance Corporation of India’s (LIC) initial public offering (IPO) was oversubscribed on Monday, raising around ₹5,620 crore from anchor investors.
Introduction to LIC
LIC is the largest public life insurance companies in India, and took its current form in 1956.
It has a 64.1% market share in Gross Written Premium (GWP) in FY21 (CRISIL). It is the #5 largest life insurer globally by GWP, see Fig 1b. LIC has a distribution network of 5,004 offices spread across 36 states and UTs, with 28 cr. policies served as on FY22. It has a workforce of 1,05,207 employees.
The proposed IPO will make it the biggest Indian IPO ever.
In India, LIC has the largest agent network of 13.5 lakh individuals in 2021, which is 55% of the total agent network in the country and was 7.2 times the number of agents of the second largest life insurer.
LIC is the largest asset manager in India (Dec’21) with AUM (includes policyholders’ investment, shareholders’ investment and assets held to cover linked liabilities) of ₹ 41 lakh crores, which was (i) 3.2 times the AUM of all private life insurers in India, (ii) 15.6 times the AUM of the #2 player in Indian life insurance industry in terms of AUM, (iii) 1.1 times the entire Indian MF industry AUM and (iv) 17% of India’s GDP for FY22. (CRISIL). LIC’s investments in listed equity represented 4% of the total market capitalisation of NSE as at that date. (CRISIL). See Fig 1a. Close to 25% of this is equity oriented, and they own more government bonds than the RBI. Thus it is a mega player that can dominate and profit from the growing Indian capital markets. Thus it is India’s Family Silver, which is made available in the IPO.
LIC is thus both a Life Insurance and an Asset Management firm.
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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 stake ownership or financial interests in LIC or any group company. Punit Jain has been a retail – insurance and annuity customer of LIC for 20+ years. Punit Jain intends to apply for this IPO. 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 a RIA – Registered 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.
Industry – Railway Transportation PSU in PMC space
Mid Cap of Rs. 4,000 crore
IPO Opens 29th Mar – 03rd Apr 2019; Price range Rs. 17-19/share
Valuations: P/E 6.9 times TTM; with a discount for Retail investors
Advice: SUBSCRIBE for listing gains
Summary
Transportation Infrastructure is a crying need in India. With Airlines, Roads and Ports sectors making good progress, the final frontier is the Indian Railways. The sleeping giant of IR appears to be getting up in the last few years.
IPO Overview: RVNL is a Delhi based PSU into PMC of Railway projects like track laying, electrification, bridges etc. Its FY18 revenue, EBITDA and PAT were Rs. 7,822 cr., Rs. 614 cr. and Rs. 570 cr. resp. Revenue has grown at an impressive 33.7% and PAT at 19.2% over the last 3 years. Valuations are attractively low with a FY18 PE of 6.9x for the IPO. It has an asset light model. A good kicker should come from Q4FY19 results and listing gains in a positive market. Governance appears good and transparent within the PSU limitations.
Key Risks: 1) Change in Central Govt. 2) De-emphasis on infra and railways by govt. 3) Issue of a contingent liability 4) Weak infra funding environment.
Opinion: Investors can SUBSCRIBE to this IPO with a listing gains and a 2 year perspective.
Here is a note on RVNL IPO.
IPO highlights
The IPO opens: 29th Mar-03rd Apr 2019 with the Price band: Rs. 17-19 per share. A discount of ₹0.50 per share on the offer price has been offered to retail and employee bidders.
Shares offered to public number 25.34 crore of FV Rs. 10 and each market lot is 780 shares.
The IPO will raise Rs. 482 cr. for 12% equity by current promoter i.e. Govt. of India with no dilution. The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.
The unofficial/ grey market premium for this IPO is Rs. 1-1.5/share. This is a positive.
Introduction
RVNL – Rail Vikas Nigam Ltd – is a Delhi based PSU into PMC of Railway projects like track laying, electrification, bridges etc.
Its FY18 revenue, EBITDA and PAT were Rs. 7,822 cr., Rs. 614 cr. and Rs. 570 cr. resp. Revenue has grown at an impressive 33.7% and PAT at 19.2% over the last 3 years.
RVNL is a Miniratna (Category – I) firm incorporated by the Ministry of Railways (MoR) in 2003, as a project executing agency for MoR to undertake rail project development, mobilization of financial resources and implementation of rail projects for golden quadrilateral, port connectivity and project execution. RVNL mobilizes finances and forms project specific SPVs with private participation.
The railway projects include new lines, doubling, gauge conversion, railway electrification, metro projects, workshops, major bridges, cable stayed bridges, institution buildings etc.
Since 2003, RVNL has got 179 projects of which 174 are sanctioned for execution. Out of these, 72 have been fully completed for ₹20,567 cr. outlay and the balance are ongoing. They have an order book of ₹77,504 cr. as on Dec 2018 for 102 ongoing projects.
During FY18, they completed 885 RKm (Route kilometre) of project length which included 315 RKm of track doubling and 425 RKm of rail electrification.
RVNL earnings are from a management fee on the annual expenditure incurred for the execution of projects, of 9.25% for metro projects, 8.5% for other plan heads and 10% for national projects.
Their activities under the various plan heads can be classified as under:
New lines: is augmenting the rail network by laying new lines to achieving seamless multi-modal transportation network across the country and connecting remote areas.
Doubling: Doubling involves the provision of additional lines by way of doubling the existing routes to enable the Indian Railways to ease out traffic constraints of single line or construction of 3rd/4th line to increase the capacity. RVNL is a significant contributor to the doubling projects and has been contributing to a third of the total doubling being completed / commissioned on Indian Railways for the last three years. (Source: CARE)
Gauge conversion: includes conversion of meter gauge lines to broad gauge railway lines.
Railway electrification: This includes electrification of current un-electrified rail network and electrification on the new rail network, generally from diesel run trains.
Metro projects: This includes setting up of metro lines and suburban network in larger cities.
Workshops: This includes mfg. facilities, and workshops for repairing and mfg. rolling stock.
Others: This includes but is not limited to construction of traffic facilities, railway safety works (building of sub-ways in lieu of crossings), other electrification works, training works, surveys, construction of bridges including rail over bridges, etc.
As a PMC (Project Management Consultant) firm, its services comprise of: (i) project development and execution of works related to creation of rail infrastructure; (ii) creating project-specific SPVs for encouraging private participation in the funding of railway projects; (iii) undertaking execution of railway projects under specific financial arrangement for the MoR and other Govt. departments; (iv) and other ancillary services like bankability studies for projects and preparation of detailed project reports.
It has an asset light model where the contractor identified for project execution brings in all the people resources and machinery required.
RVNL has a lean organization with only 541 employees of which 150 are regular and 391 are on deputation and may return to their home employer over time.
Leadership in RVNL is Pradeep Gaur (53) is CMD, Ajay Kumar (56) is Director (Personnel), Vijay Anand (59) is Director (Projects) and Arun Kumar (59) is Director (Operations). They are all professionals with experience in Indian Railways and Metro corporations.
Financials and Segments
We can see a solid growth of financials. FY19 so far does not look good, but we typically see H2 and Q4 as better than H1. See 4 year financials of RVNL in Fig 1.
The emphasis in RVNL is on new lines, lines doubling and Metro projects. See business segments as reflected by the Order Book as on 31st Dec 2018 in Fig 2.
Fig 1- RVNL FY18 Financials Fig 2 – RVNL Order Book Segments
Industry thoughts:
Over the last few decades, the Indian Railways (IR) has not developed as fast as Roads, Ports and Airline sectors. It has struggled with its public service role as the dominant transporter of passengers. Most of the passenger services are priced at a discount and profits are from the goods services.
However capacity constraints like tracks have forced IR to de-emphasize goods services.
Productivity improvements have suffered in IR due to large and ageing workforce, legacy organization issues, weak governance in the past and slow decision making. Corruption has been an issue in IR in recruitment, private contracts and public services.
Computerization has helped improve the Reservation system in IR. However there is still a long way to go in passenger capacity utilization, flexible pricing and ease of access.
In recent times we have seen a dramatic improvement on many of these parameters in IR.
In 2016, IR announced a capex plan of Rs 8,60,000 cr. over 5 years i.e. 2016-20. The capex plan is 90% more than the capital outlay in the previous 15 years.
IR may be a critical element of India’s future growth story if it improves productivity, technology upgrades, goods transportation focus, financial sensitivity and improves services.
RVNL is a key growth arm of IR and may have a good role to play in the transformation of IR in terms of capacity increase, new tech initiatives, metro projects, high speed train lines, etc.
RVNL is also one of the second generation PSU firms that are lean in terms of employees, have a sharp business focus and outsource routine tasks to firms and have high productivity.
MoR has under it group firms Indian Railways, Concor, RITES Ltd., IRCON, IRFC and RVNL.
IR is the monopoly operator of rail based passenger and goods transportation services.
Concor is a listed container focused transport firm running multi modal services.
IRCON is a multi national consultancy firm active in transportation and infra, listed recently.
RITES is a turnkey construction firm active in Rail and non-rail infra areas, listed recently.
Indian Railway Finance Corporation (IRFC) is the dedicated financing arm of the Indian Railways for mobilizing funds from domestic as well as overseas Capital Markets.
In this comparison it is clear that RVNL has a focus on India based Railways related work as a PMC consultant. There is little overlap with group firms.
Benchmarking
We benchmark RVNL against other comparable Indian Railway firms, and also KEC which is a private sector infra EPC firm. See Exhibit 3.
Exhibit 3 – Benchmarking
The PE post IPO is low. This provides a safety net for IPO investors.
Return ratios are good among the PSU pack.
Debt is high but this is expected from an infra projects firm. Also it is a pass through debt, with IR making the payments as per schedule.
3 year growth of revenues and PAT is excellent.
Positives for RVNL and the IPO
We have seen a flurry of new initiatives in IR and a slew of new projects and technology initiatives. The GoI is serious about change. So RVNL may see acceleration in business.
Many private sector suppliers to IR have reported good growth in orders booked and revenues, across parts supply, and projects related to track laying and electrification. Many of these initiatives may be run by RVNL. Also it is notable that GoI is procuring from reputed private sector firms and taking their help to ramp up its operations.
RVNL is a lean and productive firm, and with this listing, may be allowed to chart an Indian Railways independent part to growth and impact. Infra development is a high potential sector.
It has attractive valuations with low PE and PB, moderate return ratios and a high 3 year revenue and PAT growth. The over 4%+ dividend yield is good.
An order book of Rs. 77,500 cr. gives business visibility of 10 years.
BV of Rs. 4,062 cr., and BVPS of Rs. 19.4/share is close to IPO price.
Risks and Negatives for RVNL and the IPO
Typically infra projects have issues like land acquisition and govt. clearances which delay execution. This is true for railway projects too with suburban and metro projects.
Funding of infra projects is underdeveloped in India. Long term funds from insurance and pension firms do not flow smoothly to infra, so projects become riskier with shorter term and more expensive funding. It is also exposed to financial variations like the current NBFC liquidity issue.
On many parameters IR is weak when compared internationally, such as speed of trains, passenger services in trains and at stations, etc. Conversely many improvements are possible.
The MoR and IR have been slow to grow in the Metro segment in India. As a specialized suburban train, the Metro is seen as an essential urban solution in Tier 1, 2 and 3 towns.
As a MoR firm, with IR as the key group firm, RVNL may be constrained by their slow approvals and permissions. There are worries around political compulsions in MoR.
Also RVNL has got projects by default from IR in the past due to relationship and structure. However in future and after RVNL listing, the flow of new projects is not assured.
There is a contingent liability of Rs. 3774 cr. This is due to a demand from a contractor. However RVNL feels that the demand is not as per agreement, also if the charge is enforced, it will add to the project cost and be reimbursed by respective clients.
H1 FY19 performance indicates no growth over FY18, however financials for PSU could be skewed towards H2 and Q4 which is usually the best quarter for infra/ GoI firms.
Of the 10 IPOs made by PSUs in the last 2 years, only 2 have generated positive returns. Balance 8 are down 30% on average. IRCON is down 16% since listing.
Political risk: With elections due in 1-2 months, we note that RVNL has accelerated performance in the current term of GoI. A change in leadership or party in power at MoR may affect future growth.
Overall Opinion and Recommendation
Infrastructure is a crying need in India. With Airlines, Roads and Ports sectors making good progress, the final frontier is the Indian Railways. The sleeping giant of IR appears to be getting up in the last few years.
RVNL represents the new initiatives, new technologies and expansion projects for IR. The current path is of acceleration, ambitious growth and standardization across India. The challenge is to get IR to grow in double digits, improve productivity, cover the country better and lower costs.
Valuations are attractively low with a FY18 PE of 6.9x for the IPO. A good kicker should come from Q4FY19 results and listing gains in a positive market.
Governance appears good and transparent within the PSU limitations.
Key risks are 1) Change in Central Govt. 2) De-emphasis on infra and railways by govt. 3) Issue of contingent liability 4) Weak infra funding environment.
Opinion: Investors can SUBSCRIBE to this IPO with a listing gains and 2 year perspective.
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 stake, ownership or known financial interests in RVNL or any group company. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.
Date 24th July; IPO Opens 25-27th July at Rs. 1095-1100
Valuations: P/E 32.3 times TTM, P/B 10.7 times (Post IPO)
Mid Cap: Rs. 23,300 cr. Mkt cap
Industry – Asset Management
SUBSCRIBE for the IPO
Summary
Overview: HDFC AMC is the #2 player among AMCs by AUM and #1 by profits. HDFC operates as a JV between HDFC and Standard Life Investments. HDFC is one of India’s leading finance companies. Revenues and profit for FY18 were Rs. 1,867 cr. and Rs. 722 cr. HDFC revenues, EBITDA and PAT grew at 19.9%, 19.2% and 19.1% CAGR in 5 years. The Indian mutual fund industry is expected to grow at a CAGR of 20% between FY18 and FY22, due to buoyant capital markets, and a shift from physical to financial assets. Valuations in terms of P/E are 32.3 times, P/B at 10.7 times and market cap/AUM at 8% are high. However we have seen that in emerging sectors/ industries the excelling high quality players can command very high valuations. So a good track record, robust financial performance, sectoral tailwinds, reputed management team and good promoter identity makes this IPO attractive.
Risks: 1) High Valuations 2) Regulatory risks 3) Competition can impact margins 4) Macro concerns
Opinion: Investors can SUBSCRIBE to this IPO with a 3 year perspective.
Here is a note on HDFC Asset Management Company (HDFC) IPO.
IPO highlights
The IPO opens: 25-27th July 2018 with the Price band: Rs. 1095-1100 per share.
Shares offered to public number 2.54 crore. The FV of each is Rs. 5 and market Lot is 13.
The IPO is of Rs. 2,800 cr. for 12% equity by current promoters HDFC Ltd. and Standard Life Investments UK, with no dilution. HDFC Ltd. and Standard Life are selling 4.05% and 7.96% of shares.
The Promoter group (HDFC and Standard Life) own 95% in HDFC which will fall to 83% post-IPO, ie. 53% and 30% in resp. HDFC is a well-known Indian NBFC and is the holding company into financing the purchase or construction of houses, commercial real estate, etc. in India.
The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.
The unofficial/ grey market premium for this IPO is Rs. 370-380/share. This is a positive.
Introduction to HDFC AMC
HDFC AMC is a leading Indian asset management firm into Mutual Funds and PMS Advisory. It is a JV between HDFC Ltd and Standard Life Investments. HDFC Ltd. is a leading Indian housing finance firm.
Revenues and profit were Rs. 1,867 cr. and Rs. 722 cr. for FY18. It has 1,010 employees out of which 58% are in sales and 29% are in client services. It had an AUM of Rs. 2,92,000 cr. in FY18. It is the most profitable AMC in India. It is the largest AMC in India in terms of equity-oriented assets and has consistently been among the top 2 AMCs in India in terms of total average AUM since Aug 2008.
The equity-oriented and non-equity-oriented assets are Rs. 1,50,000 cr. and Rs. 1,42,273 cr. resp. of total AUM. HDFC AUM has grown at 25.5% CAGR over FY13-18. Their proportion of equity-oriented AUM to total AUM is 51.3%, higher than the industry average of 43.2%. As equity schemes have a higher fee structure compared to non-equity schemes, the product mix helps achieve higher profits.
The market share of AUM is 13.7% and of active equity AUM is16.8% among AMCs see Fig 1c.
HDFC offers a large suite of savings and investment products across asset classes, which provide income and wealth creation opportunities to customers. In FY18, they offered 133 schemes classified as 27 equity-oriented schemes, 98 debt schemes (including 72 fixed maturity plans FMP), three liquid schemes, and 5 other schemes (including ETF schemes and funds of fund schemes).
This diversified product mix provides them with the flexibility to operate successfully across various market cycles, cater to a wide range of customers from individuals to institutions, address market fluctuations, reduce concentration risk in a particular asset class and work with diverse sets of distribution partners which helps them expand their reach.
Fig 1(a) – HDFC AUM split -June 2018 (b) HDFC Segment revenues c) Market share /Note – QAAUM is Quarterly Average AUM /Click to enlarge image view.
HDFC also provides portfolio management and segregated account services, including discretionary, non-discretionary and advisory services, to high networth individuals (HNIs), family offices, domestic corporates, trusts, provident funds and domestic and global institutions. As of FY18, they managed AUM of Rs. 6,474 cr. as part of their PMS and segregated accounts services’ business.
HDFC had a total of Live Accounts of 81 lakh as of FY18, and their Monthly Average AUM from individuals was 62.2% of their total MAAUM, compared to the industry average of 51.4%.
A key element of their strategy is to promote a customer-centric culture that spans across all aspects of their business. As of FY18, they served customers in over 200 cities through their pan-India network of 209 branches (and a Dubai office) and service centers of their registrar and transfer agent, which is supported by a network of 65,000 empaneled distribution partners across India, consisting of independent financial advisors, national distributors and banks.
Leadership is Deepak Parekh (Chairman), Keki Mistry (Non-Exec Director), Milind Barve (MD), Prashant Jain (CIO) and Piyush Surana (CFO).
Promoter – HDFC Ltd and Group – Snapshot and Financials
The HDFC group is a known financial conglomerate in India, with presence in housing finance, banking, life and non-life insurance, asset management, real estate funds and education finance. Listed companies of the group include HDFC Ltd., HDFC Bank, HDFC Standard Life Insurance Co. and GRUH Finance. HDFC Ltd is the holding company and is also engaged in financing the purchase or construction of residential houses and commercial real estate.
Income and PAT has grown at 14.1% and 19.5% CAGR resp. over 5 years.
Fig 2 – HDFC Financials
HDFC Ltd. share price gained 19.5% CAGR over the last 5 years and CMP is Rs 1,970.
HDFC Ltd. has visible signs of pick-up in demand for mortgage loan led by improving affordability, attractive incentive from PMAY scheme and introduction of RERA which augurs well for sustained growth in loan book for HDFC over the next 3-5 years. Further, the performance of its various financial business subsidiaries/associates has improved substantially over the last few quarters.
The key risks are 1) Aggressive competition among the HFCs 2) Unstable interest rate environment.
HDFC has a market cap of Rs 3,33,106 cr. to be ranked #6 in India.
HDFC is a prestigious group with good ethics. It has rewarded shareholders and performed well over decades. The listed subsidiaries of HDFC Ltd. have generally retained these qualities.
News, Updates and Strategies of HDFC AMC
The average cost of acquisition of equity shares for HDFC ltd. has been Rs 19.53 over 2000-18 and for Standard Life Investments it is Rs 15.01 over same period.
HDFC’s business strategy is as follows: 1) Maintain strong investment performance 2) Expand their reach and distribution channels 3) Enhancement of product portfolio. 4) Invest in digital platforms to establish leadership in the growing digital space.
HDFC has grown by acquisition, taking over Morgan Stanley AMC (2014) and Zurich India MF (2003).
HDFC AMC sold its shares worth almost Rs 150 cr. to distributors in April 2018 before the upcoming IPO. These shares were offered to 190 distributors and advisers at Rs. 1,050/share. But SEBI in July 2018 directed HDFC to scrap this placement and to return the money it had collected with a 12% interest. These shares were then acquired by PE firm KKR paving the clearances for the IPO. Prior to the share allotment, HDFC had sought approval for a special quota for distributors in its IPO, but SEBI rejected the proposal then because it was against a separate quota for distributors.
MF Industry Outlook in India
The economy has seen financial events such as demonetization, RERA implementation, GST and a crackdown on black money and shell companies. All these have rekindled interest in financial assets as compared to real estate and gold which were the most popular earlier.
Penetration of equities remains low, with only 2% of population having a demat or equity /MF ownership. Gold & real estate hold a large proportion of savings but have generated weak returns.
The regulations and disclosures around MFs have ensured good traceability and audit trails. SEBI has promoted MFs as good entry level equity and debt products, and MF asset growth has been good.
The MF industry’s AUM grew at a CAGR of 24.9% from Rs. 7 lakh cr. in FY13 to Rs. 21.4 lakh cr. as of Mar 2018, supported by strong investor inflows of Rs. 9 lakh cr. FY17 & FY18 have been remarkable for the industry, attracting around 68% of the Rs. 9 lakh cr. net inflow, with equities leading the charge. Equity-oriented funds (including balanced and excluding ETFs) attracted 60% of the total net inflows in FY17 & FY18. Supported by these strong inflows, growing participation from individual investors and rising equities, the assets surged 42.3% in FY17 and 21.7% in FY18. During FY18, the fresh investments in MFs grew by 22.2% to Rs. 3.9 lakh cr. in the FY 2018.
The growth in the AUM has been supported by a favorable macro environment, the rising of capital markets, foreign fund inflows as well as growing investor awareness.
Today there are 41 AMCs operating comprising 7 promoted by PSB’s, 2 by financial institutions, 25 by private sector and 7 by foreign players (including JV’s). The Indian MF industry is concentrated with the 10 large AMCs having 80% of the industry AUM. ICICI Prudential AMC, HDFC, Reliance, Birla Sun Life and SBI Funds are the 5 largest with 57% of AUM.
The MF industry is expected to grow at a CAGR of 20% between FY18-22, with the AUM expected to grow to Rs. 45 lakh cr. by Mar 2022. Growth rates are expected to be higher in FY19 due to buoyant capital markets and increase in retail participation, after which it may taper down. Stock broking firms too perform very well when markets are in a bullish phase.
Global asset management firms have struggled in India as independent MF firms. Many sold out and exited. They have had a better success rate on partnering with Indian firms as the MF JV promoter.
India’s MF penetration (AUM to GDP) at 12.8% is much lower than the world average of 62% and also lower than developed economies like US (101%), France (76%), Canada (65%) and UK (57%) and even emerging economies like Brazil (59%) and South Africa (49%). This is expected to grow fast.
Financials of HDFC
HDFC revenues, EBITDA and PAT grew at 19.9%, 19.2% and 19.1% CAGR in 5 years, see Fig 3.
Margins for 5 years are flat but high double digits due to good exposure to equity assets. Given the high revenue growth, flat margin is a good achievement. Absolute profits have grown fast.
HDFC had a RoE of 33.4% in FY18 and RoCE of 49.1%. The return ratios are high and excellent.
HDFC paid dividends of Rs. 405 cr. in FY18 (including DDT). The dividend payout ratio is high at 56%.
HDFC has been Free Cash Flow positive in the last 5 years. This is good CF management, see Fig 4.
76% of the pre IPO equity shares have been pledged by a non-promoter shareholder. None of the shares held by the promoter or promoter group have been pledged.
The issue has been priced at Rs. 1,100 share which translates to a P/E of 32.3 times. The market cap/AUM is 8%. This is aggressive and makes the issue expensive.
Fig 3 – Financials, Fig 4 – HDFC Cash Flow
Benchmarking
We benchmark HDFC against other Indian and global AMCs. See Exhibit 5. Only Reliance Nippon is a pure AMC, other Indian firms have NBFC and broking businesses. US firms are for comparison.
The asking PE and P/B is high. HDFC has moderate 3 year sales and PAT growth. The NBFC business segments of Indian firms has allowed faster growth.
The Debt is low, but again for non AMC business, the debt is necessary so it not comparable.
The margins are at the higher end amongst most peers from the industry. This is a positive.
The return ratios historically also have been very high and robust among comparable peers.
Note – The USA companies data is for CY2017, Exchange rate is Rs/$ of Rs 68.
Exhibit 5 – Benchmarking
Positives for HDFC and the IPO
HDFC has a market leadership in the Indian MF industry of #2 on AUM and #1 on equity AUM. Their market share of total AUM was 13.7% and of actively managed equity-oriented AUM was 16.8%.
HDFC has a trusted brand and strong parentage of HDFC group. The holding company and the 3 other listed group firms have done well on the stock markets. HDFC Standard Life Insurance Co was the most recent to list in Nov 2017. It has also done well post listing, up 65% on IPO price.
HDFC MFs have performed well with a solid approach, philosophy and risk management.
HDFC has a superior and diversified product mix distributed through a multi-channel distribution network. Their product mix enables them to operate through various market cycles, cater to specific customer requirements and reduce concentration risk. Strong distribution relationships also ensure the commitment of the channels for new launches and investor support and confidence.
HDFC has consistently had assets and profit growth.
HDFC has an experienced and stable management & investment teams.
Risks and Negatives for HDFC and the IPO
The valuations are high in terms of P/E, P/B and market cap/AUM.
HDFC had overextended its distributor benefits pre-IPO, and was ordered by SEBI to avoid a conflict of interest and revoke the distributor allotment of shares. HDFC realizes the importance of distributors, but needs to take care to not cross the legal or market accepted limits.
The global macros are looking cloudy. Trade war tensions between USA – China can escalate. A diplomatic conflict with Iran is playing out. Oil prices are trending higher. Brexit threatens the UK economy. Europe and the Euro are looking weak with poor economic outcomes for the region. In this situation a sharp deterioration on any of these parameters can affect Indian investment climate.
AMCs are closely regulated by SEBI and is subject to changes or tightening of norms. For example in July 2014, the holding period for long-term capital gains tax on debt MFs was increased from 12 to 36 months. It is possible that regulatory changes can affect their business in future.
SEBI in Oct 2017 issued a circular to categorize and rationalize the MF schemes. MFs are classified into 5 groups, i.e., equity, debt, hybrid, solution oriented and other schemes. These 5 groups have 36 categories of schemes, and only 1 scheme per category is permitted by a MF. This has resulted in many MF schemes being merged, renamed and repurposed in the industry. HDFC has complied with the SEBI changes, but the rationalization may have a adverse impact on their brands and business.
Competition from existing and new MFs could reduce their market share or put pressure the fees.
The tax on Long term Capital Gains from equity was introduced in budget 2018 in Feb at 10%, from zero earlier. This caused a correction in markets, particularly the mid and small cap stocks.
Competition to the MF industry is from alternatives like the PMS industry, AIF/ Hedge Funds, Private equity markets and direct equity advisory services. Many of these are the next steps for MF investors after they have started their investment journey with MFs.
HDFC has defocused from PMS and other segments and appears to focus on Mutual Funds.
Overall Opinion and Recommendation
In India there is a massive trend of financialization of assets, a move away from physical / guaranteed assets like real estate, gold and FDs, towards equity and debt.
The MF industry is witnessing a massive growth with total AUM’s growing rapidly in the last 10 years. The number of new investors and their portfolios has grown significantly from retail investors. In fact the domestic driven MF industry has emerged as a foil to the FII investors in India.
The #2 player by AUM, HDFC AMC is well managed financially, has a great brand, high margins and return ratios, low CAPEX and cost structure.
Valuations look high in terms of PE 32.3 times, P/B 10.7 times and market cap/AUM at 8%. However we have seen that in emerging sectors/ industries the excelling high quality players can command very high valuations (think Avenue Supermarts in Retail and group firm GRUH Finance in rural home loans). HDFC certainly faces high competition, but can pull ahead and become #1 by AUM in the next few years. So a good track record, robust financial performance, sectoral tailwinds, reputed management team and strong promoter identity makes this IPO attractive.
Opinion: Investors can SUBSCRIBE to this IPO.
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 stake ownership or known financial interests in HDFC AMC. He has a stake in HDFC Bank. Punit Jain may apply for this IPO in the Retail category. 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.
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