Avenue Supermarts IPO: The Mart of Choice

  • Date 7th Mar 2017, IPO Open 8-10th Mar at Rs. 295-299
  • P/E 39.9 times TTM
  • Large Cap: Rs 18,660 crore Mkt cap
  • Industry – Retail 
  • Advice: Investors can BUY with a 2 year perspective

jainmatrix investments, dmart supermarkets

  • Overview: D-Mart is an emerging national supermarket chain, with a focus on value retailing. Total income for FY16 was Rs 8,606 cr. and net profit Rs 319 cr. Its revenues, EBITDA and PAT have grown at 40.3%, 45.5% and 51.6% resp. CAGR over 5 yrs. It has 118 stores with total retailing area of 35.9 lakh sq.ft. It has a low employee count and uses contract staff to contain costs.
  • Operations: D-Mart has a cluster based growth strategy which has allowed it to extend reach in areas where it has a presence. The store expansion strategy and cost control techniques are good. D-Mart has a professional management team, a respected promoter and clear vision and growth strategies which are likely to keep the company on the successful path. At a current P/E of 39.9, the asking price is fair, considering that DMT is the leader in its segment.
  • Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Most good IPOs get oversubscribed and few applicants get share allotments. Subscribe to JainMatrix Investments to get their pre-listing IPO notes, and invest successfully.  

Here is a note on Avenue Supermarts Ltd. (DMT) IPO.

IPO highlights

  • This IPO opens: 8-10th Mar 2017 with the Price band: Rs.295-299 per share.
  • Shares offered to public number 6.25 cr. The FV of each is Rs. 10 and market Lot is 50. These shares are 10.02% of equity. The IPO will collect Rs 1,870 cr. with a fresh issue of shares.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35. This is good for Retail.
  • DMT was incorporated in the year 2000 by Mr. Radhakishan Damani. He is also a well known Stock market Investor, Stockbroker and a Trader. He owns 43.8% in DMT while his investment vehicle Bright Star owns another 15.8%. His brother and several family trusts own the remaining shares. The promoter group holds 91.36% stake, which will fall to 82.2% post-IPO.
  • DMT will benefit from the fresh issue of shares as the proceeds will go the company.
  • Utilization of IPO proceeds: Repayment of loans / redemption of NCDs Rs. 1,080 cr., construction and new stores Rs. 366.6 cr., and general corporate purposes Rs. 423.4 cr.

Introduction

  • DMT is an emerging national supermarket chain, with a focus on value-retailing.
  • Revenue in FY16 was Rs. 8,606 cr. and profit Rs. 319 cr. It has 4,738 full time employees.
  • According to Technopak, DMT was among the larger and more profitable Food and Grocery (F&G) retailer in India in FY16. DMT offers a range of products like Foods, Non-Foods (FMCG) and General Merchandise & Apparel. See Fig 1.
  • For FY16, sales were from Mah. (62.6%), Guj. (18.8%), Telangana (10.15%) and Kar. (6.14%).

jainmatrix investments, dmart superstores

Fig 1 – D’Mart Segment revenues

  • DMT opened its first store in Mumbai, Mah. in 2002. By Jan 2017, they had 118 stores and retail area of 35.9 lakh sq.ft, located across 45 cities in Mah. (59), Guj. (27), Telangana (13), Kar. (7), AP (4), MP (3), Chhattisgarh (1), NCR (1), Daman (1) and Raj. (2).
  • DMT will expand store network in south & west India, and follows a cluster-based expansion.
  • Leadership is Ignatius Noronha (MD), Ramakant Baheti (CFO), Udaya Yarlagadda (COO Retail).

News, Updates and Strategies of DMT

  • DMT operates and manages all its stores. They operate mostly on an ownership model (incl. long-term lease, with lease period over 30 years and building is owned by the company).
  • DMT opens new stores using a cluster approach on the basis of adjacencies and focuses on an efficient supply chain, targeting densely-populated residential areas with middle class consumers. It operates distribution & packing centers that form the supply chain backbone for stores. They have 22 dist. centers and 6 pack. centers in Mah., Guj., Telangana and Kar.
  • DMT’s approach is to retail quality goods at competitive prices. The majority of products stocked are everyday basic products rather than discretionary items. They minimize operating costs by procuring goods directly from vendors /manufacturers, having an efficient distribution system, minimize inventory build-up, and good store operations.
  • DMT is piloting a project to open delivery centers or pick-up points in catchment areas where it has a store, for online customers. The 150-250 sq. ft. centers named “D’Mart Ready” and will be package pick-up points for eCommerce.
  • DMT plans to add 60% more store space in 3 years, about 21 lakh sq. ft. by FY20.
  • A high proportion of DMT staff are employees on contract. As of Dec 2016, they had only 4,738 full-time employees compared to a high number of employees on contract.
  • The grey market premium for the IPO is about Rs. 227-228. This is a positive.
  • A personal visit to the store was interesting. There were discounts on most products, and on some very good deals. The store location was good, and it was in a busy area. The parking space was ample for customers. There were a range of products under various categories, and in one section DMT had its own private label products with brand names like “D Homes” and “D Premia”. One had to search a little to find shop assistants. There were long queues, even though there were many cashiers counters, indicating popularity at 9.30 pm on a weekday. Overall the experience was good because of the location and deals.

Retail Sector Outlook

  • While organized retail, primarily brick & mortar, has been in India for more than two decades, its contribution to total retail is still low at 9% (USD 55 bn.) as of 2016, a modest increase from around 7% in 2012. This is expected to become 12% (USD 115 bn.) by FY20.
  • Share of urban retail is expected to grow from 49% in FY16 to 52% in FY20 due to increasing urbanization, a higher urban household income, rural distress due to erratic monsoons and increasing penetration of organized retail in urban centers.
  • Currently, the food and groceries (F&G) segment constitutes a majority share of retail (67%). According to Technopak, F&G will have a share of 66% in 2020. Apparel & accessories and consumer electronics categories account for another 8% and 6% of the the retail market.
  • 16 Indian states contribute 85% of the total retail spend. Retail opportunity in three south states – Kar., AP and Telangana is currently USD 100 bn. According to Technopak, these three south states will witness robust growth. Mah. with 19% and Gujarat will grow steadily.
  • Footwear has the highest penetration in organised retail at 40%; apparel & accessories, jewellery and CDIT have penetrations of 22%, 27% and 25%, resp. whereas F&G has just 3%.
  • The implementation of GST will benefit the retail industry over the next 1 year. Source: RHP
  • At present, the organized general merchandise players in India occupy around 40-45 million sq. ft. area. This requirement of retail space is estimated to grow to 60-65 mn. sq. ft. by 2020.
  • Supermarkets have been observed to garner higher levels of productivity amongst the general merchandise focused formats. The store productivity of a supermarket is typically 20-25% higher than that of a hypermarket. Though the efficiencies are higher for supermarkets, the margins are lower as compared to hypermarkets due to F&G category accounting for a greater portion of the product mix, in which the margins are lower as compared to other non-FMCG categories.

jainmatrix investments, dmart superstore

Exhibit 2 – Sales PSF of Supermarket Firms

  • We can see in Exhibit 2 that DMT has superior sales psf. The profit drivers of this industry are 1) Growth of Private Label 2) Optimum Store Size and 3) Growth in Food Processing.
  • Organized retail at a national level opened up only 10-15 years ago in India. On introduction, there were worries that a lot of labor intensive small retail businesses will be affected, so it will have negative social impact. However quite quickly we saw that 1) the sector has taken off rapidly and consumer habits have changed fast 2) small retail has not been much affected 3) political opposition has eased. However there are still restrictions on Walmart or other MNC chains with multiple brand retail business directly entering India without local partners.
  • Market shares – Per reports, in F&G, Future group holds the largest market share with 13% followed by D’Mart at 10% and Reliance at 8%. Together, they contribute 31% of F&G segment. Additionally, the overall organised retail market in India is $60 billion in size. With DMT revenue for FY16 = Rs. 8,606 cr., DMT has a 2.11% in the total organized retail market.

Financials of D-Mart

  • DMT’s revenues, EBITDA and PAT have grown at 40.3%, 45.5% and 51.6% CAGR from FY12-16, see Fig 3. (FY17 data is a projection of 9M FY17 financials). Thus revenue & PAT growth is good.
  • The EPS has risen sharply in the last 5 years. This is excellent.

jainmatrix investments, dmart superstores ipo

Fig 3 – D-Mart Financials

jainmatrix investments, dmart superstores, IPO

Fig 4 – D-Mart Cash Flow

  • DMT has positive cash from operations, see Fig 4, but it has been investing into fresh capacities and hence the company has negative FCF.
  • DMT has an ROE of 21% and ROCE of 23.7% for FY16 which is excellent.
  • DMT has not declared dividend in the last 5 years though the promoter has 91.4% stake. The firm has instead reinvested funds generated into capacity expansion.
  • DMT has good margins. The PAT margin for FY16 stood at 3.7% and for 9M FY17 at 4.4%. The margins will improve as the company reduces debt. DMT has a bank balance of Rs. 351 cr. which translates into Rs. 5.6 as cash/share which is low. So cash is being managed efficiently.

Benchmarking

We benchmark DMT against other retail majors and global retail giant Walmart. See Fig 5.

jainmatrix investments, dmart superstores IPO

Exhibit 5 – Financial Benchmarking (click image to enlarge)

  • PE for DMT appears average compared to listed Indian retail firms. (TTM is trailing 12 months). However it is high as Trent and Shoppers Stop are recovering from losses till 2 years ago.
  • DMT has witnessed excellent PAT growth compared to peers in the last few years. The 3 year PAT growth over 50% makes it the leader. The D/E ratio at 0.74 is moderate. This will fall after the IPO and so it’s a positive. The inventory turnover ratio at 14.2 times makes DMT leader on this parameter too. The ratio indicates how quickly inventory is sold / rotated.
  • The return ratios are best in the industry. Majority of the retail players are stressed.
  • Notes: Revenues, EBITDA and PAT values for Walmart are for CY15/CY16. Operating Margin (EBIT)/Operating Income is used interchangeably with EBITDA Margin/EBITDA for Walmart. Exchange rate of 1USD = Rs. 67.8

Positives for DMT and the IPO

  • DMT is good at offering value retail to the cost conscious consumers. The consumption story in India is robust with a rising aspirational urban middle class. This sector has potential.
  • DMT has taken up its footprint expansion using a distinct store acquisition strategy and ownership model. Business has grown rapidly in recent years, and there is ample opportunity in current presence states in West & South, as well as growth in Central, North & East regions.
  • DMT as high operating efficiencies and a lean cost structure through stringent inventory management and good IT systems. DMT has a strong track record of growth and profitability.
  • DMT enjoys a strong promoter background and an experienced & entrepreneurial management team and high of employee ownership.
  • DMT can aspire for high valuations given that they are growing steadily, profitably and organically. It may soon reduce debt, and has a sustainable business model.
  • The IPO is a fresh issue of shares. Hence the promoters aren’t cashing out, this is positive.
  • With just 9% penetration in retail, the organized sector has massive room to grow.
  • The company has been conservatively managed financially with a D/E of 0.74 this year.

Risks and Negatives for DMT and the IPO

  • The valuations look expensive in terms of P/B ratio. However DMT is able to ask for a premium because of its leadership position.
  • Warren Buffet sold off his stake in global retail leader Walmart last quarter. This is partially due to fierce competition from eCommerce, like Amazon. However USA is at a very different stage of development compared to India. Organized retail dominates there; it is at an early stage of penetration here. eCommerce is well established there; it is at a nascent mostly PE stage here.
  • Having said this, well-funded eCommerce firms are offering good discounts and rapid delivery in urban regions thus grabbing volumes and market share, and changing buying habits.
  • In many pockets in India real estate development is restricted by hidden forces like local politician fiefdoms, administrative permit raj and corruption. Any of the retail firms can be victims of this.
  • Future Retail is a fierce competitor with all India presence, and both organic and acquisition based growth with brands like EasyDay, Nilgiris and Heritage retail. Reliance Retail too is a very big player with Reliance Fresh and vertical chains. Several MNC firms are keen to enter.
  • With stake of 82% post IPO, the promoters will need to reduce to 75% within 3 years of listing.

Overall Opinion and Recommendation

  • Organized retail in India has a good future, and will offer consumers better services and range of products. We can certainly expect multi-year growth, new formats and innovation.
  • DMT has managed current operations and growth very well, and built up a loyal customer base. It has good performance metrics and should grow well organically.
  • The IPO is going to benefit the company in terms of premium inflows that will help reduce debt and grow the network/ operations. Repayment of debt will reduce finance costs.
  • DMT has a professional management team, a respected investor promoter and clear vision and growth strategies which are likely to take the company to new heights in the near future.
  • At a current P/E of 39.9, the valuations are good, considering that DMT is the leader in its segment.
  • This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

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

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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. Punit Jain intends to apply for this IPO in the Retail category.  Other than this, JM has no known financial interests in DMT 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.

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Bharat Electronics – Post OFS Note

  • 1st Mar 2017, CMP: Rs 1,518
  • Large Cap – Mkt Cap 33,900 crores
  • OFS Retail Cut off Price: Rs 1,557/share plus a 5% discount
  • Advice: Buy now from the secondary market at CMP

jainmatrix investments, bharat electronics

Here is a post Offer for Sale (OFS) note on Bharat Electronics Ltd (BEL).

About the OFS Offer

OFS Application dates were from 22-23rd Feb with only the second day for Retail. Govt of India sold 1.11 cr. equity shares – 5.0% of stake in BEL, through the OFS route. This was done to meet FY17 divestment targets. The shareholding was 74.4% which has come down to 69.4% after the OFS. The OFS floor price was Rs 1,498; 20% of OFS offer was reserved for Retail, who also got 5% discount. See detailed OFS report: Bharat Electronics – A Value BUY

jainmatrix investments, bharat electronics

Post OFS applications and allotment

  • The Retail quota got subscribed 3.67 times; overall the issue was subscribed 5.3 times. Due to high demand, the actual allotment price/ cut-off was fixed at Rs. 1,558 for retail. After a 5% discount this translates into a price of Rs. 1,479.
  • Many investors lost out on allotment due to 1) sudden OFS announcement 2) confusion around floor price v/s cut off price 3) High cut off price.
  • The share is trading at Rs. 1,518 which is 2.6% higher than discounted OFS price. See Figure above. BEL stock is also 7% below the all-time high of 1,624 of 30th Jan 2017, and 50% above the 1 year low of 1,009 of 1st Mar 2016, reflecting a sharp price uptick in the recent past.
  • We had also written about a transformation in the public sector – A Repurpose for our PSUs 

Opinion

  • BEL is still a value stock for investors who may buy the shares from the open market.
  • IPOs, OFS and FFOs focus attention of investors on a particular stock. However far better bargains are available in the listed company/ secondary markets.

JainMatrix Knowledge Base

See other useful reports:

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

Do you find this site useful?

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

Disclaimer

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

Bharat Electronics OFS – A Value BUY

  • 22nd Feb 2017 
  • CMP: Rs 1,510
  • Large Cap – Mkt Cap 33,700 crores
  • Issue Period: 23rd Feb 2017, one day only
  • OFS Floor Pricing: Rs 1,498/share. Retail gets a 5% discount
  • Advice: Investors can BUY with a 2 year perspective 

Summary

  • Overview: BEL is a PSU Navaratna engaged in design, mfg. and supply of electronics products/systems for the defense requirements, as well as for non-defense markets.
  • The EPS growth has been excellent recently and the price has risen faster than EPS growth leading to re-rating of the PE ratio/valuation of the company. The current government has a big thrust on defense which is evident from the quantum of fresh orders acquired for FY16.
  • Investors have got a 5 year CAGR return of 25.7% and 12.1% CAGR in the last 2 years.
  • BEL has conservatively preserved cash and is poised to grow financially as the Indian defence sector starts to grow domestically.
  • Overall Opinion: We feel BEL is a value BUY for investors in this OFS.

OFS Offer details

  • CMP is Rs 1,510. The OFS floor price is Rs 1,498; there is a 5% discount for Retail investors. 20% of the OFS offer is reserved for Retail. At floor price this is Rs 1,423.
  • Cut off is the lowest price at which OFS shares will be sold, and will be equal or above the floor price. Cut off depend on the bids. Applicants may apply for OFS at floor price, or above, or at Cut Off.
  • OFS Application date is only one day – Feb 23rd, 2017 between 9.15 am to 3.30 pm.
  • The GoI will sell 1.11 cr. equity shares (5.0%) of stake in BEL through the OFS route. The govt. is selling this to meet its FY17 divestment targets. The shareholding is currently 74.4% which will come down to 69.4% after the OFS. It could fetch GoI about Rs 1,672 cr., based on the pricing declared.
  • P/E as on 21st Feb, 2017 closing price is 21.8 times, which appears high.

Here is a note on the Bharat Electronics Ltd (BEL) Offer for Sale (OFS).

Introduction

  • BEL is a Bangalore based PSU engaged in design, mfg and supply of electronics products/systems for mostly defense, and some non-defense applications.
  • It has been accorded Navratna status by the GoI. BEL owns 9 factories.
  • Turnover and profits were Rs 7,459 cr. and Rs 1,357 cr. in FY16. BEL has 9,848 employees (FY16) and a market Cap of Rs. 33,734 cr. Exports make up 7% of turnover.
  • Shareholding in % is – GoI 74.4, DIIs 15.8, QFIs 4.3, Individuals 2.8, Others 2.74%.
  • Its key products are weapon systems, radar and fire control systems, and communication. Its defense products include defence communication; radars; naval systems; computers, intelligence systems; weapon systems; telecom and broadcast systems; electronic warfare; electro optics, and solar photovoltaic systems. Its nondefense products include turnkey system solutions; civilian radars; e-governance systems, and homeland security. It also offers electronic mfg. services in areas of PCB assembly and testing; precision machining and fabrication; opto electronics components and assemblies, and offsets, among others.

Stock Evaluation, Performance and Returns

jainmatrix investments, bharat electronics

Fig 1 – Price History

  • Revenues, EBITDA and Profits have grown at 7.1%, 6.2% and 7.7% over 7 years.
  • There’s been a recent acceleration – the EPS TTM has grown from Rs 28.3/share in Dec 2012 to Rs 69.4/share in Dec 2016, a 25.2% CAGR growth in EPS in 4 years.
  • The share price, grew at 25.7% CAGR over 5 years, see Fig 1 – Price History.
  • The margins are good. The EBITDA and PAT margin for FY16 stood at 35.2% and 24.7%, see Fig 2.

 

jainmatrix investments, bharat electronics

Fig 2 – Quarterly Financial

  • We can see that the Q4 – March quarter is the largest by far due to Govt. customers.
  • ROCE and RONW are currently at 20.2% and 16.2% resp. Both these ratios have been high and fairly stable over the last 5 years.
  • The dividend at 257% on a FV of Rs 10, provides a dividend yield of 1.13%. This is good.
  • Cash from operations and Free Cash Flow are positive for 7 of the last 9 years. This is a positive. Fig 3.
  • As a result BEL has good cash reserves and zero debt. The cash on hand is Rs.7,553 cr (FY16), which is Rs 315 per share. In theory, the operations of BEL are available today for Rs 1510-315= Rs 1,195.
  • This cash on the balance sheet may be used for expansions, M&A or dividends.

 

jainmatrix investments, bharat electronics

Fig 3 – Cash Flow and Dividend

jainmatrix investments, bharat electronics

Fig 4 – Price and PE Chart/ Fig 5 – Price and EPS Chart

jainmatrix investments, bharat electronics

  • The Price and P/E chart is Fig 4. The 8 year historical average PE is 17.5 times and range is 10 to 25 times in 4 quadrants. Current P/E at 21.75 times is in the high or overpriced quadrant per the chart.
  • The Price and EPS chart Fig 5 shows a strong rise in EPS from 2014-16. However the BEL share price rose faster, so the PE too has risen in the last 4 years.
  • We conclude that the BEL stock has got re-rated and the historical average has moved to a higher level in the last 2.5 years.

jainmatrix investments, bharat electronics

Fig 6 – Booked to Bill ratio / Fig 7 – New Orders 

jainmatrix investments, bharat electronics

  • A key ratio is Total Orders Booked to Revenues Billed, Fig 6. This is linked to annual new orders, Fig 7. The last 4 years view shows that the ratio is improving.
  • It is because of GoI thrust on defense combines with the Make in India program where they are trying to develop domestic capabilities in both private and public sectors. This is evident from the quantum of fresh orders acquired for FY16.

Benchmarking

benchmarking

Exhibit 8 – Financial Benchmarking (click image to enlarge)

In the benchmarking exercise we compare BEL with some peers. See Exhibit 8.

  • It’s difficult to find comparable firms to BEL due to its unique defence sector, electronics products, emerging industry and PSU status.
  • The PE ratio appears moderate, however the P/B ratio appears to be high.
  • It has a good position in terms of margins and dividend yield and return ratios.
  • The double digit return ratios are good and stable over the years. This is a positive considering the nature of the business of BEL.

Overall Opinion

  • India has the third largest armed defense force in the world. India’s requirements on defense are currently catered largely by imports. The GoI policy is now promoting self-reliance, indigenisation, technology upgradation, achieving economies of scale and development of capabilities in defense.
  • BEL occupies an important space as it has a momentum of capabilities in electronics and is being entrusted with many new initiatives. Its growth has picked up massively in the recent years.
  • We feel that opening up of the defence sector to the private players is the way to go in the long run. However the growth of private domestic defense firms may take time to translate to reality. Until then, PSU defense firms will dominate. They will also help in the transition to private sector.
  • BEL like most PSUs has conservatively preserved cash and is poised to grow fast.
  • We feel BEL is a value BUY for a 2 year holding period in this OFS and at current levels from markets.

Download the PDF to see entire note.

JainMatrix Investments_BEL_Feb2017

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DISCLAIMERS

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

BSE IPO: Put this Exchange on Hold

  • Date 20th Jan 2017 
  • IPO Opens 23-25th Jan at offer price range: Rs. 805-806
  • Its a Mid Cap with Rs 4,400 crore Mkt cap
  • Industry – Stock Exchange 
  • P/E 35.9 and P/B 1.80 times (based on FY16)
  • Advice: the IPO is rated AVERAGE

bse_logo

Overview: BSE is a stock exchange platform which is the first stock exchange in Asia and the world’s largest exchange by number of companies. Income for FY16 was Rs 658 cr. and profits Rs 123 cr. It offers a wide range of trading related services and monitors the listed companies, Sensex index and market activities. New product offerings, start of operations at GIFT city and stake divestment via CDSL IPO are likely to boost financials in the medium term. However it is an OFS, so BSE doesn’t benefit in IPO. Market shares are low at 39% in currency derivatives and 14% in equity cash. At FY16 P/E of 35.9, and a FY17E forward PE of 21.0, the valuations are high. NSE is a fierce competitor, and is ahead in terms of volumes, growth and profits, reducing BSE to a niche player.

Opinion: This offering is rated AVERAGE, and investors may look elsewhere for long term gains.

We present here a short video on the BSE IPO.

A VIDEO on BSE IPO 

Here is a note on the Bombay Stock Exchange Ltd. (BSE) IPO.

IPO highlights

  • This IPO opens: 23-25thJan 2017 with the Price band: Rs.805-806 per share.
  • Shares offered to public number 1.54 cr. The FV of each is Rs. 2 and market Lot is 18. These shares are 28.26% of equity. The IPO will collect Rs 1,243 cr. (UMP) under the OFS route.
  • The IPO shares are available to institutional, non-institutional and retail in ratio of 50:15:35.
  • Trading Members hold 44% stake of BSE, and 56% is held by institutions & investors. Singapore Exchange, Atticus Mauritius Ltd and Quantum Ltd. are completely exiting through this IPO offering.
  • BSE would not benefit from the IPO as it is an offer for sale (OFS).

Introduction

  • BSE is a stock exchange platform, the first stock exchange in Asia, formed in 1875. It is the world’s largest exchange by number of listed companies, and India’s largest and the world’s 10th largest exchange by listings market cap, with US$ 1.7 tn. in total market cap of listed companies.
  • Total income for FY16 was Rs 658 cr. and net profit Rs 123 cr. It has 513 employees.
  • As a platform, it regulates listed issuers and provides a market for listing and trading in various types of securities as allowed by SEBI. The primary operating businesses of BSE are as follows: (See Fig 1)
    • Listing business: called the primary market, which relates to the issuance of new securities. It also has a platform for listing and trading in equities of small-and-medium enterprises (SME).
    • Market business: which consists of trading of listed securities, MFs, OTC corporate bonds, membership of depository participants in CDSL depository and providing post-trade services.
    • Data business: which consists of the sale and licensing of information and trading products.
    • Their operations also include IT services and solutions, the setting up of indices and training. They offer equity and currency derivatives, securities lending and borrowing, and platforms to facilitate buyback and sale of securities by substantial shareholders of listed companies.
  • BSE has listed 5,868 companies and 1,446 members across all segments, and in FY16 it took 28.49 crore orders and executed 15.5 lakh trades in equity shares average per trading day, making it the 12th most active trading exchange in the world.
  • BSE extensively monitors the listed companies and market activities to minimize the risk of default, promote market transparency and integrity, contributing to growth of the Indian capital markets.
  • Deutsche Borse, Singapore Exchange, SBI, LIC, and GKFF Ventures hold 4.75%, 4.75%, 4.75%, 4.68% and 4.58% respectively.
JainMatrix Investments, BSE IPO

Fig 1 – BSE FY16 Segment Revenues

JainMatrix Investments, BSE IPO

Fig 2 – BSE revenue growth

  • BSE has a market share of 39% in the currency derivatives segment and 14% in equity cash segment whereas NSE remains the leader with shares of 56% and 86% respectively. In the profitable equity derivatives segment, BSE market share has dropped to almost zero.
  • In April 2012, the SEBI board passed regulations limiting stock exchanges from owning more than 24% of the share capital of a depository and gave 3 years to comply. BSE was not compliant and SEBI extended its deadline to FY17. To meet this requirement, BSE divested 4.15% stake in CDSL to LIC in Oct 2016, but still holds 50.05%. BSE will dilute the excess stake in CDSL in the IPO of CDSL.
  • Leadership Sudhakar Rao-Ch’man, Ashish Kr. Chauhan-MD/CEO, Nehal Vora-CRO, Nayan Mehta CFO

News and Updates for BSE

  • BSE’s index – the S&P BSE Sensex is India’s most widely tracked stock market benchmark index.
  • India International Exchange (IIE), a subsidiary of BSE, commenced trading at Gujarat International Finance Tech (GIFT) city on 16th Jan, 2017. Tech offerings by IIE will facilitate co-location of members in its center at GIFT IFSC as well as algo trading including high frequency traders. The high speed platform will provide cross-border opportunities of investment with a supportive regulatory framework, and many infra and tax benefits. NSE is also expected to launch here soon.
  • SEBI announced a reduction of 25% in the fee payable by brokers and also decided to amend regulations to enable them to make payments through digital mode. This is a positive for the sector.
  • BSE discontinued lump sum transactions through paperless SIP facility for MF investors in Jan 2017. It introduced iSIP to help set up a SIP without documents, and ‘BSE StAR MF’ mobile app for android.
  • BSE was caught in two legal disputes just before the IPO. A contempt of court petition was filed in the high court because of irregularities in the Corporate office building, where a legal notice has challenged the launch of the IPO for BSE. The contempt petition has been filed by Yogesh Mehta against city officials, highlighting their inaction against illegalities in the building. The stock exchange lost the case right up to the Supreme Court, while another PIL in the case was dismissed by the HC.
  • BSE introduced new interest rate futures (IRF) contracts from Dec 30, 2016 on 6-year govt. bonds. The contract is based on 6.84% central govt. security maturing in 2022. An IRF contract is an agreement to buy or sell a debt instrument at a specified future date at a pre-determined price.
  • BSE announced in Jan 2017 that it will conduct periodic call auction for illiquid securities of 335 illiquid stocks. The auction would be based on trading activity during the period July–Dec 2016.
  • BSE shares 85% of profits as dividend, and plans to continue with high dividend in future
  • Subsidiary CDSL has filed papers for IPO with SEBI. BSE would dilute 26% stake in this IPO.
  • The unofficial/ grey market premium for this IPO is in the range of Rs. 128-130. This is a positive.

STOCK Exchange Sector OVERVIEW

  • Globally, there are over 70 major stock exchanges with a listings market cap of more than US$5 bn each. The total global market cap of WFE member exchanges (World Federation Exchanges) aggregated to US$68 tn. Of these stock exchanges, 16 had a market cap of above US$1 tn. each. Market cap of these stock exchanges taken together account for 86% of the total global market cap.
  • The NYSE dominates with a market cap of about US$18.2 tn. In terms of turnover, Shanghai SE topped the list with a turnover of about US$21.3 tn. in 2015. BSE was the largest in the world in terms of number of listed companies at the end of Oct 2016, with 5,868 companies.
  • Global exchanges derive revenue from transaction fees, listing, clearing and depository services. For both exchanges, BSE and NSE, revenue mainly comes from securities. Services to corporates, like listing income makes a significant contribution to revenues.
  • Equity as a percentage of financial savings in India is just 5%, compared with 14% China, 15% (Brazil), 20% (Indonesia) and 42% in USA. Growth for equity should grow and BSE will surely gain from this.
  • The key growth drivers for the exchange sector in India are as follows:
    • Demographic: India’s working age population is more than 60% of the population. A rising working age population results in a boost to consumer spending in the economy.
    • Awareness and participation by retail investors: In recent years, equity investments by Indian investors is slowly increasing due to specific tax breaks for equity investors and financial awareness programs conducted by MF houses and stock exchanges.
    • Initiatives by the GoI: Last year, GoI allowed the Employee Provident Fund Organisation (EPFO) to invest in equity markets. The state-run pension fund had a retirement corpus of Rs 8.5 lakh crore in 2015. It made a small investment of Rs 6,577 cr. in FY16, which may increase.
    • FIIs: The FIIs are significant players in Indian capital markets, and constitute 18% of turnover in cash market, and 10% of client turnover in derivatives. FII flows will be a key driver of growth.
  • From FY12 to FY16, the no. of shares traded on BSE & NSE combined grew by 30%. However, in H1 FY17, the shares traded on BSE declined by 9% YoY, while those traded on NSE increased by 22%.
  • Information and data services contribute just 4-5% compared to 10-25% in other economies. They grew at 14% CAGR over 5 years. However, the base is low, so they should grow annually by 15-20%.
  • India had an IPO revival recently, driven by strong economic fundamentals, favorable policy climate and strong investor confidence. Listing fees should grow at 15-20% over the next 5 years.
  • Revenues from index services can further grow for the Indian market by expanding product offerings beyond equities. Revenues from index services should grow at 15-20% over the next 5 years.
  • Source: BSE –RHP, NSE – DRHP

Financials of BSE

  • BSE’s revenues, EBITDA and PAT have grown at 3.28%, -4.4% and -8.2% resp. CAGR from FY12 to FY16, see Fig 3. (Note: FY17 data is a simple doubling of H1 FY17 financials). Thus revenue growth is flat while profits have fallen, with NSE fast gaining market share in various segments. But we can see there is a recovery in earnings in H1 FY17.
  • BSE has an ROE of 5% and ROCE of 8.2% for FY16 which is poor.
JainMatrix Investments, BSE IPO

Fig 3 – BSE Financials

JainMatrix Investments, BSE IPO

Fig 4 – BSE Cash Flow

  • BSE has robust margins that are improving. Even a small revenue growth will see improvements.
  • The current dividend yield is 1.86% which is moderate. BSE distributes 85% of its profits as dividend and plans to continue with the high dividend in the future.
  • The top 5 subsidiaries of BSE are CDSL, ICCL, Marketplace Technologies, CDSL Venture and BSE Institute. It has 50.1%, 100%, 100%, 100% and 100% stake in them resp. and all are profitable.
  • BSE has a bank balance of Rs. 1,692 cr. which translates into Rs 310 as cash/share. With an IPO pricing of Rs 806, we can buy the operations of BSE for Rs 496. BSE has been generated free cash flows from FY12 through FY16. This is a positive. However it may be negative in FY17. See Fig 4.

Benchmarking

We benchmark BSE against NSE, MCX and other listed global stock exchanges. See Fig 5.

JainMatrix Investments, BSE IPO

Exhibit 5 – Financial Benchmarking (click on image to enlarge)

  • The FY16 based PE for BSE appears to be high. P/B is lower and looks reasonable.
  • BSE has the witnessed low sales and PAT growth compared to its peers. NSE has performed far better in the same macroeconomic conditions. BSE is debt free which is good. However low/no debt is common across all exchanges globally. BSE margins are high, which is a positive. However it appears low compared to its peer group. BSE has low return ratios, but moderate dividend yield.

Notes to financial benchmarking: Revenues, EBITDA and PAT values have been ascertained using the latest financial data/information available for global exchanges (CY15, Jun 16). Operating Margin (EBIT)/Operating Income has been used interchangeably with EBITDA Margin/EBITDA for global stock exchanges. Exchange rate of 1USD = Rs. 68, 1HKD = 8.77, 1SGD = 47.8, 1Euro = 72.5, 1AED = 18.51

Positives for BSE and the IPO

  • BSE has strong brand recognition with a track record of innovation. According to CARE Research, BSE ranks third globally in terms of currency options and futures contracts traded in 2015.
  • BSE has a diversified & integrated business model and good relationships with market participants. Revenues are more broad based with lower risk. With the largest number of listed firms, BSE provides critical listing infra for many firms.
  • The valuations are moderate in terms of P/E and P/B. The company is debt free and has generated free cash flows from FY12 through FY16. This is good for investors looking for stable companies.
  • Due to a good cash position, we can buy the operations of BSE for Rs 496, which is quite low.
  • The IT platform of BSE is robust and high speed, which can be a valuable asset.
  • BSE is nimble in its offerings and services, and has grabbed new opportunities, including the IIE.
  • There has been a spate of IPOs in Indian markets in recent times, and they have almost all sailed through, some with massive over subscriptions. Listing revenues segment can be quite positive.
  • In H1FY17, margin improved due to healthy growth in transaction charges and higher other income. In the near term, earnings may be boosted by changes in settlement guarantee fund (SGF) norms.

Risks and Negatives 

  • The IPO is an OFS, so BSE does not benefit. It is a liquidity event for past investors.
  • The BSE is very weak in the profitable equity derivatives segment.
  • Stock exchanges are the basic infrastructure for the trading industry. With higher volumes there can be a sharp rise in profits. However we see a flat revenue growth and falling profits at BSE. Even though H1FY17 results were good, we cannot say that this trend has been reversed yet. It’s likely that NSE will dominate the high volume and profitable segments, and BSE will remain a niche player.
  • BSE operates in a highly regulated industry and may be subject to censures, fines and other legal proceedings if they fail to comply with their legal and regulatory obligations.
  • BSE has received certain complaints from the public after filing of the DRHP with SEBI, with many allegations. Any litigation arising on account of such complaints, if adversely determined, could materially affect its businesses and financial condition.
  • BSE isn’t loss making per se, however there hasn’t been real growth in the last 3 years. In spite of double digit margins, the bottom-line may not improve if there is no sales growth.
  • Unconfirmed reports suggest that investors in BSE over the past few years are exiting with flat gains.

Overall Opinion and Recommendation

  • Post demonetization, we feel Indian households will increasingly channel savings to equity markets, as will FIIs and DIIs. BSE should benefit from this.
  • Not just historically but also in terms of market breadth, BSE is a leader and should be able to consolidate its position financially over the next few years.
  • More product offerings, commencement of operations at GIFT city and stake divestment via CDSL IPO are likely to keep BSE financials healthy in the medium term.
  • However NSE is a fierce competitor, and is way ahead in terms of volumes, growth and profits.
  • At a FY16 P/E of 35.9, and a FY17E forward PE of 21.0, the valuations are average.
  • This IPO offering is rated AVERAGE, and investors are advised to look elsewhere for long term gains.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. CPSE ETF FFO – An Energizing Offer
  2. Balmer Lawrie – An Update
  3. Why Stocks, and Investment Outlook – Dec 2016
  4. Investment Outlook – Short Term Pain, Medium Term Gain
  5. The Natural Quotient: A Sustainability Metric for Business
  6. PNB Housing Finance IPO: A Transformed Lender
  7. Endurance Technologies IPO 
  8. ICICI Prudential Insurance IPO – An Expensive BUY
  9. GNA Axels IPO
  10. RBL Bank IPO 
  11. New Banks: Big Changes in Small Change 
  12. Equitas IPO – Leader in SF Banks
  13. Do you want to be a value investor?
  14. Mahanagar Gas IPO 
  15. A Repurpose for our PSUs
  16. How to Approach the Stock Market – A Lesson from Warren Buffet
  17. Announcement – SEBI approval as a Research Analyst

DO YOU FIND THIS SITE USEFUL?

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Disclaimer

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

Balmer Lawrie – An Update

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

Dear Readers,

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

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

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

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

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

JainMatrix Investments, Balmer Lawrie

Balmer Lawrie – 6 month price history

We hope you make handsome gains on BLC.

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

Happy investing,

Punit Jain, Founder, JainMatrix Investments

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

Disclaimers

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

PNB Housing Finance IPO: A Transformed Lender

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

Summary

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

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

IPO highlights

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

Introduction

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

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

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

Promoter (Punjab National Bank) – Snapshot and Financials

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

Fig 4 – PNB financials

News and Updates for PHF

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

Indian Housing Finance Industry Outlook

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

Financials of PHF

JainMatrix Investments, PNB Housing Finance

Fig 5 – PHF Financials

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

Benchmarking

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

JainMatrix Investments, PNB Housing Finance

Exhibit 6 – Benchmarking

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

Positives for PHF and the IPO

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

Risks and Negatives for PHF and the IPO

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

Overall Opinion and Recommendation

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

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

  • Visit the Investment Service offering page to find how you can get more.
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Disclaimer

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

Balmer Lawrie – Is Traveling Fast Now

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

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

BLC – Description and Profile

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

Fig 1 – BLC Business Segments/ Geographical Segments

Recent events, Business Plans and Strategies

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

Industry Views:

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

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

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

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

Stock evaluation, Performance and Returns

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

Fig 2 – Price History

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

Fig 3 – Quarterly Financials (click to enlarge)

JainMatrix Investments, Balmer Lawrie

Fig 4 – Free Cash Flow

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

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

JainMatrix Investments, Balmer Lawrie

Fig 6 – Price and EPS Chart

JainMatrix Investments, Balmer Lawrie

Fig 7 – Financial Metrics

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

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

Benchmarking and Financial Estimates

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

JainMatrix Investments, Balmer Lawrie

Exhibit 8 – Financial Benchmarking

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

Exhibit 9 – Financial Projections

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

Strengths of BLC

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

Weaknesses and Risks

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

Opinion, Outlook and Recommendation

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

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer and Notes

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

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