S Chand IPO: An Educational Content Powerhouse

  • IPO Open 26-28th Apr at Rs. 660-670
  • Mid Cap: Rs. 2,328 crore Mkt cap
  • Industry – Education Publishing
  • P/E 36.8 times TTM
  • Advice: Investors can BUY with a 3 year perspective

Summary

  • Overview: SCL is a 70 year old firm that delivers books, content and services in education to the K-12, higher education and early learning segments with strong presence in CBSE/ICSE schools. SCL revenues, EBITDA and PAT have grown at 32.6%, 47.5% and 33.9% CAGR from FY12 to FY16. SCL had a strong distribution and sales network across India. SCL has good relationships with authors who create and refine content. Textbook quality is excellent. The recent M&A strategy has given them a strong position across subjects, central and state boards and multiple languages. SCL is a thought and execution leader in this space with good content through authors and reach through distribution networks. It is capturing innovation by buying good education firms to enhance offerings. The IPO will help reduce debt even as operational revenues grow at 32.6% CAGR.
  • Key risks: 1) At a PE of 36.8 TTM, the valuations are expensive. 2) SCL has a seasonal business 3) NCERT provides subsidized textbooks and may prevent usage of SCL textbooks.
  • Opinion:   This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is a note on S Chand and Company Ltd. (SCL) IPO.

IPO highlights

  • The IPO opens: 26-28th Apr 2017 with the Price band: Rs. 660-670 per share.
  • Shares offered to public number 1.08 cr. The FV of each is Rs. 5 and market Lot is 22.
  • The IPO in total will collect Rs 729 cr. while selling 31.34% of equity. Of this, SCL will raise Rs. 325 cr. by issuing fresh shares and the selling shareholders will receive Rs. 404 cr. at the UMP. The promoter group owns 58.33% in SCL which will fall to 46.7% post-IPO.
  • SCL would benefit from the fresh issue of shares and the proceeds of Rs. 325 cr. would be used for:

Exhibit 1 – Utilization of proceeds from fresh issue of shares

  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35. This is good for Retail.
  • IFC holds 9.4% stake in SCL (Pre-IPO) and Everstone Capital Partners holds 32.3% (Pre-IPO). IFC will remain invested, while Everstone is selling half of its current stake in SCL.
  • The unofficial/ grey market premium for this IPO is in the range of Rs. 160. This is a positive.
  • The first day of IPO saw that it is already 52% subscribed, so it looks like it will sail through very successfully.

Introduction

  • SCL is a 70 year old firm that delivers books, content and services in education to the K-12, higher education and early learning segments and has a strong presence in CBSE/ICSE affiliated schools.
  • Revenues for FY16 were Rs. 541 cr. and profit Rs. 47 cr.
  • It has 2,135 full time employees (Dec ‘16.), whereas Chhaya has 309 employees (Dec ‘16.).
  • In Dec2016, SCL bought a 74% stake in Kolkata-based publisher Chhaya Prakashani Pvt. Ltd for Rs. 170 cr. SCL will acquire remaining 26% by Nov2018. In the past S Chand acquired Delhi-based publishers New Saraswati House in 2014 and Vikas Publishing House in 2012.
  • SCL has 55 consumer brands across knowledge products and services including S. Chand, Vikas, Madhubun, Saraswati, Destination Success and Ignitor. It recently acquired 74% of Chhaya Prakashani Pvt. Ltd. and now also offers 4 Chhaya brands including Chhaya and IPP.
  • SCL has a contractual relationship with 1,958 authors (including co-authors) for over 5 years. Additionally, Chhaya has contractual relationships with at 24 authors.
  • SCL had a sales and distribution network of 42 warehouses in 19 states, 4,932 distributors and dealers, and a sales team of 838 working from 52 branches and marketing offices. Chhaya Acquisition has expanded presence in East India to add 771 distributors and dealers.
  • SCL has developed a robust supply chain. In FY16, 85% of printing requirements were met by facilities in Sahibabad and Rudrapur. The paper purchases are integrated, which lowers costs.
  • About 72.5% of SCL’s sales are derived from the K-12 segment (KG to 1st to 12th grade). And 75% of sales of SCL are generated in the 4th quarter every year, at the start of the new academic year. Fig 2.

Fig 2 – a) SCL revenue over the years and  b) FY16 segments

  • Leadership is Desh Raj Dogra (Chairman), Himanshu Gupta (MD), and Saurabh Mittal (CFO).
  • In FY11, SCL’s key subjects were English grammar, Math and Science. It has since made many acquisitions. In 2013, SCL acquired Madhubun and Vikas – to improve its Hindi language titles. In FY15, it acquired Saraswati brand to strength its French, languages, arts and crafts titles.
  • SCL has 12 subsidiaries including Chhaya Prakashini. But 7 of these 12 have incurred losses in FY16.

News, Updates and Strategies of SCL

  • In FY16, SCL sold 3.55 crore copies of 11,144 titles. Additionally, Chhaya sold 98.8 lakh copies of 433 titles. SCL’s top 10 best-selling titles accounted for sales of 29.6 lakh copies in FY16, and 15 of their authors had each sold over 10 lakh copies of their titles during the last 5 years.
  • On the website, schandpublishing.com the firm offers ecommerce services.
  • SCL is looking to acquire firms in the higher education business, particularly in the test prep market. It plans to do so to increase its market share in the State Board segment in attractive markets.
  • SCL invested in online test prep startup Testbook in Mar2016. It is an online test prep platform for competitive exams such as GATE, CAT, SBI PO and IBPS PO, besides others. The platform allows students to simulate an environment similar to the actual examination.
  • SCL invested Delhi-based Smartivity Labs Pvt Ltd, an online venture that deploys augmented reality and robotics for kids learning projects in Oct 2015.

Education Sector Outlook

  • A recent survey by market research agency Nielsen revealed that India’s book publishing market is the sixth-largest in the world at Rs 26,100 crore, and is likely to touch Rs 73,900 crore by 2020.
  • The formal education segment comprises both K-12 schools (including secondary and senior secondary schools) and higher education institutions (colleges, higher education institutes). Whether government or privately owned, this segment is governed by the ‘not for profit’ diktat, meaning that such educational institutions in India cannot be operating on a ‘for profit’ basis.
  • The informal segment comprises test preparation, tutoring, early education and vocational/skill-based training segments. The informal segment does not have restrictions on operating on a ‘for profit’ basis and does not have restrictions on profit distribution.
  • The formal, informal and ancillary segments are collectively estimated at US $90 billion as of 2015 and expected to reach US $188 billion by 2020. India has a large population in the education age bracket of students aged 5-24, which stood at 52 crores in 2016. This may grow to approximately 53.4 crores by 2020. In addition to the growing population, a reduction in drop-out rates is expected to contribute to increase in market size.
  • The K-12 education system in India is one of the largest in the world, with a market size of US $49.5 billion, comprising 11 lakh govt. schools and 4 lakh private schools. Schools have grown from 13.6 lakh (FY11) to 15.2 lakh in (FY15). During 2011-2014, the share of private unaided schools recorded the highest growth rate among other types of schools from 14.2% to 19%.
  • Most schools in India are affiliated to 1 of 3 main governing bodies for K-12 schools: (a) state level SSC education board; the Central Boards of (b) CBSE; and (c) ICSE.
  • CBSE schools have grown at the fastest CAGR of 8.9% during 2011-2015.
  • The growth drivers of the K-12 education segment are: 1) Rising disposable incomes 2) Consumer preference for private unaided schools 3) Government initiatives on promoting primary education
  • SCL is a market leader with a share of 13% in education content. The closest peers are Oxford Publication and Orient Black Swan have a share of 6% each. (source – newspaper reports).

Financials of SCL

  • SCL’s revenues, EBITDA and PAT grew at 32.6%, 47.5% and 33.9% CAGR in 5 years, see Fig 3.
  • FY17 revenues is a projection of 9M FY17 financials, assuming 75% comes in Q4; and adding financials of Chhaya Prakashini. Thus revenue and PAT growth are good.
  • The EPS has risen sharply in 5 years. This is excellent. But there was a fall in FY15. Here SCL witnessed a disruption due to Chennai floods; it also acquired 51% in New Saraswati House.

Fig 3 – SCL Financials/ Fig 4 – SCL Cash Flow

  • SCL has negative cash from operations and FCF in 3 of last 5 years, Fig 4. This is a negative. However this is explained by the vigorous M&A activity as SCL has grown inorganically.
  • SCL has not declared dividend in the last 2 years, however it hadan interim dividend for FY17.
  • SCL has an ROE of 7.8% in FY16 which is low.
  • Operating margins have been flat while profit margins have fallen a little. However with acquisition of Chhaya Prakashini, the margins should improve, it had a net profit margin of 12.4% (Dec 2016).
  • SCL has a cash balance of Rs. 24.4 cr. today which translates into Rs. 7.03 as cash/share which is low.

Benchmarking

We benchmark SCL against peers from education /publishing sector. However the main comparison is with Navneet due to Repro (losses), MPS (technology), CLE (classroom) and others (newspaper publishing). Note that Navneet too has a significant stationary business. See Fig 5.

Exhibit 5 – Financial Benchmarking

  • PE for SCL appears expensive at an FY17P* of 36.8 as compared to Navneet at 25.2 times with better financials. The valuation of SCL is moderate in terms of P/B ratio.
  • SCL has witnessed high sales growth in the last few years. The EBITDA margins are good, while profit margins have dragged.
  • The 3 year PAT growth is moderate at 13.4%. The D/E ratio at 0.82 is moderate, however the highest in the industry. The return ratios are poor. This is a negative.
  • The SCL numbers are consistent with a firm on a growth and acquisition spree that is well on the way to becoming a textbooks and education content leader. In 2-3 years the benefits of this will accrue to shareholders.

Positives for SCL and the IPO

  • The IPO is beneficial to SCL. The fresh issue proceeds will retire some of the debt and improve financials.
  • SCL has strong brand equity with high consumer recall. The IPO and post listing visibility will enhance the brand of SCL as a consumer product.
  • SCL has in the last 4 years followed a coherent M&A strategy – first to expand subjects under coverage, then including state boards, regional languages and education innovation tech firms.
  • SCL is a comprehensive consumer education content player across the education lifecycle.
  • A strong presence in the CBSE/ICSE schools and increasing presence in state board schools.
  • SCL has strong integrated in-house printing and logistic capabilities. In FY16 over 85% of their printing requirements were met by their facilities located in Sahibabad and Rudrapur.
  • SCL has a pan-India sales and distribution network driving deep market reach.

Risks and Negatives for SCL and the IPO

  • SCL has a highly seasonal business of their main K-12 business segment with 75% of their sales generated in Q4 every year. This also means seasonality in working capital.
  • The valuations look expensive in terms of P/E ratio. Debt is high, with ok margins and low RoE.
  • SCL operates in a highly-competitive and fragmented industry. Many of the content providers have strong brand recognition in local markets and long term relationships with schools, school authorities and educational authorities. They also face competition from the govt. National Council of Educational Research and Training (NCERT) and the State Council of Educational Research and Training (SCERT), which publish books for the K-12 market at subsidized costs.
  • For the past 2 years, CBSE board has issued an advisory circular advising CBSE affiliated schools to use only NCERT books for all classes. CBSE issued the circulars in response to reports and complaints from parents that schools were asking them to buy books published by private companies. The CBSE books are much cheaper (subsidy) but there is a big difference in quality and content of these.
  • A large portion of SCL revenues are derived from titles of their top authors. In FY16, their top 20 authors contributed to 48.9% of revenues. The loss of such authors could adversely affect business.
  • SCL has an obligation to acquire the remaining 26% of share capital of Chhaya Prakashani by Nov 2018 which may need to be financed with additional debt.
  • SCL may be impacted by the introduction of the GST. However it is likely that after making the operational alignment changes, it may be beneficial for business and ease distribution and pricing.
  • The presence of 55 consumer brands sounds daunting. It may be a legacy of M&A. It may be necessary for SCL to simplify branding by merging many and focusing on 5-10 key brands.
  • M&A are often risky and SCL needs to ensure success of all acquisitions, and suitable synergy gains.

Overall Opinion and Recommendation

  • India has a very young population that is underpenetrated in terms of education. A lot of govt. focus is already on improving availability and outcomes in K-12 education.
  • Education content continues to be an important aspect of K12 education with textbooks, guides and question papers being key elements.
  • SCL is a thought and execution leader in this space with good content through authors and reach through distribution networks. It is also aggressively growing across subjects and languages, from central to state boards, and from paper to online distribution. It is capturing innovation by buying good education firms to enhance offerings.
  • At a PE of 36.8 TTM, the valuations are expensive. However we feel that debt can be reduced post IPO even as operational revenues gallop forward at 32.6% CAGR.
  • Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. Vikas Ecotech – Get ‘Vikas’ for your Investments
  2. CPSE ETF FFO 2 – An Energizing Offer – BUY
  3. Investment Notes – Euphoria
  4. Avenue Supermarts IPO: The Mart of Choice
  5. Bharat Electronics OFS
  6. Whats different about the Investment Service from JainMatrix? – A video
  7. Why are Indian stock markets attractive for Investments? – A video
  8. BSE IPO: Put this Exchange on Hold – Report plus Video
  9. CPSE ETF FFO – An Energizing Offer – Report plus Video
  10. Balmer Lawrie – An Update
  11. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  12. Investment Outlook – Short Term Pain, Medium Term Gain
  13. PNB Housing Finance IPO: A Transformed Lender
  14. RBL Bank IPO 
  15. New Banks: Big Changes in Small Change 
  16. Do you want to be a value investor?
  17. Mahanagar Gas IPO 
  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 intends to apply for this IPO in the Retail category.  Other than this, JM has no known financial interests in SCL or any group company. 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 under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Investment Notes – Euphoria

Three positive events have occurred. Demonetization is over; the Feb 2017 budget was good, and the 5 state elections threw up BJP as a likely winner in 4. At this point, we are overwhelmingly positive on the investment outlook.

Investment Notes

It was 18th Feb 2015. The Sensex had just closed at 29,320. It had been 9 months since the Modi led BJP won the parliamentary majority – they got 272 seats – to form a government. In the last one year, the Sensex had jumped from 20,536 to these levels, a gain of 43%.

An investor asked me a simple question: So what has changed on the ground and among the companies that has resulted in a 43% jump in Sensex? I just nodded, unable to express the reasons. I’d like to try to answer this today. The simple answer – NOTHING !! Most of the companies were 5-10% up on financials/ EPS in the last one year. Nothing special to report here.

So what gives? What explains the big jump? The answer is optimism and sentiment. Just like most things in life, people act on the basis of heart (emotions) and head (rationality). The Modi govt. won a resounding victory, after a bitter, negatively fought election. A lot of people now looked to the future with renewed hope and optimism, and felt we have a govt. that is cleaner, more decisive and which is thinking long term.

The positivity changed the outlook of investors. Retail bought Mutual Funds. Investors took fresh 2-3 year, long term positions. FIIs entered and took new 10+ year investments on the basis of longer term trends like consumption and housing shortages. Sensing all this, traders bet positively.

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham

So while nothing changed on the ground, the 2 year forward outlook changed sharply. The stock market always tries to look a few years ahead. At a stock level, most large caps have 1-2 year financials baked into the prices. Mid-caps are divided into the well-known and the lesser known. The well-known firms too have 1-2 year financials baked into the prices. Since growth rates are higher here, valuations parameters like P/E and P/B can look expensive. The lesser known mid-caps and small caps can flounder at low valuations until they get discovered. Many opportunities are available here for investors to find high quality firms that can be great investments.

So what happened after Feb 2015? The 43% jump due to euphoria and positivity gave way to rationality. Whats really happening on the ground? Is business looking up? What big bang reforms are the govt. conducting?  The answers were not immediately obvious. The parliament became a logjam – the lower house had things easier but the upper house blocked new initiatives.  Massive industry specific issues such as coal and power can’t be wished away with a govt. owned magic wand. It takes time and resolve and good administration.

Post Demonetization Post Budget 

By Feb 2016, the Sensex had fallen to 23,154, a fall of 21%. Post budget, once again there was optimism. The govt. has given a positive budget. No major worries. Toward Nov 2016, we had demonetization. There was confusion, discomfort and a cash shortage. Recovery from this started by end Dec. The cash shortage now looked likely to be resolved in a few months with few residual issues. Recovery was sharp, aided by another good budget in Feb 2017.

The Budget 2017 was overall positive. Small sops for the people included lower tax at entry levels. There were benefits for real estate transactions and Industry status for affordable housing. There were no major negatives, and fears dissipated. GST is likely in 2017-18.

The direction from the govt. is very clear. Black money is to be legalized and cleansed, and black money sources are to be capped. Cash and real estate cannot be a store of ill-gotten wealth. Taxation and compliance has to go up. Big ticket reforms are to be made, opening up new sectors. Foreign and local investors must be encouraged. Abject poverty has to be eliminated. The average man is honest, hard-working and follows the rules. Lets make life easier for him. Plus big changes have to be made to make the country a better place. All subsidies must be targeted using Aadhar to avoid waste. We hope that tax rates – both direct and indirect, are peaking now, and as compliance improves, rates should ease.

The FIVE State Elections

The 5 state elections of Uttar Pradesh, Uttarakhand, Punjab, Manipur and Goa have just concluded. Its been a strong victory in the biggest state, UP, and Uttrarakhand, for BJP. Manipur and Goa may also go BJP way per latest reports. So even the tricky UP population is convinced. In a delayed fashion, BJP will also get more seats in the Rajya Sabha. While it is unclear when BJP will get majority, but certainly over time the statewise support for BJP will increase.

These three big positives combined makes things look good for a 3-6 month period.

We signal a new euphoria for the Indian market

jainmatrix Investments

We welcome – the Bull

India and USA markets:

Just like in India, there appears to be an election led upswing in the USA. The Trump administration too is looking to take bold steps. The focus is on domestic improvements. Jobs, some elements of domestic protectionism, better healthcare, etc. Optimism has shot up in USA. Rather than fearing the world, USA may move to strengthening its own country.

jainmatrix investments

A quick look at Sensex and Dow Jones over the last 2 years indicates a good correlation. See figure – thanks Google Finance. Barring some big local events like demonetization, the two markets are moving in sync. This is another factor that makes me positive about Indian market outlook – its difficult for Indian indices to outperform year after year unless at least some of the global markets are also moving in a similar way.

The potential Risks or negatives that I see now are – 1) Fed rate hike expected this week – will it affect Indian Indices? 2) INR strengthening against USD – is this even possible? 3) Higher inflation – we have early signs of increase 4) Bad monsoon in 2017.

There are always risks and negatives. But at this point, we are overwhelmingly positive on the investment outlook.

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

  1. Avenue Supermarts IPO: The Mart of Choice 
  2. Bharat Electronics OFS
  3. Whats different about the Investment Service from JainMatrix? – A video
  4. Why are Indian stock markets attractive for Investments? – A video
  5. BSE IPO: Put this Exchange on Hold – Report plus Video
  6. CPSE ETF FFO – An Energizing Offer – Report plus Video
  7. Balmer Lawrie – An Update
  8. Why Stocks, and Investment Outlook – Dec 2016 – A Video
  9. Investment Outlook – Short Term Pain, Medium Term Gain
  10. The Natural Quotient: A Sustainability Metric for Business
  11. PNB Housing Finance IPO: A Transformed Lender
  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?
  17. Mahanagar Gas IPO 
  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

DO YOU FIND THIS SITE USEFUL?

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

DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in any company mentioned here. 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 Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Avenue Supermarts IPO: The Mart of Choice

  • Date 7th Mar 2017, IPO Open 8-10th Mar at Rs. 295-299
  • P/E 39.9 times TTM
  • Large Cap: Rs 18,660 crore Mkt cap
  • Industry – Retail 
  • Advice: Investors can BUY with a 2 year perspective

jainmatrix investments, dmart supermarkets

  • Overview: D-Mart is an emerging national supermarket chain, with a focus on value retailing. Total income for FY16 was Rs 8,606 cr. and net profit Rs 319 cr. Its revenues, EBITDA and PAT have grown at 40.3%, 45.5% and 51.6% resp. CAGR over 5 yrs. It has 118 stores with total retailing area of 35.9 lakh sq.ft. It has a low employee count and uses contract staff to contain costs.
  • Operations: D-Mart has a cluster based growth strategy which has allowed it to extend reach in areas where it has a presence. The store expansion strategy and cost control techniques are good. D-Mart has a professional management team, a respected promoter and clear vision and growth strategies which are likely to keep the company on the successful path. At a current P/E of 39.9, the asking price is fair, considering that DMT is the leader in its segment.
  • Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Most good IPOs get oversubscribed and few applicants get share allotments. Subscribe to JainMatrix Investments to get their pre-listing IPO notes, and invest successfully.  

Here is a note on Avenue Supermarts Ltd. (DMT) IPO.

IPO highlights

  • This IPO opens: 8-10th Mar 2017 with the Price band: Rs.295-299 per share.
  • Shares offered to public number 6.25 cr. The FV of each is Rs. 10 and market Lot is 50. These shares are 10.02% of equity. The IPO will collect Rs 1,870 cr. with a fresh issue of shares.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 50:15:35. This is good for Retail.
  • DMT was incorporated in the year 2000 by Mr. Radhakishan Damani. He is also a well known Stock market Investor, Stockbroker and a Trader. He owns 43.8% in DMT while his investment vehicle Bright Star owns another 15.8%. His brother and several family trusts own the remaining shares. The promoter group holds 91.36% stake, which will fall to 82.2% post-IPO.
  • DMT will benefit from the fresh issue of shares as the proceeds will go the company.
  • Utilization of IPO proceeds: Repayment of loans / redemption of NCDs Rs. 1,080 cr., construction and new stores Rs. 366.6 cr., and general corporate purposes Rs. 423.4 cr.

Introduction

  • DMT is an emerging national supermarket chain, with a focus on value-retailing.
  • Revenue in FY16 was Rs. 8,606 cr. and profit Rs. 319 cr. It has 4,738 full time employees.
  • According to Technopak, DMT was among the larger and more profitable Food and Grocery (F&G) retailer in India in FY16. DMT offers a range of products like Foods, Non-Foods (FMCG) and General Merchandise & Apparel. See Fig 1.
  • For FY16, sales were from Mah. (62.6%), Guj. (18.8%), Telangana (10.15%) and Kar. (6.14%).

jainmatrix investments, dmart superstores

Fig 1 – D’Mart Segment revenues

  • DMT opened its first store in Mumbai, Mah. in 2002. By Jan 2017, they had 118 stores and retail area of 35.9 lakh sq.ft, located across 45 cities in Mah. (59), Guj. (27), Telangana (13), Kar. (7), AP (4), MP (3), Chhattisgarh (1), NCR (1), Daman (1) and Raj. (2).
  • DMT will expand store network in south & west India, and follows a cluster-based expansion.
  • Leadership is Ignatius Noronha (MD), Ramakant Baheti (CFO), Udaya Yarlagadda (COO Retail).

News, Updates and Strategies of DMT

  • DMT operates and manages all its stores. They operate mostly on an ownership model (incl. long-term lease, with lease period over 30 years and building is owned by the company).
  • DMT opens new stores using a cluster approach on the basis of adjacencies and focuses on an efficient supply chain, targeting densely-populated residential areas with middle class consumers. It operates distribution & packing centers that form the supply chain backbone for stores. They have 22 dist. centers and 6 pack. centers in Mah., Guj., Telangana and Kar.
  • DMT’s approach is to retail quality goods at competitive prices. The majority of products stocked are everyday basic products rather than discretionary items. They minimize operating costs by procuring goods directly from vendors /manufacturers, having an efficient distribution system, minimize inventory build-up, and good store operations.
  • DMT is piloting a project to open delivery centers or pick-up points in catchment areas where it has a store, for online customers. The 150-250 sq. ft. centers named “D’Mart Ready” and will be package pick-up points for eCommerce.
  • DMT plans to add 60% more store space in 3 years, about 21 lakh sq. ft. by FY20.
  • A high proportion of DMT staff are employees on contract. As of Dec 2016, they had only 4,738 full-time employees compared to a high number of employees on contract.
  • The grey market premium for the IPO is about Rs. 227-228. This is a positive.
  • A personal visit to the store was interesting. There were discounts on most products, and on some very good deals. The store location was good, and it was in a busy area. The parking space was ample for customers. There were a range of products under various categories, and in one section DMT had its own private label products with brand names like “D Homes” and “D Premia”. One had to search a little to find shop assistants. There were long queues, even though there were many cashiers counters, indicating popularity at 9.30 pm on a weekday. Overall the experience was good because of the location and deals.

Retail Sector Outlook

  • While organized retail, primarily brick & mortar, has been in India for more than two decades, its contribution to total retail is still low at 9% (USD 55 bn.) as of 2016, a modest increase from around 7% in 2012. This is expected to become 12% (USD 115 bn.) by FY20.
  • Share of urban retail is expected to grow from 49% in FY16 to 52% in FY20 due to increasing urbanization, a higher urban household income, rural distress due to erratic monsoons and increasing penetration of organized retail in urban centers.
  • Currently, the food and groceries (F&G) segment constitutes a majority share of retail (67%). According to Technopak, F&G will have a share of 66% in 2020. Apparel & accessories and consumer electronics categories account for another 8% and 6% of the the retail market.
  • 16 Indian states contribute 85% of the total retail spend. Retail opportunity in three south states – Kar., AP and Telangana is currently USD 100 bn. According to Technopak, these three south states will witness robust growth. Mah. with 19% and Gujarat will grow steadily.
  • Footwear has the highest penetration in organised retail at 40%; apparel & accessories, jewellery and CDIT have penetrations of 22%, 27% and 25%, resp. whereas F&G has just 3%.
  • The implementation of GST will benefit the retail industry over the next 1 year. Source: RHP
  • At present, the organized general merchandise players in India occupy around 40-45 million sq. ft. area. This requirement of retail space is estimated to grow to 60-65 mn. sq. ft. by 2020.
  • Supermarkets have been observed to garner higher levels of productivity amongst the general merchandise focused formats. The store productivity of a supermarket is typically 20-25% higher than that of a hypermarket. Though the efficiencies are higher for supermarkets, the margins are lower as compared to hypermarkets due to F&G category accounting for a greater portion of the product mix, in which the margins are lower as compared to other non-FMCG categories.

jainmatrix investments, dmart superstore

Exhibit 2 – Sales PSF of Supermarket Firms

  • We can see in Exhibit 2 that DMT has superior sales psf. The profit drivers of this industry are 1) Growth of Private Label 2) Optimum Store Size and 3) Growth in Food Processing.
  • Organized retail at a national level opened up only 10-15 years ago in India. On introduction, there were worries that a lot of labor intensive small retail businesses will be affected, so it will have negative social impact. However quite quickly we saw that 1) the sector has taken off rapidly and consumer habits have changed fast 2) small retail has not been much affected 3) political opposition has eased. However there are still restrictions on Walmart or other MNC chains with multiple brand retail business directly entering India without local partners.
  • Market shares – Per reports, in F&G, Future group holds the largest market share with 13% followed by D’Mart at 10% and Reliance at 8%. Together, they contribute 31% of F&G segment. Additionally, the overall organised retail market in India is $60 billion in size. With DMT revenue for FY16 = Rs. 8,606 cr., DMT has a 2.11% in the total organized retail market.

Financials of D-Mart

  • DMT’s revenues, EBITDA and PAT have grown at 40.3%, 45.5% and 51.6% CAGR from FY12-16, see Fig 3. (FY17 data is a projection of 9M FY17 financials). Thus revenue & PAT growth is good.
  • The EPS has risen sharply in the last 5 years. This is excellent.

jainmatrix investments, dmart superstores ipo

Fig 3 – D-Mart Financials

jainmatrix investments, dmart superstores, IPO

Fig 4 – D-Mart Cash Flow

  • DMT has positive cash from operations, see Fig 4, but it has been investing into fresh capacities and hence the company has negative FCF.
  • DMT has an ROE of 21% and ROCE of 23.7% for FY16 which is excellent.
  • DMT has not declared dividend in the last 5 years though the promoter has 91.4% stake. The firm has instead reinvested funds generated into capacity expansion.
  • DMT has good margins. The PAT margin for FY16 stood at 3.7% and for 9M FY17 at 4.4%. The margins will improve as the company reduces debt. DMT has a bank balance of Rs. 351 cr. which translates into Rs. 5.6 as cash/share which is low. So cash is being managed efficiently.

Benchmarking

We benchmark DMT against other retail majors and global retail giant Walmart. See Fig 5.

jainmatrix investments, dmart superstores IPO

Exhibit 5 – Financial Benchmarking (click image to enlarge)

  • PE for DMT appears average compared to listed Indian retail firms. (TTM is trailing 12 months). However it is high as Trent and Shoppers Stop are recovering from losses till 2 years ago.
  • DMT has witnessed excellent PAT growth compared to peers in the last few years. The 3 year PAT growth over 50% makes it the leader. The D/E ratio at 0.74 is moderate. This will fall after the IPO and so it’s a positive. The inventory turnover ratio at 14.2 times makes DMT leader on this parameter too. The ratio indicates how quickly inventory is sold / rotated.
  • The return ratios are best in the industry. Majority of the retail players are stressed.
  • Notes: Revenues, EBITDA and PAT values for Walmart are for CY15/CY16. Operating Margin (EBIT)/Operating Income is used interchangeably with EBITDA Margin/EBITDA for Walmart. Exchange rate of 1USD = Rs. 67.8

Positives for DMT and the IPO

  • DMT is good at offering value retail to the cost conscious consumers. The consumption story in India is robust with a rising aspirational urban middle class. This sector has potential.
  • DMT has taken up its footprint expansion using a distinct store acquisition strategy and ownership model. Business has grown rapidly in recent years, and there is ample opportunity in current presence states in West & South, as well as growth in Central, North & East regions.
  • DMT as high operating efficiencies and a lean cost structure through stringent inventory management and good IT systems. DMT has a strong track record of growth and profitability.
  • DMT enjoys a strong promoter background and an experienced & entrepreneurial management team and high of employee ownership.
  • DMT can aspire for high valuations given that they are growing steadily, profitably and organically. It may soon reduce debt, and has a sustainable business model.
  • The IPO is a fresh issue of shares. Hence the promoters aren’t cashing out, this is positive.
  • With just 9% penetration in retail, the organized sector has massive room to grow.
  • The company has been conservatively managed financially with a D/E of 0.74 this year.

Risks and Negatives for DMT and the IPO

  • The valuations look expensive in terms of P/B ratio. However DMT is able to ask for a premium because of its leadership position.
  • Warren Buffet sold off his stake in global retail leader Walmart last quarter. This is partially due to fierce competition from eCommerce, like Amazon. However USA is at a very different stage of development compared to India. Organized retail dominates there; it is at an early stage of penetration here. eCommerce is well established there; it is at a nascent mostly PE stage here.
  • Having said this, well-funded eCommerce firms are offering good discounts and rapid delivery in urban regions thus grabbing volumes and market share, and changing buying habits.
  • In many pockets in India real estate development is restricted by hidden forces like local politician fiefdoms, administrative permit raj and corruption. Any of the retail firms can be victims of this.
  • Future Retail is a fierce competitor with all India presence, and both organic and acquisition based growth with brands like EasyDay, Nilgiris and Heritage retail. Reliance Retail too is a very big player with Reliance Fresh and vertical chains. Several MNC firms are keen to enter.
  • With stake of 82% post IPO, the promoters will need to reduce to 75% within 3 years of listing.

Overall Opinion and Recommendation

  • Organized retail in India has a good future, and will offer consumers better services and range of products. We can certainly expect multi-year growth, new formats and innovation.
  • DMT has managed current operations and growth very well, and built up a loyal customer base. It has good performance metrics and should grow well organically.
  • The IPO is going to benefit the company in terms of premium inflows that will help reduce debt and grow the network/ operations. Repayment of debt will reduce finance costs.
  • DMT has a professional management team, a respected investor promoter and clear vision and growth strategies which are likely to take the company to new heights in the near future.
  • At a current P/E of 39.9, the valuations are good, considering that DMT is the leader in its segment.
  • This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

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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 intends to apply for this IPO in the Retail category.  Other than this, JM has no known financial interests in DMT or any group company. 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 under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.