A Note on Crypto-currency

Introduction

  • Cryptocurrencies (CC) are digital currencies that utilize blockchain technology to provide improved security, anonymity and decentralization. There is no central authority to manage it and no third parties are needed to facilitate transactions.
  • The most popular currencies on the market are bitcoin and ethereum, which have market caps of $44.86 B and $6.7 B respectively. Bitcoin was released as open-source software in 2009, and has nearly tripled from a price of under $1,000 a coin to nearly $2,800 since Jan 2017 while ethereum has jumped from $8 to $220 in the same timeframe.

Recent News and Events

  • The Chicago Board Options Exchange said they will launch bitcoin derivatives by end 2017 pending regulatory approval.
  • On Tuesday, the blockchain supporting Bitcoin split into two creating two competing versions of the virtual currency with the new version being BitcoinCash. With the rapid rise in Bitcoin usage over the last few months, its blockchain technology was slow in processing transactions and developers and miners disagreed with how to expand resulting in a new version being created. BitcoinCash will be able to process 56 transactions per sec. compared to 7 tps.

  • In July, digital currency trading platform BTC-e, was suspended by Dept. of Justice for involvement in criminal activities of money laundering, identity theft, and drug trafficking transactions.
  • Start-up CC firms are using Initial Coin Offerings (ICOs) in favor of VC funding. ICOs are crowdfunding events where firms release their own CC tokens. These differ from IPOs as there is no govt. regulation or required documentation for the sale. In 2017, ICOs raised $1.3B for start-up CC firms with only $358M in traditional VC funding.
  • The large run-up in price of CCs over the last few months has fueled a bubble in the blockchain world through ICOs. The lack of regulation here has enabled start-ups to gain access to funding from unsophisticated individual investors than they would normally be able to receive through venture capital.
  • Bitcoin is gaining acceptance as many ecommerce websites and producers of repute are allowing online payments.
  • The arrest of Alexander Vinnik of BTC-e, seems to indicate that blockchain analysis can connect identities to users.

Opinion and Outlook

  • The growth in transactions and value of CC seems to be driven more by traders and speculators looking to profit off the massive volatility than the fundamental use of exchanging currency for goods and services. Also due to the anonymity in transactions, criminals are attracted to them as a mechanism for money laundering.
  • While blockchain technology is an exciting innovation, we feel it has much better applications than currency in banking – to facilitate international trade and streamline processes and healthcare – to store records securely.
  • In its current form and usage, CCs may continue to grow as a unregulatable digital currency in much of the free world.
  • As investors, we feel the CC market is overheated with the introduction of ICOs, and the high volatility does not meet our standard for conservation of capital. It is not a safe asset class for the masses.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. Security and Intelligence Services IPO
  2. IRB Infra Developers – In INVIT We Trust – 25 JULY
  3. Stock Market Awareness Presentation by JainMatrix – July 
  4. Equity Investment Made Easy by JainMatrix – Updates July 2017
  5. A Rural focused Stock Pick – premium – 08 July
  6. Eris Life IPO – and Pre listing note – premium – 28 June
  7. AU Small Finance Bank IPO – 26 June 
  8. The JainMatrix Investments Outlook – 22 June
  9. MSC Portfolio Review – 10.8% CAGR Alpha – premium – 21 June
  10. JainMatrix – Track Record – 31 May
  11. IndiGo Airways – Flying High, Wide and Handsome – 30 May
  12. Eicher Motors – It’s Firing on Both Engines – 16 May
  13. Hudco IPO – Sector Uncertainties, AVOID – 09 May
  14. S Chand IPO: An Educational Content Powerhouse – 27 Apr
  15. Vikas Ecotech – Get ‘Vikas’ for your Investments – 24 Apr

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. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

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Security and Intelligence Services IPO

Good Growth but Expensive

  • Date 01st Aug 2017 
  • IPO Open 31st Jul – 2nd Aug at Rs. 805-815
  • Mid Cap: Rs. 6,000 cr. Mkt cap
  • Industry – Security Services
  • P/E: 66.5 times
  • Advice: The IPO is rated as AVERAGE

Summary

  • Overview: SIS is a provider of private security and facility management services in India and Australia. It is the largest company in security services in Australia and the #2 in security services and cash management in India. SIS’s revenues, EBITDA and PAT have grown at 14.5%, 13.7% and 12.4% CAGR from FY13 to FY17. They have a network of 251 branches in 124 cities and towns in India. Also they have an employee base of 154,432 employees across India and Australia.
  • Key risk: Valuations look expensive in terms of P/E ratio at 66.5 times.
  • Opinion: We rate the IPO as AVERAGE.

Here is our research report on Security and Intelligence Services Ltd. (SIS) IPO.

IPO highlights

  • This IPO opens: 31st Jul – 2nd Aug 2017 with the Price band: Rs. 805 – 815 per share.
  • SIS is a provider of security services, cash logistics services, electronic security and facility management services (FMS).
  • The IPO issue size is Rs. 780 cr. at UMP. Shares offered to public number 0.95 cr. out of which 0.51 cr. are tendered under the OFS route. The FV of each is Rs. 10 and market Lot is 18. These shares are 13.07% of equity. The selling shareholders will receive Rs. 417 cr. at the UMP. See Exh. 1a.
  • SIS benefits as the fresh issue of shares will generate Rs. 362.25 cr. to be utilized as in Exh. 1b:

JainMatrix Investments, Security and Intelligence Services IPO

Exhibit 1a – Post IPO shareholding pattern

JainMatrix Investments, Security and Intelligence Services IPO

Exhibit 1b – Utilization of proceeds from fresh issue of shares

  • The promoter and promoter group owns 76.9% in SIS which will fall to 70.4% (Post-IPO).
  • The IPO share quotas for QIB, NIB and retail are in ratio of 75:15:10. Retail has low quotas.
  • Theano (the investment vehicle of CX partners, which is a leading private equity group in the Indian mid-market) holds 15.19% stake in SIS (Pre-IPO). Theano is partially exiting through the IPO by tendering 32.6% of its current holding. The average cost of acquisition of equity shares for the Investor selling shareholders (Theano and AAJV) is Rs. 182.84/share. Ravindra Sinha (Chairman) and Rituraj Sinha (MD) have tendered 2.75% and 7.47% of their pre-IPO shares in the OFS.

Introduction to Security and Intelligence Services

  • SIS is a provider of private security and facility management services in India and Australia. Started 32 years ago, it now has a #1 position in manned guarding in Australia and #2 in manned guarding and cash management in India. Revenues for FY17 were Rs. 4,577 cr. and profit Rs. 91 cr.
  • They are a massive employer with an employee base of 154,432 personnel across India & Australia, of which 150,325 are billing employees. SIS categorizes employees as ‘billing’ who are deployed at customer premises and ‘non-billing’ who perform administration and support.
  • SIS has a network of 251 branches in 124 cities and towns in India. Employees are not unionized, other than employees in their cash logistics business in Maharashtra; and some employees of a subsidiary. This is an advantage.
  • In Australia, they provide paramedic and allied health, fire rescue services, mobile patrol, loss prevention and other related services. For Revenue segments, see Fig 2.
  • SIS is the #2 cash logistics service provider in India. This includes transportation of bank notes and other valuables, doorstep banking and cash processing, ATM services include ATM replenishment, first line maintenance and safekeeping, and vault services for bullion and cash. The electronic security services include integrated and turnkey electronic security and surveillance solutions combining electronic security with trained manpower. They have recently entered into a JV in order to provide home alarm monitoring and response services. FMS in India include cleaning, janitorial services, disaster restoration and clean-up of damage, as well as facility operation and deployment of receptionists, lift operators, electricians and plumbers, and pest & termite control.

JainMatrix Investments, Security and Intelligence Services IPO

Fig 2 – SIS Segment Revenues FY17 / Fig 3 – SIS Revenue Geographies

  • SIS has strategic relationships with several MNCs in India. For the cash logistics and alarm monitoring and response businesses, they have a JV with Prosegur, a global player. They also have a JV with Terminix, a MNC provider of termite and pest control services. SIS has licensed the ‘ServiceMaster Clean’ brand, and associated processes, operating materials and knowhow for their FMS in India from ServiceMaster group, a top service provider.
  • Revenues grew faster in India at 33% compared to Australia – 5% CAGR over 5 years. See Fig 3.
  • It has deep geographical reach for manpower sourcing & training; operates 18 training academies (India) and 4 in Australia. Security personnel undergo extensive 28 day residential program in various aspects of security. They also pay for this course so this is a revenue center.
  • Leadership is Ravindra Sinha (Ch’man), Rituraj Sinha (MD), Uday Singh (CEO) and Arvind Prasad (CFO).

News, Updates and Strategies of SIS

  • Promoter Background: Ravindra Sinha is the founder. He currently holds 41.57% stake. He is a member of Partiament. He started his career as a journalist, then became an investigative reporter and served as a war correspondent during the Indo-Pak war 1971. He has served as an advisor to the MoHRD. Per reports he declared personal assets of Rs. 850 cr. in 2014.
  • In July’17 SIS, through a subsidiary SIS Australia, acquired an addl. 41% of the voting rights in SXP, formerly an associate, to now make it a subsidiary. In Aug’16, SIS acquired 78.7% of the equity of Dusters Total Solutions Services at a cost of Rs. 116.9 cr. Dusters is the 4th largest FMS provider in India, in terms of revenues, as of FY16.
  • SIS’s revenue share from Australia has fallen from 74.5% in FY13 to 52.45% in FY17, due to faster revenue growth in the Indian market. The trend is likely to intensify.
  • The strategy at SIS is to 1) Grow their businesses across customer segments including govt. and private sectors 2) Upgradation of technology to improve productivity. In Aug’16 they deployed ‘iOps’, a mobile security services operations platform; and deployed ‘SalesMaxx’ in Mar’17, a portable tablet sales kit, to enhance sales productivity and reduce time overheads 3) Leverage existing branches to achieve operational synergies 4) Inorganic growth through acquisitions 5) Australia business has good cash flows while the growth has been coming from the India businesses.
  • The unofficial/ grey market premium for this IPO is in the range of Rs. 105-107. This is a positive.

Industry Reviews:

  • In India: The security services market in India is witnessing high growth due to an improved economic environment, concerns about crime, terrorism, public safety measures and urbanization.
  • The market for security services in India grew at 18.2% CAGR from FY10-15 to reach Rs. 39,000 cr. by FY15. It may grow at the rate of 20% between FY15-20 to reach Rs. 97,000 cr. by 2021.
  • The industry works on a credit period of 60-90 days from completion of services. Many smaller operators pay wages only when they receive payments from customers while larger players pay wages on a monthly basis. In addition, security services is a low margin, high volume business. This makes the security services industry a working capital intensive business. This operating model is not expected to undergo much change in the next few years.
  • The industry faces high attrition (57% for SIS), but that does not mean the guards are exiting the industry. When a large contract is lost or expired, the guards already employed in that location may be absorbed on the payrolls of the firm that wins or takes over the contract. This is a common business practice in the Indian security services market.
  • The security services market is fragmented but has good growth. National operators currently have 20% share and regional /local operators have 80%. However, with the rollout of GST and stricter enforcement of PSARA (Private Security Agency Regulation Act 2005), the share of national operators is going to improve and local operators may get hit by cost of compliance. By FY20, national and regional operators are likely to have 90% of the market in India.
  • The demand drivers of the Indian security services are 1) Increasing economic activity and GDP growth leading to need for improved security 2) Growth in Wages 3) Increased threat from anti-social elements and terrorist outfits 4) Societal perception on threats and awareness on security.
  • Facility Management Industry in India: FMS refers to the outsourcing of services and functions which are considered non-core activities. The total FMS market has grown at a CAGR of 16% from FY10-15. The total FMS market in India is estimated to grow with a CAGR of 20.3% between FY16-20.
  • Demand for FMS is consistently growing with increasing awareness among end-users. End-users include offices, hotels, hospitals, malls, residential spaces, the auto industry, the pharma industry, electronics, food and infra development, mostly the commercial sector.

Financials of SIS

JainMatrix Investments, Security and Intelligence Services IPO

Fig 4 – SIS Financials

  • SIS’s Revenue, EBITDA and PAT grew at 14.5%, 13.7% and 12.4% CAGR from FY13-17, see Fig 4.
  • The EPS grew moderately in the last 5 years. There was a fall in FY15 as the bonus was increased from Rs. 10,000 to Rs. 21,000 with retrospective effect from Apr 1, 2014 per a Dec 2015 amendment in Payment of Bonus Act. As a result SIS incurred additional expenses of Rs. 8.75 cr. in FY15. Also a change in depreciation calculations as per new regulations impacted the bottom-line for FY15.
  • SIS has an ROE of 16.8% and a RoCE of 22.4% for FY17 which is good. The return ratios are high. Dividend declared grew at a CAGR of 30.7% from FY13-16. But in FY17 there was no dividend. SIS has low and flat margins over the years which is due to the nature of the business and industry. Thus high sales growth is essential for attractive PAT growth.
  • SIS had negative FCFE in only 1 out of the last 5 financial years, see Fig 5.
  • The attrition rate of employees in the security services business in India for FY15, FY16 and FY17 was 65.7, 57.7% and 55.7% resp. The attrition rate of employees in Australia, for FY15, FY16 and FY17 was 24.2%, 21.4% and 20.6%, resp. The industry faces high attrition.
  • But borrowings have been high recently on account of acquisitions. The current D/E ratio is 1.37 (FY17). This may improve after Rs. 200 cr. debt is paid off post IPO from a total debt Rs. 762.5 cr.

JainMatrix Investments, Security and Intelligence Services IPO

Fig 5 – SIS Cash Flow

Benchmarking

We benchmark SIS against Quess Corp and TeamLease Services. The business segments for these firms are different as compared to SIS. Majority of Quess revenues are derived from recruitment (RPO), general staffing, training and skill development etc. whereas TeamLease is into multiple HR services ranging from temp staffing (general & IT), permanent recruitment, payroll processing etc. However they are close comparables. We also view but not rate Redington and NIIT. See Exhibit 6.

JainMatrix Investments, Security and Intelligence Services IPO

Exhibit 6 – Benchmarking

  • PE for SIS is moderate at 66.52 times as compared to its peers. Quess Corp enjoys PE valuations at 117 times largely due to high expectations from investors due to high recent sales and PAT growth.
  • The valuation is moderate in terms of P/B ratio (adjusted post IPO at 6.67 times).
  • SIS has witnessed poor sales growth compared to its peers in the last few years. The 3 year sales growth below 13.8% and the 3 year PAT growth at 9.9% is moderate. However the India business has grown much faster than the Australia business and is now over 50% of revenues.
  • The D/E ratio at 1.37 is highest but is expected to improve post IPO.
  • The margins are moderate. The return ratios are good with RoE at 16.8% and RoCE at 22.44%.
  • The dividend yield is the highest, however the yield is low on a standalone basis.
  • Note: The dividend yield has been calculated basis FY16 and the UMP of the IPO at Rs. 815/share.

Positives for SIS and the IPO

  • Leader: SIS is #1 in security services in India & Australia, and #2 cash logistics provider in India.
  • SIS has a diverse customer base, so is de-risked from economic cycles and customers dependence.
  • SIS has a scalable business model. Also security services are becoming essential over the years and this makes the business shock-proof to any kind of demand fluctuations.
  • New initiatives like GST are positive for organized players like SIS.

Risks and Negatives for SIS and the IPO

  • The valuations look expensive in terms of P/E ratio. SIS has the high D/E, low margins and low growth rates for the asking PE ratio which stands at 66.5 times FY17 which is expensive.
  • Rising labour costs are worrisome for SIS and will impact profitability.
  • SIS has a large workforce deployed across workplaces and customer premises, in high risk/ crime affected roles. They may be exposed to service claims and losses or employee disruptions that could have an adverse effect on the business.
  • SIS is exposed to 18 criminal proceedings and 27 taxation related matters currently. Any adverse outcome in any of these proceedings may negatively affect the business.
  • SIS’s businesses involve carrying and handling of firearms by employees. Any misuse or contravention of laws or policies relating to firearms by personnel may affect their reputation.

Overall Opinion and Recommendation

  • Employment generation is a challenge in today’s environment. SIS with its large workforce and structure is well placed to create jobs and build strong brands around services of security, cash management and FMS.
  • With deep relationships in govt. and private sectors, and a good niche, SIS may continue to get good growth in the Indian market.
  • The Indian securities business of SIS grew 33% YoY in FY17 and grew 50% faster than the industry. The management is focused on the Indian market for the years to come.
  • The valuations are expensive at a P/E of 66.5 times of FY17 earnings, so we rate the IPO as AVERAGE.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. IRB Infra Developers – In INVIT We Trust – 25 JULY
  2. Stock Market Awareness Presentation by JainMatrix – July 
  3. Equity Investment Made Easy by JainMatrix – Updates July 2017
  4. A Rural focused Stock Pick – premium – 08 July
  5. Eris Life IPO – and Pre listing note – premium – 28 June
  6. AU Small Finance Bank IPO – 26 June 
  7. The JainMatrix Investments Outlook – 22 June
  8. MSC Portfolio Review – 10.8% CAGR Alpha – premium – 21 June
  9. JainMatrix – Track Record – 31 May
  10. IndiGo Airways – Flying High, Wide and Handsome – 30 May
  11. Eicher Motors – It’s Firing on Both Engines – 16 May
  12. Hudco IPO – Sector Uncertainties, AVOID – 09 May
  13. S Chand IPO: An Educational Content Powerhouse – 27 Apr
  14. Vikas Ecotech – Get ‘Vikas’ for your Investments – 24 Apr

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer

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

Equity Investment Made Easy by JainMatrix – July 2017

Dear Investors,

This is a very exciting period in the Indian stock markets. We at JainMatrix Investments are tracking events and empowering equity investors through our reports:

  • We had signaled euphoria in March this year and predicted positivity based on several macroeconomic and political developments. Read our article Investment Notes –Euphoria. We are optimistic on the long term story of Indian equities, and these are often accompanied by short term corrections.

jainmatrix investments

  • We had recommended Avenue Supermarts IPO in March as a Buy and it did exceedingly well. Currently the stock price is up 208% from the IPO pricing within 4 months of listing. The flip side of course was that only a few lucky people got shares on IPO allotment.
  • Next in Apr 2017, we researched a small cap stock, Vikas Ecotech. It is up 3.3% in a span of 3 months after over a 10% correction. We believe this gives our investors an excellent entry opportunity. Also the management plans to split/ demerge the business. We continue to be positive on Vikas.
  • The S Chand IPO was tricky. We were always positive. There was high demand for this with overall subscription of the IPO at roughly 60 times. However on listing day, it listed flat leading to losses for HNIs who had taken leveraged positions. So it fell sharply after listing.
  • We published a report on HUDCO IPO in May 2017. We had advised investors to avoid the issue. However it has done well. In June, we were positive on the ERIS Lifesciences IPO and had recommended an avoid for AU SFB IPO.
  • We note that there are murmurs of price manipulations in IPOs. Here is an article highlighting the problems in recent primary market. Click on the LINK to know more. Our advice is to ignore short term and IPO listing gains, and apply and buy fundamentally strong companies with 1-2 years of holding period.
  • In May 2017, we published our Eicher Motors report for all readers. A year ago, we had first reported on Eicher Motors for our premium subscribers only, and the stock has been up 55.9% in this period.
  • Similarly we made our Indigo Airways (Interglobe Aviation) report public in May 2017. Our recent call was a HOLD. But the share is up 16.5% in 2 months largely due to the fall in crude prices.
  • Meanwhile we continue to provide an excellent performance for premium subscribers on our Model Portfolios. We updated our Track Record on 31st May, and reported that the large cap portfolio has delivered a 12.5% CAGR return since inception as against Sensex at 11.4%. Also we reported that our mid and small cap portfolio has delivered a 23.8% CAGR return since inception as against the 19.4% CAGR by the S&P BSE Small Cap.
  • At JainMatrix, we want to make equity investments easier for visitors and subscribers of this website. We have also created an Investor Education section for your benefit.
  • This website jainmatrix.com has been created to be a valuable resource for the investor. There are now over 100 reports and articles here which assess equity fundamentals, analyze events, comment on sector performance and educate the Investor. To use this resource best, find the Company or Sector of your interest from the Search Boxes, or use the drop down Menus for guidance.

If Time is Money for you, it will give us pleasure to add you to our select group of Subscribers.
I hope you find these reports useful, rewarding and informative.
Regards,
Punit Jain
Bangalore
JainMatrix Investments

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 may have personal holdings in many of the firms mentioned here – read individual reports for separate disclosures. 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.

Stock Market Awareness Presentation by JainMatrix

Last week, JainMatrix Investments conducted a Stock Market Awareness Presentation for employees of an IT services company in Bangalore. The one hour session was meant to expose some of the basics of the stock market to new investors, as well as touch upon some advanced concepts to more experienced investors.

This initiative is a small attempt to help people develop the right attitude towards equity and stock markets. I have also tried to address the typical myths and misconceptions they have.

See some snaps from there: jainmatrix investment, equity awareness

In the conference room with the audience

With Mr Sudev Alampalli, the India Operations Head (center) of Snuvik Technologies, Ms Reena Serrao, a colleague (left) and me. 

Regards,

Punit Jain

AU SF Bank IPO – Transformation Required, Valuations Stretched

  • Report dated 26th June
  • IPO Open 28-30th June at Rs. 355-358
  • Valuations: P/E 31 times TTM, P/B 5.1 times 
  • Large Cap: Rs. 10,000 cr. Mkt cap
  • Industry – Small Finance Bank
  • Advice: AVOID
  • Overview: AUB is a Jaipur based small finance bank (SFB) which operates in 3 business lines: vehicle finance; MSME and SME loans. They used to be an asset oriented NBFC earlier, and commenced SFB operations in Apr 2017 and launched new retail and rural focused loan services.
  • Revenues and profit for FY17 were Rs. 1,431 cr. and Rs. 329 cr. It has 8,515 full time employees. AUB’s revenues, NII and PAT grew at 36.4%, 43.9% and 47.5% CAGR in 5 years. The gross AUM and disbursements of AUB for FY17 stood at 10,734 cr. and 6,730 cr. resp.
  • AUB has a massive task ahead of itself to rebuild itself within 3 years as a priority sector SFB institution. This involves setting up deposits infra, giving MFI loans which are high volume low value and reaching out into the villages. PSL (Priority Sector Loans) to non PSL is 35:65% today and has to become 75:25% in 3 years. These changes are costly, time consuming and involve staff retraining.
  • At a P/B of 5.09 times TTM FY17, the valuations of the IPO are high and aggressive. Further the book value per share rose sharply in FY17 due to the sales of subsidiaries and associates, and BVPS growth may not sustain operationally. Thus on the P/B parameter, AUB is overvalued.
  • Risks: 1) Regional concentration: As of FY17 54% of the AUM was in the state of Rajasthan 2) Business concentration: Vehicle loans constitute 50% of AUM, making AUB dependent on this sector 3) The recent farm loan waivers by govts. may affect the credit behavior of farmers.

Opinion: This IPO offering is an AVOID, investors can pass up this opportunity and instead look to pick up the shares at more reasonable levels in future.

To get the entire equity research report in PDF format, sign up for free alerts on top right panel with your email. 

JAINMATRIX KNOWLEDGE BASE

See other useful BFSI reports:

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

Disclaimer

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

The JainMatrix Investments Outlook – June 2017

A short market note

  • When demonetization happened in Nov-Dec 2016, there was high uncertainty and markets fell sharply. By end Dec however, the Indices bottomed out. The cash shortage was being overcome and other fears receded. Since then, the key indices recovered smartly by about 21%. We feel that the event is behind us and even the worst affected firms are now nursing back to pre-demon health.
  • The budget in Feb and the 5 state elections after this strengthened the positivity and good feel factor. Markets appear to be resuming the broad multi-year bull-run.
  • The next major event is the imminent GST implementation which is bringing many changes, many good and some bad:
    • As GST rates are being declared, companies are reacting to them eg. Gems and Jewellery firms rose sharply on 5th June, reacting to the 3% GST on gold, which was positive.
    • Sectors like Logistics, Transportation and FMCG are beneficiaries of GST and they have appreciated in the last 6 months on GST news.
    • However, the destocking and restocking by dealers /wholesalers to deal with GST and compliance requirements and changes to systems and processes at all levels will take a quarter to settle. Incremental tax fears may see weak June orders but a strong July may cover up.
    • Unorganized sector and MSME may see a net increase in taxes as GST compliance covers all, and this may affect profits and competitiveness.
  • Round UP of other factors:
    • The INR remains stable in the Rs 63-68 zone with a strengthening bias in light of lowered inflation, good forex reserves and exports looking robust.
    • In Indian markets, liquidity flow is strong from retail and FII investors into Indian markets. This reflects in the IPO markets, which look strong with the CDSL IPO subscribed 170 times, a new record. GoI too is planning a number of disinvestments.
    • The 3rd Fed rate hike happened and it did not appear to affect Indian markets. Fear around inflation looks unfounded, and a bad monsoon in 2017 looks unlikely.
  • The risks or negatives that we see now are – 1) bank NPAs need resolution, the GoI is focused on this and there needs to be some progress here  2) along with some clarity around PSBs restructuring 3) cross border and terrorism issues 4) The Q4FY17 results were fair, and the market is in ‘above average’ valuations zones. However current levels are not excessive. Mid and small caps continue to do well.
  • Stay positive on the markets !!

Happy investing,

Punit Jain,

JainMatrix Investments

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. Eris Lifesciences IPO
  2. JainMatrix Investments – Track Record 
  3. IndiGo Airways – Flying High, Wide and Handsome
  4. Eicher Motors – It’s Firing on Both Engines
  5. Hudco IPO – Sector Uncertainties, AVOID
  6. S Chand IPO: An Educational Content Powerhouse
  7. Vikas Ecotech – Get ‘Vikas’ for your Investments
  8. Investment Notes – Euphoria
  9. Whats different about the Investment Service from JainMatrix? – A video
  10. Why are Indian stock markets attractive for Investments? – A video
  11. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  12. Investment Outlook – Short Term Pain, Medium Term Gain
  13. Do you want to be a value investor?
  14. Announcement – SEBI approval as a Research Analyst

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  • Visit the Investment Service page to find how you can get more. Or Click LINK
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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. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Adviser. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Eris Lifesciences (IPO) is Strong on B2D

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

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

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

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

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

IPO highlights

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

Introduction

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

JainMatrix Investments, Eris Lifesciences

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

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

JainMatrix Investments, Eris Lifesciences

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

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

News, Updates and Strategies of ERIS

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

Indian Pharma Market Outlook

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

Financials of ERIS

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

JainMatrix Investments, Eris Lifesciences

Fig 4 – ERIS Financials

JainMatrix Investments, Eris Lifesciences

Fig 5 – ERIS Cash Flow

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

Benchmarking

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

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

JainMatrix Investments, Eris Lifesciences

Exhibit 6 – Benchmarking

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

Positives for ERIS and the IPO

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

Risks and Negatives for ERIS and the IPO

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

Overall Opinion and Recommendation

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

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

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. JainMatrix Investments – Track Record 
  2. IndiGo Airways – Flying High, Wide and Handsome
  3. Eicher Motors – It’s Firing on Both Engines
  4. Hudco IPO – Sector Uncertainties, AVOID
  5. S Chand IPO: An Educational Content Powerhouse
  6. Vikas Ecotech – Get ‘Vikas’ for your Investments
  7. CPSE ETF FFO 2 – An Energizing Offer – BUY
  8. Investment Notes – Euphoria
  9. Avenue Supermarts IPO: The Mart of Choice
  10. Bharat Electronics OFS
  11. Whats different about the Investment Service from JainMatrix? – A video
  12. Why are Indian stock markets attractive for Investments? – A video
  13. BSE IPO: Put this Exchange on Hold – Report plus Video
  14. Balmer Lawrie – An Update
  15. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  16. Investment Outlook – Short Term Pain, Medium Term Gain
  17. PNB Housing Finance IPO: A Transformed Lender
  18. RBL Bank IPO 
  19. Do you want to be a value investor?
  20. Mahanagar Gas IPO 
  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. JM has no stake ownership or known financial interests in Eris Lifesciences or any group company. Punit Jain may choose to apply for this IPO in the Retail category. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Adviser. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.