Bharat22 ETF – A Balanced ETF – Post Listing Note

  • Date 29th Nov
  • Equity MF- ETF, Diversified
  • Allotment price: Rs. 35.97
  • CMP: Rs. 37.42
  • Advice: Buy with a 3 year perspective

Here is a post listing note on Bharat 22 ETF (BH22).

In this note, we continue from the 13th Nov Note – Bharat 22 ETF NFO Offer – A Balanced ETF 

jainmatrix investments, bharat 22 etf nfo

Subscription, Allotment Price and NFO details 

  • The BH22 is an open-ended index ETF which listed on 28th Nov, 2017. The investment objective is to provide returns like the S&P BSE Bharat 22 Index.
  • The NFO received the highest subscription for any new fund offer (NFO) in the history of Indian MF industry. The ETF was subscribed about 4 times as the amount to be raised was Rs. 8,000 cr. and it received applications for around Rs. 32,000 cr. The NFO attracted 3.35 lakh retail investor applications.
  • Due to the excellent response, the ETF issue size was raised to Rs. 14,500 cr. A NFO discount of 3% was offered to all investors including retail, retirement funds, QIBs and non-institutional investors.
  • Retail investors who applied with Rs. 2,00,000 (Retail cap) were allotted 5,560 units at Rs. 35.97/unit (including the 3% discount). Retail applicants appear to have received 100% allotment this time.
  • Currently the ETF is trading at Rs. 37.42 translating into a gain of 4.03%. This means any retail investor who applied for the max. allowable limit of Rs. 2,00,000 has notionally gained Rs. 8,060. This is because of the discount as well as rise in the S&P BSE Bharat 22 Index.
  • You can check the index value as well as the ETF value using the following link. Bharat 22 ETF Price – http://www.moneycontrol.com/india/stockpricequote/miscellaneous/iciciprudentialmutualfund/ICI15

Overall Opinion

  • This ETF is set to create good value for the investor as profit making PSUs, PSUs undergoing reforms and private sector firms have been bundled together. ETFs are also advantageous in terms of management costs & liquidity. Also with the discounts given in BH22, we feel that this is a good long term buy for low risk equity investor and is comparable to the Balanced MFs.
  • If you have missed out Bharat 22 ETF in the NFO, you can also BUY it from the open market.
  • Investors can BUY with a 3 year perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain discloses that he holds a position in BH22 ETF as a successful Retail applicant in NFO. He may also hold positions in some of the constituents of the ETF. Other than this JM has no known financial interests in BH22 ETF or constituent firms. 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 .

Bharat 22 ETF New Fund Offer – A Balanced ETF

  • Date 13th Nov; ETF Opens 15-17th Nov
  • Product Type: Mutual Fund – ETF
  • Listing: Within 5 days post allotment
  • Raising Fund: Rs. 8,000 cr.
  • Sector: Diversified
  • Advice: Buy with a 3 year perspective 

jainmatrix investments, bharat 22 etf nfo

Summary

  • Overview: The BH22 is PSU heavy open-ended ETF scheme. The BH22 will cover 6 sectors and 22 firms including PSUs, PSBs and a few blue chip private firms. BH22 has a 20% cap on each sector and a 15% cap on each stock. The Rs 8,000 crore NFO is available at a discount of 3% on the Reference Bharat 22 Index. The BH22 appears better than CPSE on several counts like sector diversity, balance and higher mkt cap. firms.
  • Risks: 1) 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.  2) There is Political risk as a surprise election result could affect PSU firms.
  • Opinion: Investors can SUBSCRIBE to this ETF offering with a 3 year perspective.

See our past coverage of CPSE ETF NFO in Mar 2014, review in Sept 2015, the CPSE ETF FFO in Jan 2017 and a Video, and finally the CPSE ETF FFO 2 in Mar 2017.

Here is a note on Bharat 22 ETF (BH22)

Introduction  

  • The BH22 is an open-ended index ETF which is going to be listed on the Exchanges. The investment objective is to provide returns like the S&P BSE Bharat 22 Index. The amount to be raised is Rs. 8,000 cr.
  • The BH22 consists of 22 blue chip Govt. of India (GoI) holdings including PSUs, Public Sector Banks and the strategic holdings of GoI through SUUTI (Specified Undertaking of Unit Trust of India). BH22 is the 2nd ETF from GoI after CPSE ETF launched in 2014. Both these will speed up GoI’s disinvestment plans.
  • The BH22 will cover 6 sectors of basic materials, energy, finance, FMCG, industrials and utilities. The SUUTI firms (L&T, ITC and Axis Bank) have a 40% weight on the index. Other big names include SBI, Power Grid, NTPC and ONGC (5-9% each). The ones which would have a lower weight include NALCO, Indian Oil, Coal India, Bharat Electronics, Bank of Baroda, NBCC, Indian Bank and SJVN.
  • The mechanism of the ETF at launch would be as follows:

jainmatrix investments, bharat 22 etf nfo

Fig 1 – Bharat 22 ETF Mechanism

  • NFO price: The NFO Units being offered will have a FV of Rs. 10/- each and a premium of the difference between NFO Allotment Price and the FV. The NFO Allotment Price would be equal to 1/100th of S&P BSE Bharat 22 Index less discount.
  • In this offer 25% each is reserved for 1) Retail 2) Retirement Funds 3) QIB / NII and 4) anchor investors.
  • Discount: A discount of 3% on the NFO Reference Market Price of the underlying shares of S&P BSE Bharat 22 Index shall be offered to NFO of the Scheme by GOI.
  • The scheme is being managed by ICICI Prudential Asset Management Company Ltd. Asia Index will be the index provider and the index will be rebalanced annually.

Investment Details of BH22

  • The Scheme will invest at least 95% of assets in stocks of the Bharat 22 Index. It may invest in safe Money Market Instruments upto a max. of 5% of assets.
  • The AMC will use a passive or indexing approach to achieve the Scheme’s investment objective.
  • Here are Sectoral Asset Allocation, Historic Returns and Analysis of the 22 companies as part of this ETF.

jainmatrix investments, bharat 22 etf nfo

Fig 2 – Sectoral Allocation / Fig 3 – Performance of Index / Source: Offer Documents 

jainmatrix investments, bharat 22 etf nfo

Fig 4 – Analysis of Companies / Source: Offer Documents

  •  15 of the 22 firms are Large Cap giving some stability to this ETF composition.
  • Dividend: The Trustees may declare Dividend to Unit holders subject to the availability of surplus, at their discretion. If the Fund declares Dividend, the NAV will stand reduced by that amount.
  • Minimum Investment: It is Rs. 5,000 and in multiples of Re. 1 thereafter, with a maximum amount of Rs. 2 lakhs in retail category. Non Institutional Investors and HNIs may apply for over Rs 2 lakhs.
  • How to apply: You can apply via your broker or via the AMC (iciciprumf.com).
  • Listing:The units of the Scheme will be listed on NSE and BSE within 5 days after allotment. The allotment date of Units will be within 5 business days of offer application period. There may be an additional offering depending on NFO response.

How has the CPSE ETF performed so far?

From an issue price of Rs. 17.5/unit in March 2014 (for Retail), the CPSE trades at Rs. 30.4 giving a gain of 21% simple annual. The CPSE ETF FFO 2 launched in Jan 2017 had allotment at Rs. 25.21, giving a gain of 20.6% (in 10 months). So the energy focused ETF has so far generated above Index average returns.

Differences between CPSE ETF and BH22 ETF

  • The CPSE ETF comprised 10 PSU stocks from the Oil & Gas and energy sector. However the BH22 ETF is diversified among 6 sectors and 22 firms with a 20% cap on each sector and a 15% cap on each stock. Hence this ETF is more balanced across sectors and firms.
  • The GoI has cherry picked stocks which are into sectors where large reforms are underway.
  • This fund even includes Private sector firms like L&T, ITC and Axis Bank.
  • The CPSE ETF fund is larger. It has raised Rs 11,500 in 3 offerings from 2014 – 17.

Pros and Positives of BH22

  • This ETF has a lower management charge and the expense ratio is 0.0095% of daily average net assets. Also the maximum recurring expenses that can be charged shall not exceed 1.5% of daily net assets.
  • The fund will offer 3% discount to the NFO subscribers.
  • The 5 year share returns are 13.8% CAGR as against Sensex of 13.9%. See Fig 3. However the 1 year performance has been better at 22.5% as against 20.5% for Sensex.
  • Dividend yield for the stocks is 2.42% which is moderate, but higher compared to Nifty/Sensex, see Fig 4.
  • The constituents of BH22 have a lower P/E & P/B as compared to Nifty 50/S&P BSE Sensex. See Fig 5.

jainmatrix investments, bharat 22 etf nfo

Fig 5 – Valuations and Dividend Yields

  • The BH22 is diversified among 6 sectors with caps by sector and by stock. This gives leverage in the form of both secular & cyclical growth prospects.
  • Like the CPSE, the BH22 may be popular among Pension Funds, new equity investors and retirees.
  • Many of the firms have wonderful assets, the family silver of the GoI. Some even enjoy monopoly status in their sectors. With a resurgence in GoI governance and programs such as ‘Make in India’, Bank Recapitalization and focus on Defense and infrastructure, many firms have good prospects.
  • GoI is asking for higher dividends from PSUs and allowing them operational freedom to exploit assets and be more productive. This will benefits investors also. See report,  A Repurpose for our PSUs.

Cons and Negatives of BH22

  • There is no clarity on the future of GoI shareholding in these firms – will they be fully divested, or sold in a strategic sale, or expanded into JVs, or simply retained with GoI majority in the long run.
  • This BH22 ETF based divestment by GoI, like the CPSE, is likely to be repeated at a future date.
  • We are not sure if the high dividend paid by the PSUs will be passed on to the unit holders (either as NAV gain or Dividend) or used for recurring expenses, as per NFO document. The CPSE ETF 2014 too has not paid dividend for 3 years. The 2.42% dividend yield in BH22 involves substantial monies.
  • The average beta of these stocks is 1.28 indicating higher volatility than indices.
  • 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.
  • Any unexpected election results at the State or Center can delay reforms and affect BH22 performance.
  • A few firms are into financing power projects. The power sector is yet to see a revival and NPAs here are a key concern. As long as this problem is not resolved, these firms may face financial troubles.
  • Within the energy basket, there are upstream and downstream oil firms. Upstream firms do well when crude prices rise as their realizations go up, whereas downstream firms do well when crude falls as margins expand. The energy basket might be balanced, but together these firms may do just average.
  • Coal India recently hiked wages by 20%. Also there is a pollution aspect to coal usage. The share has performed badly. Any adverse government reforms could impact its financials in the short term.
  • ITC is a firm that is mainly into cigarette sales. This is a harmful product and in USA the industry players are in a sunset mode due to legal action – class action suits and massive penalties for compensating unwell consumers and their families.

Overall Opinion

  • The BH22 appears better than CPSE on several counts like sector diversity, balance and higher mkt cap.
  • This ETF is set to create good value for the investor as profit making PSUs, PSUs undergoing reforms and private sector firms have been bundled together. Given the advantage of an ETF in terms of cost & liquidity along with the discounts given by the GoI, we feel that the BH22 ETF is a good long term buy for value conscious investors.
  • This product appears attractive to the low risk equity investor and is comparable to the Balanced MFs.
  • Risks – lack of strategic clarity on PSU firms, and Political – a surprise election result could affect PSUs.
  • Investors can BUY with a 3 year perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain may hold a position in several of the stocks mentioned in this report. He also holds an interest in CPSE ETF since NFO in 2014. Other than this JM has no known financial interests in BH22 ETF. 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.

Bharat Electronics – Post OFS Note

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

jainmatrix investments, bharat electronics

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

About the OFS Offer

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

jainmatrix investments, bharat electronics

Post OFS applications and allotment

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

Opinion

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

JainMatrix Knowledge Base

See other useful reports:

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

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Disclaimer

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

A Repurpose for our PSUs

Thought for the day

Background: 

The Central Public Sector Enterprises were set up with the purpose of promoting “national interest” and “public investments in large industries” – something which could not be done by the private sector. This was done way back in the 1960s and 70s.
Forty years on, a lot has changed in the economic and business environments. Private sector lead by Reliance, Tatas and Bharti Group has surged ahead and shown them quite capable of setting up and handling global scale industries. Even the holy grail of “Defense” production is now being handed over slowly to Indian private sector firms. So why should GoI own large swathes of sectors like Oil & Gas, steel, other metal producers, telecom, banks, FMCG, pharma, even Indian Railways? In fact govt. ownership has actually allowed a lot of firms to fall back and wither away in terms of competitiveness and financial health (Air India!!??).

The Repurpose: 

The GoI appears to be relooking at our national “family silver” in this new environment and gearing up to repurpose our CPSEs. We feel the main purposes now should be:

  1. Just retain a few PSUs of strategic and national importance in the long run.
  2. Wherever the CPSE is in good health, is listed, and serves no major national interest, monetize these assets quickly. This can be through dividends, divestment and/or strategic sales (like Maruti !!??).
  3. Improve the health of the others, and set them up for listing, divestment and/or strategic sales.
JainMatrix Investments, CPSE

Please … not the Taj Mahal

The Capital Restructuring: 

The Central Govt. has issued comprehensive guidelines on capital restructuring of CPSEs by way of buyback, dividends, issue of bonus and splitting of shares to rake in more revenue. The finance ministry issued fresh norms which are as follows:

  • CPSEs having surplus cash can no longer invest funds in FD’s in banks, which generate a poor post-tax return of 4-5%. Every CPSE having net worth greater than Rs 2,000 crores and cash & bank balance of over Rs 1,000 cr. would have to buy back their shares.
  • Related to dividend, the new guidelines mandate that every CPSE would have to pay a minimum annual dividend of 30% of PAT or 5% of the net worth (whichever is higher) subject to the maximum dividend permitted under the current regulations.
  • CPSE’s will have to issue bonus shares if their reserves and surplus is equal to or more than 10 times of its paid up capital. Further, all CPSEs have to consider issue of bonus shares if their reserves and surplus are more than 5 times of the paid up capital.
  • The order has replaced the general guidelines on splitting of shares, by mandating that every CPSE, whose market price or book value of its share exceeds 50 times of its face value, will have to split its shares to make it affordable for retail investors. (Source Financial Express)

A quick look at some of the CPSEs we track reveals that many of these firms meet the stated criteria. The chart indicates likely corporate action by these PSUs.

  • In green are the firms that pass the criteria for the corporate action.
  • We have also calculated the dividend payable threshold, in crores, for the firms per these guidelines. It is still subject to the maximum dividend permitted regulations.
JainMatrix Investments

The new norms applied to a few PSUs

Benefits:

  • Most of these new norms are very good and uniformly benefit all shareholders. Buy backs improve the Earnings per Share of the firm, and should soon raise their market prices. Dividends, splits and bonuses are shared by both GoI promoters and all other shareholders.
  • This is also superior to the Follow on Public Offer method of encashing the GoI’s PSU shareholding, which was damaging to the share price and generally manipulated by the market participants.
  • Funds raised from these divestments/ sales should be used for infrastructure, education and capital expenditures rather than mere funding of deficits. Of course one can only hope for this kind of discipline from the GoI.

Open questions:

The real challenge before the government is to decide if it wants the CPSEs to become:

  • Independent institution and public owned firms, like ITC and L&T, benefiting the broad investing public, or
  • Owned by strategic partners/ new owners, like Maruti Suzuki, where they take over the firm for a large ownership premium, benefiting the coffers of GoI.

Either way, I have a feeling the CPSEs, PSUs and who knows, maybe even PSBs, may once again become valuable for the public shareholders !!

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. 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 atpunit.jain@jainmatrix.com.

PSUs are HOT investments

The government sector and PSUs were, till recently, not very good investments. The reasons were many. There was an uncertainty about their future.

Now things have changed:

  • The new Central government (well not new, now about 18 months in power) has undertaken a number of structural reforms that will slowly but surely improve the economy.
  • Government departments, lead by motivated ministers, are gathering speed in terms of clearer objectives, faster decisions and accountability. Coordination issues among ministries are being sorted out.
  • There are plans emerging for PSUs disinvestment, which will accelerate this process.
  • The slogan is ‘less government, more governance’. They appear to be executing on this.

In the light of this, JainMatrix Investments has prepared a report on a mid sized PSU. Based on our research, the PSU firm has a projected 80% gain in 2 years.

This is however premium content, so we invite you to subscribe to our Investment service to receive this and other such reports.

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NBCC: Small PSU Construction Sub-Contractor IPO, Avoid

  • Report Date: 27th March
  • The updates of 26th EOD are: Overall 58% subscription with Retail 93% and Institutions 52% with FIIs also stepping in. HNIs are at only 3%. These  are not great numbers.
  • My sense is that HNI will dive in today only, and with Retail and Institutions doing their bit, subscription may go to 2-3 times. Of course this is crystal ball gazing :-)
  • If limited to 2-3 times, then the IPO may list at the lower end of range.
  • Retail applicants can apply accordingly.

Report Date: 24th March ’12

  • Offering: Price Range Rs 90-106, available  from Mar 22-27
  • Opinion: Government dependent,  long term outlook poor , Avoid

NBCC – Description and Profile

  • National Building Construction Co is owned by GoI /Ministry of Urban Dev.
  • It provides Project Management Consultancy (PMC) for civil construction projects for Central and State Govt, civil infrastructure for power sector and real estate. Nationwide spread of projects address sectors like Hospitals (customer ESIC), Education Institutes, roads, irrigation, border fencing, etc.
  • FY11 Revenues were Rs 3,127 crores, with Net Profit 140 cr and EPS 15.6. The net worth is 728 cr and it has an order book of over ~10,000 cr. Dividend yield is about 3-4% at current IPO pricing.
  • However NBCC is a small PSU as it is a Nodal agency that essentially subcontracts work to contractors like L&T, Ramky Infra, etc. Here NBCC has back to back payments to contractors  so that payments from customers are disbursed less margins. So debt is zero. Free cash on the books is 450 cr (35/share).
  • NBCC has maintained ROE and ROCE of about 20% & 33%, in the last 3 years.

Key Strengths of NBCC and IPO offer

  • The 3 years revenue visibility due to the order book is fine, and debt is zero.
  • All India presence, with some international operations starting up too.
  • The construction /infrastructure sectors are in a boom phase with terrific multi decade growth. The Indian government has placed infrastructure spending at a high importance, per Budgets/ Plans.
  • A number of government depts are comfortable dealing with a PSU, and place their orders with NBCC.
  • A discount of 5% on the Offer Price is being offered to Retail Bidders

Key Weaknesses of NBCC and IPO offer

  • As a nodal Agency, NBCC itself does not possess project execution capabilities.
  • The quality of output of NBCC is dependent upon subcontractors. In this current competitive phase for construction, top firms are ready to work for NBCC. Once these pressures ease up in the next 2-3 years, the quality will fall.
  • In the medium term current subcontractors will themselves take up projects directly from govt departments, and NBCC will lose business.
  • NBCC can be compared/ benchmarked against a number of firms. In Building construction, private sector firms are available at PEs ranging from 2-20 times with only larger high profile firms going over 6 times. In Civil Construction sector, large firms are in a range of 6-20 times, with the average at 14 times. Many firms in this sector are available cheaper than NBCC, offering ownership of a better business operation.

Strategic Thoughts around this IPO

  • My worry is whether the good-looking NBCC financials will hold up once it is a listed firm. The QoQ requirements of transparency of a listed firm are challenging, particularly for a govt department run PSU.
  • Why does the government need to do an IPO for NBCC? This Nodal agency for construction should continue doing its good work for government departments. Why should the unsuspecting public be offered ownership in this business? (One rumour is that the Indian Government is testing waters before larger IPOs. This firm is then a bad choice in my opinion).
  • In the 60s, the Indian government owned/ nationalized firms like Banks, LIC, SAIL, BHEL, BEL, Indian Railways etc. so that they can manage them and invest large amounts in new capacity (no one else could). Today the Indian government suffers from a monopolistic, legacy oriented thinking, and a mistrust of the private sector.
  • In these modern times, private operators are far more efficient, capable and technologically advanced than PSUs in the same sector. Private sector can invest in heavy industry. The government should in fact vacate from sectors where private sector can do a better job. NBCC is clearly in one such sector.
  • NBCC has a poor competitive position in the industry. In the next 5-10 years, it will lose its relevance, unless it learns to compete against the private sector firms, and execute projects end to end.
  • See my reports of other firms in this space – BGR Energy Systems and A Roads and Highways Developer (please Subscribe to receive this)

IPO Offering Outline:

  • Offer is of 1.2 crore equity shares for 10% of the firm’s equity, in price range Rs 90-106, available from Mar 22-27th.
  • At the upper end, this values the firm at P/E of 6.8 times, and it will collect 127 crores, and the market cap of the firm will be 1200 crores.
  • Rating agency CARE has assigned a grade 4/5 to the IPO.
  • As on 24th Mar, the issue is 23% subscribed, primarily by Domestic Institutions. One hopes this firm is not another one headed for LIC :-)

Opinion, Outlook and Recommendation

  • NBCC IPO is not for the long term investor
  • It is of course possible that NBCC may offer a listing pop.
  • Conservative investors looking for PSU firms and safety for next 1-2 years may like to Subscribe. Interested investors should watch the subscription numbers on 26 Mar and take their decision.
  • And check back on this website www.jainmatrix.com for updates :-)

Public Reports

For the benefit of my readers, I will share public reports on this IPO by brokers. Note that their opinions may be different from mine :-)

No   Report Link Opinion
1 Aditya Birla Money Link Subscribe for Short Term Gains
2 Hem Securities  Link Subscribe for limited upside
3 Edelweiss Subscribe
4 Swastika Investmart Link Subscribe for the long term
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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

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Petronet LNG – entering a new Orbit

This report has been updated in June 2012 – see Petronet LNG – A Solid Gas Company

  • Date: 19 December, 2011
  • CMP: Rs 157, Large Cap with Market Cap Rs 11,883 crores
  • Advice: Invest, Target: Mar 2013 – 250 and Mar`14 – 301

Petronet LNG is doubling capacities in the next two years. It provides a clean fuel, Liquefied Natural Gas to an energy starved country. Being a PSU JV, business risks are lower. The operational performance and capacity addition projects in the last few years have been excellent. It is a gem of a stock that will continue to give equity investors safe and high returns for the next few years.

Petronet LNG – Description and Profile

  • Petronet LNG imports, processes and sells LNG in India, and is a JV of GAIL, ONGC, Indian Oil & BPCL.
  • Turnover in 2011 was Rs 13,197 crores with PAT at 620 crores. PLNG owns and operates a LNG terminal at Dahej, Gujarat that imports 10 mmtpa (Million Metric Tonne Per Annum) of LNG.
  • LNG is sourced through long term contracts (with 7.5 mmtpa from RasGas-Qatar, 1.44 mmtpa from Exxon Mobil-Australia and 2.5 mmtpa from Gazprom) and also spot cargoes (sourcing 0.6MT in ’12 from Gaz De France) that boost volumes and utilize capacity. These contracts indicate stable supplies.
  • Imported LNG is regassified and supplied to customers in pipelines – generally operated by GAIL and GSPL. The customer base includes power plants, household and commercial piped gas, fertilizer plants, Industrial boiler fuel, etc. Most sales are through GAIL, IOCL & BPCL
  • Operational performance was excellent, with the FY11 LNG volumes at 11 mmtpa, a 110% capacity utilization at Dahej.
  • The global prices of LNG have been rising. It depends on location, and today varies from  4$/mmbtu in USA to 15$/mmbtu in Japan. However, PLNG is protected from these prices, as it ensures back to back buying arrangements with customers. It earns a Rupee denominated marketing margin.

The current projects include:

  • PLNG is 26% promoter of a JV with Adani Enterprises, called Adani Petronet (Dahej) Port Pvt Ltd.  This is a bulk Solid Cargo Port of capacity 12 mmtpa that has started operations this year at Dahej.
  • Construction has started of an additional LNG jetty at Dahej which will take the terminal capacity from 10 to 15 mmtpa by Sept ’13.
  • Construction of a new LNG terminal at Kochi, Kerala of 5 mmtpa, which will start by Sept 2012.
  • Started LNG Supply in Cryogenic road Vehicles – for supply to isolated customers without pipelines
  • Direct Marketing of LNG  in coastal & industrial areas, will develop the market /boost demand

 Future Plans

  • Plan for forward integration into a power plant of 1200 MW capacity at Dahej using LNG fuel.
  • A plan for building a LNG Terminal on the east coast of India. Location to be decided.
  • Once the Kochi terminal is ready, PLNG may also invest in a power plant here, using LNG fuel.
  • By FY16, total capacity could increase to 25 mmtpa, which is 2.5 times current capacity.

Industry Note:

  • Gas is a cleaner fuel than Coal and Oil. It burns completely. Usage of Gas is better environmentally than other fuels.
  • Gas consumption in India is low compared to global patterns. PLNG is a pioneer that is creating the infrastructure that will improve gas usage and meet demand.
JainMatrix Investments

Fig 1 – Energy consumption – World and India – Click to expand

  • Today India is energy hungry, and raw fuel deficit, with supply issues:
  1. Coal – while there are enough Coal reserves, Coal India has not been able to meet production targets. Their constraints are environmental clearances, logistic challenges, recent heavy rains in mining areas and labor issues. Other mine owners in India are also not producing enough; so many customers need to import coal. Also Coal is a dirty fuel.
  2. India is a crude oil importer and 70% of demand comes from this route. Oil prices are high.
  3. Nuclear energy has suffered a setback in India due to the Japan disaster. New plant construction is a political hot potato. Hydro and Renewables have a high cost of capacity setup.
  • Indian gas demand is expected to reach 381 mscmd by 2015, compared with a current supply trajectory of 202.9 mscmd. There is definitely a huge demand for gas.
  • Domestic supply of Natural gas from Reliance (Krishna Godavari), ONGC and Oil India wells has not scaled up and will not be able to meet above demand.
  • Other LNG terminals are Hazira (Shell owned, 3.5 mmtpa) and Dabhol (GAIL/NTPC, ready by 2012).
  • GAIL also procures LNG in long term contracts, and used the available terminal capacity (including PLNG) to import this.

Stock evaluation, performance and returns

  • PLNG had its IPO in March 2004 priced at Rs 15. It was oversubscribed 4.2 times.
  • The maiden dividend of Rs 1.3 on FV Rs 10 was paid in 2007. Thereafter dividend has shown a steady to increasing trend (See Figure 2)
  • At CMP of Rs 157 today, the stock has shown a 42% annualized return over the last 8 years!
  • Revenues have grown steadily at 37% CAGR, (Fig 3), along with EBITDA – 35% and Profits 29%.
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Fig 2 – Petronet LNG stock performance – Click to expand

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Fig 3 – Quarterly revenues have grown steadily

  • Cash flow and EPS are showing a robust growth rate – see Fig 4. A dip in 2010 was temporary, with a substantial recovery in 2011.
  • With the excellent capacity utilization in 2011, PLNG has partially repaid debt and D/E ratio is 1.0
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Fig 4 – Cash Flow and EPS have grown substantially

  • Price and PE chart shows that PE has fallen recently close to the 5 year mean of 14 times. (Fig 5). PE today is 13.3 and has fallen 43% from 23 levels. During this fall, the price has only fallen 14% from the recent peak of 183 in Aug 2011. The rest of the fall comes from EPS growth, see fig 6.
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Fig 5 – Price and PE Graph

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Fig 6 – Price and EPS Graph

  • Price and EPS quarterly graph shows that EPS growth has accelerated in recent quarters. This elevated EPS will stabilize in 2012, and any further gains will come from interest cost reductions. Volume growth will happen in 2013 with additional capacity coming on stream in Kochi and Dahej.
  • ROCE is between 15 – 25%
  • PEG is at 0.46 – indicates safety and undervalued status

Financial Projections, with FY14 estimates

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Exhibit 7: Financial Projections – (Click to expand)

Risks:

  • A global recession, perhaps involving a European country debt default, will depress the equity market overall, and PLNG also. But this even if it happens, will be a temporary condition.
  • There has been a recent spurt in spot LNG price. This was largely due to the March 11 Japan earthquake and nuclear disaster; Japan has started idling their nuclear plants, and turned to LNG in a big way. In India, LNG demand is high, but may drop if prices exceed 18$/ mmbtu. However, spot prices in USA are at <4 $/mmbtu, so this is unlikely. US has low prices as they have started producing LNG from non conventional sources.
  • Pipeline infrastructure from Dahej to customers is a constraint. However this is being aggressively addressed by GAIL and GSPL. Similarly pipelines to demand centers around Kochi have to be set up to evacuate gas. This being addressed by Kerala Government and GAIL
  • Currently, LNG charges regasification tariffs are not under the purview of the regulator. Any policy decision to regulate the tariff may affect the valuation of the stock.

Opinion, Outlook and Recommendation

  • PLNG has an excellent track record of investing in LNG assets and utilizing/ operating them well.
  • In the last 8 years, all performance metrics of revenues, profits and EPS have improved to a new orbit every time capacity was added. Imminent capacity addition will replay this characteristic.
  • Demand is huge in India, and as of now, all LNG import for the next 6 months are booked by customers.
  • My opinion is that Petronet will continue down the path of solid stock performance and dividends over the next decade .
  • Invest now and systematically for long term outperformance
  • The projection/ targets for PLNG are
    • March 13 target is 250 (a 60% appreciation from current levels)
    • March 14 is 301 (a 92% appreciation)
  • The projections are based on PE expectations of 18 times.

:-)

This report is an update on a Feb 2011 report I had shared, available on Link

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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/