Star Health IPO – A Toast, to your Health!!

  • Date 30th Nov; IPO Opens 30-2nd Dec, at ₹ 870-900/share
  • Large Cap: ₹51,800 cr. Mkt cap; Sector – Insurance, Health
  • Advice: SUBSCRIBE
  • Why Buy Now: The waves of Covid have pushed SHI into losses but 1) we do not anticipate more severe waves in future, and 2) SHI should be able to recover through faster business growth and adjustment of prices for the covid pandemic. By having an IPO at this time, investors have an opportunity to buy SHI at low valuations We expect profitability in SHI by 2022, even as it grows rapidly in revenues and network. Once this happens, this IPO entry price will look reasonable.
  • Risks: 1) Loss making entity, so this is a risky investment opportunity 2) Uncertain covid outlook 3) high competition 4) New infectious diseases 5) regulatory uncertainty.  
  • Opinion: Investors with a risk appetite can SUBSCRIBE to this IPO with a 2 year perspective.  

Here is a note on Star Health and Allied Insurance IPO (SHI).

IPO Highlights

  • Star Health IPO will open from Nov 30 – Dec 2 with a price band of ₹ 870 – ₹ 900.
  • The firm will raise ₹ 7,249 crores, including fresh issue ₹ 2,000 cr. and offer for sale 5.83 cr. shares by promoters & shareholders, for max. ₹ 5,249 cr., together 14% of post IPO shareholding.
  • Star Health is looking for a market cap of ₹ 51,796 cr.
  • Promoters currently hold 66.22% stake and post-IPO this will come down to 58.3%. Public holding will increase from the current 33.78% to 41.70%. The quotas are QIB 75%, NII 15%, and Retail 10%.
  • Promoters of Star Health are Safecrop Investments India LLP, WestBridge AIF I and Rakesh Jhunjhunwala. The shareholders selling shares in the IPO include promoter Safecrop Investments India LLP, and many other (public) shareholders.
  • The grey market premium (GMP) of SHI has declined sharply to below ₹ 10 per share, according to people who deal in unlisted stocks; it has fallen from ₹ 90 per share last week.
  • Objects – with the funds raised from fresh offering, SHI plans to augment the company’s capital base and maintain solvency levels.
  • One lot size is 16 shares and Face Value is ₹ 10. Retail investors can bid for one or more lots, and a minimum of ₹ 14,400 or multiples of this, upto a maximum of ₹ 1,87,200 for 13 lots and 208 shares.

Introduction to Star Health and Allied Insurance

  • Star Health and Allied Insurance is the largest private health insurer in India with a 15.8% share in FY21 (CRISIL Research). Started in 2006, it is #1 based on health GWP over 3 years.
  • It had retail health GWP of ₹ 9,349 cr. in Fiscal 2021. SHI made a loss for the first time in 3 years in FY21 even as revenue rose, due to Covid.
  • Its health insurance product suite insured 2.05 cr. lives in retail and group health, which accounted for 89.3% and 10.7%, resp, of total health GWP (Gross Written Premium) in FY21.
  • It has a distribution network of 779 health insurance branches spread across 25 states and 5 UTs. Its agency distribution channel also includes corporate agent banks and other corporate agents, which accounted for ₹ 220.9 cr. and ₹ 19.1 cr., resp., of its GWP in FY21.
  • Promoter of SHI are Safecrop Investments India LLP, WestBridge AIF I and Rakesh Jhunjhunwala.
  •  The proposed IPO will make SHI the fourth private sector insurance provider to list on Indian stock exchanges, following HDFC Life, ICICI Prudential Life and ICICI Lombard General.
  • Star Health’s total number of individual agents grew at a CAGR of 27.3% from 2.9 lakh (Mar’19), to 4.6 lakh (Mar’21) and 5.1 lakh (Sept’21). Under the IRDA (Appointment of Insurance Agents) Regulations, 2016, insurance agents are only permitted to sell the policies of three insurers: one life insurance company, one non-life insurer and one health insurer.
  • SHI has enabled online purchase of policies in as less as 5 minutes on website Starhealth.  
  • SHI has already allocated ₹ 3,217 cr. to 62 anchor investors today.
  • Key leaders: V Jagannathan, Chairman & CEO, Dr. S. Prakash, MD (since ‘19), Anand Roy MD (‘19)

Fig 1a) Revenue Segments in FY21 and b) Industry Market Shares

Insurance 101, and Health Insurance in India

  • Insurance is a very useful product. There are several types – Life, Health, Automobile, Property, Farm/crop, and all kinds of asset insurance products. Products are for retail or business consumers.
  • Health insurance is a long term product. Having a health problem is not highly predictable, so it is bought so that in case a hospitalization happens, you are protected to the extent of Sum Assured.
  • Salaried employees may get Group health insurance from their employer. They should check if their families are also covered – this may be an add-on. Non salaried need to buy on their own.
  • The health insurance penetration in India is low at just 0.36% of GDP whereas the global average comes around 2% of GDP. Countries like the UK, China, Argentina and the United States have higher penetration level of 0.61%, 0.65%, 0.78% and 4.1%, respectively.
  • The players are regulated by IRDAI (Insurance Regulatory and Development Authority of India) and is subject to regulatory uncertainty and compliance requirements.

Fig 2a) Penetration

Fig 2b) Premium per person

Fig 2c) Industry segments  

  • The average premium paid per person in India at $5 / ₹ 375 per year on average for the population.
  • Health in India is a split sector – the govt. of India does offer public hospitals and facilities that are free, but there are insufficient facilities in most places to cover the population. Wherever govt. facilities are insufficient or inadequate, people have to pay and use private medical services.
  • The Covid crisis of FY21 & FY22 has shown the importance of Health insurance. At the same time we can see India has low penetration of health cover, high out-of-pocket expenses, and only 10% of the population has insurance policies outside of government plans, according to CRISIL Research.
  • The total expenditure spent on healthcare by the centre and states for FY20 was 1.6% of GDP, including establishment expenditure of salaries, gross budgetary support to various institutions and hospitals and fund transfers to states under centrally sponsored schemes such as Ayushman Bharat.
  • Health insurance industry data shows the types of companies and product segments.
  • Personal experience: As a customer of the Family Floater product from SHI, I had it for several years with no claims. About 3 years ago, I suddenly had to use the insurance for a hospitalization and operation. It was a relief that these were covered. The process was easy and a doctor came to verify the patient, operation and hospital. SHI finally reimbursed about 90% of my claim.

Financials of SHI

  • Revenues have grown steadily, but PAT fell in FY21 & H1FY22 due to Covid.
  • The cash flow for SHI is shown in Fig 3b. It’s clear that FY20 and FY21 have been negative for FCF.

Fig 3a) Financials, and Fig 3b) Free Cash Flow

Benchmarking

We benchmark SHI against listed insurance firms in India, and PolicyBazaar. See Fig 4.

Fig 4 – Benchmarking

  • As a loss making firm, the PE is negative for SHI. As are the profits.
  • On sales growth we can see that SHI is close to the leader, SBI Life. New India lags here.
  • As a result, the key valuation parameters are P/B, EV/Sales and Mcap / GWP.
  • The P/B of SHI is about average. New India is valued low partly as it’s a PSU. HDFC Life is expensive.
  • On EV to sales, SHI is a value leader. Highest is SBI Life. On Market Cap to GWP, again SHI is the leader while HDFC Life is most expensive. On revenues, we can see that SHI is the leader. However, the loss making situation is marring the valuations of SHI on traditional parameters of PE and ROE.
  • Putting this together, we sense that SHI is a valuable asset available at low valuations due to the covid related losses. It’s entirely possible that post covid, SHI may emerge quite profitable.
  • Star Health stands out among other standalone health insurers (SAHI) in terms of size, strong growth rates (32% Gross Written Premium CAGR over FY18-21) and better operational performance which is reflected in pre-Covid numbers for the company (~93% combined ratio).

Positives for SHI and the IPO

  • Largest private health insurance firm in India with leadership in the attractive retail health segment.
  • There is low penetration of health insurance in India. Also Post covid, awareness of health insurance has risen. This category may continue to see high growth.
  • The famous Indian investor Rakesh Jhunjhunwala has backed SHI as promoter. As he has a large following in India, this helps with publicity and investor confidence.
  • India has an aggressive plan for vaccination and has covered a good proportion of population. The one dose number has crossed 100 cr. and two doses 37 cr. There is a plan for a booster dose too.
  • SHI has a good brand, a national presence, and the largest network distribution in health industry.
  • Diversified product suite with a focus on innovation and launch of new and specialized products.
  • Strong risk management with superior claims ratio and quality customer services.
  • Demonstrated track record of operating and financial performance.   
  • Low valuations as per benchmark analysis.
  • The sector is divided 46-54% between PSU and private. There is ample opportunity to grow for SHI.
  • The second wave was better handled by people & hospitals compared to the first. With this experience, any further waves should be handled better in terms of prevention and cure.

Risks and Negatives for SHI and the IPO

  • In India we appear to be in a recovery from Covid, but we cannot accurately predict any 3rd/4th wave in India and the business impact of the same. Omicron is a new variant found recently also.
  • The company has suffered a setback for the last 18 months due to covid, and has run into losses.
  • In order to emerge from this crisis, SHI may have to raise the prices of its products.
  • There are 29 active health insurance companies in India. It’s a competitive space and thus it may be difficult for any one company to dominate or win a 40%+ market share.
  • Post covid, GoI may be forced to raise spending on healthcare, which is mostly free services.
  • The Medical Council of India has been replaced by the National Medical Commission in FY20 for the purpose of medical education and medical professionals. The poorly regulated sector has seen shortages of doctors and nurses, and hopefully this will improve in future.
  • Recent loss making firms that have IPO’ed had uneven results. Zomato and PolicyBazar have done well, but Paytm had a rough first week.

Overall Opinion and Recommendation

  • Public sector healthcare is inadequate and of insufficient capacity. With rising medical services and medicine costs there is ample demand for health insurance.
  • SHI has grown rapidly and is well focused on the health insurance sector.
  • The waves of Covid have pushed SHI into losses but 1) we do not anticipate more severe waves in future, and 2) SHI should be able to recover through faster business growth and adjustment of prices for the covid pandemic.
  • There is a massive growth opportunity for health insurance in India as affluence grows. This will also be driven by higher inflation in medical services.  
  • As the largest private player, SHI has an opportunity to grow the market and service the demand.
  • We expect profitability in SHI by 2022, even as it grows rapidly in revenues and network. Once this happens, this IPO entry price will look reasonable.
  • Risks: 1) Loss making entity, so this is a private equity type, risky investment opportunity 2) Uncertain covid outlook 3) high competition 4) New infectious diseases
  • Opinion: Investors with a risk appetite 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. JM has no stake ownership or financial interests in Star Health or any group company. He has been a retail customer of SHI for 5+ years. Punit Jain intends to apply for this IPO. 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 a RIA – Registered 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.

A View on the Sensex

Date: 28th Nov 2021

The Sensex Returns V/S GDP Growth chart

Chart Explanation

  1. Chart Notes: 2021SF is 2021 So Far. CY is calendar year. Also a positive ‘High-Low Return’ number indicates that intra-year high was after intra-year low and vice-versa. Data Sources: wikipedia, Bloomberg, Credit Suisse.
  2. The CY Sensex returns reflect key events – 1999 dot com up; 2000 crash, 2008 crash etc.
  3. The average CY Sensex return over 20 year period is 18%.
  4. The High Low Return is the intra CY volatility. The GDP real growth line largely runs similar to Sensex return while being mostly positive and smoothened out. Except 2020.

Key Observations

  1. The CY Sensex return over 2018-2021SF isn’t very high. It looks like just average returns. The volatility is high with higher highs and lower lows. GDP growth has fallen in 2020 and now looks in recovery mode.
  2. It does appear that the GDP fall is not reflected in the Sensex returns.

Conclusion

  • Sensex returns have been low to average, contrary to public opinion. Volatility has been high.
  • A good GDP recovery in CY21-23 can raise Sensex returns to above average levels.

Disclaimer:

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

IEX – Indian Energy Exchange

‘Indian Energy Exchange is India’s premier energy marketplace, providing a nationwide automated trading platform for the physical delivery of electricity, renewables, and certificates.’ – from IEX website.

  • Did you know, the IEX share has gained 4X in the last one year?
  • See IEX on MoneyControl.
  • Waaat? Why? How?
  • It is at a PE of 104 times today, per MoneyControl.
  • Is it a good investment today? Should I just ignore the stock? Or is it time to exit my IEX holdings?

JainMatrix Investments has just published a report covering all this and more.

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PRICING AND PAYMENT OPTIONS

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 is marketing collateral. We have not expressed any opinion in this marketing collateral so there is no need for disclosures on IEX. 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 has applied for certification under 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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This service and related documents have been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. These documents are 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. 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 (SEBI Registration No. INH200002747) 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.

Indian Markets, Over or Undervalued? – A discussion

Summary: In this note, we debate on the current levels of the Indian markets, using several well-known ratios, in the context of local and global events. We are perhaps continuing from my previous Outlook article – Equity Outlook, Nov’20: Rising like a Phoenix from the Ashes

Introduction

  • The Markets are at an all-time high as Nifty crossed 17,000 levels and Sensex 58,000 levels. However, the Indian markets have been quite volatile in the last 2 years.
  • In this note we try to debate and understand the causes and effects, and if the markets are Overvalued or Undervalued at these levels.
  • Here are 20 year and 2 year charts of Nifty. Over 20 years, the Nifty has gained at 15.4% CAGR. Fig 1.
  • In Mar’20, the market fell sharply by 39% due to Covid fears, but recovered thereafter See Fig 2.

Fig 1 and Fig 2: Nifty (Source tradingview) – All charts are clickable

PROS: Reasons why the Indian Stock Market is Overvalued

1. The Covid pandemic has affected the Indian economy, yet the markets are booming.

  • The GDP growth in FY21 was -8%. In the second wave of May-July this year too the social and economic impact was hard. Inspite of this, the stock markets have risen. So, until the economy recovers, markets certainly look overvalued.

2. High P/E ratio of Nifty, as well as Midcap and Smallcap indices

  • PE of nifty was recently as high as 42 times, and even today at 28 times means that investors are paying ₹28 for ₹1 of earnings. See Fig 3. Before the 2008 market crash, Nifty PE ratio was 28.29.
  • Historically, a Nifty PE ratio of more than 25 means the Indian market is overvalued. 
  • Due to pandemic, there has been a fall in earnings of companies, even as the stock market rose. This was one of the main reasons why Nifty 50 touched life time high. For example, Reliance Ind. and TVS have shown steady growth but there has been a steep fall in earnings of companies like ONGC, Maruti Suzuki etc. which caused a large increase in Nifty PE ratio.
  • Cash influx by FIIs. During the pandemic, Central banks of USA and Europe printed cash in trillions as stimulus. The US Fed reduced interest rate to as low as 0.25%. FIIs started investing some of the cash in emerging markets like India for growth opportunities.
Fig 3: Nifty PE

3. Market Cap to GDP Ratio

  • This ratio is sometimes referred to as the Buffet indicator. It is a good way to check if the market is overvalued or undervalued compared to its past historical average.
  • Historically India’s Market cap to GDP ratio is 75%. A ratio of 100% is a sign of an expensive market.
  • Before the stock Market crash of 2008, the market cap to GDP was 103%.
Market Cap / GDPInterpretation
85% < ratio < 101%Moderately overvalued
Ratio >101%Significantly overvalued
Today’s level103% indicates Nifty is overvalued

4. Stock Market in a Bubble

  • In India, investors seem to be in a frenzy and attracted to the stock markets. Total Demat accounts have doubled in the last 2 years. What started as a hobby and pass-time during the lockdown, also encouraged by mobile apps by stock brokers, has grown into a massive wave. The IPOs are getting highly oversubscribed.
  • According to RBI, prices of risky assets have surged across many countries and have touched record high levels during 2020-21 on the back of unparalleled levels of monetary and fiscal stimulus.
  • The US Fed said the turn in market sentiments “following positive news on the development of and access to vaccines and the end of uncertainty surrounding US election results” were some of the major factors that led to increased valuation of global equities, also reflecting in Indian markets.
  • This asset price inflation in the context of 8% contraction in GDP in FY21 poses the risk of a bubble.

5. Debt to GDP Ratio

  • The central govt. total debt/ GDP at end of FY21 was 58.73%. High ratio indicates that the market is highly leveraged. During 2008 the ratio was highest and was 58.86%.
  • In a similar way, India’s total public debt (Centre and States) is likely to touch 90% of GDP in FY21, the highest ever recorded. In 2019-20, the total public debt to GDP ratio was 70%.
Fig 4: Debt to GDP ratio

6. Nifty Price to Book Value

  • It is the proportion of price to assets you own when you buy shares of a company.
  • The average long term Nifty PB is 3.5. Majority of the time, Nifty PB stays in the range 2-4 range.
  • It hit a peak of 6.55 during 2008.
If PB greater than  4Expensive
Between 2.75 – 3.5Fairly priced
Less than 2Cheap
Currently  PB ratio4.25

7. The monetary and fiscal stimulus has to end, followed by Global Tightening

  • With some recovery, the Fed and other Central Govts. have to draw back on the easy liquidity, raise interest rates, and the Indian stock markets will crash.
  • This is a likely scenario, but we cannot say if this will happen in the next quarter or next 4 years.

CONS: Reasons why the Indian Stock Market is still Undervalued

1. Reforms in the Indian Economy

  • A series of reforms in the last decade such as IBC, RERA, GST, crackdown on Black Money and investments in Digital and Fintech have happened and the benefits of these are unfolding.
  • Growth initiatives like ‘Make in India’ and ‘PLI for manufacturing’ have set the stage for higher employment, reduced imports and a stronger economy and self-sufficiency.
  • Govt. initiatives like controlling deficits, import substitution (in defense and monetization of gold assets) have strengthened the domestic economy.
  • The Digital Transformation of Indian Stock Markets, and the fall from grace of Indian Real Estate for investments.

2. The China + 1 Situation

  • The trade and political tension between USA and China has changed the equations in the last few years. USA had become dependent on China for a lot of manufactured products. With changing equations, it has become necessary for global firms to look at alternatives for manufacturing at scale. India is positioning itself as a good alternative by the Make in India and Production Linked Incentives (PLI) in manufacturing, extending from electronics, chemicals, defense, textiles, auto, etc.
  • In capital markets, China recently cracked down on several domestic sectors like steel, education, ecommerce, fintech, etc. Many foreign investors lost money as the changes in business ground rules were sudden and unexpected and based on China’s authoritarian system. China may thus become an unattractive option for global capital, and India may emerge as a stronger alternative.
  • These situations can result in India attracting high FDI and FII capital in the next few years.  

3. Because of Covid, many domestic sectors were affected, but are recovering fast

  • Sectors such as Travel & Tourism, passenger transportation, Hotels, Restaurants, Auto, mfg., Real Estate & construction are sectors still below pre-Covid levels. Banks have also suffered. All these sectors are expected to recover in 1-2 years, which will help improve earnings of the sectors.
  • The IMF has put India’s growth forecast as 9.5% for fiscal 2022 inspite of the second wave of Covid during Apr-Jun‘21. Chief Economic Adviser K V Subramanian said the economy is expected to stabilize to 8% growth in subsequent years.
  • Strong economic growth will drive up the Earnings, and reduce the high valuations of the market. Already we can see that the Nifty PE has fallen from 42 to 29 in just 2 quarters as the economy improves earnings and recovers from Covid, see Fig 3.
  • With better earnings, the high P/E ratio of Nifty, as well as Midcap and Smallcap indices will correct.

4. High Exports growth

  • India’s exports are growing very well in the last few quarters, in sectors such as gems and jewellery, petroleum, chemicals and engineering. The indications are of an economic revival in India and the country is on track to achieve $400 billion of goods exports this financial year and attract high FDI in FY22.
  • India’s foreign exchange position has strengthened in the context of the pandemic and India has been growing forex reserves at a record pace.
  • The INR has strengthened in the last few quarters, while there was a broad decline in the USD after the Fed Chairman said more progress was needed in the economy to withdraw stimulus.

5. Covid fears reducing, and global economy in a rebound

  • The second wave of Covid is receding in India. A third wave is possible, but we have already seen that the second wave was handled well by the administration and industry.  
  • Vaccination is scaling up in India and should cover a majority of the population soon. This will allow free movement of people, a return to work, and ensure a rapid recovery of the economy.
  • Post covid, the global travel will recover. Meanwhile in India IT based services and manufacturing are ramping up and supplying consumers in a global recovery.
  • A massive migration of workers in India from Urban centers to villages, is slowly reversing as jobs beckon across construction, logistics and retail. Education centers and offices are also reopening.
  • The high Market Cap to GDP Ratio may correct if the GDP rises as expected in next few years.
  • The Stock Market appears in a Bubble but it is in fact recovering from many years of under penetration of equity and slow growth. A new generation of younger investors are more optimistic and positive in their thinking.
  • The fiscal deficit would remain elevated over the next two years but the debt to GDP ratio is expected to stabilize or flatten out.
  • The private sector has been underinvested in Capacity and Capex in the last decade. With lower interest costs and higher growth expected, the private sector is making capex plans. If the trend accelerates, the Price to Book Value will reduce.
  • The stock market is forward looking. It anticipates higher GDP and growth in the next few years, and the Nifty levels reflect this optimism.

Conclusion

  • As an investor in the Indian markets over the last 15 years, I have always believed in the growth story and the resilience of the market. At around $1947, the Indian per capita income is low. Given the freedom, global connects and govt. initiatives, the economy should be able to achieve over 7% GDP growth over the next few years. Except for the informal sector and unlisted space, much of this growth should translate into gains for the stock markets in India.
  • The Indian economy has been reset by the Covid infection. However most businesses have been able to adjust and adapt to it in terms of prevention and resolution. It’s not business as usual any longer. The people and businesses are back, stronger than ever, and with a new urgency.
  • Assuming a full recovery for the economy over the next year and good growth thereafter, the markets will stay positive. Given the context of excellent liquidity, low interest rates and a benevolent, growth oriented, stable policy environment, the Indian markets can continue to rise.
  • Markets are unpredictable in the short term, but participants and investors can expect good returns in a 3-5 year period horizon.  

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Nestle India – Healthy Food, but High Valuations

  • Date: 02nd Sept 2021
  • CMP: ₹19,950
  • Industry: Food & Beverages
  • Large Cap: ₹1,88,000  cr. mkt cap
  • P/E:  82.46 times and P/B: 88 times
  • HOLD with a Jan’24 target of ₹26,400, a 33% gain in 2.5 years.

Summary

  • About Nestle: in India since 1912, Nestle has brands like Cerelac, Nescafe, Maggi, Milkybar, Kit Kat, Bar-One, Milkmaid and Nestea. With 8 mfg. locations, it primarily makes products in house. The premium products are widely distributed. Nestle revenue in CY20 was ₹13,290 cr. & profits ₹2,082 cr. Revenues, EBITDA and PAT have grown at 10%, 12.2% & 12.6% CAGR over 8 years. Nestle is investing in capex of ₹2,600 cr. over the next 3-4 years, to augment capacities and locations. Innovation is impressive with several launches planned.
  • Risks: 1) High valuations 2) intense competition 3) regulatory challenges 4) raw material price volatility 5) a new event like the ‘Maggie crises’.
  • Opinion: Given high valuations, we suggest HOLD with a target of ₹26,431 by Jan’24, a 33% gain.

The Investment research report is available for download, do read our insightful research in PDF format here.

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. The basis for Target Price is a target P/E of 77.5 times, management commentary and analyst judgement. Punit Jain has no position or shareholding in Nestle India. In addition, JM has no known financial interests in Nestle India 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.

RACL Geartech – Gearing up for Growth

JainMatrix Investments presents an Investment Report on RACL Geartech Ltd.

  • 16th Aug 2021
  • CMP: 482
  • Sector: Auto Ancillary
  • Small Cap – Mkt cap of 520 Cr.
  • Advice:  BUY with a May 2023 target of ₹740, a 54% gain in 2 years

Summary

  • The Auto & Auto ancillary sectors in India are a fast growing & globally competitive.
  • Why RACL: It has a good client roster and a high quality perception in automotive gears. RACL works closely with customers to develop new products per specifications, and so should have sticky relationships, and be able to grow with its clients. Older clients have worked as strong reference for RACL, for new clients. The business segment mix indicates a lower cyclicity in revenues. While revenues are small at ₹204 crores, there is ample room to grow for RACL.
  • Why Now: In the last 3 years, RACL has grown much faster than the domestic industry. It has customers in India and abroad, and in fact exports are higher. RACL is undertaking high capital expenditure, of ₹50 Cr. preparing for visible high growth.
  • RACL looks overvalued, but a high growth in the next 3-4 years easily justifies a BUY at CMP.
  • Key Risks: 1) Covid related disruptions, in the factories as well as customer demand 2) High receivables 3) Client concentration 4) Rising commodity prices can impact margins.
  • Opinion: BUY with a May 2023 target of ₹740, a 54% gain in 2 years

Other Auto sector reports

RACL Geartech – Description and Profile

  • RACL Geartech Ltd. is a leading automotive gear manufacturer located in New Delhi.
  • In FY’21, RACL had an income of ₹203.61 Cr. from Revenue as compared to ₹212.33 Cr. in FY’20. RACL PAT is ₹23.38 Cr. as compared to ₹16.98 Cr. in FY’20. See Fig 1(a).
  • RACL is engaged in the business of making auto components like transmission gears and Shafts, Sub-assemblies, Precision Machined Parts and Industrial Components.
  • RACL has mfg. units is located in Gajraula and Noida. Current Capacity utilization is 70-75%.
  • Export sales of the RACL rose to 67.05%. Customer segments are mapped in Fig 1(b).
  • RACL has invested over 74 Cr. in developing its mfg. unit stretched across an area of 8000 sq mts and comprising machines and equipment.
  • RACL has already procured machinery and technology for BS6 & EV, which will allow the firm to smoothly transition into the new technologies.
  • RACL has a long list of satisfied clients in countries like Japan, Germany, Italy, Switzerland, Austria, Thailand, UAE & Sri Lanka. See Fig 2(a).
  • RACL is doing a 50 Cr. capex to venture into new segments i.e. EV, industrial gears for electrical switch gears, circuit breakers, winches and cranes. Auto Ancillary companies can do an Asset Turnover of 3-4X on fixed asset. The new capex can generate additional revenue of 200-250 Cr.
  • RACL has 25 acres of surplus land within its existing plants, which can facilitate future capex.
  • RACL is known for its high performance products, it has proven capabilities to achieve up to DIN grade 7 & JIS grade 4 gear accuracies with gear shaving process. See Fig 2(b).
  • RACL has capabilities to produce complex gears & shafts up to DIN grade 5 or JIS grade 2 gear accuracies with state of the art FASSLER gear power honing process. (DIN is the short form for Deutsche Institut für Normung, or the German Institute for Standardization. On the other hand, JIS stands for Japanese Industrial Standards).
  • RACL gives importance to quality, this uncompromising stand for excellence has been recognized and been awarded with ISO TS 16949 and ISO 14001 certifications.
  • Current shareholding are Promoters 53%, MF/FII 0.1%, Retail/Individual 28.25%, HNI/Individual 6.49%, Other Public  11.84% and Others 0.01%.
  • Key Leaders: Gursharan Singh (Age 59, CMD), Dev Raj Arya (Age 70, Director & CFO), Narinder Paul Kaur (Age 58, Non Exe. Non Ind. Director), Raj Kumar Kapoor (Age 67, Ind. director).

The rest of the report is available as a download, see PDF –

Do read our insightful research, we attach the complete Investment report in PDF format here.

Disclosures and 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 has no personal shareholding in RACL Geartech Ltd. as on Aug 2021. In addition, JM has no known financial interests in RACL 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 (SEBI Registration No. INH200002747) and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.