CPSE ETF FFO 2 – An Energizing Offer – BUY

  • FFO Applications: 15-17th Mar; Listing by 7th Apr 
  • ETF has 10 PSUs; Oil and Gas heavy
  • Raising amount: Rs. 2,500 cr. 
  • Managed by Reliance Nippon Life Asset Management
  • Central PSEs, Exchange Traded Fund, Further Fund Offer 2
  • Buy with a 1 year perspective

Overview: The Scheme is a further follow on issue (FFO 2) after the January 2017 offer which was successful. CPSE ETF facilitates GoI’s initiative to disinvest stake in CPSEs through the ETF route. Past performance of CPSE ETF 2014 has been good with 19.2% CAGR over 3 years. A discount of 3.5% on the “FFO Reference Market Price” of the Nifty CPSE Index shall be offered in this Scheme. There are high sectoral risks in Oil and Gas sector with a commodities play. Also typically the asset rich PSUs are slow moving firms with a poor, lethargic culture. However overall the offer is attractive and rated a BUY with a 1 year perspective.

Advice: This is a medium risk, medium return offering suitable for conservative investors. Buy with a 1 year perspective.

Here is a note on the CPSE ETF FFO 2 offer 2017.

Offer Differences

  • This is a smaller offer, of Rs 2,500 crores compared to Rs 6,000 crores FFO earlier in Jan 2017
  • Very similar product, with CPSE ETF as benchmark
  • The retail discount on offer is 3.5% this time compared to 5% in the first FFO in Jan 2017
  • There is a small change in the allocation to the 10 companies of the Index, with PSU firms having more central govt. holdings getting a few % higher allocations.

Description

  • The Scheme is an open-ended index scheme, listed on the Exchanges in the form of an ETF. The investment objective is to provide returns like the Nifty CPSE Index.
  • In this offer 70% is reserved for Retail and QIB, while max 30% is for Anchor investors.
  • The CPSE ETF 2017 has been created to help in GoI disinvestment of PSUs. The Further Fund Offer (FFO) launched in Jan 2017 received good response; collections were Rs.13,742 cr., out of which Rs.7,742 cr. was refunded to investors due to limited issue size of Rs.6,000 cr.
  • The ten PSUs’ included in the ETF are known high dividend, low capital gains, asset rich firms.
  • FFO Price: The FFO Units being offered will have a face value of Rs. 10/- each and a premium equivalent to the difference between FFO Allotment Price and the FV . The FFO Allotment Price would be equal to 1/100th of Nifty CPSE Index less discount.
  • Discount: A discount of 3.5 % on the FFO Reference Market Price of the underlying shares of Nifty CPSE Index shall be offered to FFO of the Scheme by GOI. A discount of 5% was offered to retail investors in the first FFO in Jan 2017 which has been reduced to 3.5% this time.
  • The scheme is being managed by Reliance Nippon Life Asset Management Ltd.

Investment Details of the Scheme

  • Amount to be raised: Rs. 2,500 cr. The Scheme will invest at least 95% of assets in stocks of the Nifty CPSE Index. It may invest in Money Market Instruments upto a max of 5% of assets which could include T-Bills, commercial paper of public private sector corporate entities, etc.
  • The AMC will use a passive or indexing approach to try and achieve Scheme’s investment objective. Unlike other Funds, the Scheme does not try to beat the markets they track and do not seek temporary defensive positions when markets decline or appear overvalued.
  • Sectoral asset Allocation and historic returns:

jainmatrix investments, CPSE ETF

Table 1 – Sector allocation           Table 2 – CPSE ETF 2014 returns including Dividend

Source: Reliance Mutual Fund FFO 2 document

Analysis of the ten PSUs as part of this ETF:

jainmatrix Investments, cpse ETF

Table 3 – CPSE ETF FFO PSUs analysis

  • Note 1: The Engineers India report by JainMatrix Investments is available on LINK
  • Note 2: The Bharat Electronics report by JainMatrix is available at LINK
  • Note 3: When we say price is high, it is relative to 5 year historical prices. We have not done valuation exercises on these firms.
  • Portfolio Turnover: It is expected that there would be a number of Subscriptions and Redemptions on a daily basis. Portfolio Turnover Ratio of the Scheme is 1.02 as on Feb 28, 2017.
  • Dividend: The income received by way of Dividend shall be used for recurring expenses and redemption requirements or shall be accumulated and invested as per the investment objective of the Scheme. The Trustees may declare Dividend to the Unit holders under the Scheme subject to the availability of surplus, and at the discretion of the Trustees. If the Fund declares Dividend, the NAV of the Scheme will stand reduced by that amount.
  • Listing: The units of the Scheme will be listed on NSE and BSE by maximum April 7, 2017.
  • RGESS Eligibility: Investments made by a Retail Individual Investor in the RGESS Scheme will qualify for a 50% deduction of the actual amount invested from the taxable income of the financial year.

The ETF structure is explained below.

JainMatrix Investments, CPSE ETF

Table 4 – Nature of ETFs             Source: Reliance Mutual Fund FFO 2 document

Past Performance since launch in March 2014

jainmatrix investments, cpse

Table 5 – Performance of CPSE ETF since 2014 (as on 13th Mar 2017)

The CPSE ETF 2014 was listed in April 2014, and has been able to give original NFO retail investors an absolute 69.4% returns over 36 months. This includes a 1 year bonus for Retail, which is not available in CPSE ETF 2017. The CAGR returns are 19.2%, higher than those in Table 2 published in FFO. See reports:

  • JM Investments Mar 2014 report – CPSE ETF 2014 – New Fund Offer report
  • JM Investments Sept 2015 performance review – Review Sept 2015 of CPSE ETF 2014
  • We had published a report on the FFO (Further Fund Offer) of CPSE ETF on 14th Jan, 2017. And recommended a BUY with a 1 year perspective. You can have a look at the report on the following LINK and the video on this LINK.
  • Subscription response: The Reliance Mutual Fund managed CPSE ETF opened for applications from 17-20th It was subscribed by 2.30 times, with bids worth Rs13,802 cr. coming in against the issue size of Rs 6,000 cr. The FFO received 250,000 applications, with good demand across investor segments.
  • FFO Price: The FFO Allotment Price is approximately equal to 1/100th of Nifty CPSE Index minus discount. The allotment price was Rs 25.21 and this tranche was listed on 31st
  • Performance: The EOD closing price on the exchange was Rs. 27.71 today, i.e. 13thMar, 2017. This translates into a gain of 9.9% in 1.5 months.

PROS

  • This ETF has a lower management charge as this automatic. The expense ratio is 0.065% annualized.
  • The fund will offer 3.5% discount to the FFO 2 subscribers.
  • The 5 year share returns are 7.47% CAGR, see Table 3. This is fair but below Sensex of 10.63%.
  • The dividend yield for these stocks is 5.18% today which is good, Table 3.
  • The average beta of these stocks is 1.15 indicating higher volatility than indices.
  • Many of these firms own wonderful assets, the family silver of the GoI. Some of these firms also enjoy monopoly status in their sectors. See our opinions in Table 3.
  • GoI is asking for higher dividends from PSUs and allowing operational freedom to exploit assets and be more productive. This will benefits investors also. See report, A Repurpose for our PSUs
  • The crude oil price fall from USD 100+ levels to sub 50 per barrel is complete. While it is volatile, crude in next 1 year should be in USD 40-60 range. If it does, the Oil & Gas sector can perform well.
  • This fund is Oil and Gas heavy with 57% weightage. However it does have a mix of upstream, mid and downstream O&G firms, which together can de-risk the portfolio against commodity volatility.

CONS

  • This third fund raising is an opportunistic attempt by GoI to raise funds in FY17 based on the good market conditions and the success of the Jan 2017 offer. However every successive offer dilutes incremental gains and novelty of the offer. This dilution is being run in parallel with stock level dilution efforts like the Offer for Sale (OFS) with Bharat Electronics and Engineers India.
  • There is no strategic clarity on GoI shareholding in these firms – will they be fully divested, or a strategic sale, or as JVs, or retained with GoI majority holding in the long run.
  • While the expense ratio of the ETF is low, the high dividend paid by the PSUs is not being passed on to the unit holders, but used for recurring expenses, as per FFO document. The CPSE ETF 2014 too has not paid dividend for 3 years. The 5.18% dividend yield involves substantial monies. It’s not clear if dividends have contributed to the NAV of the CPSE ETF 2014.
  • This fund is O&G heavy with 57% weightage. If one extends the description to Energy/Coal/ Power/ Oil & Gas and related financing, it increases to 90%. These sectors are essential to the economy, but are typically operationally constrained and not shareholder friendly. They are dependent upon global prices, and so even well managed firms can swing to losses with a fall in commodity prices.
  • In Oil & Gas sector, the upstream Oil Exploration firms have been hit by falling crude oil prices. The CPSE ETF is upstream Oil & Gas heavy with ONGC having 25% weightage.
  • Even though Gail India has a monopoly, it has been hit in pipeline construction by interstate politics, farmer /social pressures and weak infra execution environment.
  • PFC and REC are executors of GoI programs in power sector. Their returns are sometimes guaranteed by GoI but when the entire sector gets stressed, they can suffer poor performance.
  • These stocks performance depends on revenue growth, which has been inconsistent in recent years.
  • Many of these firms depend on GoI policies and monopoly situations to grow. Some are externally constrained by weak infrastructure that hampers distribution (Railways for coal, pipelines for gas).
  • This CPSE ETF 2017 offering is managed by Reliance Mutual Fund.

Overall Opinion

  • The current govt. is focusing on good execution and better administration with a series of reforms. The environment is more result oriented with less political interference in PSUs.
  • The outlook for Oil & gas sector is stable this year. Domestic demand is high.
  • Past performance of CPSE ETF 2014 has been good with 19.2% CAGR over 3 years.
  • There are high sectoral risks with an Oil & Gas heavy commodities play. Also typically the asset rich PSUs are slow moving firms with a poor, lethargic culture.
  • However overall the offer is attractive and rated a BUY with a 1 year perspective.
  • This is a medium risk, medium return offering suitable for conservative investors.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer

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

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Investment Notes – Euphoria

Three positive events have occurred. Demonetization is over; the Feb 2017 budget was good, and the 5 state elections threw up BJP as a likely winner in 4. At this point, we are overwhelmingly positive on the investment outlook.

Investment Notes

It was 18th Feb 2015. The Sensex had just closed at 29,320. It had been 9 months since the Modi led BJP won the parliamentary majority – they got 272 seats – to form a government. In the last one year, the Sensex had jumped from 20,536 to these levels, a gain of 43%.

An investor asked me a simple question: So what has changed on the ground and among the companies that has resulted in a 43% jump in Sensex? I just nodded, unable to express the reasons. I’d like to try to answer this today. The simple answer – NOTHING !! Most of the companies were 5-10% up on financials/ EPS in the last one year. Nothing special to report here.

So what gives? What explains the big jump? The answer is optimism and sentiment. Just like most things in life, people act on the basis of heart (emotions) and head (rationality). The Modi govt. won a resounding victory, after a bitter, negatively fought election. A lot of people now looked to the future with renewed hope and optimism, and felt we have a govt. that is cleaner, more decisive and which is thinking long term.

The positivity changed the outlook of investors. Retail bought Mutual Funds. Investors took fresh 2-3 year, long term positions. FIIs entered and took new 10+ year investments on the basis of longer term trends like consumption and housing shortages. Sensing all this, traders bet positively.

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham

So while nothing changed on the ground, the 2 year forward outlook changed sharply. The stock market always tries to look a few years ahead. At a stock level, most large caps have 1-2 year financials baked into the prices. Mid-caps are divided into the well-known and the lesser known. The well-known firms too have 1-2 year financials baked into the prices. Since growth rates are higher here, valuations parameters like P/E and P/B can look expensive. The lesser known mid-caps and small caps can flounder at low valuations until they get discovered. Many opportunities are available here for investors to find high quality firms that can be great investments.

So what happened after Feb 2015? The 43% jump due to euphoria and positivity gave way to rationality. Whats really happening on the ground? Is business looking up? What big bang reforms are the govt. conducting?  The answers were not immediately obvious. The parliament became a logjam – the lower house had things easier but the upper house blocked new initiatives.  Massive industry specific issues such as coal and power can’t be wished away with a govt. owned magic wand. It takes time and resolve and good administration.

Post Demonetization Post Budget 

By Feb 2016, the Sensex had fallen to 23,154, a fall of 21%. Post budget, once again there was optimism. The govt. has given a positive budget. No major worries. Toward Nov 2016, we had demonetization. There was confusion, discomfort and a cash shortage. Recovery from this started by end Dec. The cash shortage now looked likely to be resolved in a few months with few residual issues. Recovery was sharp, aided by another good budget in Feb 2017.

The Budget 2017 was overall positive. Small sops for the people included lower tax at entry levels. There were benefits for real estate transactions and Industry status for affordable housing. There were no major negatives, and fears dissipated. GST is likely in 2017-18.

The direction from the govt. is very clear. Black money is to be legalized and cleansed, and black money sources are to be capped. Cash and real estate cannot be a store of ill-gotten wealth. Taxation and compliance has to go up. Big ticket reforms are to be made, opening up new sectors. Foreign and local investors must be encouraged. Abject poverty has to be eliminated. The average man is honest, hard-working and follows the rules. Lets make life easier for him. Plus big changes have to be made to make the country a better place. All subsidies must be targeted using Aadhar to avoid waste. We hope that tax rates – both direct and indirect, are peaking now, and as compliance improves, rates should ease.

The FIVE State Elections

The 5 state elections of Uttar Pradesh, Uttarakhand, Punjab, Manipur and Goa have just concluded. Its been a strong victory in the biggest state, UP, and Uttrarakhand, for BJP. Manipur and Goa may also go BJP way per latest reports. So even the tricky UP population is convinced. In a delayed fashion, BJP will also get more seats in the Rajya Sabha. While it is unclear when BJP will get majority, but certainly over time the statewise support for BJP will increase.

These three big positives combined makes things look good for a 3-6 month period.

We signal a new euphoria for the Indian market

jainmatrix Investments

We welcome – the Bull

India and USA markets:

Just like in India, there appears to be an election led upswing in the USA. The Trump administration too is looking to take bold steps. The focus is on domestic improvements. Jobs, some elements of domestic protectionism, better healthcare, etc. Optimism has shot up in USA. Rather than fearing the world, USA may move to strengthening its own country.

jainmatrix investments

A quick look at Sensex and Dow Jones over the last 2 years indicates a good correlation. See figure – thanks Google Finance. Barring some big local events like demonetization, the two markets are moving in sync. This is another factor that makes me positive about Indian market outlook – its difficult for Indian indices to outperform year after year unless at least some of the global markets are also moving in a similar way.

The potential Risks or negatives that I see now are – 1) Fed rate hike expected this week – will it affect Indian Indices? 2) INR strengthening against USD – is this even possible? 3) Higher inflation – we have early signs of increase 4) Bad monsoon in 2017.

There are always risks and negatives. But at this point, we are overwhelmingly positive on the investment outlook.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in any company mentioned here. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any equity investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an 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.

Avenue Supermarts IPO: The Mart of Choice

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

jainmatrix investments, dmart supermarkets

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

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

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

IPO highlights

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

Introduction

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

jainmatrix investments, dmart superstores

Fig 1 – D’Mart Segment revenues

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

News, Updates and Strategies of DMT

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

Retail Sector Outlook

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

jainmatrix investments, dmart superstore

Exhibit 2 – Sales PSF of Supermarket Firms

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

Financials of D-Mart

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

jainmatrix investments, dmart superstores ipo

Fig 3 – D-Mart Financials

jainmatrix investments, dmart superstores, IPO

Fig 4 – D-Mart Cash Flow

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

Benchmarking

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

jainmatrix investments, dmart superstores IPO

Exhibit 5 – Financial Benchmarking (click image to enlarge)

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

Positives for DMT and the IPO

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

Risks and Negatives for DMT and the IPO

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

Overall Opinion and Recommendation

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

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

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

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Disclaimer

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

Bharat Electronics – Post OFS Note

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

jainmatrix investments, bharat electronics

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

About the OFS Offer

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

jainmatrix investments, bharat electronics

Post OFS applications and allotment

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

Opinion

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

JainMatrix Knowledge Base

See other useful reports:

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

Do you find this site useful?

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

Disclaimer

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

Bharat Electronics OFS – A Value BUY

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

Summary

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

OFS Offer details

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

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

Introduction

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

Stock Evaluation, Performance and Returns

jainmatrix investments, bharat electronics

Fig 1 – Price History

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

 

jainmatrix investments, bharat electronics

Fig 2 – Quarterly Financial

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

 

jainmatrix investments, bharat electronics

Fig 3 – Cash Flow and Dividend

jainmatrix investments, bharat electronics

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

jainmatrix investments, bharat electronics

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

jainmatrix investments, bharat electronics

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

jainmatrix investments, bharat electronics

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

Benchmarking

benchmarking

Exhibit 8 – Financial Benchmarking (click image to enlarge)

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

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

Overall Opinion

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

Download the PDF to see entire note.

JainMatrix Investments_BEL_Feb2017

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DISCLAIMERS

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

Why are Indian stock markets attractive for Investments?

In this 5 minute video, JainMatrix Investments founder Punit Jain presents a few reasons for investing in Indian stock markets. This is part of the Investor Education section of http://www.jainmatrix.com.

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

DISCLAIMERS

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.