Tag: JainMatrix Investments

Britannia Ind. – A Ready to Eat Investment

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_________________________________________________________________

  • 03-Feb-2014
  • CMP: Rs 880
  • Mid Cap – Mkt Cap 10,500 crores

JainMatrix Investments has published a report on Britannia Industries for its Subscribers. A partial report is available below. Edited from it are Product Overview, Risk factors, Bench-marking, Financial Projections and 2 year target prices for BIL stock. The JainMatrix Investment service is available for a subscription fee.

SUBSCRIBE NOW. Click on See Offering

Here is a note on Britannia Industries (BIL).

Britannia Industries is a leading Indian food processing firm, making biscuits, dairy products and bakery items like cakes, rusks and breads. This firm has seen a turnaround since 2010, with fair revenue growth, but excellent margin improvements. The ongoing initiatives in manufacturing capacity addition, sales team synergies and ‘nutrition’ oriented product launches should see BIL emerge as a premium food giant. Buy. 

Business Profile

  • Britannia Industries (BIL) is a Bangalore based firm selling bakery and dairy products. Started in 1892, it is one of the largest food processing firms in India.

  • Sales turnover in FY13 was Rs 5,615 crores and PAT is 233.9 cr. Sales have grown 7.5% (CAGR) over the last 5 years. Market Cap is 10,500 cr., ranked 3rd in India in the food processing industry.

  • BIL has 30-33% biscuit market share in India, and a reach of 36 lakh retail outlets across the country. It has about 2190 employees.
  • The shareholding pattern is: Promoters-50.8%, FII’s-19.1%, Individuals/HNI-17.2%, FIs/Insurance-5.6%, MFs-4% and Bodies Corporate 3.3%.
  • Key executives are: Chairman Nusli Wadia, MD Vinita Bali, and COO Varun Berry.
Britannia Business Segments, JainMatrix Investments

Fig 1 – Business Segments, JainMatrix Investments

Click on any graphic in report to see in full size.

Britannia Key Brands, JainMatrix Investments

Fig 2 – Key Brands, JainMatrix Investments

  • BIL’s products are high volume food products. It has a large distribution network reaching ~36 lakh outlets, with more than 40% of the consumption in rural India.
  • Economic Times Brand Equity placed BIL among the top 10 trusted brands of India.

Recent Events and Strategies

  • BIL is adding production capacities, and also reducing the dependence on contract manufacturing. To manufacture its own products, BIL has spent nearly Rs 300 cr to add capacities, much of which was earlier outsourced. Three new plants have come up in Bihar, Odisha and Gujarat. These plus one in TN will take the total plants owned by BIL to 12. These will take care of 50% of the company’s manufacturing needs, with the rest coming from contract manufacturers.
  • BIL is planning to set up another wholly owned subsidiary for baked goods in Tamil Nadu, to serve South Indian markets, at an estimated cost of Rs 100 crores in early 2015.
  • BIL is also driving innovation across the existing categories and has strengthened its R&D for this.
  • Synergies were created through integration of the bakery and dairy sales and distribution system.
  • Increased distribution of more high-priced products in urban areas, at the same time concentrating on rural areas is going to be the company’s primary objective for the FY14, according to company’s COO Varun Barry, which should help BIL grow sales by 15% in FY14.
  • MD Vinita Bali is set to exit the company in March’14 and will be succeeded by COO Mr. Varun Barry. The latter is already head of the India operations. He is also undertaking a management restructuring, to make the top team smaller and more focused.  

Stock Evaluation, Performance and Returns

  • The price and dividend history is detailed in Fig 3. There was a split in Face Value (10 to 2) in 2010.
  • Post 2010 BIL has started a sharp uptrend. Investors in BIL over the last 5 years have seen a return on 25% CAGR on the share price. In the past 1 year itself, the share has appreciated over 60%.
  • Revenues have grown at 15.7% of CAGR in the past 4 years. The EBITDA and PAT have grown at 7.9% and 6.7% respectively in this period.
  • The all-time high of 972 was hit in Oct 2013. It is at 9.5% below these levels.  
Britannia Price History, JainMatrix Investments

Fig 3 – Price History, JainMatrix Investments

Britannia Quarterly Financials, JainMatrix Investments

Fig 4 – Quarterly Financials, JainMatrix Investments

  • The EPS has increased by 6.7% CAGR over the last 5 years – Fig 4. However post the losses of Mar’10, the recovery has been rapid. Dividend too has followed a similar pattern. The reasons for this are a combination of volumes growth and better margins.
  • Standalone Free Cash Flow has been positive for the last 5 years (Fig 5), this is positive. It allows the firm to reinvest in the business or reward shareholders. Dividend too has increased. Yield is 1%.
Britannia Cash Flow, Dividend, JainMatrix Investments

Fig 5 – Cash Flow, Dividend, JainMatrix Investments

Britannia Price PE Chart, JainMatrix Investments

Fig 6 – Price PE Chart, JainMatrix Investments

  • The P/E after FY11 has been in the 26-40 range, Fig 6. At 31 times today it’s in the low-end of this.
  • We can see the recent surge in EPS – Fig 7. The Price of BIL has been tracking EPS growth. The EPS now is in the channel indicated in the Chart.
Britannia Price EPS Chart, JainMatrix Investments

Fig 7 – Price EPS Chart, JainMatrix Investments

  • Other relevant consolidated financial parameters –
  • ROCE and RONW are 44.5% and 46.7%, both excellent numbers
  • BIL has just 24 cr. of equity capital; there is a good chance of bonus, split, dividend increase or other shareholder reward if performance continues to excel.
  • Debt equity fell from 0.61 (FY13) to 0.3 (Q1FY14), indicating a fast improving Balance Sheet.
  • PEG at 0.4 indicates undervalued status.

Opinion, Outlook and Recommendation

  • Buy 

JainMatrix Investments has published a report on Britannia Industries for its Subscribers. A partial report is available below. Edited from it are Product Details, Risk factors, Bench-marking, Financial Projections and 2 year target prices for BIL stock. The JainMatrix Investment Service is available for a subscription fee.

SUBSCRIBE NOW. Click on See Offering

JainMatrix Knowledge Base:

See other useful reports

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

Do you find this site useful?

  • Visit the SUBSCRIBE page to find how you can get more. 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:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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JainMatrix Investments – Jan 2014 Updates‏

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__________________________________________________________

Dear Reader,

What a terrific month we have had, to usher in the new year. JainMatrix Investments presents Investors a January 2014 roundup of reports.

  • The new technologies listings firm Just Dial Ltd had us intrigued, so we created an Equity Research Report. Note that it’s up 23% in a month – this company may be interesting.
  • Success isn’t limited to new tech – we noted that our Aug 2013 report on BHEL was timely – and it has appreciated 40% in this period.
  • We tracked the top 10 of the portfolio and found they were up 80% annualized – Track Record.
  • Our New Year message – Think Big in 2014.
  • The Power Grid FPO was a success and the share is up 14% in 1.5 months. See Analysis and current opinion.
  • There’s a lot of criticism the Indian IT sector attracts, so the piece – ‘In defence of the Indian IT industry’.
  • We also created reports on
  1. Repco Home – A Fortune at the bottom of the Pyramid
  2. Bajaj Finance – Equity Research Report 2014

I hope you find this useful, rewarding and informative.

If you haven’t already, do sign up on the website to receive new article alerts by registering your email ID.

Or register as a Paid Subscribers to receive the Large and Mid/Small Cap Portfolios and have full access to all investment reports.

Regards,

Punit Jain
Bangalore
JainMatrix Investments

Do you find this site useful?

  • Visit the SUBSCRIBE page to find how you can get more. 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:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/

Bajaj Finance – a Firm you can Bank on

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_________________________________________________________________

  • 23-Jan-2014
  • CMP: Rs 1569
  • Mid Cap – Mkt Cap 7910 crores
  • Advice: Buy with a March 2016 target of Rs 3435

JainMatrix Investments presents investors the complete report on Bajaj Finance as part of the Investor Rewards Fortnight. 

Bajaj Finance is an NBFC on a rapid growth path. It is a leader in auto and consumer durable loans, and a strong contender for a Banking license. Key strengths are diversified business segments, good product range, broad geographical reach, strong ‘Bajaj’ brand and nimble business model. The performance has been steady in 2013, and operational metrics are good, with low NPAs. Gains can accelerate for Bajaj Finance if the Bank license comes through. Invest in this high potential mid cap.

This is a follow-up report to the one published in Jan 2012, entitled – Bajaj Finance, Auto-matic Growth.

Business Profile

  • Bajaj Finance (BFL) is a NBFC promoted by Bajaj Auto 26 years ago. Key management personnel are Rahul Bajaj – Chairman, Sanjiv Bajaj – Non Executive Vice Chairman and Rajeev Jain, CEO.
  • The total Income in FY13 was Rs 3111 crore and PAT 591 cr.  
  • BFL’s products portfolio includes loans for Consumer Durables, Personal use, Against Property & Securities, for Small Business, Construction Equipment, and Insurance Services. See Figs 1 & 2. About 60% of its business is consumer oriented – B2C, while rest is B2B, with a SME focus.
  • About 30% of the 2&3 wheelers of Bajaj Auto are today financed by BFL. In the last 6-7 years, BFL has converted itself into a professional, diversified financing company.
  • BFL has a network of 7,000+ distribution franchise across 112 cities, and 80 lakh plus customers.
  • In 2013, BFL added 1,565 permanent employees, taking the total employee strength to 3,090. This is a sign of business confidence and investments in expected growth.
Business Segments, JainMatrix Investments

Fig 1 – Business Segments, JainMatrix Investments

  • Funds sourcing – CRISIL has rated it at FAAA/Stable for FDs (high safety on timely payment of interest and principal), A1+ (short-term debt) and AA+/stable (long-term debt) by CRISIL & ICRA.
  • The share-holding pattern is 62.1% Promoters, and public shareholding includes 11.3% individuals, 10.2% FII’s, mutual funds/UTI 7.9%, and bodies corporate 7.3% and 1.2% others.
Fig 2 - Product offerings, JainMatrix Investments

Fig 2 – Product offerings, JainMatrix Investments

Recent News and Updates

  • BFL had a Rights issue in Jan 2013, and raised 750 cr. The issue ratio was 3:19 and pricing Rs 1100.
  • BFL extended its consumer electronics financing business recently to digital product financing.
  • BFL also launched a rural financing initiative in 7 branches and 30 spokes in Maharashtra.
  • The total customers acquired in Q3 FY14 grew by 15%.
  • The firm’s borrowing mix from banks & money market is 60:40. This appears a balanced mix.
  • The Bajaj Group has applied for a Bank license from RBI, which is expected to be issued in early 2014. There are totally 25 applicants. BFL is the firm proposed to be converted to a Bank if this application is successful. There may however be a need for a restructuring within the Bajaj group as after getting banking license there cannot be any preferential treatment to Bajaj Auto.
  • BFL was rated by Aon Hewitt as one of the top employers in India in terms on Employee Satisfaction.
  • Other business achievements – It is the first NBFC to launch online personal loans. It is among the few NBFC with active co-branded credit card (with Standard Chartered Bank. It is the first NBFC to tie up with UIDAI to access Aadhar card/eKYC database.
  • The recent Q3FY14 results were good. AUM grew 33% to 22,461 cr; customers acquired during Q3 rose 15% YoY to 9,62,204 and deployments climbed 45% YoY to 7,532 cr.

Industry Note

  • There are a large number of NBFCs in India (>10,000). These are relatively unregulated companies, unlike Banks that are governed by RBI. In this fragmented market, there is tremendous opportunity to offer Loans and Financial services.
  • RBI has projected a 14% growth in loans for Banks; NBFCs should have higher industry growth rates of 24% for the next five years. (ICRA/ industry experts).
  • Inflation and Interest rates are at highs in Q4 of FY14, which is difficult for the sector. However the 2 year outlook is a slow fall in both, even as the investment cycle recovers in India.

Unique Strengths

  • BFL shares the strong ‘Bajaj’ brand; and is part of the growth of Bajaj Auto through Auto loans. BFL has a wide presence and leadership in high value Consumer Electronics and retail loans.
  • BFL is diversified across customer segments and geographies; this de-risks operations and inspires a confidence in continued growth. BFL has a presence in 7 business sectors (Fig 1) and is nimble enough to shift focus to the performing sectors in order to achieve its targeted growth.
  • The group financial services ambitions and new initiatives are going to be routed through BF.
  • A strong distribution network, spread nationally with presence across customer segments, industries and geographies. The BFL strategy is to diversify their loan exposure with a 30% cap on each segment. This will provide a de-risked business model.
  • With a wide product portfolio, BFL targets cross-selling and up-selling products to its customer base.

Stock Evaluation, Performance and Returns

  • Listed since 1994, BFL performed well over the last 6-8 years, as seen in Fig 3.
  • A sharp fall in price around Jan-Mar ‘13, was caused in part due to the rights issue.
Share Price History, JainMatrix Investments

Fig 3 – Share Price History, JainMatrix Investments

The fall we see around August ’13 is linked to the events of 1) threat of stoppage of the Quantitative Easing program in USA, 2) fall in INR v/s USD value. Most Bank share prices in India fell at this time.

Bajaj Finance, Quarterly Growth Growth of Income, Profits, JainMatrix Investments

Fig 4 – Bajaj Finance, Quarterly Growth of Income, Profits – JainMatrix Investments

The Growth of Total Income, Net Interest Income, Net Profits and EPS TTM has been very steady since June 2008, see Fig 4.

Price, P/BV ratio, Dividends, JainMatrix Investments

Fig 5 – Price, P/BV ratio, Dividends, JainMatrix Investments

  • The Share price has appreciated by 28% CAGR over the last 9 years. However, post the 2009 fall, the appreciation has been very steep at 86% CAGR over 5 years, mapped in Fig 5.
Price PE chart, JainMatrix Investments

Fig 6 – Price PE chart, JainMatrix Investments

  • Price and PE chart Fig 6, indicates that the PE is distributed over a range of 8-32 times, with the 8 year historical average of 20 times.
  • It shows that PE is currently near all-time lows even though the Price is at all-time highs. It seems the full effect of the Earnings improvements is not yet reflected in the Price.
Price EPS chart, JainMatrix Investments

Fig 7 – Price EPS chart, JainMatrix Investments

  • The EPS growth has accelerated since 2010, (Fig 7). This is an excellent chart of the firm’s growth. The EPS appears to be in a channel – of blue lines, and on a good growth path.
  • Dividend yield by the company is 0.95%. Dividend rate has increased steadily over the last 5 years.
  • We can trace the financial metrics of Return on Net Worth, Return on Capital Employed and Tier 1 Capital Adequacy in Fig 8. ROCE is 16% and RONW is 17.6%, in FY13. These are good ratios.
  • Today, BFL has a tier-1 capital adequacy ratio at 17.7% (Sept’13). This is at a comfortable level to fund rapid growth and meet the standards for the sector.
  • NIM has fallen to 11.7% but this is driven by higher share of secured loan products.
  • Gross NPA increased from 1.14% to 1.15% while net NPAs declined from 0.26% to 0.23 % YoY.
Financial Metrics, JainMatrix Investments

Fig 8 – Financial Metrics, JainMatrix Investments

  • P/BV is 2.35 today which is a fair level, not overpriced.
  • The PEG today is at 0.48 – indicates undervalued status.

Risks:

  • Our base case assumes BFL wins the Banking license, and needs to restructure and invest in itself to re-launch as a bank. The share price will surge post this prestigious win. But in case it does not win this, restructuring costs will be lower and profits higher; but the share price may see some fall.
  • High Inflation. If the current high inflation in India cannot be tamed, it will affect BFL business.
  • Our base case is a mild economic recovery in India. However, if the Indian economy continues to show flat or poor growth, the BFL growth will be hit.
  • Promoter driven consolidation. Bajaj group has other financial firms like Bajaj Allianz (Insurance), Bajaj Financial Solutions (Wealth management and advisory) and Bajaj Finserv. Consolidation will change the outlook and business strategy of BFL.
  • The worse performing business lines have been Infra and commercial lending, which have been pared down over the last two years. No fresh losses should emerge from this loan book.

Peer benchmarking and Financial Estimates

BFL is compared to some of its peers to understand and benchmark its key ratios. See Exhibit 9.

Peer Benchmarking, JainMatrix Investments

Exhibit 9 – Peer Benchmarking, JainMatrix Investments

  • BFL leads in ratios of growth and Returns.
  • Behind a national major like HDFC, it leads across most parameters.
  • It appears undervalued at Current Market Price.

Three-year projections of BFL financials indicate a robust ramp up of revenues and profits, Exhibit 10.

Financial Projections, JainMatrix Investments

Fig 10 – Financial Projections, JainMatrix Investments

  • Review of Projections from the Jan 2012 report on BFL. While the firm actually exceeded our projections for FY12 and the Profits for FY13 were lower by just 9%, we noticed that the volatility in Banking/ NBFC sector pulled down the valuation & price from our estimates by 35% by end FY13.
  • In the next 2-3 years, this should reverse and the valuation multiples should rise.

Opinion, Outlook and Recommendation

  • Indian market is underserved for loans and financial services. Quick calculations show BFL has 2-3% market share among Indian NBFCs (non-Bank). While small, this indicates a big opportunity for BFL.
  • In India, Consumer debt/ GDP is 9%, low compared to S.Korea 80%, European>50% and China 12%.
  • BFL is a firm gifted with an outstanding, valuable brand, positive image and good reputation. BFL is well placed to capitalize on this by growing into a financial powerhouse with businesses into insurance, loans and finance.
  • In the past few years, BFL has embarked on a business trajectory that, if sustained, can make it a top 5 NBFC in 4-5 years. In essence it may move from mid-cap to large-cap, and shareholders could gain considerably.
  • Invest now and systematically for long-term out-performance.

The projection/ targets for Bajaj Finance are:

  • March 2015 – Rs 2850 – an 81% gain
  • March 2016 – Rs 3435 – an 118% gain

JainMatrix Knowledge Base:

See other useful reports 

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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 independent Financial Expert/Advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

Also see: https://jainmatrix.wordpress.com/disclaimer/

Are we in a new Bull Run?

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_______________________________________________________________________

Recent media articles have spoken about Indian Indices hitting new all time highs, and the start of a new Bull Run. My thoughts Pro and Con on this subject. On any matter its better to hear both sides of the story:

Pros:

  • The bull run from ’04-07 has been followed by a flat period from ’08-13 (of Indices). A significant period of consolidation. But the economy has not been flat in this period, and grown by 5-8% per annum. This indicates a likely rise hereon.
  • We may be economically at a trough right now, the bottom in terms of economy and growth. The inflation cycle is turning already. CAD is under good control. RBI and the banking sector are in good hands.
  • A lot of projects have been cleared by the govt recently and investment is going to spike up.
  • Indices valuations are at the average for India over the last 15 years, giving a fair chance of a rise, see Nov’13 NOTE
  • Impending Elections, the BJP and AAP have raised expectations of people. Based on results, sentiments should improve.
  • We have seen that FII buying has accelerated in recent times, and foreign ownership of Indian firms is at an all time high. The converse is that Retail has not been present in this market. If he starts investing (ie domestic investment mood improves) then markets will rise.
  • We are at new Index highs, this may be a turning point for Retail to come back to the market.
  • The PGCIL FPO has shown the kind of money waiting on the sidelines, for an opportunity to enter the stock markets. See FPO analysis.

Before you hit the buy button, do take a look at the converse arguments.

Cons:

  • FII money can be hot money. It only takes an US economic event for them to pull the plug on Indian investments. Events such as stopping of the QE program, rise in US inflation, or a rise in US interest rates. We are not even talking of a Black Swan, unpredictable, disaster event here.
  • The Indian retail has invested more in Mid and Small caps, and these have not really recovered so far. In other words he is still staring at notional losses, and is he likely to come back to such a market?
  • Corruption, poor governance, Indian manufacturing going downhill, electricity and power woes, infra woes …. do you think all this is going to change this year? Not very likely. Then how can industry / businesses and stock markets in India advance from these levels?
  • The 2004-07 bull run in India was a global growth period where India was also a part. For USA it was a home price, low-interest and easy loans based boom that ended in disaster. We are nowhere near a big global uptick right now.
  • The harsh reality is that Indian GDP growth has fallen to 5% and things are quite bad right now.

My conclusion:

Based on all this, I remain positive for investors and investments. If one tempers expectations away from overnight riches, to a simple – double of FD returns, from this and the next few years, you should not be disappointed. A Bull Run is just a small possibility, and should not be the reason for your investments.

JainMatrix Knowledge Base:

See other useful reports

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/

Repco Home – A Fortune at the bottom of the Pyramid

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_________________________________________________________________

  • 06-Jan-2014
  • CMP: Rs 340
  • Mid Cap – Mkt Cap 2120 crores
  • Advice: Buy
  • Target: 660 by March 2016

Here is a note on Repco Home Finance (RHF). Download the report using the Link – REPCO home finance_JainMatrix Investments_Jan2014

Summary

Repco Home Finance is a Chennai based NBFC. The average loan ticket size is small, and aimed at self-employed and weaker sections of society. Even so, it’s a well-managed firm with Total income, NII and Net Profit growing at 42.6%, 39.7% and 39.6% CAGR over the last 6 years. After the May 2013 IPO the share price has appreciated 98% already. RHF is addressing “the Bottom of the Pyramid” and still doing so with low NPAs and a good NIM. Invest in this firm not just for the growth or profits or share price appreciation, but for the immeasurable social benefits it provides.

Business Profile

  • Repatriates Cooperative Finance and Development Bank, (REPCO BANK) a Govt. of India firm was set up for supporting the rehabilitation of repatriates from neighboring countries mainly Sri Lanka and Burma. Chennai based Repco Home Finance, (RHF) was promoted by REPCO bank in 2000.
  • Total Income in FY13 was 406 cr and Profits 80 cr. Its asset under management are at Rs 4035 crore.
  • RHF focuses on relatively under-penetrated markets, see their business profile in Fig 1.
  • RHF has 82 branches and 20 satellite centers, majorly in South India, with 64% of loan book from TN. The plan is to grow to 100 branches with new branches in Mah, Gujarat, Orissa and West Bengal.  
  • The M.D of Repco Group including RHF is Mr R. Varadarajan, a career Banker.
  • Consumer – The average home loan size is Rs 9.8 lakhs given to lower-income self-employed people. The total construction value may be Rs 15 lakhs, for a 1000 sq. ft house. (JainMatrix estimates).
Fig 1 - Business Overview, JainMatrix Investments

Fig 1 – Business Overview, JainMatrix Investments

  • RHF follows a lean and efficient business model, with small branches having 2-4 employees with local knowledge, a centralized loan process, no DSA sourcing and totally only 398 employees.
  • Good ratings post IPO with ICRA (upgraded) AA- and CARE (assigned) AA- rating for RHF long term loans.
  • Current shareholdings are Promoters 37.4%, FII 6.3%, DII 15.9%, NRIs/Foreign Individuals/Non Resident companies 35.8%, others 4.8%.

Industry Note

  • There are a large number of NBFCs in India (>10,000). This fragmented market offers big growth opportunities for Home Loans. RBI has projected a 14% growth in loans for Banks; NBFCs should have higher industry growth rates of around 24% for the next five years. (ICRA/ industry experts).
  • Housing finance companies account for 40% of the retail home loan market. The home loan portfolios of mortgage NBFCs have also grown faster than commercial banks in the last few years.
  • The top 4-5 companies will have close to 85-90% share of the retail home loans. These firms are HDFC Ltd, LIC Housing Finance, Dewan Housing Finance Corporation and Indiabulls Housing Finance.
  • RHF addresses a market segment that is underserved, and only addressed by a few micro-finance NBFCs. This is a large and unaddressed, high potential sector.
  • Inflation and Interest rates are at highs as of now, which is difficult for the sector. However the 2 year outlook is a slow fall in both, even as the investment cycle recovers in India.

jainmatrix investments, repco home finance

Fig 1 – Business Overview

Unique Strengths

  • Since RHF is promoted by REPCO Bank (a PSU Bank), it should get state govt. support. Repco Bank is part owned by Govt. of India, and TN, AP, Kerala and Karnataka governments.
  • RHF reaches to the underserved, weaker sections of the society, offering small ticket home loans to self-employed persons. It addresses a segment which is underserved and has high growth potential.
  • RHF has a strong local presence in Tamil Nadu, and is extending operations to neighboring states.
  • With a healthy 4% NIM, RHF is profitable while growing fast.
  • With its lean branches and its presence in Tier 2 and 3 cities, and periphery of Tier 1 cities, RHF has an organisation structure well geared to addressing its current customer segment. RHF shares branches with Repco Bank, thus reducing the cost of operations and having synergies.
  • Cost of capital was stable for the last 2 years, and loan rates for customers have not been increased.
  • RHF has conservative lending metrics: LTV (Loan to Value) 65% and IRR 50%. This is a strength.
  • A personal visit by the researcher to a Repco Bank/ RHF branch indicated courteous service and discussions, a competitive home loan rate and simple but efficient branch environment.  

Stock Evaluation, Performance and Returns

  • RHF was listed recently in April 2013, with an IPO pricing of Rs 172. The Rs 270 crore IPO was a success with 1.62 times over-subscription. It has already appreciated 98% since to date.
  • RHF has shown very good performance over the last few years, with Total income, NII (Net Interest Income) and Net Profit growing at 42.6%, 39.7% and 39.6% CAGR over the last 6 years. See Fig 2.
  • A fall in NII% indicates an increase in cost of loans. PAT margins too have fallen from 27% to 20%. However in the backdrop of surging Total Income, this is not worrying.
Fig 2 - Business Financials, JainMatrix Investments

Fig 2 – Business Financials, JainMatrix Investments

  • The loan book grew at 38% CAGR from FY-09 to FY-13.
  • The cost of borrowing of the company is 9.3% which is quite low. The dividend yield is 0.31%.
Fig 3 - Financial Metrics, JainMatrix Investments

Fig 3 – Financial Metrics, JainMatrix Investments

  • From the chart we can see that the NIM ranges between 4-5%. See Fig 3. NIM may have fallen recently, but it is high at 4% levels. It may rise again post IPO.
  • Gross and Net NPA are within comfort levels at 1.48% and 0.99%.
  • Post IPO the capital adequacy ratio (CAR) is at very good level of 25.6% which is well above 12% level specified for the sector. RHF has room for loans growth for several years with current capital.
Fig 4 - Price and PE Chart, JainMatrix Investments

Fig 4 – Price and PE Chart, JainMatrix Investments

  • Price and PE chart shows that Share Price and PE are fairly in sync. We can see that PE has risen rapidly post IPO from 12 to 22 times and the mean level stands at 17 times. See Fig 4.
  • ROCE is 11.6% and Return on net worth is 12.6%, these are good ratios.
  • Its asset under management stood at Rs 4035 crore by H1 FY14, a growth of 30% in 1 year.
  • PEG is at 0.7 – indicates undervalued status, below the norm of 1.

Peer Benchmarking and Financial Projections

In a benchmarking exercise, we compare RHF with its peers.

Benchmarking

  • It appears that RHF is overpriced and closer to HDFC Ltd on valuations. However we can see that RHF has good NIMs and lower D/E ratios.
  • Also on productivity metrics, RHF scores high. This indicates that in the short term, growth can be accelerated by means of hiring.
  • RHF by virtue of its small size, growth and lack of competition looks well placed.
  • Bajaj Finance also shows good metrics. See a research report on the same. LINK

Find projections of RHF financials in Exhibit 6.

Projections

Opinion, Outlook and Recommendation

  • Indian market is underserved for loans and financial services. This is more so in the poorer sections and self-employed of society. RHF has little competition in this segment.
  • Indications are that RHF will continue to grow its business well. The exit of some Private equity investors post IPO should actually accelerate the profits due to lower costs.
  • RHF is not just doing a Social Service, but doing so at a healthy profit. In his famous book, “The Fortune at the bottom of the Pyramid” the respected author C K Prahalad turned attention to firms that can do this. We feel RHF is one such company.
  • RHF has had its IPO only 9 months ago. As the company becomes better known and understood, we feel investors will understand the Social achievements of RHF.
  • Invest in RHF not just for the growth or profits or share price appreciation, but for the immeasurable social benefits it provides. Invest systematically for long-term out-performance.
  • Advice: Buy with a Target of Rs 660 by March 2016
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Happy New Year 2014

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Dear reader, 

Lets dream BIG in 2014.

Seasons Greetings

and

A very Happy New Year 2014

from

JainMatrix InvestmentsAbout the photo – I took this when I visited the Grand Canyon, USA. This 17 million year old landmark is BIG.  

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In defense of the Indian IT industry

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Musings on the IT Sector

An Article

I came across an interesting article from a well known national daily entitled Jobs, pain and the world of IT.

http://www.thehindu.com/todays-paper/tp-business/jobs-pain-and-the-world-of-it/article5517002.ece

Its an article that’s critical of the IT industry practices and highlights a couple of problems. It expresses a certain point of view.

Response

I would like to voice my thoughts on reading this article. Disclosure – I used to work in large Indian IT sector firms till 1.5 years ago. So I do know some things that happen here.

  • Every success will face some amount of skepticism and criticism. Certainly this article is one such.
  • This industry also has people from the real world working in it, so there will be many real situations, some described in this article.
  • In every industry anywhere, also in India, there will be some friction between Promoter/ management and employees. This is natural. The former may be paid 3-10 times more than the latter. Infosys at one point was very employee friendly and decided that this ratio will not go too high.
Computers Monitor

Computers Monitor (Photo credit: yum9me)

  •  Resources: The main resource for the IT industry is intellectual capital/ employees. Even now, revenues are generally proportional to the number of employees. An important activity for an IT company is hiring and this is based on internal demand projections. Certainly many firms have gone wrong here and found that campus hiring done in Oct of one year was excessive compared to business demand in the second year, 12-18 months later, as the environment has changed. This should be handled properly and painlessly by any firm, and I cannot comment on any specific event or firm.
  • The Visa challenge: Getting Visas today is a very complex issue is for an IT company. It is critical to get a visa in order to get any work done abroad, yet every country has complex laws and rules, costs and rejection rates. Hundreds of employees in India in one project depend on 4-5 visas for onsite visits. And now countries are making it tougher to get this. I would not say that the IT sector is threatened. But there can be a 20-30% costs rise for Indian IT firms if certain countries carry out a visa revamp and clamp down.
  • Work environment: If one company ‘tightly controlled’ lives of its US based employees, it needs to be handled by the employees there. All of us in large companies face some work environment challenges. The treatment of foreign postings as a limited period incentive by firms does not sound like a serious freedom violation to me.
  • Rigidly exploitative. 14 hour work schedules. Tough words. But in return the employees get salaries that are 10 times the national per capita average of 55,000 Rs/ year. Plus good learning. Plus foreign visits. India is a free country. We are all searching for a dream employer who pays well for 8 hours of easy work, right?

Opinion

  • My opinion is that the IT sector has over the last 20 years provided Indians lucrative employment, sometimes fabulous riches, and companies worldwide wonderful, quality services that they are willing to pay top dollar for.
  • And the Indian government must learn how to understand, nurture and grow industries while at the same time setting standards for employee/ labor conditions.

Read some of my reports on the IT Sector:

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These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/