CPSE ETF FFO 2 – An Energizing Offer – BUY

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

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

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

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

Offer Differences

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

Description

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

Investment Details of the Scheme

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

jainmatrix investments, CPSE ETF

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

Source: Reliance Mutual Fund FFO 2 document

Analysis of the ten PSUs as part of this ETF:

jainmatrix Investments, cpse ETF

Table 3 – CPSE ETF FFO PSUs analysis

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

The ETF structure is explained below.

JainMatrix Investments, CPSE ETF

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

Past Performance since launch in March 2014

jainmatrix investments, cpse

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

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

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

PROS

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

CONS

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

Overall Opinion

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

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer

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

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CPSE ETF FFO – An Energizing Offer – Post Listing Note

Date: 3rd Feb 2017 

Hi investors,

Introduction: We had published a report on the FFO (Further Fund Offer) of CPSE ETF on 14th Jan, 2017. And recommended a BUY with a 1 year perspective. You can have a look at the report on the following LINK and the video on this LINK.

Here is an update about the offer and about the performance of the CPSE ETF FFO.

  • Subscription response: The Reliance Mutual Fund managed CPSE ETF opened for applications from 17-20th It was subscribed by 2.30 times, with bids worth Rs13,802 cr. coming in against the issue size of Rs 6,000 cr. The FFO received 250,000 applications, with good demand across investor segments.
  • Allotment: Retail investors were favoured in this offer. It seems that full allotment has been made to all retail applicant applying up to Rs. 2 lakh worth of this Fund. Investors may also get a rounding off amount credited as refund.
  • Discount: A discount of 5 % on the FFO Reference Market Price of Index was offered to retail.
  • FFO Price: The FFO Allotment Price is approximately equal to 1/100thof Nifty CPSE Index minus discount. The allotment price was Rs 25.21 and this tranche was listed on 31st  Jan.
  • Performance: The EOD closing price on the exchange was Rs. 27.88 today, ie. 3rd Feb, 2017. This translates into a gain of 10.6% in 14 days.
  • Advice: (We stay with our recommendations) that this is a medium risk, medium return offering suitable for conservative investors. Buy with a 1 year perspective.
  • News: Based on the success of this second tranche of CPSE ETF, the Union Budget for FY 2017-18 announced that the government will continue to divest stake in state-owned companies in FY18 in the form of variations of CPSE ETF.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain has an ownership in CPSE ETF 2014 units and CPSE ETF 2017 as a Retail applicant in NFO/ FFO only. Other than this JM has no known financial interests in CPSE ETF / Reliance Mutual Fund or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

CPSE ETF FFO – An Energizing Offer – A Video

Hi Investors,

We present here a short video on the CPSE ETF FFO offer.

To read a detailed report, see CPSE ETF FFO – An Energizing Offer 

Happy investing,

Punit Jain

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. Balmer Lawrie – An Update
  2. Why Stocks, and Investment Outlook – Dec 2016
  3. Investment Outlook – Short Term Pain, Medium Term Gain
  4. The Natural Quotient: A Sustainability Metric for Business
  5. PNB Housing Finance IPO: A Transformed Lender
  6. Endurance Technologies IPO 
  7. ICICI Prudential Insurance IPO – An Expensive BUY
  8. GNA Axels IPO
  9. RBL Bank IPO 
  10. New Banks: Big Changes in Small Change 
  11. Equitas IPO – Leader in SF Banks
  12. Do you want to be a value investor?
  13. Mahanagar Gas IPO 
  14. A Repurpose for our PSUs
  15. How to Approach the Stock Market – A Lesson from Warren Buffet
  16. Announcement – SEBI approval as a Research Analyst

DO YOU FIND THIS SITE USEFUL?

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

DISCLAIMER

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

CPSE ETF FFO – An Energizing Offer

  • Date: 14th Jan 2017
  • FFO Application: 18-20th Jan and Listing by 10th Feb, 2017
  • Amount to be raised: maximum of Rs. 6,000 cr.
  • Managed by Reliance Nippon Life Asset Management
  • Central PSEs, Exchange Traded Fund, Further Fund Offer
  • Buy with a 1 year perspective.

Overview: The Scheme is a follow on issue after the 2014 offer which was quite successful. CPSE ETF facilitates GoI’s initiative to disinvest stake in CPSEs through the ETF route. Past performance of CPSE ETF 2014 has been good with 19.8% CAGR over 33 months. A discount of 5% on the “FFO Reference Market Price” of the underlying shares of Nifty CPSE Index shall be offered to FFO of the Scheme. There are high sectoral risks in Oil and Gas sector with a commodities play. Also typically the asset rich PSUs are slow moving firms with a poor, lethargic culture. However overall the offer is attractive and rated a BUY with a 1 year perspective.

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

Here is a note on the CPSE ETF Offer 2017.

Offer Description

  • The Scheme is an open-ended index scheme, listed on the Exchanges in the form of an Exchange Traded Fund (ETF). The investment objective of the Scheme is to provide returns that closely correspond to the returns of the Nifty CPSE Index, by investing in the constituents of the Index in the same proportion as in the index.
  • The CPSE ETF 2017 is an instrument created to help the GoI in the disinvestment of PSUs. Post listing, there is a facility that further disinvestment can also be done through this vehicle.
  • Ten leading PSUs’ will be included in this ETF. Typically these are fairly well known high dividend, low capital gains but asset rich companies.
  • FFO Price: The FFO Units being offered will have a face value of Rs. 10/- each and will be issued at a premium equivalent to the difference between FFO Allotment Price and the face value of Rs. 10/- each. The FFO Allotment Price would be approximately equal to 1/100th of Nifty CPSE Index and would be calculated considering discount offered by GOI pursuant to FFO of the Scheme for buying underlying Nifty CPSE Index shares out of the FFO Proceeds.
  • Discount: A discount of 5 % on the FFO Reference Market Price of the underlying shares of Nifty CPSE Index shall be offered to FFO of the Scheme by GOI.
  • Retail gets at least 70% quota of entire Offer. Anchor investors + QIB + NII will get the remaining available 30% quota of offer.
  • The scheme is being managed by Reliance Nippon Life Asset Management Limited (RNLAM)

Investment Details of the Scheme

  • The Scheme will invest at least 95% of its total assets in the stocks of the Nifty CPSE Index.
  • The Scheme may invest in Money Market Instruments upto a max of 5% of its assets which could include T-Bills, commercial paper of public private sector corporate entities, etc.
  • Amount to be raised: Rs. 6,000 cr. includes Initial Amount of Rs. 4,500 cr. and Addl. Rs. 1,500 cr.
  • The AMC will use a passive or indexing approach to try and achieve Scheme’s investment objective. Unlike other Funds, the Scheme does not try to beat the markets they track and do not seek temporary defensive positions when markets decline or appear overvalued.
  • Sectoral asset Allocation and historic returns – Source: Reliance MF FFO document
JainMatrix Investments, CPSE ETF

Table 1 – Sector allocation/ Table 2 – CPSE ETF 2014 returns inc. Dividend

  • Portfolio Turnover: With Subscriptions and Redemptions on a daily basis and tracking error, Portfolio Turnover Ratio is expected to be 0.15 as on Dec 31, 2016.
  • Dividend: The income received by way of Dividend shall be used for recurring expenses and redemption requirements or shall be accumulated and invested as per the investment objective of the Scheme. The Trustees may declare Dividend to the Unit holders under the Scheme subject to the availability of surplus, and at the discretion of the Trustees. If the Fund declares Dividend, the NAV of the Scheme will stand reduced by that amount.
  • Listing: The units of the Scheme will be listed on NSE and BSE by maximum Feb 10, 2017.
  • RGESS Eligibility: Investments made by a Retail Investors in the RGESS Scheme will qualify for a 50% deduction of the amount invested from the taxable income of the financial year.
  • Analysis of the ten PSUs as part of this ETF
JainMatrix Investments, CPSE ETF

Table 3 – CPSE ETF FFO PSUs analysis

  • Note 1: The Engineers India Ltd recent report by JainMatrix Investments is available on LINK
  • Note 2: When we say price is high, it is relative to 5 year historical prices. We have not done valuation exercises on these firms.

The ETF structure is explained below.

JainMatrix Investments, CPSE ETF

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

Past Performance

The CPSE ETF 2014 was listed in April 2014, and has been able to give original NFO investors an absolute 64.24% returns over 33 months. This includes a 1 year bonus for Retail, which is not available in CPSE ETF 2017. The returns for Retail are 19.77% CAGR, higher than those in Table 2 published in FFO. Also see reports made by JainMatrix:

JainMatrix Investments, CPSE ETF

Table 5 – Past Performance of CPSE ETF 2014

PROS

  • This ETF offering has a lower management charge as stock selection and portfolio changes are automatic. The expense ratio is just 0.065% annualized.
  • The fund will offer 5% discount to the FFO subscribers.
  • The 5 year share returns are 8.05% CAGR, see Table 4. This is fair but below Sensex of 10.59%.
  • The dividend yield for these stocks is 5.24% today which is good, Table 4.
  • The average beta of these stocks is 1.16 indicating higher volatility than indices.
  • Many of these firms own wonderful assets, the family silver of the GoI. Some of these firms also enjoy monopoly status in their sectors. See our opinions in Table 4.
  • GoI is asking for higher dividends from PSUs and also allowing operational freedom to exploit assets and be more productive. This is positive. See report, A Repurpose for our PSUs
  • The crude oil price fell last year from USD 100+ levels to sub 50 per barrel. The fall looks complete for now. While prices are volatile, crude in next 1 year should be in USD 40-60 range. If it does, the Oil & Gas (O&G) sector overall can perform well.
  • This fund is O&G heavy with 57% weightage. However it does have a mix of upstream, mid and downstream O&G firms, which together can derisk the portfolio against commodity volatility.
  •  Employees’ Provident Fund Organisation decides to invest Rs2,800 crore in CPSE ETF. This surely meas that the institutional quots will be over subscribed.

CONS

  • While the expense ratio of the ETF is low, the high dividend paid by the PSUs may not be passed on to the unit holders, but used for recurring expenses, as per FFO document. The CPSE ETF 2014 too has not paid dividend for 2.5 years. The 5.4% dividend yield this year involve substantial monies. It’s not clear if dividends have contributed to the NAV of the CPSE ETF 2014.
  • This fund is O&G heavy with 57% weightage. If one extends the description to Energy/Coal/ Power/ O&G and related financing, it increases to 90%. These sectors are essential to the economy, but are typically operationally constrained and not shareholder friendly. They are dependent upon global prices, and so even well managed firms can swing to losses with a fall in commodity prices. In O&G sector, the upstream Oil Exploration firms have been hit by falling crude oil prices.
  • Even though Gail India has a monopoly, it has been hit in pipeline construction by interstate politics, farmer /social pressures and weak infra execution environment.
  • These stocks performance depends on revenue growth, which has been inconsistent in recent years.
  • Many of these firms depend on GoI policies and monopoly situations to grow. Some are externally constrained by weak infrastructure that hampers distribution (Railways for coal, pipelines for gas).
  • PFC and REC are executors of GoI programs in power sector. Their returns are sometimes guaranteed by GoI but when the entire sector gets stressed, they can suffer poor performance.
  • This CPSE ETF 2017 offering is managed by Reliance Mutual Fund.

Overall Opinion

  • The current govt. is focusing on good execution and better administration with a series of reforms. The environment is more result oriented with less political interference in PSUs.
  • The outlook for Oil & Gas sector is stable this year. Domestic demand is high.
  • Past performance of CPSE ETF 2014 has been good with 19.8% CAGR over 33 months.
  • Retail gets at least 70% of CPSE ETF offer, so it is skewed in their favour.
  • There are high sectoral risks with a commodities play. Also typically the asset rich legacy PSUs are slow moving firms with a poor, lethargic culture.
  • However overall the offer is attractive and rated a BUY with a 1 year perspective.
  • This is a medium risk, medium return offering suitable for conservative investors.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. Balmer Lawrie – An Update
  2. Why Stocks, and Investment Outlook – Dec 2016
  3. Investment Outlook – Short Term Pain, Medium Term Gain
  4. The Natural Quotient: A Sustainability Metric for Business
  5. PNB Housing Finance IPO: A Transformed Lender
  6. Endurance Technologies IPO 
  7. ICICI Prudential Insurance IPO – An Expensive BUY
  8. GNA Axels IPO
  9. RBL Bank IPO 
  10. New Banks: Big Changes in Small Change 
  11. Equitas IPO – Leader in SF Banks
  12. Do you want to be a value investor?
  13. Mahanagar Gas IPO 
  14. A Repurpose for our PSUs
  15. How to Approach the Stock Market – A Lesson from Warren Buffet
  16. Announcement – SEBI approval as a Research Analyst

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer

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

Mahanagar Gas – A Hot Piping IPO

  • Date: 20th June 2016
  • Issue Price range: Rs. 380 – 421 and Period: 21st-23rd June
  • Industry – Gas Distribution
  • Mid Cap – Rs 4,156 crores Mkt cap
  • Advice: Buy for 2 years 

Summary

  • Overview: MGL is a city gas distribution firm that has the sole distribution rights for CNG and PNG supplies in and around Mumbai. It is a JV between GAIL and the British Gas of U.K.
  • MGL had revenues of Rs 2,121 cr. and profits of Rs 309 cr. in FY16. MGL’s revenue, EBITDA and PAT have grown 12.4%, 1.8% and 0.1% CAGR over 5 years. MGL has a good balance sheet, low debt, high cash and a high dividend yield.
  • MGL supplies CNG to over 4.7 lakh vehicles through a network of 188 CNG filling stations, and PNG to 8.6 lakh households, 2,866 commercial and 60 industrial consumers.
  • With global gas prices falling, demand for gas is expected to rise. MGL is growing pipeline networks.
  • It is available at attractive valuations. Based on the adjusted FY16 EPS, the asking PE stands at 13.47 which is lower than listed peers.
  • Opinion: The Mahanagar Gas IPO is rated a BUY with a 2 year perspective.

IPO highlights

  • IPO opens: 21-23rd June 2016 with Issue Price band: Rs. 380-Rs. 421 per share.
  • Shares offered to public: 2.46 cr. of Face Value: Rs. 10 per share, Market Lot is multiples of 35.
  • Shares offered are 25% of post equity. Promoter holding will fall from 90% to 65%. The IPO is of Rs 1,040 cr. which is a sale by current shareholders; there is no fresh issue of shares.
  • MGL is a JV between promoters GAIL and British Gas Asia Pacific Holdings (BGAS) where each owns 45% stake. Govt. of Maharashtra holds an additional 10%. Through the IPO, promoters would offload a stake of 12.5% each. The IPO helps MGL meet the 25% public holding norm.
  • The offering is available to institutional, non-institutional and retail in ratio of 50:15:35 of the offer.

Introduction

  • MGL is a city gas distribution (CGD) firm that supplies natural gas in Mumbai and surrounding areas. It is the sole distributor in Mumbai. MGL is a JV between GAIL and the British Gas of U.K. For abbreviations full form or glossary, see last page.
  • MGL had revenues and profits of Rs 2,121 crores and Rs 309 cr. resp. in FY16.
  • The firm distributes and sells natural gas, moving it from suppliers to end consumers. It distributes CNG for use in vehicles and PNG for domestic households, commercial and industrial use.
  • In FY16, MGL supplied CNG to over 4.7 lakh vehicles through a network of 188 CNG filling stations. It also provided PNG connection to 8.6 lakh domestic households, 2,866 commercial and 60 industrial consumers in Mumbai and adjoining areas.
  • For FY16, their CNG and PNG businesses accounted for 71% and 29%, of their total gas revenue. And 23.1% of the total CNG sales were to retail customers through company owned/ franchised outlets and 76.9% of CNG sales were through Oil Marketing Cos. and State Transport Units. See Fig 1.
  • MGL has a supply network of 4,646 km of pipelines, with 4,231 km polyethylene and 415 km steel.
  • Ashutosh Karnatak is Chairman; Rajeev Mathur is MD of MGL. In FY16, they had 499 employees.
  • MGL has the exclusive authorization (Infrastructure Exclusivity) to lay, build, expand and operate the CGD network in Mumbai until 2020, its adjoining areas until 2030 and the Raigad district until 2040.
JainMatrix Investments

Fig 1 – Segments by Value/ Fig 2 – Post IPO shareholding in MGL

British Gas Snapshot

  • BGAS (British Gas Asia Pacific Holdings) is a subsidiary of BG Group UK, which in turn is a subsidiary of Royal Dutch Shell plc. Shell is one of the world’s largest independent oil and gas firms.
  • In 2016, Shell had cash flow from operations of $30 billion. The Shell Group develops crude oil and natural gas supplies from major fields. Natural gas based liquefied natural gas (LNG) is shipped to markets around the world. The Shell Group’s portfolio of refineries and chemical plants enables it to add value to the oil and gas, turning them into a range of refined and petrochem products, which have domestic, industrial and transport uses.

GAIL Snapshot and Financials

  • GAIL (India) Ltd. is the largest state-owned natural gas processing and distribution firm in India. The company has 80% market share in natural gas transmission. It possesses about 11,000 km of gas pipeline network with a capacity of 210 mmscmd. It has presence in Egypt and China through city gas projects and in Myanmar through E&P. It acquired shale gas assets in USA through US subsidiary GAIL Global (USA) Inc.
  • Income has grown at 5.6% CAGR over the last 5 years Fig 3. In the same duration, EBITDA and PAT witnessed a fall of -6.5% and -17.4% CAGR. P/E ratio has however risen to 19.6 times.
  • GAIL has low net profit margin of 5.2% and a 80% market share (monopoly) in gas distribution, controlled by the govt. The current dividend yield for GAIL stands at 1.48%.
  • The RoCE stands at 9.57% and RoE at 9.24%. This is average performance.
JainMatrix Investments

Fig 3 – GAIL Financials Snapshot

  • The firm’s performance was poor because of long term contractual agreements. Under an agreement GAIL is liable to take 60% of Petronet LNG’s procurement which was sourced from Qatar based company RasGas. Based on the contract signed between the Petronet LNG and RasGas in 1999, Petronet LNG was getting LNG at $12-13 per mBtu (million British thermal unit) in FY16 whereas the spot gas prices had fallen to $7 per mBtu, leading to GAIL India suffering losses.
  • However the contract terms were renegotiated in FY16, under which the price for the buyer would be governed by market dynamics based on a crude price linked formula. So GAIL is expected to perform better in FY17 with reasonable costs, good demand and high utilization of pipelines.

Business Model, News and Updates for MGL

  • MGL has paid a dividend of Rs 17.5/ share in the previous 3 years, which gives a yield of 4.1%.
  • As per the MoPNG guidelines, MGL has access to cost effective domestic natural gas equal to 110% of their CNG and domestic PNG requirements (such customers are “Priority Sector”). The domestic natural gas is currently sold to them at US$ 3.06/ mmbtu (GCV), which is lower than the price of imported natural gas, for supply exclusively to the Priority Sector. These sales accounted for 84.1%, 85.0% and 85.6% of MGL total sales volume in FY14, FY15 and FY16, resp. For industrial and commercial PNG consumers, they source regasified liquefied natural gas both on term and spot basis. The selling price of natural gas is not regulated and thus they generally are able to pass on an increase in the cost to customers.
  • The price at which MGL sells natural gas is benchmarked to the price of alternate fuels as petrol, diesel, other liquid fuel and LPG, which are in turn linked to crude oil. MGL is given pricing flexibility based on procurement costs for both CNG and PNG. However CNG prices are regulated. It means that MGL is allowed to change the price, but govt. can intervene for the price of CNG, but not PNG.
  • The price of domestic natural gas allocated by the MoPNG is determined as per the Pricing Guidelines, this is the administered price mechanism (APM). The price of natural gas is presently US$ 3.06/MMBTU on GCV basis, this price is much lower than the price of imported natural gas.
  • MGL launched its mobile application ‘MGL Connect’ for its PNG and CNG customers. The mobile application featured various consumer friendly features and services.
  • In 2014 there was a Gas leak in MGL’s pipeline in Mumbai’s Worli area. The measures were taken at the right time and a major mishap was averted.
  • A ban on >2000 cc diesel engine car sales in New Delhi is meant to help clean the environment. It was imposed by the NGT (National Green Tribunal) in Dec 2015. This may soon be extended to other cities and regions in the country. It emphasizes the importance of natural gas as a clean fuel in India.
  • New Delhi was the first to enforce CNG as fuel for all bus services, helping clean the air. We expect this to be rolled out in all major cities over time.
  • Growth driver – MGL has commenced project activities in Raigad district to lay pipeline infrastructure. The Raigad district provides good opportunities for expansion of their networks.
  • On 21st June, the Day 1 of IPO, the issue was subscribed 110% by 5pm, indicating a good demand.
  • MGL collected Rs 309 crore from anchor investors, a day ahead of its IPO, by raised money from over 20 anchor investors, by selling shares at Rs 421 apiece – the higher end of the price range.
  • The unofficial/ grey market premium for this IPO is in the range of Rs 100 – 102.

Industry Outlook

  • Natural gas production in FY14 was 97 mmscmd by ONGC, OIL, non-state owned and JV companies. This however constitutes only about 26% of India’s gas consumption.
  • The Indian CGD market size was estimated at INR 24,000 cr. in FY14, with sales volumes of 20 mmscmd, accounting for 13% of India’s total natural gas consumption.
  • The PNGRB has envisaged a rollout plan of CGD network development through competitive bidding in more than 300 Geographical Areas (GA) in a phased manner. The actual rollout has been delayed due to lack of connectivity and supply constraints, with the Govt. needing to assure domestic gas supplies for CGD entities (CNG and domestic PNG). The PNGRB has bid out 34 GAs in the sixth round of CGD bidding. 106 GAs have been identified by PNGRB for subsequent bidding subject to natural gas pipeline connectivity.
  • PNGRB’s bidding rounds could be a large opportunity for growth with 11 GAs in Maharashtra and 60 GAs in rest-of-India offering multiple opportunities to MGL for expansion beyond Mumbai.
  • By the end of FY14, India had a natural gas pipeline network length of 14,988 km with capacity of 401 mmscmd spread over 15 states and UTs. GAIL as a leading player owns 73% of the network.
  • CRISIL Research expects CGD sales volumes to rise from 20 mmscmd in FY14 to 22.4 mmscmd in FY17. Volumes of both industrial and commercial segments have declined over the last 2 years. But volumes are expected to increase from 2015-16 and grow at approximately 6%, led by fleet additions to public transport, private vehicle conversions and rising economic activity.
  • Natural gas demand for CGD sector is expected to rise steadily due to the growth of gas networks in new cities, price advantage of CNG and increased use of PNG in domestic, industrial and commercial sectors. The Govt. plans to set up 15,000 kms of new gas pipelines would aid CGD usage in newer areas.
JainMatrix Investments

Exhibit 4 – Prospects for the CGD Sector, Source: MGL RHP

  • The last 2 years saw a sharp fall in prices of crude oil and natural gas, caused by both a supply glut and a fall in global growth. India however is a beneficiary as it is a major importer of natural gas.
  • Mumbai has a population of 20.7 mn with 5 mn households and 6.7 mn motor vehicles. MGL serves only 0.47 mn vehicle and 0.86 mn domestic users. Thus the penetration stands at 7.01% (0.47/6.7) for motor vehicles and 17.2% (0.86/5) for domestic users.

Financials of MGL

  • MGL’s revenue, EBITDA and PAT has grown 12.42%, 1.76% and 0.08% CAGR over the last 5 years.
  • The revenue and EPS growth (Fig 5) were flat for FY15 and FY16 as CGD companies faced cost pressures and a fall in margins. MGL supplied 1.95 mmscmd of natural gas in FY12 which rose to 2.43 mmscmd for FY16, registering a CAGR of 5.67%. Thus over the years, MGL had increasing revenues and volumes, however there was almost no PAT growth because of rising input costs.
  • The operating margin fell from 39% (2012) to 26.9% (2016). The net profit margin also fell from 23.17% (2012) to 14.55% (2016). But margins are likely to be stable from now on.
MGL Financials, JainMatrix Investments

Fig 5 – MGL Financials

MGL Cash Flow, JainMatrix Investments

Fig 6 – Free Cash Flow

  • MGL has been able to generate Free Cash Flow over the last 5 years, a big positive. Fig 6.
  • MGL has a ROE of 20.2% (FY16) and RoCE of 22.0% (FY15). These are healthy return ratios.
  • The cash per share including Reserves & Surplus and Cash in Balance sheet is Rs 163/share. This indicates that the current operations of MGL are available at (421-163) = Rs 258/share.

Benchmarking

We have benchmarked MGL against peer gas companies like Indraprastha Gas, Gujarat Gas, etc.

JainMatrix Investments

Exhibit 7 – Benchmarking

  • MGL appears to be available at reasonable valuations. The low D/E is a positive. Dividend yield is the highest. The balance sheet is strong and can be leveraged for future business needs.
  • Margins are in the fair range. But MGL has good ROE (20% +) even with low margins. Margins are expected to improve from now on and volumes would also be higher. Thus return ratios are good.

Positives for MGL and the IPO

  • The IPO pricing is attractive. At the upper band of Rs 421/share, MGL’s asking price P/E is 13.47 times which is lower than its peer Indraprastha Gas Ltd. (19.55 times).
  • The CGD industry is at a turning point with a renewed focus on cleaner environment and lower costs of gas versus competing fuels which is likely to push volumes. Green efforts and NGT rulings will push transportation towards CNG as fuel. This is likely to benefit MGL.
  • MGL is a debt free, with strong balance sheet, cash balance and high return ratios (RoCE and RoE).
  • MGL has the exclusive rights for gas pipelines & sales in Mumbai (2020 limit), Raigad (2040) and Thane (2030). There is ample potential for MGL to grow in these regions.
  • The promoters of British Gas/ Shell can provide technology and commercial expertise for growth.
  • Piped gas supply by MGL is superior to the cylinder based LPG supply by state owned oil marketing firms. As soon as MGL sets up a network in an area, most consumers will switch.

Internal Risks

  • The price of domestic natural gas and RLNG purchased by MGL is USD denominated while the selling price is in INR. The currency risks have to be absorbed by MGL and its customers.
  • Transporting natural gas is hazardous and there can be accidents caused by floods, other utility company activities, road accidents, etc. These could adversely affect their reputation and business.
  • Smooth relations between the equal shareholder promoters is important for MGL.
  • MGL has a monopoly on Mumbai region gas pipelines and supply till 2020. It must rapidly set up a high quality network in this period to ensure it continues to dominate the gas business thereafter.
  • MGL will not have any gains from this IPO, and the proceeds will go to the promoters only.

External Risks

  • MGL’s gas supply is met by the allocation by the MoPNG at prices in accordance with the Gas Pricing Guidelines. Any increase in the cost price or reduction in allocation will adversely affect business.
  • MGL’s natural gas marketing exclusivity in Mumbai and adjoining areas has not been dealt with by PNGRB. The subject is subjudice in the Delhi High court for a case involving IGL. Their request to PNGRB to retain marketing exclusivity in Delhi was rejected, and which was in turn taken to Delhi HC. The Delhi HC verdict is pending on the issue. An unfavourable ruling would mean that CGD firms will have to distribute other competing companies’ gas through their own pipeline.
  • MGL may be restricted in its operation to the Mumbai/ Thane/ Raigad areas, and hence may not be allowed to continue to grow into a national player. Thus after a point, MGL growth may be limited.
  • The growth of renewables has been very rapid, encouraged by GoI. These are superior to fossil fuels but require a higher capex. After a few decades, gas may become a backup fuel source. However gas sector will continue to grow for 10-20 years as it is cleaner and superior to other fossil fuels.

Overall Opinion

  • Gas as a source of energy is superior to other fossil fuels. In energy hungry India, it will continue to grow as a fuel source. With the recent fall in prices, we see an upswing in demand.
  • MGL operates in a regional monopoly and has ample scope to grow in Mumbai & surrounding areas.
  • The recent financials of MGL were stressed by higher cost of gas. However measures have been taken and costs have stabilized for MGL. The outlook now is much superior for MGL. Inspite of this stress, MGL has a good balance sheet, no debt, high cash and a good dividend yield.
  • In a sector dominated by PSUs, MGL brings in a high level of governance, vision and shareholder friendliness. It is available at attractive valuations. Based on the adjusted FY16 EPS, the asking PE stands at 13.47 which is lower than listed peers.
  • MGL is not just a piping hot IPO, but also A Hot Piping IPO.
  • Hence, MGL is a BUY with a 2 year perspective.

Abbreviations

Exhibit 8 - Abbreviations

Exhibit 8 – Abbreviations

JAINMATRIX KNOWLEDGE BASE 

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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. JM has no known financial interests in Mahanagar Gas Ltd. or any related group. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst (SEBI Registration No. INH200002747) under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Balmer Lawrie – A Steady Boat

___________________________________________________________

  • 26-Nov-2013
  • CMP: Rs 306
  • Small Cap – Mkt Cap 880 crores
  • Advice: Buy with a 2-3 year perspective

Here is a note on Balmer Lawrie & Co (BLC).

Business Overview

  • BLC is a Public Sector Unit under Ministry of Petroleum and Nat Gas. Based in Kolkata, it is rated at as Mini-Ratna I Public Sector Enterprise, and has 62% shareholding by govt.
BLC - Business Segments (JainMatrix Investments)

Fig 1 – BLC Business Segments (JainMatrix Investments) 

  • The FY13 consolidated revenues were Rs 3018 cr and Profits 167 cr.
  • It is quite diversified into both Services (Travel Agency, Logistics, Oilfield Services) and Products (Steel packaging, Greases & Lubes, Chemicals). It has 7 joint ventures in addition to the main standalone firm and has operations in many countries outside India. There are about 1500 employees.

Pricing Snapshot

The share price history of BLC can be seen below:

BLC Price History, JainMatrix Investments, Click to enlarge

Fig 2 – BLC Price History (JainMatrix Investments) Click for enlarged image

  • Dividends have been increasing every year. Current dividend yield is 5.7%.
  • There was a share bonus issue in 2013 of 3:4. Fig 2 dividend percentage has been adjusted for this.
  • Over the last 5 years the share price low is Rs 115 (Dec 2008) and high is 439 (Nov 2010). Today’s CMP of 306 is 30% below the highs, this gives some comfort in valuations.

Finance Snapshot

  • Steady growth over last 5 years with Revenues and Profits up 10.7% per year. See Fig 3. 
  • A look at the financial chart shows that Revenues, EBITDA and Profits are trending up. The equity base has been unchanged (barring a bonus in 2013), and the EPS also has grown 11.2% annually.
  • The steady and rising profits have been shared with shareholders in the form of Dividends.
BLC Financials, JainMatrix Investments

Fig 3 – BLC Financials (JainMatrix Investments) Click for enlarged image

  • The firm has generated Cash steadily with about 100 cr of cash from operations (standalone) in FY13. Not much investments in new assets is happening, though.
  • There is Rs 412 cr of cash & bank balance with the firm (FY13). Less debt, cash on hand is Rs 214/share.  Looking at the cash on the books, a purchase of a share of 306 only costs us Rs 92.
  • Prospects in terms of future are good. Barring 2-3 Private firms, the Petroleum and Natural Gas sector in India is dominated by PSUs.
  • It is a good candidate for government disinvestment, as the current govt shareholding is in a holding company called Balmer Lawrie Investments.
  • Current P/E reported is 5.29, which is quite low. Price/ Book is 1.42 times.
  • Debt/ Equity is 0.26, which is low.
  • One Risk we perceive is low trading volumes for BLC on the exchanges.

Overall Opinion

  • Very good cash position, and strong balance sheet.
  • BLC is a good value buy at this time. Buy with a 2-3 year perspective
  • Don’t expect sharp share price appreciation, it is a steady stock.
  • However if disinvestment to a strategic partner comes through, it could be a bonanza.

JainMatrix Knowledge Base:

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Cairn India – A Formula for Success

  • 05 July 2013
  • CMP: Rs 294
  • Large Cap – Mkt Cap 56,100 crores
  • Advice:  Buy

Executive Summary

  • Formula for success: rise early, work hard, strike oil – (a quote by J. Paul Getty)
  • Cairn India is a large cap and the top Indian private sector Oil E&P firm.
  • It has excellent Oil exploration and producing assets. At current Revenue of 17,524 cr, Profits are 11,606 cr and the Cash Flow is 11,000 cr. The business is lucrative in terms of high cash flow, and low operating costs and investments, and debt free status.
  • For last 4 years, Operating and Profit margins are excellent at 69%, and 65% on average.
  • The demand outlook for oil in India is good, with 70% from imports, and annual growth at 6-8%. Cairn Profits get boosted with a weak rupee and increase in international oil prices.
  • The Valuations at a P/E of 4.6 times are very attractive making it a Value play.
  • Risks to this investment are: ability to sustain and grow oil production from current fields, make new discoveries from exploration assets, and ability to utilize or share the firm’s cash reserves

Business Snapshot:

  • Cairn India is the top Indian private sector Oil Exploration and Production firm.
  • The consolidated Revenue is 17,524 cr with Profits 11,606 cr (FY13) and cash balance of 16,713 cr.
  • Promoters are the UK listed Vedanta Resources/ Anil Agarwal group, that holds 58%. Vedanta Resources took over Cairn India Ltd (Cairn) from Cairn Energy UK in end 2011.
  • It’s a pioneering firm that has opened up the Indian Oil & Gas sector to private sector discoveries. From its first Oil discovery in Jan 2004, Cairn has come a long way to deliver on it’s potential and emerge as the second largest producer of Oil & Gas in India. Cairn’s oil production data are in Fig 1:
Fig 1 – Oil Production at Cairn, Source: Cairn corporate reports, JainMatrix Investments

Fig 1 – Oil Production at Cairn, Source: Cairn corporate reports

(kboepd – Kilo Barrels Of Oil Equivalent Per Day)

  • Current shareholdings are Promoters/Vedanta 58.8%, Cairn Energy UK 10.3%, MF/ DII/ FII 25.7%, Individuals 2.7% and Others 2.5%.
  • Cairn has about 1450 employees. It has the exploration assets portfolio in India (7), Sri Lanka (1) and South Africa (1). Commercial production is from Rajasthan, Cambay and Ravva fields in India.
  • In addition it owns the Mangala Processing Terminal, the Mangala development pipeline – a 590 km heated insulated pipeline for crude evacuation, and oil infrastructure at Ravva and Cambay.
  • The current 205 kboepd oil production includes 175 kboepd from Rajasthan. There is significant upside potential here, with the internal target as 215 kboepd by Mar2014. (Of 95% oil and 5% gas).
  • In the longer term there is (the asset evaluations show that the total resource base now provides) a basin potential to produce 300 kboepd, subject to further investments and regulatory approvals.
Fig 2 – Cairn Profit and Cost Metrics, JainMatrix Investments

Fig 2 – Cairn Profit and Cost Metrics, JainMatrix Investments

  • Cairn is among the lowest cost producers of Oil, and has among the highest net profit per barrel oil.

Business Model:

  • Cairn is paid for oil delivered to refineries. The Cairn business model is sensitive to the international oil prices, with the Rajasthan oil output priced at a 8-13% discount to Brent, in USD.
  • The rupee weakening against USD is also beneficial to Cairn, as it earns higher INR for the oil.
  • The recent decision to double natural gas prices to $8.4 per mBtu will also be beneficial to Cairn.

Pricing Snapshot 

Fig 3 Price History, JainMatrix Investments

Fig 3 Price History, JainMatrix Investments

The available 6-year view of the share price of Cairn Fig 3 shows us:

  • The IPO of Cairn was in Dec 2006; it was subscribed 1.14 times and got a listing price of Rs 160.
  • Since then, Cairn has given investors 10.5% returns CAGR to date.
  • Given its pioneering status, Cairn has seen a high level of interest. The pricing low was 88 in 2008, and the high 401 in Mar 2012, post the Vedanta takeover. Its fallen by 27% since then.

Financial Snapshot

Fig 4 – Consolidated Financials Snapshot, JainMatrix Investments

Fig 4 – Consolidated Financials Snapshot, JainMatrix Investments

  • Significant Oil revenues at Cairn actually only began in FY10. It has ramped up in the last 3 years, with the resolution of issues with State Governments, ONGC and Petroleum Ministry.
  • In line with this, the P/E (ttm) has rapidly fallen from 53 times (FY10) to 4.6 times currently. Fig 4.
  • At current levels of Revenue 17,524 cr, Cash Flow is 11,000 cr. The business is very lucrative in terms of cash flow, with low operating costs and investments. Current cash on the books at 16,713 cr is at Rs 87 per share. The firm is debt free.
  • For last 4 years, Operating and Profit margins are excellent at 69%, and 65% on average.
  • Dividend declared for FY13 is 115% or Rs 11.5 per share, giving a current dividend yield of 4%.
  • PEG based on 1 year projection is at 0.2 – indicates very undervalued stock.

Opportunities and Concerns

Strengths and Opportunities

  • India is oil deficit, and imports 70% of its oil, priced in US dollars. This has caused stress in India’s Current Account Deficit CAD. In these circumstances, Cairn is a very valuable firm, as it helps save import costs. It has had very good success rates at oil exploration.
  • The Rajasthan oil fields are expected to have a 23% growth in 1 year, and up to 71% in the next 3-4 years. In addition, the other Indian, Sri Lankan and South African oil fields have potential.
  • The Mangala development pipeline is being extended by 80 km up to a sea terminal at Bhogat in Gujarat. This will allow Cairn to sell to any of the coastal refiners for better margins.
  • The Promoter is Vedanta Resources plc is a diversified natural resources group with US$ 11 billion revenues. This provides stability and strength to business operations.
  • In India, Oil & Gas exploration, discovery and production has had a very poor record. ONGC has a poor record, and the private sector so far has not had a very free hand in terms of opportunities and incentives. In this scenario, if Cairn is able to expand its operations and continue on the current path, it can taste great success.
  • The major concern is how to use the large cash balance well. The firm has announced a USD 3 billion (Rs 16,500 crore) investment plan for the next 3 years to drill more than 450 wells in Rajasthan block, (increased from 25 wells drilled in FY2013). The wells planned include 100 exploration and appraisal wells, while balance will be development wells to sustain / enhance production volumes.

Risks and Concerns

  • Oil exploration and production is an inherently risky and unpredictable business. The BP /Gulf of Mexico oil spill of 2010 shows that disaster can strike suddenly, causing business losses.
  • Risk is also high in terms of the oil discovery to production cycle, which can take years of evaluation and studies. Oil Reserves can be ‘Proved’, ‘Probable’ and ‘Possible’.
  • Unpredictable govt. regulations and unclear subsidy/ revenue sharing with govt. can be a risk with this firm.
  • It has to be seen if Vedanta can continue on the pioneering path established by Cairn UK of successful exploration to oil production. A different skill set is needed at this stage for Cairn to negotiate effectively with government agencies, establish production infrastructure and compete effectively with rivals like Reliance.
  • New Promoter: Today Cairn is a high revenue, profitable, ‘Cash Cow’ type of firm. We need to see if the new Promoters respect the firm’s independence, reward shareholders for business performance and continue on the path of good corporate governance.

Opinion, Outlook and Recommendation

  • Oil consumption in India is in a very steady growth path, of 6-8% for the foreseeable future. The demand flows from transportation – vehicles, railways, airlines, shipping, and oil as fuel for factories, gensets, motors, tractors and infrastructure/ equipments/ agriculture.
  • With significant oil production, visible growth potential, many new discoveries moving into production, as well as production and exploration agreements in place with the regulator, Cairn is a valuable, cash rich oil stock.
  • At 4.6 times, the current P/E of Cairn puts it at a significant discount to most other Oil and Gas sector firms in India. It is a underpriced Value Stock. Valuations are attractive at these levels.
  • The maiden dividend awarded this year is 115%. With cash flow and profitability high, and production likely to grow, investors can expect to gain in terms of shareholder rewards.
  • Investors can buy Cairn at these price levels.

JainMatrix Knowledge Base

See other useful reports

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  • JainMatrix Mid Cap Model Portfolio 2013 – LINK
  • Apple Inc. – LINK
  • Arshiya International: A Collapsing Star – LINK
  • Bharti Airtel – This is a year of consolidation – LINK
  • Yes Bank – LINK

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