AU Small Finance Bank IPO

AU Small Finance Bank IPO Open 28-30th June at Rs. 355-358.

Dear Investors, 

JainMatrix Investments has been creating IPO reports since it started in Nov 2012. Our IPO reports have been appreciated for the depth of analysis, direct observations, independence and investor friendliness.  We also have been providing IPO reports at a popular price point – zero.

We do this because these reports showcase the JainMatrix Investments capabilities of analyzing firms with minimum of public data available, and often from new emerging sectors and with unknown management. And getting it right quite often.

We have already published our report of AU Small Finance Bank IPO. However, this is available to only those who have registered for free alerts on the JainMatrix website. You can do this right away. Look for the panel on the right, that says – Register with JainMatrix. Get free equity investment reports!  Enter your email in the box, say yes to the confirmation mail that you will receive, and bingo. You can still get your free PDF copy of the AU Small Finance Bank IPO report by JainMatrix. Within a day. 

Also have a look at the Eris Lifesciences IPO report on this website.

Happy Investing

Punit Jain

JAINMATRIX KNOWLEDGE BASE

See other useful BFSI reports:

  1. PNB Housing Finance IPO: A Transformed Lender
  2. RBL Bank IPO – A Grand Revival
  3. New Banks: Big Changes in Small Change
  4. Equitas IPO  – Leader in Small Finance Banks
  5. Announcement – SEBI approval as a Research Analyst
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Eris Lifesciences (IPO) is Strong on B2D

  • Date 15th June; IPO Open 16-20th June at Rs. 600-603
  • Valuations: P/E 34.3 times TTM, P/B 15.4 times
  • Mid Cap: Rs. 8,300 crore Mkt cap
  • Industry – Pharma sector
  • Advice: Investors can BUY with a 2 year perspective

Overview: Eris is an Ahmedabad based firm that develops, manufactures and sells branded pharma products from the chronic and acute categories in the Indian pharma market. Revenues for FY17 were Rs. 725 cr. and profit Rs. 242 cr. ERIS’s revenues, EBITDA and PAT grew at 16.6%, 34.7% and 42.8% CAGR in 5 years. Within the growing industry, Eris has a market share of 0.7% achieved in just 10 years of existence. There is certainly ample scope for Eris to grow both market share and absolute revenues. Eris is already growing fast and stands out for the domestic focus, strong marketing & sales, good business relationships with doctors (B2D) and efficient mfg. & procurement giving high margins. At a P/E of 34.25 TTM the valuations in the IPO are high but not aggressive, and justified by Eris’ growth rates.

Key risks: 1) Pending complaints with the Medical Council of India 2) Adherence to voluntary code of UCPMP 3) We are unsure that Eris will be able to maintain its high growth rates, high procurement of products and subsequently margins

Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is a note on Eris Lifesciences Ltd. (Eris) IPO.

IPO highlights

  • The IPO opens: 16-20th June 2017 with the Price band: Rs. 600-603 per share.
  • Shares offered to public number 2.87 cr. The FV of each is Rs. 1 and market Lot is 24.
  • The IPO in total will collect Rs 1,741 cr. while selling 21% of equity. The offer is a complete OFS and the selling shareholders will receive the entire sum. ChrysCapital’s investment arm Botticelli would be exiting by selling its current 16.3% stake. Botticelli’s average cost of acquisition in Eris was Rs 87.27/share giving them 6.9x on their investment in 6 years. The other selling shareholders are individuals who hold around 4-9% stake individually in the company. The promoter & promoter group owns 59.18% in ERIS which will fall to 55.9% post-IPO.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 75:15:10.
  • The unofficial/ grey market premium for this IPO is Rs. 86/share. This is a positive.

Introduction

  • Eris is an Ahmedabad based firm that develops, manufactures and sells branded pharma products from the chronic and acute categories in the Indian pharma market.
  • Revenues and profit for FY17 were Rs. 725 cr. and Rs. 242 cr. It has 2,645 full time employees out of which over half – 1,501 are sales reps.
  • So Eris has strong sales, marketing and distribution capabilities with 7 sales divisions focused on developing and growing engagement with doctors.
  • Eris products are cardiovascular, anti-diabetics, vitamins, gastroenterology and anti-infectives from the chronic and acute category which are linked to lifestyle disorders. The chronic category contributed 65.6% of its revenues in FY17. The product portfolio has 80 mother brand groups (FY17) and is focused on therapeutic areas which are handled by specialists and super specialists such as cardiologists, diabetologists, endocrinologists and gastroenterologists. See Exhibit 1.

JainMatrix Investments, Eris Lifesciences

Exhibit 1 – Eris products, therapeutic areas, revenues and brands, Source RHP

  • Between FY13 and FY17, there has been an increase in the no. of doctors prescribing their products from 37,842 (about 13.8% of doctors in metros and class 1 towns in India) to 50,282 (15.7% of doctors in metro and class 1 towns) with a prescription share of 1.3% for FY17.
  • Eris owns and operates a mfg. facility in Guwahati, Assam. They also outsource the mfg. of some products, and currently have 20 third party mfg. vendors.

JainMatrix Investments, Eris Lifesciences

Fig 2 – ERIS Segment revenue and Fig 3 Post IPO Shareholding Pattern

  • Eris has 3 subsidiaries namely Eris Therapeutics Pvt. Ltd (wholly owned), Aprica Health (wholly owned) and Kinedex. As of June 2017, Eris and subsidiaries have registered 138 trademarks for various brand names. It has a team of 32 personnel working in its IP and R&D department.
  • In July 2016, Eris acquired trademarks in relation to 40 brands, from Amay Pharma for Rs.32.8 cr., in order to grow their product portfolio in the cardiovascular and anti-diabetics therapeutic areas. Amay Pharma’s revenues, from these brands were Rs. 19.3 cr.
  • In Nov 2016, ERIS acquired 75.48% share of Kinedex for Rs. 77.2 cr.
  • It focuses on products for mobility related disorders in the musculoskeletal therapeutic area, within the acute pain-analgesics therapeutic area. Kinedex’s revenues were Rs. 83 cr. for FY17.
  • Eris’s facility in Guwahati had a capacity utilization for tablets, capsules and sachets of 76%, 57.6% and 19.6% resp. It enjoys tax break under Income Tax Act, which will continue post GST till FY24.
  • For FY16 and FY17, the products made at Guwahati contributed to 51.6% and 59.3% of their revenues. An additional 28.2% and 18.7% of revenues for the same periods was mfg. in partnership with Sozin Flora Pharma. Eris was a partner in Sozin up to Aug 2016, and then transferred their stake to the other partners of Sozin, to enhance operational efficiency and productivity.
  • Leadership is Amit Bakshi (CMD), Kaushal Shah (Head mfg. & dist.) Sachin Shah (CFO), Rajendra Patel (Head procurement)

News, Updates and Strategies of ERIS

  • Eris with Indian Medical Association and Heart Care Foundation of India conducted a national study for ambulatory blood pressure readings amongst medical fraternity in May 2017. It was found that 50% physicians were suffering from hypertension despite taking hypertensive medicines; 56% from irregular BP at night and 21% from masked hypertension.
  • Eris will consolidate its position in therapeutic areas in which they have good presence including:
  • Targeting new categories within its existing therapeutic areas, e.g. strengthening its position in the anti-diabetes therapeutic area by launching new products.
  • Continuing to expand its network of key opinion leaders (KOL) in existing therapeutic areas and increase its coverage of specialists to drive growth in prescriptions.
  • Continuing to execute on its doctor-patient engagement model by leveraging diagnostics and technology to aid better outcomes and enhance patient compliance.
  • Eris will explore in-licensing and co-development opportunities with other pharma firms. It will also utilize its R&D efforts to target select products which are currently under patent protection in India.

Indian Pharma Market Outlook

  • India is one of the largest pharma markets in the world. Between FY13-17, revenues grew at 11.8% CAGR to reach Rs. 1,14,326 lakh cr. The IPM is the 13th largest market globally in terms of value and 3rd largest in terms of volume.
  • The IPM is expected to grow at a CAGR of 11.6% between CY16-21. The underlying growth is driven by: 1) Favorable demographics and macro-economic developments 2) Rising prevalence of chronic diseases and 3) Medical talent including specialists and super specialists 4) increasing insurance coverage and 5) the under-penetration of medical infrastructure and talent.
  • The IPM can be classified into acute and chronic The acute category comprises therapies intended for diseases of short duration and recent onset, including anti-infectives, gastro intestinal medication, vitamins and gynecology. The chronic category caters to non-communicable diseases that are prolonged in duration like heart disease, diabetes, cancer and arthritis.
  • Eris has a 0.7% market share in IPM. It was ranked 20th out of the 377 domestic and MNC firms in the chronic category, in terms of revenues, for FY17, compared to 26th in FY13.
  • Market share by revenue in the chronic category increased from 0.9% in FY13 to 1.4% in FY17.

Financials of ERIS

  • ERIS’s revenues, EBITDA and PAT grew at 16.6%, 34.7% and 42.8% CAGR in 5 years, see Fig 4.
  • The EPS has risen sharply in 5 years. This is excellent.
  • Eris has positive cash from operations and FCF all the last 5 years, Fig 5. This is a positive.

JainMatrix Investments, Eris Lifesciences

Fig 4 – ERIS Financials

JainMatrix Investments, Eris Lifesciences

Fig 5 – ERIS Cash Flow

  • Eris has declared dividend an interim dividend for FY16 amounting to Rs. 83 cr. (62.2% of FY16 PAT). Apart from this, the company hasn’t declared any dividend in the last 5 years including FY17.
  • Eris had a RoE of 44.8% in FY17 while the 3 year avg. RoE stood at 42.9% (FY15-FY17). The RoCE stands at 50.9%. These are high, healthy and consistent return ratios.
  • EBITDA margins jumped from 29.3% (FY16) to 39.7% (FY17), whereas the PAT margin increased from 22.4% (FY16) to 33.4% (FY17), reflecting a massive positive change. Such high margins were on account of low input costs, low interest costs and low effective tax rate (tax benefit at mfg. facility).
  • Eris has a reserves and surplus balance of Rs. 526 cr. which is Rs. 38.26/share.

Benchmarking

We benchmark Eris against peers from pharma sector. See Exhibit 6.

  • PE appears high at 34.25 compared to peers, but not a worry. The D/E ratio at 0.19 is comfortable.
  • The P/B ratio is high at 15.36 times, but this is because just 52% of products are mfg. in-house, and the rest is procured. As long as vendor-partners can adhere to the quality norms, it’s good.

JainMatrix Investments, Eris Lifesciences

Exhibit 6 – Benchmarking

  • Eris has witnessed fair sales but good profit growth recently. The 3 year PAT growth, EBITDA and PAT margins are high, coming in second highest of this group.
  • The return ratios are excellent and highest in the group at 45-51% each. This is a positive, and allows Eris to command premium valuations as returns are on a small equity base of Rs. 13.75 cr.
  • The company has not declared any dividend in FY17 unlike other pharma companies.

Positives for ERIS and the IPO

  • Eris is a fast growing pharma company with a portfolio of complementary products. In the chronic category, they were the fastest growing, among the top 25 in terms of revenues.
  • Eris has a portfolio of high volume and leading brands. Its focus is on metro cities and class 1 towns which have higher incidence of lifestyle disorders.
  • Eris has strong sales, marketing and distribution capabilities and good engagement with doctors.
  • The product range does not contain OTC products, so Eris has avoided the investment heavy consumer space. Instead it focuses on the B2D or Business to Doctor marketing. This we feel entails lower costs and helps maintain margins.
  • The financial health of the company is good, and the company has grown rapidly under the leadership of Amit Bakshi. He was a pharma salesman who worked in companies like Torrent, Eli Lilly and Intas and had many years of experience in the pharma industry before starting Eris.
  • Eris is immune to the global approvals/ USFDA risks as they have a domestic focused business.
  • Leadership appears to be dynamic and aggressive, and using strategies that play to their strengths.

Risks and Negatives for ERIS and the IPO

  • Eris has received letters from the Medical Council of India and certain state medical councils in connection with anonymous complaints, which allege that they have provided special benefits to several doctors. In the event the allegations are found to be true and in violation of applicable regulations and statutes, their reputation and business may be adversely affected.
  • Stricter norms in India for companies doing business in the pharma industry could affect their ability to effectively market its products. The Dept. of Pharma announced details of the UCPMP, which became effective across India from Jan 1, 2015. The UCPMP is a voluntary code which, among other things, provides detailed guidelines about promotional materials, conduct of medical reps, physician samples, gifts and relationships with healthcare professionals. Although these guidelines are voluntary in nature, they may be made mandatory in the future.
  • Will Eris be able to sustain the high growth rates and margins as it grows larger? While Eris still has a small market share in a growing market, typically pre IPO and small cap growth rates are difficult to sustain as a mid-cap firm. Competition too is intensifying in Eris’ key segments, and they will have to envision new strategies to continue on the growth path.
  • By procuring 48% of products from vendors, Eris has kept investments low and got high margins. Will this strategy be suitable in future? Any quality control problems at their mfg. facility or those of their third party mfg. may damage their reputation and expose them to litigation or other liabilities.
  • Some generic pharma sector risks: 1) If any of their products cause, or are perceived to cause, severe side effects, their reputation, revenues and profitability could be adversely affected. 2) The availability of counterfeit drugs, such as drugs passed off by others as their products, could adversely affect their brands.

Overall Opinion and Recommendation

  • As India accelerates its per capita income from a low base, a lot of the individual income gains are directed to the pharma sector for better healthcare.
  • Within the growing industry, Eris has a market share of 0.7% achieved in just 10 years of existence. There is certainly ample scope for Eris to grow both market share and absolute revenues.
  • Eris is already growing fast and stands out for the domestic focus, strong marketing & sales, good connect with doctors & medical ecosystems, and efficient mfg. & procurement giving high margins.
  • While the IPO is an exit opportunity for some investors, it empowers Eris for the next phase of growth by providing visibility and prestige, and the ability to raise fresh funds at low cost.
  • At a P/E of 34.25 TTM the valuations in the IPO are high but not aggressive, and justified by Eris’ growth rates.

Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

JAINMATRIX KNOWLEDGE BASE

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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 stake ownership or known financial interests in Eris Lifesciences or any group company. Punit Jain may choose to apply for this IPO in the Retail category. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Adviser. 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.

S Chand IPO: An Educational Content Powerhouse

  • IPO Open 26-28th Apr at Rs. 660-670
  • Mid Cap: Rs. 2,328 crore Mkt cap
  • Industry – Education Publishing
  • P/E 36.8 times TTM
  • Advice: Investors can BUY with a 3 year perspective

Summary

  • Overview: SCL is a 70 year old firm that delivers books, content and services in education to the K-12, higher education and early learning segments with strong presence in CBSE/ICSE schools. SCL revenues, EBITDA and PAT have grown at 32.6%, 47.5% and 33.9% CAGR from FY12 to FY16. SCL had a strong distribution and sales network across India. SCL has good relationships with authors who create and refine content. Textbook quality is excellent. The recent M&A strategy has given them a strong position across subjects, central and state boards and multiple languages. SCL is a thought and execution leader in this space with good content through authors and reach through distribution networks. It is capturing innovation by buying good education firms to enhance offerings. The IPO will help reduce debt even as operational revenues grow at 32.6% CAGR.
  • Key risks: 1) At a PE of 36.8 TTM, the valuations are expensive. 2) SCL has a seasonal business 3) NCERT provides subsidized textbooks and may prevent usage of SCL textbooks.
  • Opinion:   This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is a note on S Chand and Company Ltd. (SCL) IPO.

IPO highlights

  • The IPO opens: 26-28th Apr 2017 with the Price band: Rs. 660-670 per share.
  • Shares offered to public number 1.08 cr. The FV of each is Rs. 5 and market Lot is 22.
  • The IPO in total will collect Rs 729 cr. while selling 31.34% of equity. Of this, SCL will raise Rs. 325 cr. by issuing fresh shares and the selling shareholders will receive Rs. 404 cr. at the UMP. The promoter group owns 58.33% in SCL which will fall to 46.7% post-IPO.
  • SCL would benefit from the fresh issue of shares and the proceeds of Rs. 325 cr. would be used for:

Exhibit 1 – Utilization of proceeds from 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.
  • IFC holds 9.4% stake in SCL (Pre-IPO) and Everstone Capital Partners holds 32.3% (Pre-IPO). IFC will remain invested, while Everstone is selling half of its current stake in SCL.
  • The unofficial/ grey market premium for this IPO is in the range of Rs. 160. This is a positive.
  • The first day of IPO saw that it is already 52% subscribed, so it looks like it will sail through very successfully.

Introduction

  • SCL is a 70 year old firm that delivers books, content and services in education to the K-12, higher education and early learning segments and has a strong presence in CBSE/ICSE affiliated schools.
  • Revenues for FY16 were Rs. 541 cr. and profit Rs. 47 cr.
  • It has 2,135 full time employees (Dec ‘16.), whereas Chhaya has 309 employees (Dec ‘16.).
  • In Dec2016, SCL bought a 74% stake in Kolkata-based publisher Chhaya Prakashani Pvt. Ltd for Rs. 170 cr. SCL will acquire remaining 26% by Nov2018. In the past S Chand acquired Delhi-based publishers New Saraswati House in 2014 and Vikas Publishing House in 2012.
  • SCL has 55 consumer brands across knowledge products and services including S. Chand, Vikas, Madhubun, Saraswati, Destination Success and Ignitor. It recently acquired 74% of Chhaya Prakashani Pvt. Ltd. and now also offers 4 Chhaya brands including Chhaya and IPP.
  • SCL has a contractual relationship with 1,958 authors (including co-authors) for over 5 years. Additionally, Chhaya has contractual relationships with at 24 authors.
  • SCL had a sales and distribution network of 42 warehouses in 19 states, 4,932 distributors and dealers, and a sales team of 838 working from 52 branches and marketing offices. Chhaya Acquisition has expanded presence in East India to add 771 distributors and dealers.
  • SCL has developed a robust supply chain. In FY16, 85% of printing requirements were met by facilities in Sahibabad and Rudrapur. The paper purchases are integrated, which lowers costs.
  • About 72.5% of SCL’s sales are derived from the K-12 segment (KG to 1st to 12th grade). And 75% of sales of SCL are generated in the 4th quarter every year, at the start of the new academic year. Fig 2.

Fig 2 – a) SCL revenue over the years and  b) FY16 segments

  • Leadership is Desh Raj Dogra (Chairman), Himanshu Gupta (MD), and Saurabh Mittal (CFO).
  • In FY11, SCL’s key subjects were English grammar, Math and Science. It has since made many acquisitions. In 2013, SCL acquired Madhubun and Vikas – to improve its Hindi language titles. In FY15, it acquired Saraswati brand to strength its French, languages, arts and crafts titles.
  • SCL has 12 subsidiaries including Chhaya Prakashini. But 7 of these 12 have incurred losses in FY16.

News, Updates and Strategies of SCL

  • In FY16, SCL sold 3.55 crore copies of 11,144 titles. Additionally, Chhaya sold 98.8 lakh copies of 433 titles. SCL’s top 10 best-selling titles accounted for sales of 29.6 lakh copies in FY16, and 15 of their authors had each sold over 10 lakh copies of their titles during the last 5 years.
  • On the website, schandpublishing.com the firm offers ecommerce services.
  • SCL is looking to acquire firms in the higher education business, particularly in the test prep market. It plans to do so to increase its market share in the State Board segment in attractive markets.
  • SCL invested in online test prep startup Testbook in Mar2016. It is an online test prep platform for competitive exams such as GATE, CAT, SBI PO and IBPS PO, besides others. The platform allows students to simulate an environment similar to the actual examination.
  • SCL invested Delhi-based Smartivity Labs Pvt Ltd, an online venture that deploys augmented reality and robotics for kids learning projects in Oct 2015.

Education Sector Outlook

  • A recent survey by market research agency Nielsen revealed that India’s book publishing market is the sixth-largest in the world at Rs 26,100 crore, and is likely to touch Rs 73,900 crore by 2020.
  • The formal education segment comprises both K-12 schools (including secondary and senior secondary schools) and higher education institutions (colleges, higher education institutes). Whether government or privately owned, this segment is governed by the ‘not for profit’ diktat, meaning that such educational institutions in India cannot be operating on a ‘for profit’ basis.
  • The informal segment comprises test preparation, tutoring, early education and vocational/skill-based training segments. The informal segment does not have restrictions on operating on a ‘for profit’ basis and does not have restrictions on profit distribution.
  • The formal, informal and ancillary segments are collectively estimated at US $90 billion as of 2015 and expected to reach US $188 billion by 2020. India has a large population in the education age bracket of students aged 5-24, which stood at 52 crores in 2016. This may grow to approximately 53.4 crores by 2020. In addition to the growing population, a reduction in drop-out rates is expected to contribute to increase in market size.
  • The K-12 education system in India is one of the largest in the world, with a market size of US $49.5 billion, comprising 11 lakh govt. schools and 4 lakh private schools. Schools have grown from 13.6 lakh (FY11) to 15.2 lakh in (FY15). During 2011-2014, the share of private unaided schools recorded the highest growth rate among other types of schools from 14.2% to 19%.
  • Most schools in India are affiliated to 1 of 3 main governing bodies for K-12 schools: (a) state level SSC education board; the Central Boards of (b) CBSE; and (c) ICSE.
  • CBSE schools have grown at the fastest CAGR of 8.9% during 2011-2015.
  • The growth drivers of the K-12 education segment are: 1) Rising disposable incomes 2) Consumer preference for private unaided schools 3) Government initiatives on promoting primary education
  • SCL is a market leader with a share of 13% in education content. The closest peers are Oxford Publication and Orient Black Swan have a share of 6% each. (source – newspaper reports).

Financials of SCL

  • SCL’s revenues, EBITDA and PAT grew at 32.6%, 47.5% and 33.9% CAGR in 5 years, see Fig 3.
  • FY17 revenues is a projection of 9M FY17 financials, assuming 75% comes in Q4; and adding financials of Chhaya Prakashini. Thus revenue and PAT growth are good.
  • The EPS has risen sharply in 5 years. This is excellent. But there was a fall in FY15. Here SCL witnessed a disruption due to Chennai floods; it also acquired 51% in New Saraswati House.

Fig 3 – SCL Financials/ Fig 4 – SCL Cash Flow

  • SCL has negative cash from operations and FCF in 3 of last 5 years, Fig 4. This is a negative. However this is explained by the vigorous M&A activity as SCL has grown inorganically.
  • SCL has not declared dividend in the last 2 years, however it hadan interim dividend for FY17.
  • SCL has an ROE of 7.8% in FY16 which is low.
  • Operating margins have been flat while profit margins have fallen a little. However with acquisition of Chhaya Prakashini, the margins should improve, it had a net profit margin of 12.4% (Dec 2016).
  • SCL has a cash balance of Rs. 24.4 cr. today which translates into Rs. 7.03 as cash/share which is low.

Benchmarking

We benchmark SCL against peers from education /publishing sector. However the main comparison is with Navneet due to Repro (losses), MPS (technology), CLE (classroom) and others (newspaper publishing). Note that Navneet too has a significant stationary business. See Fig 5.

Exhibit 5 – Financial Benchmarking

  • PE for SCL appears expensive at an FY17P* of 36.8 as compared to Navneet at 25.2 times with better financials. The valuation of SCL is moderate in terms of P/B ratio.
  • SCL has witnessed high sales growth in the last few years. The EBITDA margins are good, while profit margins have dragged.
  • The 3 year PAT growth is moderate at 13.4%. The D/E ratio at 0.82 is moderate, however the highest in the industry. The return ratios are poor. This is a negative.
  • The SCL numbers are consistent with a firm on a growth and acquisition spree that is well on the way to becoming a textbooks and education content leader. In 2-3 years the benefits of this will accrue to shareholders.

Positives for SCL and the IPO

  • The IPO is beneficial to SCL. The fresh issue proceeds will retire some of the debt and improve financials.
  • SCL has strong brand equity with high consumer recall. The IPO and post listing visibility will enhance the brand of SCL as a consumer product.
  • SCL has in the last 4 years followed a coherent M&A strategy – first to expand subjects under coverage, then including state boards, regional languages and education innovation tech firms.
  • SCL is a comprehensive consumer education content player across the education lifecycle.
  • A strong presence in the CBSE/ICSE schools and increasing presence in state board schools.
  • SCL has strong integrated in-house printing and logistic capabilities. In FY16 over 85% of their printing requirements were met by their facilities located in Sahibabad and Rudrapur.
  • SCL has a pan-India sales and distribution network driving deep market reach.

Risks and Negatives for SCL and the IPO

  • SCL has a highly seasonal business of their main K-12 business segment with 75% of their sales generated in Q4 every year. This also means seasonality in working capital.
  • The valuations look expensive in terms of P/E ratio. Debt is high, with ok margins and low RoE.
  • SCL operates in a highly-competitive and fragmented industry. Many of the content providers have strong brand recognition in local markets and long term relationships with schools, school authorities and educational authorities. They also face competition from the govt. National Council of Educational Research and Training (NCERT) and the State Council of Educational Research and Training (SCERT), which publish books for the K-12 market at subsidized costs.
  • For the past 2 years, CBSE board has issued an advisory circular advising CBSE affiliated schools to use only NCERT books for all classes. CBSE issued the circulars in response to reports and complaints from parents that schools were asking them to buy books published by private companies. The CBSE books are much cheaper (subsidy) but there is a big difference in quality and content of these.
  • A large portion of SCL revenues are derived from titles of their top authors. In FY16, their top 20 authors contributed to 48.9% of revenues. The loss of such authors could adversely affect business.
  • SCL has an obligation to acquire the remaining 26% of share capital of Chhaya Prakashani by Nov 2018 which may need to be financed with additional debt.
  • SCL may be impacted by the introduction of the GST. However it is likely that after making the operational alignment changes, it may be beneficial for business and ease distribution and pricing.
  • The presence of 55 consumer brands sounds daunting. It may be a legacy of M&A. It may be necessary for SCL to simplify branding by merging many and focusing on 5-10 key brands.
  • M&A are often risky and SCL needs to ensure success of all acquisitions, and suitable synergy gains.

Overall Opinion and Recommendation

  • India has a very young population that is underpenetrated in terms of education. A lot of govt. focus is already on improving availability and outcomes in K-12 education.
  • Education content continues to be an important aspect of K12 education with textbooks, guides and question papers being key elements.
  • SCL is a thought and execution leader in this space with good content through authors and reach through distribution networks. It is also aggressively growing across subjects and languages, from central to state boards, and from paper to online distribution. It is capturing innovation by buying good education firms to enhance offerings.
  • At a PE of 36.8 TTM, the valuations are expensive. However we feel that debt can be reduced post IPO even as operational revenues gallop forward at 32.6% CAGR.
  • Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. Vikas Ecotech – Get ‘Vikas’ for your Investments
  2. CPSE ETF FFO 2 – An Energizing Offer – BUY
  3. Investment Notes – Euphoria
  4. Avenue Supermarts IPO: The Mart of Choice
  5. Bharat Electronics OFS
  6. Whats different about the Investment Service from JainMatrix? – A video
  7. Why are Indian stock markets attractive for Investments? – A video
  8. BSE IPO: Put this Exchange on Hold – Report plus Video
  9. CPSE ETF FFO – An Energizing Offer – Report plus Video
  10. Balmer Lawrie – An Update
  11. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  12. Investment Outlook – Short Term Pain, Medium Term Gain
  13. PNB Housing Finance IPO: A Transformed Lender
  14. RBL Bank IPO 
  15. New Banks: Big Changes in Small Change 
  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 intends to apply for this IPO in the Retail category.  Other than this, JM has no known financial interests in SCL 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.

Vikas Ecotech – Get ‘Vikas’ for your Investments

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

Summary

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

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

VIKAS ECOTECH – DESCRIPTION AND PROFILE 

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

JainMatrix Investments, Vikas Ecotech

Fig 1 – Segment and Geographic Revenue

Recent Events, Business Plans and Strategies

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

JainMatrix Investments, Vikas Ecotech

Fig 2 – VET Capacity Growth  

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

Industry Outlook

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

Stock Evaluation, Performance and Returns

JainMatrix Investments, Vikas Ecotech

Fig 3 – Price History

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

JainMatrix Investments, Vikas Ecotech

Fig 4 – Quarterly Financials/ Fig 5 – Cash Flow  

JainMatrix Investments, Vikas Ecotech

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

JainMatrix Investments, Vikas Ecotech

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

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

JainMatrix Investments, Vikas Ecotech

Fig 7 – Financial Metrics

Benchmarking and Financial Estimates

Exhibit 8 – Financial Benchmarking

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

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

Exhibit 9 – Projections  

The financial projections have been made based on following assumptions.

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

Strengths of Vikas Ecotech

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

Weaknesses and Risks

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

Opinion, Outlook and Recommendation

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

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer and Additional Details

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

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

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.

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