Future Ventures IPO note – April 2011

Update on April 29th

  • Future Ventures has got a dull response till today. The overall subscription is 1.52 times the offer.
  • QIB section is oversubscribed 0.26 times, HNI is (strangely) 7.8 times and Retail 0.6 times.
  • Poor response may be not just because of poor reviews (see my IPO note below) but also concurrent investments in Muthoot Finance IPO as well as the falling Sensex over the last few days.
  • Good luck with your investments !!

IPO Note – Published on: Apr 23, 2011

Future Group – Promoter

  • Future Ventures is a part of Future Group, which owns companies like Pantaloon Retail India (Big Bazaar, Food Bazaar), Future Value Retail and NBFC Future Capital Holdings, Future Generali Insurance, Futurebazaar India, etc.
  • The core business of the Future Group is Retail, but subsidiaries are present in consumer finance, capital, insurance, leisure and entertainment, consumer brands, retail real estate development and retail media and logistics. The key promoter is the well-known Mr. Kishore Biyani.
  • Two of these group companies are listed entities, Pantaloon Retail India and Future Capital Holdings.
  • These two have not exactly outperformed in the last few years in the market.

Pantaloon Retail – Financial snapshot

A 5-year view of the share price of Pantaloon Retail. (click on graphic to enlarge)

Future Ventures IPO

Chart 1: Pantaloon Retail Share Price

A view of financials of Pantaloon Retail. (click on graphic to enlarge)

Future Ventures IPO

Chart 2: Pantaloon Retail financials

  • While revenues are high/have grown fast, there have not been corresponding EPS growth (due to dilutions), and the P/E still remains very high
  • Current market cap – 6000 crores

Future Capital Holdings

  • Had IPO in Feb 2008
  • The stock has suffered an average 40% fall in share price annually in the last 3 years
Future Ventures IPO

Chart 3: Future Cap Shares

A view of financials of Future Capital. (click on graphic to enlarge)

Future Ventures IPO

Chart 4: Future Cap Financials

  • Sales have not increased steadily; Profits have increased, but P/E still remains very high
  • Current Market cap – 1060 crores

The short profiles of group companies show that while the ‘BigBazaar’ brand is very good, and revenue growth high, the group has not been able to translate it’s ambitious plans into profitable businesses, and benefit shareholders.

Future Ventures – Business Profile

  • Future Ventures is like a holding company, that invest in and operates businesses in ‘consumption-led’ sectors in India, sectors which will grow as the purchasing power of Indian consumers increases, and caters to their changing tastes, lifestyle and spending habits.
  • Future Ventures has so far invested around Rs 450 crore in apparel makers, and Rs 250 crore in processed foods and consumer goods space.
  • The Company has 14 companies in its portfolio, and owns brands in fashion, FMCG, food processing and home products.
Category Company Products/ Market Remarks
Retail distribution 1.   Aadhaar Retailing Limited Rural and semi-urban retail distribution of agricultural and consumer products Majority stake
FMCG 2.   Future Consumer Enterprise Ltd. Brands such as Tasty Treat, Clean Mate, Care Mate, Premium Harvest and Fresh and Pure, being marketed through Big Bazaar and Food Bazaar. Majority stake
FMCG 3.   Future Consumer Products Ltd Brand ―Sach. Majority stake
Fashion 4.   Indus League Clothing Limited Ready-made garments under brands like Indigo Nation, John Miller, Scullers and Urban Yoga Majority stake
Home Products 5.   Indus Tree Crafts Private Limited Domestic retailing and distribution of a wide range of environmentally and socially sustainable products. Majority stake
Fashion 6.   Lee Cooper India Limited A manufacturer and retailer of denims, trousers, jackets, shirts and shoes under the Lee Cooper brand. Majority stake
Fashion 7.   Biba Apparel, Holds 17.3% stake in Biba, which will be upped to 28% soon
Food Processing 8.   Capital Foods A food processing company with brands like Chings Secret, Smith & Jones, Raji, Mama Marie and Kaeng Thai.
Consumer 9.    Amar Chitra Katha Stake to increase to 26% from 13.7% presently
Fashion 10.     AND Designs India Ltd; Global Desi Luxury clothing brands
Fashion 11.     Holii Accessories Private Ltd A joint venture with Hidesign India Private Limited for leather handbags and wallets
Fashion 12.     Celio Future Fashions Ltd A JV with a French brand of men‘s apparel and accessories
Fashion 13.     Turtle Limited Manufacturer, distributor, exporter and retailer of men‘s wear products.
Retail 14.     SSIPL Retail Ltd A retailer of Nike branded products, wholesaler of footwear, sportswear and apparel, and a manufacturer and distributor of footwear.

Strategy

  • Future Ventures tries to exercise operational control or influence in the business ventures in which it invests
  • They pursue appropriate longer-term value creation strategies, which may include unlocking value in their business ventures through public market or private sales.
  • Future Ventures is also looking to invest in more ‘mature opportunities’ in companies which, it believes, have unrecognized growth potentials or are undervalued or in which it can identify hidden assets or recovery potential.

Financials

  • The company had consolidated net worth of Rs 738 crore as of December 31, 2010, with the value of investments pegged at Rs 112 crore.
  • For the nine-month period ended in Dec 2010, it had a total income of Rs 399 crore (primarily through retail sales of merchandise from its subsidiaries) with a net loss of Rs 14.67 crore.
  • Company officials claim that most of the companies that Future Ventures has invested in are breaking even at the EBITDA level and the results will improve going ahead. /This does seem like a tall claim :-).
  • The company is not expensive at around 1.1x post IPO book value (at upper band).
  • Market cap after successful listing would be about Rs 1800 crores

Negatives/ Challenges/ Concerns

  • For many portfolio companies, this is very early in the investment cycle. It is actually Private Equity companies that invest in such early stage, high risk businesses.
  • Most businesses are small and are many years and crores of rupees away from break-even volumes, a national recognized brand and profitability. Even with Pantaloon’s clout in distribution, it will take many years of investment to start making profits.
  • Intellectual Property – royalty payments to be made to Future Group for ‘Future’ trademark.
  • While there is a common ‘consumption‘ theme in the Portfolio companies, there are few synergies among them. Eg. A high-end fashion label from a well-known designer has little rub off on Amar Chitra Katha comics for kids or Chinese food sauces.
  • It’s possible that Pantaloon Retail may soon launch a number of Retail formats, but Future Ventures is a shaky ‘backward integration’ for Pantaloon Retail.
  • Maze of portfolio companies, difficult to value and project financials.

Offering

  • The IPO has been priced at Rs 10-11 a share. It is open for subscription from April 25-28 for Institutional investors and till April 29 for Retail.
  • The company will raise Rs 750 crore rupees through its initial public offering of shares, of which Rs 120-150 crore will be invested in existing businesses, while the remaining amount will be used for new acquisitions
  • Besides various privately held group firms of Kishore Biyani, Pantaloon Retail is the largest shareholder of Future Ventures with 18 per cent stake that will fall to 9.5-10 per cent post issue. Promoters’ combined holding will drop down to around 31-32 per cent post IPO while that of  Bennett Coleman & Co Ltd (Times of India Group) will see its 12 per cent stake drop to around 6.5 per cent, according to industry estimates.
  • This is the second attempt by the company to raise money via an IPO. It had earlier filed for an IPO just when the financial crisis began, then cancelled it.

Investment Advice

  • Avoid the issue for the following reasons:
  1. This is an investment vehicle in a clutch of firms that need heavy investments to grow in terms of brand and scale of business
  2. There is a bad record of profitability in the current business
  3. Poor track record of the promoter, of shareholder value creation in previously listed firms.
  • Watch subscription figures of IPO till April 28 to set expectations
  • Check back on the website www.jainmatrix.com for updates.
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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/

Performancing Metrics

My investment rupee says Yes Bank

Yes Bank is an aggressive high potential new generation bank. The recent fall in prices by 28% makes this an attractive entry point for long term investment.

There is an updated report of Yes Bank available at link The Brave Warrior of Indian Banks by JainMatrix Investments includes Q1FY13 results, news updates and FY15 projections.

Yes Bank  – Description and Profile

  • Incorporated in 2003, Yes Bank received the only greenfield (Start up/New Bank) license awarded by the RBI in the last 15 years
  • Founded by bankers Rana Kapoor and Ashok Kapur, (combined stake 32.6%). Other shareholders are Rabobank 18.20%, AIF Capital (private equity), Orient Global (investment firm), Swiss Re, Khazanah Nasional (Malaysia Govt) all 3.5-5% each.
  • It has 185 Branches currently of which 14 were added in Q3 FY11.
  • Market cap is at Rs. 9,300 crores, putting it at #12-13 among all Indian banks, and #7 in private sector
  • The firm has about 4000 employees, including 970 hired already in FY11

Yes Bank has superior strategies

In spite of over a hundred banks as competition, Yes Bank stands out for the following reasons:

  • Seasoned, capable bankers as Management team
  • The firm is nimble and agile, and rapidly enters new high potential industries sectors for advisory, loan and banking services
  • Focus on Knowledge based approach to lending. Loans exposure is to sectors like Food and Agribusiness, Engineering, Infrastructure & Logistics, TMT (Technology, Media & Telecom) and Healthcare.
  • There are four business verticals in the bank: a) Corporate & Institutional Banking b) Commercial Banking c) Business Banking-SME d) Retail Banking.
  • The business focus was Corporate banking till now and on select sectors while providing the entire value chain in those niche sectors. Having achieved some scale, the bank is now widening focus into SMEs and Retail.
  • Aggressive Retail growth plans will help increase low cost CASA deposits, and increase margins. The RBI has granted license for 91 additional branches, so the total may increase to 250 by June ’11
  • Mistakes are made, but it learns from these, and exits fast (example – in 2007, there were a lot of complaints against complex foreign exchange derivative products sold to SMEs, that turned loss making. There were litigations against Yes Bank (and several other banks too). All these have been resolved.
  • Growth has been organic, and may remain as such. The executives believe that for Yes Bank, organic growth comes at a lower cost compared to available banking assets

Stock evaluation, performance and returns

  • It’s IPO in July 2005 was priced at Rs 45. It was 31 times oversubscribed. The maiden dividend was paid in 2010.
  • At CMP of Rs 277 today, the stock has shown a 33% annualized return over the last 6 years! (See Fig 1)
  • Income and Profit too have grown steadily (Fig 2)

Yes Bank, Stock appreciationFig 1 – Yes Bank stock performance (click to enlarge) Source: JainMatrix graphics

Yes Bank, Revenue, ProfitFig 2 – Quarterly income and Profit have grown steadily over the last 5 years Source: JainMatrix graphics

  • NII – the difference between Interest from Loans and Cost of loans – has grown at 41.5 % annually over the last 5 years. This is phenomenal, and indicates good margins
  • NII plus Other Income – Add to this income from fee based services like investment banking, advisory services, etc –  have grown at 37%

Yes bank, Price Earnings trendFig 3 – Price and PE Graph (click to enlarge) Source: JainMatrix graphics

  • After IPO, made at a high valuation, the PE stayed high for a few years (fig 3). The patient investor got rewarded in 2008-2011 period, where the share price rose rapidly.
  • There has been a recent fall, the PE now is low at 14.4 and this gives investors another opportunity to enter

Yes bank, EPS trendFig 4 – Price and EPS Graph Source: JainMatrix graphics

  • EPS (adjusted for equity dilutions) growth has been 36% CAGR over the last 5 years. The EPS quarterly graph (fig 4) shows an amazing parabolic rise. I would say it is a great company just achieving critical mass of size, brand and reach.
  • PEG is at 0.4 – indicates underpriced status, a very good investment opportunity
  • RoE is at around 20% – healthy statistic.
  • Price/Book is 3.08, this is fair for a mid sized fast growing bank.
  • Gross and Net NPAs are at 0.23% and 0.06%. This shows remarkable credit assessments and good processes
  • CASA ratio stands at mere 10.1% as on Q3FY11. This is low by general banking ratios, but this is being addressed aggressively.

Opinion, Outlook and Recommendation

  • India is an underbanked country. The RBI is actively encouraging new banks, and vast swathes of Rural India remain unbanked. The potential for Yes Bank to grow is large.
  • At the same time, competition in urban areas is high, due to presence of public sector, private as well as MNC banks.
  • RBI expects average industry growth rate to be 20% during FY11.  Yes Bank is expected to grow at a far faster rate than industry. It has well-defined, sustainable growth strategies in place.
  • Yes Bank will grow at 35-45% in terms of Profits and NII + fee Income for the next 5 years. With this trajectory, Yes Bank will join the ranks of large well managed private banks like HDFC Bank and Axis Bank
  • The fall in share price by 28% from the Nov 2010 peak to date has made current valuations attractive
  • However a look at the graph of DMA of the stock (fig 5) shows that the stock stays for long periods of time above or below the 200 DMA. It recently went below the 200DMA, so my advice is to wait for the stock to go above this before investing.
  • However retail investors can start to Invest systematically.

Yes Bank technical analysisFig 5 – Price and DMA chart (click to enlarge) Source: JainMatrix graphics

Risks:

  • High competition
  • High interest rates and increased Costs – particularly employee costs
  • Execution risks in rapid bank branch growth
  • Current weakness may mean a period of falling prices before the appreciation resumes (fig 5)

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/
Performancing Metrics

Petronet LNG – This stock beats an FD anyday !!

This report on Petronet LNG was published in Feb 2011. An update is available at Link

Petronet LNG is a gem of a stock that has given equity investors safe and high returns for the last 7 years.

Description and Profile

  • Petronet LNG is a PSU created to import, process and sell LNG in the country
  • It is a JV between GAIL, ONGC, Indian Oil and BPCL. This helps in all inter company coordination issues
  • It owns and operates a LNG terminal at Dahej, Gujarat that imports 10.0 MMTPA (Million Metric Tonne Per Annum) of LNG. It also owns sea vessels that help transport LNG from sources
  • The capital/ investment plans of PLNG include:
    • Capacity expansion at Dahej
    • A new LNG terminal at Kochi, Kerala.
    • Plan for forward integration into power plant construction at Dahej, which will use the imported LNG as fuel
    • A longer term plan is for a power plant at Kochi, using LNG
  • Imported LNG is regassified and supplied to customers in pipelines – generally operated by GAIL
  • The varied customer base includes Power plants, household and commercial piped gas, fertilizer plants, Industrial boiler fuel, etc.
  • Turnover in 2010 was Rs 10,600 crores with PAT at 404 crores.
  • Sourcing of LNG is in the form of long term agreements with Australia and Qatar. In addition Petronet sources spot cargo of Natural Gas, to boost volumes and utilize capacity

Stock evaluation, performance and returns

  • This stock had it’s IPO in March 2004 priced at Rs 15.
  • Maiden dividend was paid in 2007. Thereafter dividend has shown a steady to increasing trend
  • At CMP of Rs 126 today, the stock has shown a 44% annualized return over the last 7 years!

Petronet LNG performancePetronet LNG stock performance (click to enlarge)

  • Revenues have grown steadily.

Petronet LNG Quarterly Revenue chartQuarterly revenues have grown steadily over the last 6 years

  • Cash flow and EPS are showing a robust growth rate – see graph. Dip of EPS in 2010 is expected to recover substantially in 2011.

Cash Flow and EPS have grown substantially

  • Price and PE chart shows that PE is at upper end of 5 year range. Some expectations are priced in of capacity additions and likely revenue growth.

Petronet LNG Price and PEPrice and PE graph

  • Price and EPS quarterly graph shows recent spike in price, rising to all time highs

Petronet LNG Price and EPS quarterlyPrice and EPS graph

  • ROCE is between 15 – 25%
  • PEG is at 0.93 – indicates safety and undervalued status

Opinion, Outlook and Recommendation

  • India is an energy hungry country, and will remain so for decades
  • Gas is cleaner and preferred as fuel compared to coal and oil (polluting).
  • Petronet LNG will continue to dominate the gas infrastructure and imports sector due to its PSU and JV status and strong partnerships
  • Reliance Industries gas is at a physically distant source, and of insufficient quantity to challenge Petronet LNG as a supplier. In fact the two firms may work together in the future to service customers in respective regions
  • By investing in further capacities and downstream businesses, Petronet will be able to leverage it’s cash flows for growth and profitability in the future
  • 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

Risks:

  • A spike in Natural gas prices will be passed on to customers as most are on long term purchase contracts. Spot cargo volumes may be affected, though, and customers may not purchase these incremental volumes
  • Pipeline infrastructure from Dahej to customers is a constraint. However this is being aggressively addressed by GAIL
  • Current market weakness may take PLNG down temporarily, but expect recovery and solid performance

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/
Performancing Metrics