COVID 19 – Call in the Indian Army to Handle this Emergency

Dear Friends,

Let me start with the worst case scenario for India.

  • 60% of Indians get infected with Covid-19. Thats 78 crore people *
  • 5% of these are serious and need hospitalization. That’s 3.9 crore people. # We dont have so much healthcare capacity
  • 1% of the infected succumb to the infection. Thats 78 lakh people. #

However this is 2 months away from today, if it happens.

It is within our powers to prevent this from happening.

Even though the Indian govt. health dept. and administration is doing whatever it can to prevent this, it is grappling with several constraints:

  • Many people know Covid 19 by now, but they are not really changing behaviour to deal with it
  • The persons identified for isolation are not following orders and escaping / moving around freely, exposing others to the danger
  • At this stage the infection in India is at Stage 2 (local transmission – tracking and isolation of infected, contact tracing and isolation of potentials) and if not stopped, it moves to Stage 3 (community transmission – the virus is out of control and infects everyone who is not isolated) @
  • We also do not know the real number of infected people until we have sufficient Testing. My feeling is that people with symptoms are not being tested unless the govt. hospital doctor recommends this. And access to these doctors is not easy.

We suggest 2 solutions:

  • Call in the Indian Army with its 14 lakh highly trained people to inject discipline and boost Covid 19 administration in all states of India.
  • Start Testing for Covid 19 on a massive scale. All hospitals, private sector Diagnostic chains such as Dr Lal Pathlabs, Thyrocare, Metropolis Healthcare, etc may be allowed. I believe Health Ministry is enabling this, but can this be started today?

I’m hardly an expert on healthcare. But I understand compounding. The number of infected people are growing by compounding. I also understand probabilities. My estimate is that we now have a 50% probability of moving to Stage 3. Unless we do something about it NOW.

I also believe every country has the power to control this infection if it isolates itself and acts fast enough. South Korea, China, Japan, Hong Kong and Singapore moved fast and were able to flatten the Infection curve and stay in Stage 2. See fig 1.

jainmatrix investments

Fig 1 – Source John Hopkins Univ. India is not in this as it had just crossed 100 infections on 13th Mar.

We also saw that China was able to deal with Covid-19 over 2-3 months due to a very tough administration and hard measures, easier to do in a communist system. Here in India the administration does not have command and punitive powers. They are also not geared up to do this. The Indian Army needs to be deployed to do this.

The Indian Army needs to work with the Health ministry, govt. hospitals and local administration, to monitor the airport screening, contact tracing, isolation facilities and govt. hospitals. The Isolated and infected people logistics, people security and healthcare supply chains have to be supported and enforced.

We have to fight Covid 19 before it becomes a national calamity. Its better to over-react early and prevent the problem than to react late.

Stay safe and healthy,

Punit Jain

PS – this has nothing to do with investing. But it affects all of us. I write this not to alarm people (this is a known danger) but request an urgent solution to a visible problem.

  1. * Germany is in stage 3 and has projected that this proportion of its people may get infected
  2. # These are stats available from China and few other countries in public domain
  3. @ Eco Times Article on 18/03

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 and JM has no ownership or known financial interests in any company mentioned in this note. 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.

SBI Cards – IPO is an Easy Transaction

  • IPO Opens 2-5th Mar at 750-755/share 
  • Large Cap: 71,000 cr. Mkt cap
  • Sector – BFSI, Credit Cards
  • Valuations: P/E 51.4 times TTM, P/B 14.6 times (Post IPO)
  • Advice: SUBSCRIBE

Summary

  • Overview: SBIC offers credit cards to individual cardholders and corporate clients for a range of lifestyle, rewards, travel and fuel and shopping needs. SBIC is the 2nd largest CC issuer in India, with a 18% market share. Revenues, EBITDA and profit for FY19 were ₹6,999 cr., ₹2,430 cr. and ₹863 cr. resp. PAT for H1 FY20 is ₹725 cr. Revenues, EBITDA & PAT have grown at a CAGR of 44.6%, 48.3% and 52.1% resp. from FY17-FY19. SBIC’s financials are robust. SBIC has generated high RoE, NIM; while also maintaining sufficient capital buffer through high CAR & low D/E. SBIC is a well-managed firm financially. Credit cards are an underpenetrated segment and should see high growth for many years. In this industry, larger players enjoy network advantages.
  • Risks: 1) Valuations at PE of 51 times and PB of 14.6 times (TTM) are expensive. 2) Cyber-attacks or other security breaches could affect business 3) their loans portfolio is largely unsecured.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Here is a note on Indian SBI Cards and Payment Services (SBIC) IPO.

IPO highlights

  • The IPO opens: 2-5th Mar 2020 with the Price band: ₹750-755 per share.
  • Shares offered to public number 13.86 cr. The FV is ₹ 10 and market Lot is 19. The IPO in total will collect ₹10,355 cr. while selling 14.6% of equity.
  • The promoter group owns 74% in SBIC which will fall to 69% post-IPO. SBIC is a subsidiary of SBI, a PSB and India’s largest commercial bank in terms of deposits, advances and branches.
  • The IPO offer includes a fresh issue of shares and sale by current shareholder (OFS). The fresh issue proceeds would be ₹500 cr. and the OFS proceeds would be ₹9,855 cr. at UMP.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35.
  • CA Rover Holdings (Non Promoter – Non Public shareholder) owns the remaining 26% Pre-IPO in SBIC. CA Rover is controlled by Carlyle Group, a global investment firm with $222 bn. of AUM (FY19).
  • The unofficial/ grey market premium for this IPO is ₹350/share. This is a positive.

Introduction

  • SBI Cards offers credit cards (CC) to individual cardholders and corporate clients in segments – lifestyle, rewards, travel and fuel, shopping, banking partnership cards and corporate cards. These cover all major cardholder segments in terms of income profiles and lifestyles.
  • Revenues, EBITDA and profit for FY19 were ₹6,999 cr., ₹2,430 cr. and ₹863 cr. resp. PAT for H1 FY20 is ₹725 cr. It has 3,783 employees (Sep 2019).
  • SBIC is the 2nd largest CC issuer in India, with 18.1% share in terms of cards and a 17.9% share by spends (per RBI). SBIC has grown faster than the market over last 3 years both in numbers and spends. From FY17-19, SBIC’s total CC spends grew at a 54.2% CAGR (35.6% CAGR for the CC industry) and the number of cards grew at a 34.5% CAGR (25.6% CAGR for the overall CC industry).
  • SBIC has a broad CC portfolio that includes SBI as well as co-branded CCs. See Exhibit 2. They offer 4 primary SBI branded CCs: SimplySave, SimplyClick, Prime and Elite, each catering to different needs. SBIC is also the largest co-brand CC issuer in India and has partnerships with several major players in the travel, fuel, fashion, healthcare and mobility industries. SBIC issues its CC in partnership with the Visa, MasterCard and RuPay payment networks.
  • SBIC acquires customers using multiple channels. They have deployed a sales force of 32,677 outsourced personnel in 145 cities to engage prospects through physical PoS in bank branches, retail stores, malls, fuel stations, railway stations, airports, corporate parks and offices, as well as through tele-sales, online channels, email, SMS marketing and mobile apps. SBIC has a presence in 3,190 open market points of sale. In addition, the partnership with SBI provides them with access to their network of 21,961 branches, and enables them to market CCs to their customer base of 44.5 cr.
  • SBI earns its revenues from (a) Interest Income (b) Fee base income. For breakup, see Fig 1(a).

jainmatrix investmentsjainmatrix investments, sbi cards IPOFig 1(a) SBIC FY19 Operating Revenue and Fig 1(b) Revenue over FY17-19, and Fig 1(c) Fees & Services Details

  • SBIC has a diversified revenue model whereby they generate both non-interest income (fee based income such as interchange fees, late fees and annual fees) as well as interest income on CC receivables. SBIC’s operating model is focused on the cardholder’s 2 main financial needs: transactional needs and short term credit.
  • Interest income is earned when cardholders roll over their dues. SBIC earns interest income on its assets (receivables) when card holders don’t make payment in full when they are due.
  • Fee based income is earned by levying fees and charges to its cardholders. These are categorized as (a) Subscription-based fees: consist of CC membership fees and annual CC fees charged to cardholders. (b) Spend-based income: is interchange fees that the co. earns as consideration for the transactions on using the CCs. In addition, they also earn forex markup income on international transactions (c) Instance-based fees: instance-based fees include late fees, reward redemption fees, cash withdrawal fees, overlimit fees, payment dishonour fees, processing fees or service charges for cross-sell or value added products, statement retrieval charges, among others. See Fig 1(c).

jainmatrix investments, sbi cards ipoFig 2 – SBIC personal CC portfolio details

    • As of 9M FY20, the personal cards portfolio (Fig 2) had 9.99 m. cards. In addition to personal cards SBIC offers corporate cards and white label ATM cards. White label CCs are partner-branded CCs that carry the brand partner’s logo only. They also offer 1 white label CC with partner Tata Sons.
    • Leadership is Rajnish Kumar (C’man), Hardayal Prasad MD-CEO, Richhpal Singh COO, Nalin Negi CFO

News, Updates and Strategies

  • The IPO of SBIC got delayed from Dec 2019 to Mar 2020 as there was an investigation by SEBI of SBI MF over share trading allegations of Manappuram Finance. The ok for IPO was finally given by SEBI.
  • cost of share acquisition by CA Rover Holdings was Rs 81. The partial exit is at a 9.25X gain.
  • SBIC launched a co-branded CC with Vistara in Nov 2019 with variants Club Vistara and PRIME.
  • SBIC in Dec 2019 has made an application to list CPs for an issue size of ₹400 cr. to the BSE.
  • SBIC’s business strategy is:
    • To expand its customer acquisition capabilities and grow the cardholder base. SBIC will increase the number of open market physical points of sale that they operate. They are focused on increasing presence in tier II and tier III cities where their cardholder base has been low so far.
    • To tap into new cardholder segments by broadening the portfolio of CC products.
    • To stimulate growth in CC transaction volumes.
    • To enhance cardholder experience.
    • To continue leveraging technology across their operations.

Digital Payments and CC Industry Outlook in India

  • In CY17, the penetration of CCs in India was 2.2% as compared to 320% in the US, 42% in China and 73% in Brazil, and CC spends as a percentage of GDP stood at 3% as compared to 17% in the US, 25% in Hong Kong and 12% in Brazil. Hence Indian CC market is highly underpenetrated with long runway for growth. SBIC would benefit from the fast evolving youth and spend dynamics.
  • The payments space has seen rapid innovation in the past few years, led by govt. and regulatory initiatives as well as changing consumer preferences. Jan Dhan, Aadhaar and Mobile (JAM), the demonetization of high value currency notes in Nov 2016, implementation of GST and the unveiling of the Unified Payments Interface (UPI) are some of the notable regulatory initiatives that have spurred growth in the digital payments space. New Small Finance Banks and Payment Banks have also brought new innovation, platforms and infra here. Digital payment volumes (including RTGS, but excluding interbank clearing, ECS, NEFT, IMPS, NACH, cards and prepaid instruments) have quadrupled in the last 3 years ending FY19.
  •  In terms of volume, digital payments transactions logged a 5 year CAGR of 49% from FY14-19, owing to factors such as a younger population, rising smartphone penetration, an increase in mobile internet users, increasing convenience of transacting digitally, and a booming ecommerce sector.
  •  The digital payments value in India is expected to more than double to ₹4,055 tn. in FY24 from ₹1,630 tn. in FY19, translating into a 5 year CAGR of 20%.
  • The Indian e-commerce industry has nearly doubled since FY16. CC accounts for 30-35% of ecommerce payment value while cash on delivery accounts for around 50-60%. CC usage has improved by introducing card on delivery/ portable payment options.

jainmatrix investments, sbi cards ipoExhibit 3 – Key metrics of CC players in India

  • Growth in CC volumes has risen up over the years, while annual spending has grown moderately. The no. of CCs issued is 4.7 cr. in FY19, having grown at 20% CAGR over the last 5 years, and is expected to grow by 25% from FY19-FY20, while annual spends per card is expected to grow by 1%.
  • CC spends have registered a robust growth, growing at a CAGR of 32% from FY15-19 to reach ₹6 tn. in FY19, and is expected to reach ₹15 tn. by FY24.
  • There are a total of 74 players offering CCs in India, with the top 3 private banks (HDFC Bank, Axis Bank and ICICI Bank) and SBI Card – as the leading pure-play CC issuer, dominating with a 72% market share by number of CCs as of FY19 and 66% market share by CC spends. See Exhibit 3.

Financials of SBIC

jainmatrix investments, sbi cards ipoFig 4 – SBIC Financials

  • Revenues, EBITDA & PAT have grown at a CAGR of 44.6%, 48.3% and 52.1% resp. from FY17-FY19. The 3 year no’s. are solid with rapid growth, see Fig 4.
  • SBIC for 9M FY20 reported at PAT of ₹1,161 cr., an 89% growth YoY over the same period last year.
  • PBT for 9M FY20 ₹1,619 cr. has grown by 71% YoY over 9M FY19. This is very strong operational performance despite higher provisions for bad debt.
  • EBITDA and PAT margins for SBIC are high and have improved from FY17-19.
  • SBIC had a RoE of 24%. The 3 year average RoE is 24.6%. This is an excellent return ratio.
  • SBIC has paid tax at 35% of PBT in the last 3 years. There can be a substantial profit and RoE increase in FY20 with the reduction to 25% corporate tax.

Benchmarking

We benchmark SBIC against listed private sector banks which have a CC business, a top NBFCs and a top microfinance Bank, as there is no other listed pure play CC player today. See Exhibit 5.

jainmatrix investments, sbi cards IPO

Fig 5 – Benchmarking    Note: 1) Sales & PAT growth for SBI Cards is over FY17-19, so it is 2 year CAGR growth. 2) Market share, avg loan per card o/s & avg spend per card are metrics for only the CC parts of the businesses.

  • PE and PB of SBIC are among the highest in the peer group, only Bajaj Finance, an NBFC leader is higher. Basis these valuations SBIC looks very expensive.
  • The sales and PAT growth for SBIC are also among the highest with only microfinance leader Bandhan doing better. They are growing fast as India’s CC market is highly underpenetrated.
  • SBIC’s NIM’s at 15.5% (FY19) is the highest amongst its peer group. This is a clear stand out which makes SBIC a candidate for high valuation multiples.
  • SBIC has a low D/E indicating that there is headroom for more leverage.
  • The RoE of SBIC for FY19 is the highest amongst the comparables. The 3 year average is high as well and RoE is likely to remain elevated. Dividend yield for SBIC at 1.19% is good.
  • HDFC Bank has the highest market share and SBIC is next. The market is under-penetrated and there is enough headroom for all players to grow. SBIC leads in the avg. spend per card.

Positives for SBIC and the IPO

  • The listing of SBIC will provide investors access to the second largest CC issuer in India and provide the first listed pure-play CC issuer with a 20 year operating history. The high performing BFSI sector in India has another unique and high quality offering with SBIC.
  • SBIC’s financials are robust. SBIC has generated high RoE and NIM, while also maintaining sufficient capital buffer through high CAR & low D/E. This is good financial management by the company.
  • It has the leading revenue and sales growth of the top 4 players, with growing market share.
  • SBIC has diversified customer acquisition capabilities. SBIC is a leading player in open market customer acquisitions in India. They have deployed a large outsourced sales team. When a point of sale is not directly managed by them, they work with their 11 non-bank co-brand partners and 7 co-brand bank partners using their distribution network (including their co-brand partner’s retail outlets), communication channels and customer interactions to market CCs to their customers.
  • The major competitors are more focused on internal marketing of CCs to banking customers.
  • SBIC gets supported by a strong brand and pre-eminent promoter. The relationship with SBI extends to joint promotions, sharing of office space, etc. In fiscals FY19, 18, and 17, new accounts acquired from SBI’s customer base accounted for 55.2%, 45.5% and 35.2%, resp., of SBIC total new accounts.
  • The industry characteristics suggest that the credit cards business has a network effect, so larger players have an advantage over smaller ones of sharing of infrastructure and management costs, easier marketing and benefits deals for customers, etc. Here SBIC has a #2 player advantage.
  • With just 3,783 of its own employees, SBIC has outsourced many activities, improving productivity.
  • SBIC has a good and and diversified portfolio of CC products offering.
  • SBIC has ample potential to tap SBI’s large customer base, for growth.
  • SBIC has an experienced and professional management team. The MD & CEO, Mr. Hardayal Prasad, has over 36 years of experience in the financial services industry. A large number of the senior management personnel have worked with SBIC for a significant period of time, resulting in effective operational coordination and continuity of business strategies.

Risks and Negatives for SBIC and the IPO

  • Valuations at PE 51 times and PB 14.6 times (TTM) are very expensive. On a relative basis, SBIC has valuations just less than Bajaj Finance which has an outstanding 15 year growth and track record.
  • SBIC derives substantial benefits from their existing relationship with their promoter SBI, and a loss or reduction in the level of support they receive from them could adversely affect SBIC.
  • SBIC does not own the ’SBI’ trademark and currently uses it pursuant to a non-exclusive licensing agreement. SBIC pays royalty fees of 2% of their net profit or 0.2% of income, whichever is higher. The licensing agreement may be terminated by SBI on occurrence of events: SBI’s shareholding in SBIC falls below 26%, if they undergo a change of control event, or if they fail to pay royalty to SBI.
  • Several senior officers in SBIC are on deputation from SBI and may return there causing a skills loss.
  • The CC portfolio is of unsecured loans and not supported by collateral. 98.6% of it is unsecured.
  • With 74 players, the sector looks crowded. Competition can rise also if any player decides to commit heavily to the business, with fresh investments. However so far SBIC has handled the pressures well.
  • Cyber-attacks or other security breaches can have a material adverse effect on their business. Cards cloning, phishing, etc. are threats to the business. Coronavirus too can impact consumer sentiment.

Overall Opinion and Recommendation

  • Credit cards are a mid and premium lifestyle product, and are quite habit forming, both in terms of purchases, new services experiences as well as convenience of bill payments. We expect growth to continue for many years.
  • SBIC is a well-managed firm financially. The growth, return ratios and operating metrics are robust.
  • At a 9M FY20 P/B of 14.6 times, the valuation is expensive. However this retail focused fast growing company has good return metrics and should get a premium valuation in the market.
  • Risks: 1) Valuations at PE of 51 times and PB of 14.6 times (TTM) are expensive. 2) Cyber-attacks or other security breaches could affect business 3) their loans portfolio is largely unsecured.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain discloses that he has been a retail customer of SBIC since 5 years. Other than this JM has no stake ownership or known financial interests in SBIC 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.

Reliance Industries – A Firm to Rely On

  • CMP: ₹1,532
  • Industry: Refining, Petrochem, ++ Conglomerate 
  • Large Cap with ₹9,85,000 crore mkt cap
  • Current Valuation: P/E: 23 times and P/B: 2.4 times
  • BUY with a target of ₹2,200 by May 2022 

Summary

  • Overview: Reliance Industries is the largest private sector firm and #1 by market cap in India. RIL has over decades proven its ability to build businesses of global scale and execute complex, time critical, and capital-intensive projects. ~80% of RIL’s operating profits are being generated from the refining and petchem verticals. Going ahead newer businesses like Retail and Telecom are expected to grow profitably. RIL earnings has green shoots from (a) Improving ARPU from Jio wireless business (b) Launch of Jio Fiber Broadband services (c) Traction in enterprise solutions service offering (d) Lower interest costs as RIL aims to become net debt free (e) improving margins and stable growth in Retail and eCommerce.
  • Key Risks: (a) Adverse crude prices/ petroleum margins (b) Inability to reduce debt at the committed pace. (c) Lower plastic consumption affecting the petchem vertical. (d) Muted growth in Indian economy. (e) regulatory changes in telecom
  • Advice: Investors can BUY this share with a May 2022 target price of ₹2,200/share. This will allow their investment to appreciate 42% absolute or 17% annualized over this period.

Exciting free Offer – Receive this detailed 10 page equity research report in PDF form with analysis of refining, petchem and the new verticals, benchmarking of competitors, 3 year financial projections, etc. Fill form below and in Question, request for Reliance Industries report. 

We will revert to you within 2-3 working days with the report. We respect your privacy and will not share above details with any external party. All rights are reserved. JainMatrix Investments may refuse to provide this service to an individual or corporate without assigning any reasons.

Disclaimer and Disclosure

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 has no position in Reliance Industries. In addition, JM has no known financial interests in RIL or any related group. 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.

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.

SIGN UP with us to start receiving such valuable reports – THE INVESTMENT SERVICE SUBSCRIPTION 

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.

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.