IRCTC IPO – A Matter of Convenience – Pre Listing Note – Premium

  • Date: 11th Oct, 2019
  • Mid Cap – 5,120 cr. Mkt cap
  • Industry: Railway PSU
  • IPO Price – ₹320 /share

jainmatrix investments, IRCTC IPO

  • We had published an investment report  IRCTC IPO – A matter of convenience.
  • The response to the offer was excellent, with an 112 times subscription.
  • The IRCTC IPO lists on Mon 14th Oct.

Jainmatrix Investments has just published a Premium report – A Pre-Listing Note on IRCTC IPO that guides serious investors on this opportunity.

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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 IRCTC or any group company. Punit Jain intends to apply for this IPO in line with the BUY recommendation. 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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IRCTC IPO – A Matter of Convenience

  • Date 29th Sep 2019
  • IPO opens 30th Sep -3rd Oct at price range 315-320/share
  • Industry – Railways PSU
  • Mid Cap: 5,120 cr. Mkt cap
  • Valuations: P/E 18.8 times TTM
  • Advice: SUBSCRIBE with a 2 year perspective 

jainmatrix investments, IRCTC IPO

Summary

  • Overview: Railways are undergoing a dramatic transformation to improve service levels, technology, outsource and grow faster. Subsidiaries like IRCTC are executing on the new initiatives. IRCTC is an Indian Railways owned PSU. It is the only entity authorized to provide catering services to railways, online railway tickets and packaged drinking water at stations and trains. It is financially well-managed and the return ratios and operating cash flows are robust. There is ample scope for growth in almost all business segments. Profits are expected to improve in FY20 given earnings tailwinds including restoration of Convenience fees, lower corporate tax and lower bad debt provisions YoY.
  • Risks: 1) removal of exclusivity for its business divisions 2) reduction in price of services, higher haulage or a removal of convenience charge for tickets portal 3) In the water business, a ban on single use plastic 4) Any adverse news flow on catering services or Ticket booking scams 5) GoI may list RailTel and IRFC soon, both are PSU railway firms. This can impact valuations.
  • Opinion: At a P/E of 18.8 times, the valuation are attractive. Investors can SUBSCRIBE to this IPO with a 2 year perspective.
  • Download a PDF version of this report JainMatrix Investments_IRCTC IPO_Sep2019

Here is a note on Indian Railway Catering and Tourism Corporation (IRCTC) IPO.

IPO highlights

  • The IPO opens: 30th Sep -3rd Oct 2019 with the Price band: ₹315-320 per share.
  • Shares offered to public number 2.01 cr. The FV of each is ₹ 10 and market Lot is 40.
  • The IPO in total will collect ₹645 cr. while selling 12.6% of equity. The promoter group of Indian Railways (IR) owns 100% in IRCTC which will fall to 87.4% post-IPO.
  • The IPO is an Offer for Sale (OFS) by IR, and will raise ₹645 cr. at UMP. The IPO share quotas for QIB, NIB and retail are 50:15:35. Retail and employees will get a ₹ 10 discount to listing price.
  • The unofficial/ grey market premium for this IPO is ₹140-150/share. This is a positive.

Introduction

  • IRCTC was conferred the status of Mini – Ratna (Category-I PSE) by the GoI, on May 1, 2008.
  • IRCTC is a CPSE owned by the GoI under the Ministry of Railways. It is the only entity authorized by IR to provide 1) catering services to railways 2) online railway tickets and 3) packaged drinking water at railway stations and trains in India. IRCTC was incorporated with the objective to upgrade, modernize and professionalize catering and hospitality services, manage services at railway stations and on trains and to promote international and domestic tourism in India through PPP model.
  • Revenues, EBITDA and profit for FY19 were ₹1,957 cr., ₹461 cr. and ₹273 cr. resp. It has 1,384 employees (Aug 2019). IRCTC has been profitable and debt free since incorporation in 1999.
  • 55% of revenue was from catering services; internet ticketing was 13%, etc. See Fig 1(a)

jainmatrix investments, IRCTC IPOFig 1(a) – Revenue by Segments and Fig 1(b) Margins jainmatrix investments, IRCTC IPO

  • IRCTC operates in 4 business segments of Catering, Internet Ticketing, Tourism, State Teertha (travel packages) and packaged drinking water under the “Rail Neer” brand.
  • Internet Ticketing: IRCTC is the only entity authorized by IR to offer railway tickets online. As of Aug 2019, more than 14 lakh passengers travel on IR on a daily basis, of which 72.6% are booked online. As a result, there are more than 8.4L tickets booked through http://www.irctc.co.in and “Rail Connect” on a daily basis. IRCTC operates one of the most transacted websites, http://www.irctc.co.in, in the APAC region with volumes averaging 25-28 m. transactions/month.
  • Catering: IRCTC provides food catering services to IR passengers on trains (mobile catering) and and at stations (static catering). IRCTC provides catering services for 350 pre-paid and post-paid trains and 530 static units. They provide catering services through mobile catering units, base kitchens, cell kitchens, refreshment rooms, food plazas, food courts, train side vending, and Jan Ahaars over the IR network. All other catering units, such as refreshments rooms at stations categorized at B or below, AVMs, milk stalls, and trolleys are managed by zonal railways. IRCTC offers catering services to passengers through a mobile app “Food on Track” and a website, ecatering.irctc.co.in. They also operate executive lounges, budget hotels, and retiring rooms for railway passengers.
  • Packaged Drinking Water (Rail Neer): IRCTC is the only entity authorized by Ministry of Railways to make and distribute packaged drinking water at all railway stations and on trains. They have a packaged drinking water brand ‘Rail Neer’. Currently IRCTC operates ten Rail Neer plants located at Nangloi, Danapur, Palur, Ambernath, Amethi, Parassala, Bilaspur, Hapur, Ahmedabad and Bhopal, with an installed production capacity of 1.09 m. liters/day, which caters to 45% of demand for packaged drinking water at railway premises and in trains.
  • Travel and Tourism: IRCTC have been mandated by IR to provide tourism and travel related services. IRCTC has footprints in across all major tourism segments such as hotel bookings, rail, land, cruise and air tour packages and air ticket bookings. Additionally, it has a service the SBI IRCTC Credit Card.
  • Leadership is Mahendra Mall (CMD), Narendra (Dir. Finance), Rajni Hasija (Dir. Tourism & Marketing)

News, Updates and Strategies

  • IRCTC will launch 2 new Tejas Express trains, where the train services will be managed by them rather than IR. It will offer upgraded services including food, have advertising rights to on these trains but will pay a lease to IR. The Delhi-Lucknow Tejas will begin services in Oct 2019 and the Mumbai-Ahmedabad train is expected to start in Dec 2019.
  • With effect from 1st Sept 2019, IRCTC will charge a convenience fee of ₹ 15 and ₹ 30 for booking railway tickets online for non-AC and AC classes, resp. This is expected to boost revenues; it had witnessed a revenue loss due to withdrawal of service charges after demonetisation, impacting top line over the past two years. The new fee is 25% lower than the earlier service charge, but it would help bump up revenues in the current fiscal itself. IRCTC earned ₹ 362 cr. service charges in FY17, prior to GoI withdrawing the same from Nov 23, 2016, in a bid to drive digital transactions. In place of this, the Ministry of Finance had reimbursed IRCTC ₹ 80 cr. and ₹ 88 cr. for FY18 and FY19 resp. for operational costs such as cost of server, IT staff and other IT costs. This may stop now.
  • IRCTC’s business strategy is – To diversify and offer new services to the passengers of IR, etc.
    • To develop their IRCTC iMudra wallet to promote digital payment options to customers/users. This is a prepaid card which allows users to book train tickets, shop online and transfer money.
    • To offer better services as a private train operator.
    • To continue to leverage the Government’s policy relating to their business; To strengthen products and services offering online and To strengthen operational efficiencies.

Railways Sector, Industry & Market Outlook in India

  • The GoI announced a planned outlay of ₹ 1.59 tn. for IR in the Interim Union Budget 2020, 14% higher than last year’s revised estimate of ₹ 1.39 tn., thus driving investment in the sector.
  • Total railway passenger traffic has remained nearly flat over the past four years, going from 8,397 mn. passengers in FY14 to 8,286 mn. passengers in FY18. Passenger traffic, after falling by 1-2% between fiscals 2014 to 2016, witnessed a revival in 2018, driven by non-suburban traffic.
  • As per a study conducted by Asian Institute of Transport Development (AITD) titled Environmental and Social Sustainability of Transport – Comparative Study of Rail and Road (2000), rail consumes 75% to 90% less energy for freight traffic; and 5% to 21% less energy for passenger traffic when compared to road. The social cost therefore, in terms of environmental damage or degradation is significantly lower in rail transportation.
  • IR is going through a massive revival and improvement program that includes additional lines, massive electrification, going green, technology improvement, outsourcing and efficiency.
  • A New Catering Policy 2017 will empower IRCTC and help improve coverage of catering services due to addition of base kitchens. Consequently, IRCTC’s catering revenues is expected to grow at 7.5-8.5% CAGR between fiscals 2019 and 2024 to reach ₹ 14.5-15.5 billion in fiscal 2024. IRCTC plans to expand its base kitchen network, with 15-20 greenfield base kitchens to be set up along with conversion of some Jan Ahar outlets on railway stations into base kitchens. IRCTC also plans to add pantry cars to some trains not having them.
  • IRCTC has less than 2% of the airline ticketing market share in India so there is big room to grow. The Indian Travel Agent / Booking industry was estimated at ₹1,370-1,390 bn. in FY14. On account of strong growth in domestic and inbound tourism, the industry grew at 11-12% CAGR to reach ₹2,335-2,355 bn. in FY19, including airline, hotels and railway bookings.
  • The organized packaged drinking water market has been estimated to have grown from ₹ 30-35 bn. (at retail price) in FY14 to ₹80-85 bn. in FY19 at 19.5% CAGR. Going forward, the market is expected to further grow by 16-17% CAGR and reach ₹ 180-185 bn. in FY24.

 Financials of IRCTC

  • IRCTC’s revenues, EBITDA and PAT over the years are in Fig 3. Revenues, EBITDA & PAT have grown at a CAGR of 10.4%, 10.1% and 9% resp. from FY17-19. The 3 year nos. may look average.
  • The PAT growth for FY19 was 23.5% from ₹221 cr. to ₹273 cr. IRCTC wrote off bad debts of ₹46.1 cr. in FY19. Adjusting for this the PAT growth would have been 37% for FY19.
  • IRCTC had a RoE of 26.1% and RoCE 38.8% for FY19, and 3 yr avg. RoE is 25%, this is  excellent.

jainmatrix investments, IRCTC IPOFig 2 – IRCTC Financials / Fig 3 – IRCTC Cash Flow jainmatrix investments, IRCTC IPO

jainmatrix Investments, IRCTC IPOFig 4 – IRCTC Corporate Income Tax Rate

  • IRCTC had an EBITDA margin of 23.5% and PAT margin of 13.9% for FY19. These are high margins and marginal sales growth can drive high profit growth.
  • IRCTC has strong operating cash flows and the firm is FCFE positive. See Fig 3.
  • IRCTC derives ~75% of its operating profits (EBIT) from its catering and internet ticketing business. Both the business segments have witnessed sharp rise in margins over the years. Tourism business margins have turned from loss making to high single digit margin. Rail Neer and State Teertha business segment margins have marginally declined. Overall the margin trajectory is robust.
  • Fig 4 we can see that IRCTC has paid an effective corporate IT rate of 36.6% for FY19. IT rates have been lowered from the current fiscal year to 25%. This will lead to higher earnings growth.
  • IRCTC FY20 PAT outlook is robust given (a) Tax Savings of 32% (b) Convenience fee restoration by Ministry of Railways which should double segment revenues (c) Low/No expected doubtful bad debts compared to FY19 (d) Organic growth across catering, water, ticketing and travel.

Benchmarking

jainmatrix investments, irctc ipoFig 5 – Benchmarking

We benchmark IRCTC against peers, See Fig 5. Note: For IRCTC, only 2 year CAGR sales and PAT growth have been presented, per RHP data.

  • PE and PB of IRCTC is the highest in the peer group. However the valuations are attractive given the monopoly status, sector growth, B2C nature, high earnings, high return ratios and debt free status.
  • The sales and PAT growth look low. However the reasons for the same have been explained above. From FY20 the growth numbers should accelerate.
  • The EBITDA and PAT margins are in the high range amongst this group. RoE and RoCE are the highest. This is a positive. Dividend yield is average but high considering it is a state owned unit.

Positives for IRCTC and the IPO

  • Railways are much more environmentally friendly, consuming less fuel than road and air.
  • The GoI has planned a massive investment in IR to improve operations, and it has high potential to grow usage and volumes. IRCTC is dealing with essential and cutting edge initiatives, which can grow very rapidly. IRCTC enjoys a monopoly position in several niches with the IR – online ticketing, catering and branded water – which lower risks and ensure business stability and profits.
  • The restoration of Convenience Fee from Sept 2019 will allow IRCTC to sharply improve revenues from internet ticketing in FY20 itself. These had fallen in FY18 and FY19 post demon.
  • The Catering Policy 2017 envisages a bigger role for IRCTC and takeover of many catering activities.
  • The B2C nature of Business with large number of transactions is more stable and allows IRCTC to build a brand with consumers. IRCTC also has a vast amount of data on customers through online portal which can be used more effectively to upsell and cross sell other services.
  • With the IPO and listing, IRCTC is well organized and employees better incentivized to take advantage of the emerging opportunities in the defined and new sectors.
  • High cash and bank balances and debt free status are clear positives.
  • Valuation at PE 19 times is attractive given monopoly nature of its businesses and growth prospects.

Risks and Negatives for IRCTC and the IPO

  • If GoI were to allow competition in future in business areas of IRCTC, it will quickly affect valuations.
  • IRCTC might be unable to implement the directives of Catering Policy 2017 in a timely manner, which may result in penalties. Totally 159 observations were made by commercial inspectors during 2013-2016 relating to issues of hygiene, tariff, cooking, kitchen, food and service in IR.
  • Security, hacking and phishing are key concerns as IRCTC relies on tech to operate its ticketing and tourism business. Currently all servers, IT and storage systems are at a single location.
  • IRCTC has a JV, Royale Indian Rail Tours Ltd. (RIRTL) with Cox & Kings India which is under litigation. They have not been able to consolidate the financials of RIRTL since FY11.
  • IRCTC’s business can be negatively affected if they are unable to maintain quality standards. Any adverse claims, media speculation or bad publicity could quickly affect their reputation and image.
  • Ticket booking scams/frauds – many have been discovered on the IRCTC platform over the last few years. The fraud typically pertains to booking Tatkal (last minute travel) tickets. Action is usually taken quickly by authorities. In the high revenue area, good vigilance is needed to detect frauds.
  • Change in haulage by Ministry of Railways on the trains IRCTC operates could adversely affect business. Under haulage concept, IR takes fixed charges for hauling the rake of the train from one destination to another; charges are calculated and informed by IR to IRCTC.
  • While IRCTC has been asked to unbundle catering services by creating a distinction between food preparation and food distribution, the timelines are not clearly defined and are currently under discussions. Any failure on part of IRCTC to adhere to the mandate may result in penalties.
  • While IRCTC has several monopolies, it however does not have pricing controls over the services due to price regulation by IR; they do not hedge risks of market fluctuations in commodities market.
  • IRCTC uses PET bottles and other plastic items for their packaged drinking water, which is subject to various regulatory requirements and increasing public scrutiny.
  • There are whispers of overcharging in paid mobile catering and lack of transparency / bills.
  • In the past IRCTC was affected when Lalu Prasad Yadav (former Railway Minister) was accused of misusing his official position in 2004 and conniving with officials of IRCTC to grant sub-lease rights of 2 IRCTC owned hotels in Puri and Ranchi to a private party. Such scams can tarnish IRCTC’s image.
  • The GoI has pressured PSUs for dividends and is targeting massive revenue from disinvestment. In general this is an overhang and causes PSUs to lose valuation premiums.

Overall Opinion and Recommendation

  • The Indian Railways is undergoing a dramatic transformation to improve service levels, better technology, outsource and grow fast. Subsidiaries like IRCTC are executing on the new plans.
  • The Railway industrial complex is getting unbundled. 2 of 3 recently listed railway IPOs have performed well, RVNL (read IPO report) and RITES gained but IRCON lost value since listing.
  • IRCTC has performed well in the last 20 years, using its lean structure, good technology and conservative financials to record growth and profits and good return ratios and operating cash
  • There is ample scope for growth in all business segments. IRCTC enjoys several monopoly niches. Profits are expected to improve in FY20 given earnings tailwinds including restoration of Convenience fees, lower corporate tax and lower bad debt provisions YoY. Margins are flat or improving. This makes IRCTC attractive for investors. It looks poised for a good listing and future gains.
  • The key risks are 1) In the packaged drinking water business, a ban on single use plastic 2) removal of exclusivity for its business divisions 3) reduction in price of services, higher haulage or a removal of Convenience charge for tickets portal 4) Any adverse news flow on catering services 5) GoI may list RailTel and IRFC soon, both are PSU railway firms which can impact valuations.
  • At a P/E of ~19 times, the valuation are attractive.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Agree ? Disagree? Like the report? Any thoughts here? We welcome your comments below….

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 IRCTC or any group company. Punit Jain intends to apply for this IPO in line with the BUY recommendation. 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.

Hyper-Competition and its Effects

Several sectors in India are in a hyper-competition phase. Some examples are Telecom Operators, Passenger Airlines and Mobile Phone Hardware sectors. Investors need to stay away from firms in this phase. 

What is Hyper-competition? Let’s see some examples.

  • Telecom: In Feb 2013, the Supreme Court cancelled 122 telecom licenses in India. By Sept 2018, 5.5 years later, only 4 of 14-15 players survived. Given the high volumes and growing demand, it was expected that these 4 players would do well. However one player had different ideas. With its entry in Oct 2016, Reliance Jio aggressively grew market share by providing free voice and data, and later priced these services very low. Massively funded by strong group divisions, they created large 4G capacities, and soon stabilized networks and interconnectivity. The result? While mobile users and usage grew and Jio gained 30% revenue market share (Sept 2019), customer prices fell sharply, other industry players lost subscribers, degrew revenues and saw drops in profits.
    • In today’s scenario, while consumers and govt. are benefiting with low prices and high tax revenues and levies resp., network operators are under pressure on costs and profits. The 4 player structure should survive, and market shares may stabilize for all players, once prices correct. However this may take at least a year.
  • Airlines: Airlines are a difficult business due to high airplane costs (a duopoly), fluctuating crude prices (around 30-45% of costs) and govt. funded national airlines hiding losses. In India however the market has changed in 10 years from full service airlines to Low Cost Carrier (LCC) domination with Indigo, SpiceJet, GoAir and AirAsia growing market shares. Meanwhile the GoI plan is to double the number of airports to 250 from 102 currently. The market demand has grown 10.9% a year of Revenue Passenger Kilometers (RPK) over the last 9 years, while capacity has grown by 8.3% of Available Seat Kilometers (ASK) – DGCA data. Also two airlines failed in this time, Kingfisher Airlines and Jet Airways. Air India continues to operate as a loss making airline with govt. funding. Adjusted for inflation, there are flat to falling average ticket prices in a high capacity growth scenario. The current fleet in Indian aviation is 566 commercial aircraft, and the carriers plan to increase their fleet to 1,300 in 1-2 years.
    • One possible outlet for the capacity adds are international flights, and several airlines have global ambitions.
    • If good infra is set up, India can have a few successful global airlines, a good domestic MRO industry and even a large Indian airport hub for global fliers.
    • Domestic connectivity is underserved by the alternatives of railways and roadways, so we can expect airline growth to continue for many years.
    • Consumers and govt. are benefited but in this industry only very efficient firms can stay profitable.
  • Mobile phone hardware: India is the world’s fastest growing smartphone market.
    • The value, mid-segment as well as premium segment continue to grow at high single digits QoQ. The Indian consumers are now spoilt for choice. However 41 smart phone brands exited India in 2018 while 15 entered owing to good growth prospects. TCL, Comio, Datawind and ACER are the well-known brands that exited in 2018. Lychee and Sony are likely to exit in 2019.

jainmatrix investments, hyper competitionFig 1 – Smartphone entry-exits/ Fig 2 – Marketshare of top 5. Source: ET, News 18

    • From Fig 1 it is clear that smartphone player exits over the last 3 years have been much more than new entrants. Now there are some signs of consolidation with this market becoming an oligopoly with the winners continuing to gain market share (See Fig 2). However the market share gains have come at the cost of pricing power. Xiaomi Corp reported a 43.2 bn. yuan loss in 2017 and now the company has rebounded to profits in 2018. Competition is such that the Xiaomi India head had to justify pricing of few product models to its fans while capping the margin at 5%.
    • The Make in India program for electronics has been successful in attracting mobile assembly and manufacture to India for this industry. This was set up to cater to domestic demand, but policymakers would do well to channel manufacturers to make this a base for mobile exports. If this succeeds it would benefit all three – consumers, govt. and manufacturers.
  • Hyper competition is caused by very aggressive player(s) in a free market.
  • In a hyper competition scenario, the situation develops in the following way:
    1. The high competition causes loss of pricing power, and weakening of returns or ROE of current players. The smaller or higher cost players may get squeezed out, and fail or merge.
    2. Consumers benefit in terms of choices and low prices. The govt. too may gain in terms of taxes and levies.
    3. The threat of new entrants diminishes as the sector becomes unattractive.
    4. Market shares of top 2-3 current players soon stabilize and improve but timelines are unpredictable.
    5. With time, competitive intensity reduces and pricing power returns to the surviving players.

Conclusion

  • Investors need to recognize and stay away from hyper competitive sectors as most of the players suffer in this phase, profits fall and returns reduce. It’s possible to play these sectors through other means such as suppliers or consumer firms but that needs further analysis.
  • Once hyper competition ebbs away, the situation can reverse and surviving firms may see a multi-year profit and ROE rise.

Agree ? Any thoughts here? Provide your comments below ……..

Read related reports:

  1. Indigo Airlines
  2. A Telecom sector report (2014) 

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. Several firms are mentioned in this report, listed and unlisted, but we have not presented any investment thesis or specific recommendation. 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.

Spandana Sphoorty Financial IPO – A Spunky Player

  • Date 06th Aug; IPO Opens 5-7th Aug at Rs. 853-856
  • Valuations: P/E 17.6 times TTM, P/B 2.4 times (Post IPO)
  • Mid Cap: Rs. 5,505 cr. Mkt cap
  • Industry – NBFC MFI
  • Advice: SUBSCRIBE
  • Overview: Spandana is a rural focused NBFC-MFI with a geographically diversified presence in India. It offers income generation loans under the joint liability group model, predominantly to women from low-income households in rural areas. They are the 4th largest NBFC-MFI and the 6th largest amongst NBFC-MFIs and SFBs in India, in terms of AUM. Revenues, NII and profit for FY19 were ₹1,049 cr., ₹640 cr. and ₹312 cr. resp. Capital adequacy is 39.6% which is very safe. Spandana exited from CDR in March 2017 and the operations are stable now. At a P/B of 2.4 times & PE of 17.6 times (post IPO), the valuation look attractive.
  • Risks: 1) Economically and politically sensitive sector 2) Significant exposure to unsecured loans.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Here is a note on Spandana Sphoorty Financial (Spandana) IPO.

IPO highlights

  • The IPO opens: 5-7th Aug 2019 with the Price band: Rs. 853-856 per share.
  • Shares offered to public number 1.40 cr. The FV of each is Rs. 10 and market Lot is 17.
  • The IPO in total will collect ₹1,200 cr. while selling 21.8% of equity. IPO is both an Offer for Sale by current shareholders (OFS) and a fresh issue of shares. The OFS proceeds would be ₹800 cr. at UMP and fresh issue size is ₹400 cr.
  • The Promoters are Padmaja Gangireddy, VSR Reddy Vendidandi and Kangchenjunga Ltd. that own 81.22% in Spandana which will fall to 62.58% post-IPO. The major selling shareholders are Kangchenjunga, VSR and Padmaja Gangireddy, see Exhibit 1(a). The IPO is being launched to provide partial exit to existing promoters as well as for Spandana to augment the capital base (Fresh Issue).

jainmatrix investments, spandana IPO

Exhibit 1(a) – IPO Selling Shareholders; Exhibit 1(b) – Shareholding pattern

  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.
  • The promoter Kangchenjunga Ltd is a holding co. incorporated in Mauritius. It is a private company with limited liability, which holds a Category 1 Global Business License to carry out activities as an investment holding company and to acquire, invest in and hold securities of Spandana. The Class A shareholders of promoter Kangchenjunga are seen in Exhibit 1(b).

The unofficial/ grey market premium for this IPO is Rs. 18-20/share. This is small.

Introduction

  • Spandana is a rural focused NBFC-MFI with a geographically diversified presence in India. It offers income generation loans under the joint liability group model, predominantly to women from low-income households in rural Areas. As of FY19, they were the 4th largest NBFC-MFI and the 6th largest amongst NBFC-MFIs and SFBs in India, in terms of AUM. See Exhibit 2(a).
  • Revenues, NII and profit for FY19 were ₹1,049 cr., ₹640 cr. and ₹312 cr. resp. It has 7,062 employees (June 2019). 85% of their gross loans were Abhilasha loans, and 86% of the loan book is unsecured.

jainmatrix investments, spandana IPO

jainmatrix investments, spandana IPO

Fig 2a – Loan products (above) and Fig 2b AUM Spread

  • Spandana was incorporated as a public company in 2003 and registered as an NBFC with the RBI in 2004. Soon they registered as an NBFC-MFI in 2015. In October 2010, the MFI industry (including Spandana) was severely impacted as the govt. of AP promulgated the AP Microfinance Ordinance 2010, which enforced several restrictions on the operations of MFIs. This impacted Spandana collections, cash-flow, its ability to service debt, and so their growth and profitability.
  • Spandana’s lenders referred them to the corporate debt restructuring (CDR) mechanism of RBI to restructure borrowings and revive business. The CDR plan allowed them to get cash-flow relaxations to continue their portfolio diversification, process improvement and cost rationalization. Their operations turned profitable from FY14.
  • Spandana exited CDR in March 2017, which enabled it increase lender base, diversify its borrowings to new banks and NBFCs and also issue NCDs in the capital markets. As a result, during FY18, with increasing flow of capital, they expanded their operations and were able to utilize the existing branch network and employees (earlier underutilized due to lack of capital). Prior to their exit from CDR in 2017, they had limited access to capital, due to which they had to offer loans in lower ticket sizes than the demand from clients.
  • Distribution is strong as in 2019 they cover 16 states and 1 UT across India through 929 branches.
  • Leadership – Padmaja Gangireddy (MD), Sudhesh Chandrasekar (CFO), Abdul Khan (Strategy Officer).

News, Updates and Strategies of Bandhan

  • Prior to 2010 Andhra Pradesh MFI crisis, 51% of Spandana loan book was concentrated in AP. Post the debacle they have tightened internal controls to manage risk better by restricting (a) loan book exposure to a max of 22.5% for 1 state (b) loan book exposure to a max of 2.5% for each district (c) loan book exposure to a max of 0.3% for each branch.
  • Spandana’s business strategy is as follows:
  • To leverage their popular income generation loan products to derive organic business growth.
  • To leverage existing branch network by increasing loan portfolio and employee productivity.
  • To increase its presence in under-penetrated states and districts.
  • To further diversify their borrowing profile; and reduce their cost of borrowings.

Various shareholders invested in Spandana over the years. The average cost of acquisition per share for those shareholders is as follows:

jainmatrix investments, spandana IPO

Exhibit 3 – Cost of shares by investors

  • In Jun 2018 20.3L shares were allotted to Padmaja Gangireddy and 72K shares to Abdul Feroz Khan by private placement at Rs. 235.4/share. In IPO this has grown by 3.6 times in just over a year.
  • Spandana has raised Rs 360.28 cr. from 18 anchor investors by allotting 42,08,886 shares at a price of Rs 856, the upper band of its IPO. Among the 18 anchor investors, Wells Fargo Emerging Markets Equity Fund, Goldman Sachs India Ltd, ICICI Prudential Life Insurance Company and Bajaj Allianz Life Insurance Company have been allotted about 4.40 lakh shares each.
  • Spandana IPO was subscribed 6% on the first day of bidding on Monday (5th Aug).

Micro Finance and Banking Industry Outlook in India

  • Financing needs in India have risen along with economic growth over the past decade. By complementing banks and other financial institutions, NBFCs help meet this need.
  • MFI is a volatile sector that can be badly affected by economic and political events. Spandana’s operations were also affected post AP ordinance in 2010. It went into CDR however later came out of it in Mar 2017. In Nov 2016, the Indian government announced the demonetization of currency notes of ₹500 and ₹1,000 denominations. Though demonetisation affected the retail sector’s credit performance in FY17, which dropped 300 bps from FY16, growth remained higher than industrial and agricultural credit growth in FY17. The retail segment was negatively impacted by the demonetization driven slump in the real estate sector. Retail credit grew 16% YoY, while industrial credit contracted YoY by 2%. Such events have affected collection efficiencies which could happen in the future as well.
  • Spandana has a 2.6% market share basis its GLP. See Exhibit 4

jainmatrix investments, spandana IPO

Exhibit 4 – Market share and AUM growth for MFI players over the years

  • The share of adults with a bank account in India has more than doubled to approximately 80% since 2011, largely supported by the Pradhan Mantri Jan Dhan Yojana (PMJDY) a scheme of the GOI, which led to account growth and traction in savings. However, while significant traction is present on the deposit side, India is still among the Top 3 nations with unbanked people in the world, reflecting the strong need for an enhancement of the financial inclusion agenda.
  • The microfinance sector in India has grown at a CAGR of 23.1% over the past 10 years to reach ₹2,633 bn. as of FY19, despite some setbacks that have impacted the industry’s growth. The industry has evolved over time, starting with the Self-Help Group (SHG) Bank Linkage program and not-for-profit organisations (NGOs) being the key participants in the sector, to the scaling of NBFCs, the conversion of Bandhan Financial Services into a universal commercial bank and the launch of the Small Finance Banks. Presently, the demand for micro credit is primarily being serviced by industry participants such as MFIs, NBFC-MFIs, SHG, Banks, SFBs, NGOs, and other informal lenders.
  • The MFI sector has potential to grow the client base as well as ticket size per borrower. The micro-credit opportunity is about ₹5-6 tn. supported, considering the addressable market of low-income households in India. The traction in disbursements is expected to sustain and the industry is projected to witness a portfolio growth in the range of 20-24% p.a. over the medium term. Within this, the pace of growth of the non-SHG portfolio is expected to be higher at 25-30% p.a. Further, the ticket sizes are likely to go up in the states where the penetration levels are high. Overall client growth may be 8-10% and loan outstanding per borrower may increase by 12-15%.
  • Current challenges in the Indian BFSI sector include the collapse of IL&FS, a liquidity shortage in the BFSI sector, an NPA crisis in PSBs, real estate loans troubles and weakness in DHFL and Yes Bank.
  • Per management, MFI customers are unaffected by these industry events and are doing better.

Financials of Spandana

jainmatrix investments, spandana IPO

Fig 5 – Spandana Financials

Note: 1) Data for FY15-FY16 are per Indian GAAP, FY17-FY19 is basis IND AS with FY18-FY19 are consolidated 2) NIM or Net Interest Margin = Net Interest Income / Annual Average Gross AUM (%)* 3) NIM-R is net interest margin computed as Average Interest Charged less Average Cost of Borrowing. 4) Diluted EPS has been calculated after considering fresh shares to issued post IPO.

  • Spandana’s revenues, NII and PAT over the years are in Fig 5. Revenues, NII & PAT have grown at 33.9%, 34.5% and 31.2% resp. from FY15-FY19. These are good growth numbers.
  • Spandana had a RoE of 16.51% and RoA of 8.2% in FY19. This is moderate and sustainable as the business operations have stabilized now. NIM and NIM-R have stabilized for Spandana over the last 3 years. NIM at 16.39% for FY19 is the highest in the industry.
  • The PAT for FY17 surged 82.3% as it took a deferred tax credit of ₹421 cr. PBT for FY17 was ₹35 cr.
  • Spandana has the best asset quality in the industry. The NNPA as of FY19 stood at 0.02%. The NPA’s have largely come from unsecured personal loans, agri loans as well as MSME loans.
  • NBFCs are required to maintain a CRAR consisting of Tier I and Tier II capital which should not be less than 15% of its aggregate risk weighted assets on-balance sheet and of risk adjusted value of off-balance sheet items. The Tier-I capital was required to not be less than 8.5% by FY16 and 10% by FY17. Spandana has an aggregate CRAR of 48.96% and Tier 1 capital to the extent of 48.52%. This is much higher than what RBI has prescribed which is a positive.

Benchmarking

We benchmark Spandana against peers, See Fig 6.

jainmatrix investments, spandana IPo

Fig 6 – Benchmarking

  • PE of Spandana is the lowest in the peer group. This makes the offering attractive on relative basis.
  • In terms of PB, the valuations are average. This is on an adjusted basis post dilution.
  • The 3 year sales and PAT growth is robust. However Bandhan continues to be the sector leader. The Cost/Income ratio too is low. The PAT margin (PAT/Income) as well as the NIM is highest amongst the peer group. This is a positive. The RoE is average among peer group.
  • GNPA is very high while NNPA is fine. The reason for this is loans outstanding from the AP crisis of 2010. However these are provided for by Spandana.
  • Overall we see Spandana as a MFI rapidly emerging from CDR and stabilizing operations well.

Positives for Spandana and the IPO

  • Spandana has suffered heavily and learnt its lessons in the 2010 AP MFI debacle. It emerged from CDR in 2017 after repairing its books. It now has geographically diversified operations which help in risk containment and business resilience. It also will target 25% CAR to ensure safety of operations.
  • They have a good branch network, with a current AUM of Rs 5 cr. /branch. Per management the focus now will on assets growth to Rs 10 cr. / branch.
  • Spandana’s growth has been achieved despite difficult conditions in MFI industry. After the AP crisis in 2010, there was demonetisation in 2016 and many farm loan waivers. But Spandana did well.
  • The asset quality of Spandana is robust with NNPA at 0.02% for FY19. Financially the firm is well managed with moderate return ratios, superior margins and has high growth rates. The IPO valuations at PE of 17.6 times and PB 2.4 times are also attractive.
  • Spandana has an experienced management team. Ms. Padmaja Gangireddy has 24 years of experience in Indian MFI.

Risks and Negatives for Spandana and the IPO

  • Spandana’s MFI loan portfolio is unsecured, and in the event of non-payment by a borrower, they may be unable to collect the unpaid balance.
  • The operations are still concentrated in the states of Karnataka, MP, Orissa, Maharashtra and Chhattisgarh. Any adverse developments in these states could affect business.
  • The promoters and certain directors have entered into ventures that may lead to potential conflicts of interest with their business. For instance, their Individual Promoter, Padmaja Gangireddy, owns 68.3% shareholding in Abhiram Marketing, a group company engaged in consumer goods, whose retail products are sold at their branches (and from whom they receive a sales commission). There is no assurance that the interests of Abhiram Marketing will align with Spandana’s business interests.
  • Any downgrade of Spandana’s credit ratings may increase their borrowing costs and constrain their access to capital and debt markets and, as a result, may adversely affect their results of operations.
  • MFI industry has enjoyed high growth and margins for the last few years. However the market may be getting crowded with several Private Banks acquiring or setting up MFI subsidiaries, Bandhan Bank getting a universal license and many MFIs getting SFB license.

Overall Opinion and Recommendation

  • The microfinance sector promises to extend credit to the underbanked and informal sector people for financial services penetration into rural India. The potential is immense and is barely tapped.
  • Spandana has a decent size, strong financial performance, recent recovery, good asset quality and an experienced management.
  • It is now the 4th largest NBFC-MFI with AUM, and post CDR has grown rapidly. It has a different DNA and may remain sharply focused on a national presence in only MFI loans for the next few years.
  • The management appears conservative and should able to target growth with lower risk taking.
  • At a P/B of 2.4 times & PE of 17.6 times (post IPO), the valuation look attractive.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Download Report:

The entire report can be downloaded, Click JainMatrix Investments_Spandana IPO_Aug2019

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 Spandana or any group company. Punit Jain intends 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 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.

Expectations and Thoughts on a New India – Post Elections Note

Date: 1st June 2019

Recent Events – Elections

  • Last week we had an election result day and the 2019 central election came to a dramatic end. We welcome the second term of BJP and the National Democratic Alliance at the center.
  • The 6 week long 7 phase election was an emotional, high decibel multimedia war among the parties and participants. I am so glad we fight this way. People argue, they criticize, they pull up history, they express themselves, and they get angry. They decide whom to vote for. Then they stand peacefully in a line to vote, and accept the outcome.
  • This is far better than a civil war or an agitation or a set of bandhs and protests. Thank you India. :-)

THE Economic Environment

  • Growth is slowing in the Indian economy to 7% and below. This is weak as we have a low per capita GDP. To absorb the population growth in jobs, we have to target 8% plus growth.
  • The slowdown is a culmination of multiple events – high interest rates relative to inflation; weakness in sectors like real estate, automobiles, consumption and low rural demand. BFSI sector has issues like a liquidity challenge affecting NBFCs, NPA issues in PSBs and the IL&FS crisis. Exports have slowed down as global demand is down due to weak growth and a tariff war between USA and China. The private sector is not investing.
  • Even though the above laundry list of issues is depressing, the economy also has a number of positives. Our IT and ITES sector continues to bloom. Sectors like pharma, automobiles, telecom and retail have achieved impressive scale. The large corporates have in general improved balance sheets and are low on debt. Private sector does have investment firepower in place if they see good opportunities. We are past several difficult structural reforms like GST, RERA, demonetization, shell company crackdown and Bank NPAs, and with this election result market uncertainties are much lower. We have rich human resources and need to tap this well.
  • Corporate India has to grip the large opportunities up for grabs – housing, infrastructure push from govt. including roads, railway, airlines and airports, gas distribution and water supply, mobile and telecom based opportunities, consumption by a large population, eCommerce, digital and Aadhar validation based business models.

A Wish List for Modi 2.0

As an investor, I have many hopes and expectations from this new government. Extending from governance to education to the corporate sector, this is my list:

  • How can justice be delivered faster? The numbers of pending cases in lower courts to SC are scary. The main issues are – slow resolution, and cases in lower court routinely reopened in higher courts. Our suggestion is to – have no vacancies for judges, courts open all year long, push for mediated solution rather than court battle, time bound cases (no tareek pe tareek) and low acceptance in higher courts. Digital solutions can speed access and enable common judgements for similar cases. The NCLT driven IBC code has also proven its usefulness. However this needs to be tightened based on the experience so far, to be faster and with higher success rates.
  • Do we have the right education systems today? The problems extend from low penetration and presence of schools, high dropout rates, poor learning and skill building outcomes, overlaps between state and central boards, many languages and high study load for students. Our suggestions are – more and better govt. schools, coordination between central and state boards on content and timetables, free and compulsory (penalty parents punishable) govt. education till 10th, digital tracking of schools, teachers and students, better curriculum of less rote and more experiential, discovery and project based learning, emphasis on sports with good facilities, and zero homework. Competition is always good, so all education should be freed from govt. license shackles. The best universities will naturally thrive.
  • Is the right way Garibi Hatao or Amiri Badhao? Both are important. On the former side, the excellent work on toilets, housing for all, LPG, ration card based subsidies, farmer schemes, cooperatives, good supply chain to agriculture needs to continue. Electricity for all, better quality electricity, lower leakages, pension for 60+ age, unemployment measurement and schemes (MGNREGA) needs to be bolstered. All subsidies and subsidized product distribution needs to go through Aadhar verification to plug leakages. On the latter side, corporates need to be encouraged as they generate employment, good salaries and taxable profits. Real Estate and Textiles need revival. Exports and a good startup environment is important.
  • Need for Infrastructure: This is obvious, and a crying need. While some progress has been made on Roads and Electricity, much more needs to be done here; and in Railways, Airways, Ports, Water supply, Healthcare and Education, Municipal reforms and Town planning, local transportation and Police reforms.
    1. Suggestions – funding is as important here as detailed planning. Pension and Insurance funds should be allowed and enabled to invest in Infra.
    2. Projects have to be reasonably profitable for private sector operators, with lower risks and permit challenges.
    3. Development of 1-2 new metros in every state. The current 6-7 metros are overcrowded and infra is stretched. The next 20-30 cities need to develop systematically to take pressure off these metros. The Smart Cities Mission needs to be accelerated.
  • Public Sector Enterprises: The Govt. should not be in any operational firm that has no national Interests. Firms like SAIL, NTPC, HPCL, BPCL, many parts of Indian Railways, BSNL, MTNL, Coal India, etc. should be freed from the chains of PSU restrictions, allowed to operate freely and generate reasonable returns. The PSUs and govt. ministries have assets worth lakhs of crores that are generating low single digit returns. GoI should monetize firms, assets and lands and sell to investors – foreign, Indian or even their own employees, through IPOs, auctions and management takeovers. And fund Infrastructure, Education and social needs.
  • The role of Regulators: The right way to encourage growth in a sector is to have a Regulatory authority that ensures a level playing field and meet national and business objectives to develop the sector. It has to include a think tank and sector experts. Regulators for every sector should be much more dynamic, open to discussion and forward looking, with minimum regulatory and legal overlaps. They must enable minimum ROI for new sector entrants. The success of SEBI, IRDAI, TRAI, etc. has to be extended to Hospitals, Education, Pharma, automobiles, chemicals, etc. to roll out required standards & compliance, and encourage growth and penetration.
  • Taxes, Interest Rates and more on Corporate Sector: The laundry list of urgent needs is
    1. Corporate taxes need to be lowered. This was a Modi 1.0 promise – lower taxes and fewer tax concessions.
    2. The current interest rates in India are very high in the global context, as well as given the low domestic inflation. Rates need to lowered – through RBI intervention and easing up of foreign borrowing.
    3. Simplification of GST to 2-3 levels. Inclusion of liquor, petro products and cigarettes
    4. SEZ model revival and encouragement of exports
    5. Labor reforms. Firms should be able to hire (and fire) more easily and with lower overheads.
    6. We need to officially and robustly measure & track Unemployment. This is a key economic measure.
    7. Auditors have an important role in prevention of financial crimes. Perhaps a regulator is needed for Statutory Auditors to keep up standards and prevent problems early.
  • Do we need to export more or import less? Both. Many high tech products like auto steels, specialty chemicals, commodities, oil, gold, machinery, chocolates and consumer products are imported for factories and consumers here. Local manufacturing needs to step up to fill these needs. Also exports is still not happening on a good scale. We are running a trade deficit. This has to be filled up by IT & ITES, pharma, automobiles, engineered products, steel, aluminum, petro products, gem & jewellery, tourism, airport /aviation and seaports /shipping.
  • Environmental protection: As the globe gets hotter, the oceans dirtier and forests thinner, it’s sad to see USA dropping environmental concerns and reneging on commitments. In the war on air, water and plastic pollution, India has a secret weapon – low cost of operations. It’s possible to recycle old ships (Alang), electronics /ewaste, newspaper and most dry waste, and generate a wage for workers and a profit for the business. However we need to protect our borders from waste dumping. And the Ministry of Environment, Forest and Climate Change needs to proactively reach out to industry, municipal corporations and volunteers to enable and scale these activities.
  • Thoughts on Ministerial Changes:
    1. In Singapore, the minister appointed for an Industry is often a very respected senior business executive from the sector, who transitions from a CEO role, to developing the sector for the nation. Knowledge of individuals gets institutionalized. This has allowed Singapore to progress very fast, it is now a Developed economy. India must adopt this model as in many ministries leadership requires a lot of industry knowledge.
    2. In India, we saw the Railways and Coal ministries work together innovatively due to a common Minister. Such strong coordination is needed to solve challenges such as Kashmir (Home and Defense), Transportation (Ports, Road, Rail, Air) and Energy (Electricity, Petroleum, Solar, Wind, Coal, Hydro,) etc.

Conclusion

  • Execution, administrative reform and good governance have been key observations in Modi 1.0. National pride, Industrial progress and social capital are coming together well.
  • We need to do even better in this new regime to take Indian GDP to 8-10% growth range and lift standards of 130 crore / 1.3 billion Indians.
  • Also see A Vision for the Indian Economy‘ 

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. 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.

IndiGo – Spreading Wings but Oil Squeeze

  • Date: 09th May 2019
  • Industry – Airlines 
  • CMP: Rs 1,575 
  • Large Cap of Rs 58,000 cr. mkt cap 

jainmatrix investments, indigo airlines

  • Overview: IndiGo is the market leader in Indian aviation with a low cost carrier model. It has a dominating domestic market share of 46.9%. The revenue and profit were Rs 23,967 crores and Rs 2,242 cr. resp. for FY18. The Income, EBITDA and profits have grown 31.6%, 26.6% and 21.3% CAGR over 8 years. The aggressive growth plans are in place for capacity addition. The Airline industry in India is going to see massive growth. With a big population, low penetration and weak railway sector, it should continue to grow at 15% over next few years. IGO has a strong brand and a leading domestic market share, consistent delivery and high growth. It has executed well on its LCC strategy. IGO has expanded the market with its growth. It will continue to dominate Indian skies due to network effect and good capacity additions. The IGO share is high due to market share gains, the Jet failure and Boeing grounding, inspite of high ATF prices. However there are several risks.
  • Key risks: 1) crude price rise affects ATF prices leading to sharp profit falls 2) large sector capacity adds puts pressure on prices 3) The risk of an engine failure is still there

Get the recommendation and research report: JainMatrix Investments_IndigoAir_May2019

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 been an investor in IGO since Nov 2015. He has also flown Indigo Airlines several times as a normal paying customer. Other than this JM has no known financial interests in IGO or Interglobe Aviation 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 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.