Syngene Post IPO report

Post IPO report dated 17th Aug 2015

Dear Investor,

Here is a short post listing report on the Syngene International IPO.

  • The IPO that was open from 27-29th July received excellent response with a 32.05 times over-subscription.
  • While Retail was only 4.8 times oversubscribed, the QIB portion was over 51.5 times and non institutional investors (NII) category was over a massive 90.2 times.
  • The IPO price was declared at the upper end of Rs 250. We saw the positive mood continuing on the listing  date also.
  • Listing happened on 11th Aug and was enthusiastic as the share closed with a 24% gain at Rs 310.
  • Today, one week from listing date, the share is at Rs 347, a solid 39% gain for investors.

For us at JainMatrix Investments, this is another win with a correct analysis so far.

Happy investing,

Punit Jain

IPO report dated 27th July 2015

  • Issue Price range: Rs. 240-250 and Issue Period: 27-29th July 2015
  • Target Market Cap Rs 5,000 crore and Industry – Pharma R&D
  • First day – 32% subscribed
  • Advice: Buy for 2-3 years

The Syngene IPO is a first time offer from the high potential sector of pharma R&D Outsourcing. The Income, EBITDA and Profits have grown well at 18.2%, 30% and 31.3% CAGR resp. over 5 yrs. There is ample global growth possible if Syngene is able to manage scale and efficient operations. The valuations are high by Indian IT services levels, but is justified by sector leadership & innovation. Investors may BUY with a 2-3 year perspective.

Here is a note on Syngene International Limited IPO.  (Syngene)

IPO highlights

  • The Syngene IPO is open from 27-29th July 2015 with Issue Price band: Rs. 240-250 per share.
  • Shares offered in IPO are 2.2 crores, of Face Value Rs 10 per share, which is 11% of their post-Offer equity share capital. This will raise Rs.550 cr. and target market cap is Rs 5,000 cr.
  • Minimum bids: 60 shares & multiples thereof. Minimum investment: Rs. 14,400.
  • The IPO involves no equity dilution, and IPO proceeds will flow to the promoter, Biocon Ltd.
  • The P/E of Syngene are 30.3 – 31.5 times estimated FY15 earnings, at lower/upper price limits.
  • The company has already raised Rs 150 cr. from anchor investors.
  • To understand Syngene better, we first see a snapshot of the listed parent company Biocon.

Biocon Ltd. Snapshot

  • Biocon Ltd is engaged in developing medicines (generic insulins and biosimilar monoclonal antibodies) for addressing chronic diseases for cancer, diabetes and autoimmune patients.
  • FY15 revenues were 3,300 cr and PAT 528 cr. The Income, EBITDA and Profits have grown at 15%, 9% and 10% CAGR respectively over 5 years. See Fig 1.
Biocon financials, JainMatrix Investments

Fig 1 – Biocon Financials, JainMatrix Investments

  • It had its IPO in 2004, at a price of Rs 315. There was a 1:1 bonus issue in 2008, so with the CMP of Rs 465, the share has given shareholders a 10.3% CAGR return over 11 years. The Sensex gave 15.3% CAGR in this period, so Biocon underperformed the Sensex by 5% CAGR.
  • Overall we rate Biocon as an average performer.

Introduction to Syngene

  • Syngene started in 1993 at Bengaluru, and is a subsidiary of Biocon. It is engaged in providing contract research and manufacturing services for pharma sector. It is one of India’s leading Contract Research Organisations (CRO) in the $14.7 bn global pharma CRO market.
  • Revenues in FY14 were Rs 708 cr and profits Rs 135 cr. It has 2,667 employees, incl. 2,096 scientists.
  • It offers a suite of integrated, discovery, development and delivery services for novel molecular entities (NMEs) across sectors like pharmaceutical, biopharma, and biotechnology.
  • It is primarily an export oriented business, see Fig 2.
Syngene Segments, JainMatrix Investments

Fig 2 – Syngene Business Segments, JainMatrix Investments

  • With a laboratory area of 9 lakh sq. ft., Syngene currently services over 200 clients, ranging from MNCs to start-ups, including 8 of the top 10 global firms. It has dedicated research centers with Bristol-Myers Squibb, Abbott Labs and Baxter International.
  • Syngene helps its clients in conducting discovery (from hit to candidate selection), development (including pre-clinical and clinical trials, analytical and bio-analytical evaluation, formulation development and stability studies) and pilot manufacturing (scale-up, pre-clinical and clinical supplies) each with distinctive economic advantage.
  • In addition to research staff dedicated to a particular client, Syngene also offers resources through flexible business models like a full-time equivalent (“FTE”) and fee-for-service (“FFS”).
  • Syngene is planning investments in the next three-four years of a new mfg. facility, a center for work on biologics and formulations (Bengaluru) and also to expand existing facilities. This will be with funds raised from internal accruals and debt.
  • The leadership team is Kiran Mazumdar Shaw (MD) and Peter Bains (ED/ CEO).
  • Silver Leaf Oak, a private equity fund acquired 10% stake in Syngene in 2014.

Financials of Syngene

  • The Income, EBITDA and Profits have grown at 18.2%, 30% and 31.3% CAGR resp. over 5 years. See Fig 3.
  • The EPS, adjusted for the IPO has grown by 31.4% CAGR over 5 years.
Syngene Financials, JainMatrix Investments

Fig 3 – Syngene Financials, JainMatrix Investments

  • The business has been Cash Flow positive for 4 of the last 6 years. Of late, the firm has been investing heavily in its business. In FY15, the Free Cash Flow has been positive. See Fig.4.
  • RoCE and RoE metrics are quite impressive, which are at 30.5% & 20.5%.
  • Finance costs decreased by 94% in FY14 (from 6.5 cr. in FY13) on account of repayment of debt. In addition there were forex losses in FY15. As a result, in FY15 we see that there is negative cash from operations and positive flow from Investments.
Cash Flows, JainMatrix Investments

Fig 4 – Cash Flows (Chart by JainMatrix Investments)

  • Shareholding Pattern (%): Post-issue the shareholding pattern will be Promoter Group 74.5%, Institutions and Public 22.1% and Non Promoter & Non Public is 3.3%. See Fig 5.
Shareholding Patterns, JainMatrix Investments

Fig 5 – Shareholding Patterns, JainMatrix Investments

Business and Industry Notes 

  • CRO firms offer outsourced services to support R&D driven organizations across industrial sectors like pharmaceuticals, biotechnology, biopharmaceuticals, nutraceuticals, animal health, agro-chemicals, cosmetics and electronics.
  • CRO services for pharma sector span the range of R&D activities from New Molecular Entity (“NME”) discovery, development and manufacturing.
  • CROs offer clients an opportunity to manage costs, have flexible operations and realize efficiencies in R&D and related functions. However most CRO service providers specialize to some degree based on the needs of their clients and the market in which they operate.
  • As per Frost & Sullivan estimates, global R&D expenditure for the pharma industry in 2014 was approximately US$139 billion, of which US$105 billion could have potentially been outsourced. According to the report, outsourcing penetration for the CRO market for development services as of 2014 is estimated to be 27.3% of the potential outsourcing market for development services, but poised to grow to 38.7% in 2019, reflecting a CAGR of 12.5%.
  • Growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D. The CRO industry has grown substantially in recent years and there is also an opportunity to grow through an increase in market share.

Positives for the IPO

  • Syngene has plans for capex of Rs 1200 cr. over the next 3‐4 years. Out of this, one half would be for expanding existing facilities and the rest for setting up a new facility at Mangalore.
  • Syngene has 2,096 scientists, including 259 PhDs, and 1,661 scientists with master’s degree. Resource knowledge and experience is the major asset for Syngene.
  • Syngene has a good track record in compliance, getting a clean chit in three audits conducted by the US Food and Drug Administration (USFDA) over the past 18 months.
  • Syngene has already signed commercial supply contract for 3 molecules with its clients. Besides, the company has a list of potential molecules lined up from its clients to sustain its base business over the medium term.
  • Syngene is the first listing of an Indian pharma CRO firm. It is thus a leader and an innovative company and may receive a premium valuation.
  • There is a good synergy between the Biocon (pharma manufacturing) and Syngene (CRO). This will help Syngene in its planned growth.

Negatives and Risks

  • Syngene’s top 10 clients gave 72% of its revenues in FY15. There is a dependency on a few large clients, and the financials of Syngene can be affected in case loss of any of these clients.
  • There are a number of pending litigations against Syngene, under heads Tax Matters, Threatened Litigation and Pending CIL Litigation (former subsidiary); and Litigation by and against the Promoter, all numbering close to 100. An adverse outcome in these proceedings may affect the reputation and financials, and harm future business.
  • The FY14 balance sheet showed Contingent Liabilities totaling to Rs. 181.3 cr. which if materialized may adversely affect the profitability of the company.
  • Intensifying competition for pharma CRO services.
  • The Syngene financial performance can be affected by INR/ USD price fluctuations. In addition, international economic, taxation and outsourcing policy changes can materially affected operations.
  • Ability to attract, retain and develop key personnel and R&D talent.
  • The pharma sector faces many IP related compliances and legal challenges. Syngene needs to ensure it stays protected and safe from such issues.
  • Clients need high secrecy and confidentiality as R&D work is for multi-billion dollar new drugs. Syngene needs to ensure that at the group and employee level, information stays safe.
  • Regulatory tightening of clinical trials in India has slowed the work on Indian clinical trials.

Benchmarking

As there are no listed companies in India that are directly comparable to Syngene, we benchmark the firm against IT services, KPO and PHARMA firms like Biocon, eClerx, Glenmark and Mphasis Ltd.

Benchmarking, JainMatrix Investments

Fig 6 – Benchmarking of Syngene, JainMatrix Investments

  • Based on Fig 6, we come to the following conclusions.
  • Syngene revenue growth is impressive. On margin parameters, it ranks second after eClerx.
  • Syngene rates high on RoCE and RoE.
  • For an early stage company, Syngene appears good in terms of low debt and financials.
  • Syngene’s closest listed peer outside India is a Chinese firm, Wuxi Pharmatech, which is four times bigger in revenues, and is trading at a PE of 30.

Overall Opinion

  • The Syngene IPO is a first time listing from a new and high potential sector of pharma CRO.
  • This business builds on Indian advantages in IT services and KPO, with a pharma sector focus. The benefits have shifted from cost arbitrage to enhancing R&D productivity and reducing time to market.
  • The promoters have an average record of providing returns to shareholders in Biocon. However, Syngene represents a high potential business segment, which is being spun off.
  • The success of competition, eg Wuxi Pharmatech, indicates that there are ample opportunities for Syngene to grow and compete in the global market.
  • We are positive on the prospects of Syngene in this IPO offering. Buy at cut off with a 2-3 year investment 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. JM has no known financial interests in Syngene International Limited 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. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under 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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Syngene IPO: Good Pharma R&D spinoff from Biocon

  • Date – 27th July 2015
  • Issue Price range: Rs. 240-250 and Issue Period: 27-29th July 2015
  • Target Market Cap Rs 5,000 crore and Industry – Pharma R&D
  • First day – 32% subscribed
  • Advice: Buy for 2-3 years

The Syngene IPO is a first time offer from the high potential sector of pharma R&D Outsourcing. The Income, EBITDA and Profits have grown well at 18.2%, 30% and 31.3% CAGR resp. over 5 yrs. There is ample global growth possible if Syngene is able to manage scale and efficient operations. The valuations are high by Indian IT services levels, but is justified by sector leadership & innovation. Investors may BUY with a 2-3 year perspective.

Here is a note on Syngene International Limited IPO.  (Syngene)

IPO highlights

  • The Syngene IPO is open from 27-29th July 2015 with Issue Price band: Rs. 240-250 per share.
  • Shares offered in IPO are 2.2 crores, of Face Value Rs 10 per share, which is 11% of their post-Offer equity share capital. This will raise Rs.550 cr. and target market cap is Rs 5,000 cr.
  • Minimum bids: 60 shares & multiples thereof. Minimum investment: Rs. 14,400.
  • The IPO involves no equity dilution, and IPO proceeds will flow to the promoter, Biocon Ltd.
  • The P/E of Syngene are 30.3 – 31.5 times estimated FY15 earnings, at lower/upper price limits.
  • The company has already raised Rs 150 cr. from anchor investors.
  • To understand Syngene better, we first see a snapshot of the listed parent company Biocon.

Biocon Ltd. Snapshot

  • Biocon Ltd is engaged in developing medicines (generic insulins and biosimilar monoclonal antibodies) for addressing chronic diseases for cancer, diabetes and autoimmune patients.
  • FY15 revenues were 3,300 cr and PAT 528 cr. The Income, EBITDA and Profits have grown at 15%, 9% and 10% CAGR respectively over 5 years. See Fig 1.
Biocon financials, JainMatrix Investments

Fig 1 – Biocon Financials, JainMatrix Investments

  • It had its IPO in 2004, at a price of Rs 315. There was a 1:1 bonus issue in 2008, so with the CMP of Rs 465, the share has given shareholders a 10.3% CAGR return over 11 years. The Sensex gave 15.3% CAGR in this period, so Biocon underperformed the Sensex by 5% CAGR.
  • Overall we rate Biocon as an average performer.

Introduction to Syngene

  • Syngene started in 1993 at Bengaluru, and is a subsidiary of Biocon. It is engaged in providing contract research and manufacturing services for pharma sector. It is one of India’s leading Contract Research Organisations (CRO) in the $14.7 bn global pharma CRO market.
  • Revenues in FY14 were Rs 708 cr and profits Rs 135 cr. It has 2,667 employees, incl. 2,096 scientists.
  • It offers a suite of integrated, discovery, development and delivery services for novel molecular entities (NMEs) across sectors like pharmaceutical, biopharma, and biotechnology.
  • It is primarily an export oriented business, see Fig 2.
Syngene Segments, JainMatrix Investments

Fig 2 – Syngene Business Segments, JainMatrix Investments

  • With a laboratory area of 9 lakh sq. ft., Syngene currently services over 200 clients, ranging from MNCs to start-ups, including 8 of the top 10 global firms. It has dedicated research centers with Bristol-Myers Squibb, Abbott Labs and Baxter International.
  • Syngene helps its clients in conducting discovery (from hit to candidate selection), development (including pre-clinical and clinical trials, analytical and bio-analytical evaluation, formulation development and stability studies) and pilot manufacturing (scale-up, pre-clinical and clinical supplies) each with distinctive economic advantage.
  • In addition to research staff dedicated to a particular client, Syngene also offers resources through flexible business models like a full-time equivalent (“FTE”) and fee-for-service (“FFS”).
  • Syngene is planning investments in the next three-four years of a new mfg. facility, a center for work on biologics and formulations (Bengaluru) and also to expand existing facilities. This will be with funds raised from internal accruals and debt.
  • The leadership team is Kiran Mazumdar Shaw (MD) and Peter Bains (ED/ CEO).
  • Silver Leaf Oak, a private equity fund acquired 10% stake in Syngene in 2014.

Financials of Syngene

  • The Income, EBITDA and Profits have grown at 18.2%, 30% and 31.3% CAGR resp. over 5 years. See Fig 3.
  • The EPS, adjusted for the IPO has grown by 31.4% CAGR over 5 years.
Syngene Financials, JainMatrix Investments

Fig 3 – Syngene Financials, JainMatrix Investments

  • The business has been Cash Flow positive for 4 of the last 6 years. Of late, the firm has been investing heavily in its business. In FY15, the Free Cash Flow has been positive. See Fig.4.
  • RoCE and RoE metrics are quite impressive, which are at 30.5% & 20.5%.
  • Finance costs decreased by 94% in FY14 (from 6.5 cr. in FY13) on account of repayment of debt. In addition there were forex losses in FY15. As a result, in FY15 we see that there is negative cash from operations and positive flow from Investments.
Cash Flows, JainMatrix Investments

Fig 4 – Cash Flows (Chart by JainMatrix Investments)

  • Shareholding Pattern (%): Post-issue the shareholding pattern will be Promoter Group 74.5%, Institutions and Public 22.1% and Non Promoter & Non Public is 3.3%. See Fig 5.
Shareholding Patterns, JainMatrix Investments

Fig 5 – Shareholding Patterns, JainMatrix Investments

Business and Industry Notes 

  • CRO firms offer outsourced services to support R&D driven organizations across industrial sectors like pharmaceuticals, biotechnology, biopharmaceuticals, nutraceuticals, animal health, agro-chemicals, cosmetics and electronics.
  • CRO services for pharma sector span the range of R&D activities from New Molecular Entity (“NME”) discovery, development and manufacturing.
  • CROs offer clients an opportunity to manage costs, have flexible operations and realize efficiencies in R&D and related functions. However most CRO service providers specialize to some degree based on the needs of their clients and the market in which they operate.
  • As per Frost & Sullivan estimates, global R&D expenditure for the pharma industry in 2014 was approximately US$139 billion, of which US$105 billion could have potentially been outsourced. According to the report, outsourcing penetration for the CRO market for development services as of 2014 is estimated to be 27.3% of the potential outsourcing market for development services, but poised to grow to 38.7% in 2019, reflecting a CAGR of 12.5%.
  • Growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D. The CRO industry has grown substantially in recent years and there is also an opportunity to grow through an increase in market share.

Positives for the IPO

  • Syngene has plans for capex of Rs 1200 cr. over the next 3‐4 years. Out of this, one half would be for expanding existing facilities and the rest for setting up a new facility at Mangalore.
  • Syngene has 2,096 scientists, including 259 PhDs, and 1,661 scientists with master’s degree. Resource knowledge and experience is the major asset for Syngene.
  • Syngene has a good track record in compliance, getting a clean chit in three audits conducted by the US Food and Drug Administration (USFDA) over the past 18 months.
  • Syngene has already signed commercial supply contract for 3 molecules with its clients. Besides, the company has a list of potential molecules lined up from its clients to sustain its base business over the medium term.
  • Syngene is the first listing of an Indian pharma CRO firm. It is thus a leader and an innovative company and may receive a premium valuation.
  • There is a good synergy between the Biocon (pharma manufacturing) and Syngene (CRO). This will help Syngene in its planned growth.

Negatives and Risks

  • Syngene’s top 10 clients gave 72% of its revenues in FY15. There is a dependency on a few large clients, and the financials of Syngene can be affected in case loss of any of these clients.
  • There are a number of pending litigations against Syngene, under heads Tax Matters, Threatened Litigation and Pending CIL Litigation (former subsidiary); and Litigation by and against the Promoter, all numbering close to 100. An adverse outcome in these proceedings may affect the reputation and financials, and harm future business.
  • The FY14 balance sheet showed Contingent Liabilities totaling to Rs. 181.3 cr. which if materialized may adversely affect the profitability of the company.
  • Intensifying competition for pharma CRO services.
  • The Syngene financial performance can be affected by INR/ USD price fluctuations. In addition, international economic, taxation and outsourcing policy changes can materially affected operations.
  • Ability to attract, retain and develop key personnel and R&D talent.
  • The pharma sector faces many IP related compliances and legal challenges. Syngene needs to ensure it stays protected and safe from such issues.
  • Clients need high secrecy and confidentiality as R&D work is for multi-billion dollar new drugs. Syngene needs to ensure that at the group and employee level, information stays safe.
  • Regulatory tightening of clinical trials in India has slowed the work on Indian clinical trials.

Benchmarking

As there are no listed companies in India that are directly comparable to Syngene, we benchmark the firm against IT services, KPO and PHARMA firms like Biocon, eClerx, Glenmark and Mphasis Ltd.

Benchmarking, JainMatrix Investments

Fig 6 – Benchmarking of Syngene, JainMatrix Investments

  • Based on Fig 6, we come to the following conclusions.
  • Syngene revenue growth is impressive. On margin parameters, it ranks second after eClerx.
  • Syngene rates high on RoCE and RoE.
  • For an early stage company, Syngene appears good in terms of low debt and financials.
  • Syngene’s closest listed peer outside India is a Chinese firm, Wuxi Pharmatech, which is four times bigger in revenues, and is trading at a PE of 30.

Overall Opinion

  • The Syngene IPO is a first time listing from a new and high potential sector of pharma CRO.
  • This business builds on Indian advantages in IT services and KPO, with a pharma sector focus. The benefits have shifted from cost arbitrage to enhancing R&D productivity and reducing time to market.
  • The promoters have an average record of providing returns to shareholders in Biocon. However, Syngene represents a high potential business segment, which is being spun off.
  • The success of competition, eg Wuxi Pharmatech, indicates that there are ample opportunities for Syngene to grow and compete in the global market.
  • We are positive on the prospects of Syngene in this IPO offering. Buy at cut off with a 2-3 year investment 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. JM has no known financial interests in Syngene International Limited 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. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Turbulent Markets, but JAINMATRIX Model Portfolios Outperform

Dear Investor,                                                                                                                          29th June 2015

The market has been more turbulent in the last 2 months. However, JainMatrix Investments continues to do well on its research portfolio.
JainMatrix Investments is a premium Investment Service for Indian equity. It’s independent, honest and direct. And sharply focused on Investor Returns from its two Model Portfolios.
Here’s our update on the Track Record of the JainMatrix tracked portfolios and shares.
..

Performance Tracker

See the compilation of performance of the Model portfolios and the entire tracked Stock Universe from JainMatrix Investments.

 * As per Value Research on 29th June 2015.

PERFORMANCE description

The Top Ten stocks from the tracked Stock Universe had annualized returns of 124.1% on 29th June 2015, compared to 132.9% on 07th April 2015. These Top Ten are from a total portfolio of 49 stocks + 1 ETF.
  • The Large Cap Retirement Model Portfolio is ahead of benchmarks, and in top 10% of MFs.
    1. The annualized return was 21.9% for the 7 stocks, bettering the indices of Sensex 17.1% and Nifty 16.5% over 30 months.
    2. The JainMatrix Retirement Large Cap Model Portfolio outperformed by 4.8%. 
    3. The best performing large cap mutual fund over a 3 year period had 23.9% annualized returns, calculated on Value Research website . We are happy to be in the top 10% of the Large Cap equity MFs by performance.
  • TheMulti-bagger Mid & Small Cap Model Portfolio continues its aggressive out-performance of the comparable Indices and equity MFs.
    1. It gave an annualized return of 78.4% for the 7 stocks, better than indices of CNX Midcap, BSE Midcap and S&P BSE Smallcap over 29 months, details in graphic.
    2. The JainMatrix Multi-bagger MSC Model Portfolio outperformed by 53.7%. 
    3. The best performing Mid & Small Cap MF over this period provided 42% annualized returns, per Value Research website.
Sign up for the JainMatrix Investment Service to take the right decisions, whatever the event, in your investing journey. ..

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  • Also we only include firms in our portfolio 90 days after publishing the report, to avoid errors from short-term price movements.
  • Note that Equity investments are inherently risky. Take help from your ‘Investment Adviser’ before allocating funds for the equity asset class. …

Investment Approach 

  • We research stocks based on their fundamentals including financials, industry prospects, management, etc.
  • We cannot assume that these stocks above will give you similar returns in future. Past performance is no guarantee of future results. Some volatile stocks have moved within months from the top to negative returns.
  • Much more important than past share price performance is the stability and quality of the businesses, their management, cash flows, etc. As these will reflect in the future share price.
  • These are captured in the JainMatrix Investments recommended portfolios such as the Large Cap Portfolio 2014, and the Mid Cap Portfolio 2014. These model portfolios align your investments and risk appetite to get appropriate gains.
  • The JainMatrix Investment Advisory Service is available for a subscription fee.
  • JainMatrix Investment is an independent research firm, with business income only from customer subscriptions, not transactions, and with no links to corporates.  This helps us stay focused on quality Research !!

JainMatrix Investment Advisory Service is available for an annual Subscription. 

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Manpasand Beverages IPO – Natural but Expensive

  • Date 25th June 2015
  • Price range: Rs. 290-320 and IPO Period:  24-26th June 2015
  • Small Cap with Rs 1600 cr Mkt Cap 
  • Industry – FMCG
  • Advice: High Risk, Expensive, Avoid

Manpasand Beverages is a small fruit drinks manufacturer based in Vadodara. It had FY14 revenues of Rs 294 crores and profits 20.4 cr. The market potential of this segment looks attractive. However, the segment is dominated by well-known Indian and MNC brands. The challenges extend to capacity creation and launch of several new brands and products. IPO pricing is aggressive (PE of 86-95 times) and leaves little on the table for investors in the short to medium term. Investors can avoid this IPO.

Here is a note on the Manpasand Beverages (MAP) IPO.

IPO highlights

  • The IPO is open from 24-26th June 2015 with Issue Price band: Rs. 290-320 per share
  • It’s a fresh Issue of 1.25 cr. shares of Face Value: Rs.10 per share
  • Each lot size is 45 shares and it can be bought in multiples of 45 shares
  • Shares offered as portion of equity post issue: ~25%. Post IPO the mkt cap will be ~1600 cr.
  • The promoter will sell 17% stake, while SAIF Partners and Aditya Birla Equity will sell 7% and 1%.
  • The amount proposed to be raised is Rs.400 cr. The IPO proceeds will be used for:
    • A new mfg. facility in Haryana for Rs 153.3 cr.,
    • Repayment of borrowings of Rs 100.9 cr
    • Modernization of mfg facilities at Vadodra and Varanasi at a cost of Rs.38.8 cr.
    • The rest is for a new corporate office at Vadodara, Gujarat, corporate purposes and exits by investors.

Introduction

  • Manpasand Beverages is a manufacturer and seller of fruit drinks based in Vadodra, Gujarat.
  • FY14 revenues were Rs 294 crores and profits 20.4 cr.
  • The mango based fruit drink ‘Mango Sip’ is the flagship brand and contributes 87% of sales. It caters to customers from semi urban and rural markets.
  • The distribution network of MAP includes 73 consignee agents and 654 distributors spread across 24 states. Also, MAP sells directly to Indian Railways Catering and Tourism Organization (IRCTC).
  • Dhirendra Singh, Chairman of MAP has 15 years experience in this industry. He is the also on the board for group entities like Manpasand Snacks and Beverages Ltd and Xcite Nutrition’s Private Ltd.
  • Recently the company launched two new brands, “Fruits Up” and “Manpasand ORS”. Manpasand ORS was launched with a view to capture the North East market.
JainMatrix Investments, Manpasand Beverages

Fig 1a – Revenue Segments (above) and Fig 1b – Brands

Business and News Updates  

  • Capacity: MAP has three factories that are currently manufacturing its products located in Vadodara and Varanasi including a new facility in Vadodara commencing production this April. The combined capacity for manufacturing is 40,000 Tetra Pak Cases/ day and 65,000 PET Bottle Cases/ day for fruit drinks and 15,000 PET Bottle Cases/ day for carbonated fruit drinks.
  • MAP has acquired and signed an MoU for a manufacturing facility at Dehradun. However it is yet to commence production.
  • MAP would require efficient working capital management as the soft drinks industry requires enough working capital to be able to procure and process payments for raw materials.
  • The MAP IPO has seen a 5% subscription on day 1.

Industry Outlook

  • The overall soft drinks market in India saw aggregate sales worth Rs 65,330 crores in the year 2014. The main segments constituting the soft drinks market in India are carbonates, juices and bottled water, which together accounted for over 99% of the total volumes sold in 2014.
  • About 75% of the total mango drinks market is controlled by Coca-Cola’s Maaza, Pepsico’s Slice and Parle Agro’s Frooti. Other players are Hershey’s India (Jumpin), Dabur (Real), Hector Beverages (Paperboat Aamras), Surya Food and Agro (Priyagold) and Scandic Foods (Sil).
  • Based on the industry data, MAP has a 3% market share of the packaged juices market of India.

Financials of Manpasand beverages

  • Revenues and EBITDA have been growing consistently, see Fig 2.
  • However PAT and EPS have been declining since Mar 2013.
  • Note – Mar-15 results are a simple projection of actual 9 month financials reported by MAP.
  • MAP is a profit making operation as of today but does not have free cash flows since the last few years. See Fig 3.
  • Profits and Free Cash flows appear to be stretched due to high competition, expansion costs and high capital expenditure.
JainMatrix Investments, Manpasand Beverages IPO

Fig 2 – Manpasand Beverages Financials

JainMatrix Investments, Manpasand Beverages

Fig 3 – Manpasand Cash Flows and Debt

Positives for Manpasand Beverages/ IPO offering

  • MAP is focusing on a market which is not well served i.e. semi urban and rural areas. Hence the company could see a good rise in the sales in the upcoming years
  • Rising Income Levels – In the last decade, Indian economy has progressed rapidly. With the progress of the economy, India’s per capita GDP (constant price) has gone up from Rs. 32,037 in 2005-06 to Rs. 46,555 in 2011-12, fuelling a consumption boom in the country. (Source: CARE Report). Thus demand for MAP products should continue to grow.
  • MAP has achieved net profit margins (5% approx) which would help them sustain in the long run in the FMCG sector.
  • MAP is building its own brands and this can be a powerful asset for long term growth.
  • They are growing beyond their flagship ‘Mango Sip’ product and launching a clutch of new products, which may grow their business rapidly in future.

Internal Risks

  • MAP heavily depends on its mango based fruit drink “Mango Sip‟ product which contributed 87% of its net sales for FY2014.
  • MAP had negative free cash flows in the past and this may continue in the next few years. MAP’s operations are cash intensive, and business is worse off due to high working capital needs.
  • A few group entities like Manpasand Snacks and Beverages and Xcite Nutrition’s Pvt have incurred losses in the preceding fiscal years which could be a drain on MAP’s resources.
  • MAP’s business is affected by seasonal variations like reduced demand in winter, and peak sales in summer. These variations could worsen due to a cool summer or a bad monsoon season.
  • MAP sources their tin can packaged products and 500 ml PET packaged “Fruits Up‟ drink from third party facilities and so MAP needs to maintain stringent quality controls with these partner/ vendors.

External Risks

  • A slowdown in economic growth in India could adversely impact MAP’s business.
  • The recent Nestle Maggie events highlight challenges in food packaging and labelling, and govt approvals. Compliance on these matters has to be ensured.
  • There is intense competition in this category with the presence of MNCs and large Indian business houses in the drinks segments. MAP as a small player has to build its niche and not directly compete.

Benchmarking

JainMatrix Investments, Manpasand Beverages

Fig 4 – Manpasand Beverages Benchmarking

  • PE and P/B valuations look stretched even compared to industry leaders like Britannia and Nestle.
  • Sales and profit growth look impressive. Net profit margin for MAP is almost at par with Britannia Industries, which indicates the company’s long term sustainability within the FMCG sector.
  • Overall, for a small company starting off, MAP is doing well, but needs to sustain its momentum.

Overall Opinion

  • The consumption theme in India is very powerful, and will play out over the next few years as income and education levels improve. Within this overall consumption theme, the food segment stands out as both a daily essential as well as an aspirational category.
  • Fruit based drinks is certainly a high potential consumption area with good prospects. Demand is likely to grow faster for fruit drinks than for colas and non-natural drink products.
  • MAP even with its niche rural and semi urban market, today faces intense competition, high costs of brand launches and planned capacity expansion.
  • It may take another 3-4 years to have free positive cash flows from operations.
  • Pricing of the IPO is aggressive, and the high valuations in terms of P/E (86-95 times) and P/B leaves little on the table for investors.
  • Investors should avoid this IPO.

JAINMATRIX KNOWLEDGE BASE:

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 Manpasand Beverages Ltd 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. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Seven Short Steps to Long Term Investing Success

Dear Investors,
I got a question on a discussion forum, about Long Term Investing. I found the line of thought very interesting, and my reply is in the form of the Seven Steps to Long Term Investing Success !!
So here goes.  (thanks Srini and Musa).
..

First the question

Dear All,
Need some advise.
I intend to invest some X amount in some select stocks with a holding period of about 8-9 years.
Is it good to leave it untouched till the end of holding period? Or is it advisable to set some yearly target say 20% or so and exit once the target is achieved in a year and wait for some lows to happen to reenter the stock for a target n exit once again and continue this cycle till the end of Holding year.
I don’t know how the above approach of mine sounds, but need you to give me some thoughts on how to go about it.
Regards.
..
Here’s my Answer:
..

the Seven short Steps to Long Term Investing Success

Dear Investor,
This is a pretty good question.
The investing process I feel you should follow is:
  1. Stock Selection: Obviously, choose your Select Stocks well. Since the holding period is 8-9 years, you need to look closely at the fundamentals. Each stock needs to have an investment thesis (eg. capacity expansion of 200%, or a new product launch that can grow profits 150%) and a price target for a specified period of time like say 2-3 years. These need to be high conviction ideas. Plus good Portfolio thinking is that there should not be an overexposure to any one sector, to reduce overall sector risk.
  2. Investment: Buy the Selected Shares. One way to simplify things is to buy shares of roughly equal monetary value.
  3. Monitor the Stocks: Next these shares need to be monitored. Is the investment thesis being played out in reality? Any external events affecting it? A six monthly review for these Select Stocks may be sufficient.
  4. Minimize Transactions: I would disagree about the 20% annual targets and exit /entry cycle. Good well chosen shares may appreciate even 100% in a good year, yet may still be cheap and worth buying, even at this level, if the 2-3 year outlook still looks good. Every delivery based entry and exit can cost you upto 0.6% of your asset, so transactions should be minimized for long term investments.
  5. Use Dips to Buy: Also the reverse may also happen. The investment thesis may be playing out well, but the share price may have fallen 20%. You need to be patient here, and can even buy more of this stock if you have funds.
  6. Exit Non-Performers: My approach would be to (on Review) sell those Stocks that are not performing on fundamentals as per the investment thesis (this may or may not be reflected in the price performance) and perhaps buy more of those that are performing. There is no shame in admitting mistakes. Even investment greats like Anthony Bolton (I’m reading a great book by him called Investing Against the Tide) talk about a success/ hit rate of 55-60%. The secret is to identify mistakes and reduce losses by exiting fast.
  7. Time in Market: Over the 8-9 years period a good internal price target to have is to get a 20% annualized return for your Select Stocks. But notice that big returns come in a few years and things may be flat to negative for the others. So I prefer “Time in Market” with “Good Stocks” where you will get the returns over time.
Thats it !! I guess many years of investing have helped me give a short and sweet answer.
Sorry for generating Option 3 compared to 1 or 2 asked by you, but this is my recommended approach.
Here’s to your investing success.
(needless to say, revert to me if you need help with choosing stocks and monitoring  Emoji )
Regards, Punit Jain
Bangalore, Founder, JainMatrix Investments
 .. 
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DISCLOSURES AND DISCLAIMER

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and all stock investments are subject to market risks. 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 a Financial Adviser. 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. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com