Vikas Ecotech – Get ‘Vikas’ for your Investments

  • Date: 24th Apr 2017
  • CMP: Rs. 21.25
  • Small Cap – Mkt Cap is 610 crores 
  • Industry: Specialty Chemicals
  • Target price is Rs. 52.7 by May 2019, a growth of 143% over 25 months 
  • A High Risk but High Gain opportunity for aggressive investors

Summary

  • Overview: Vikas Ecotech is engaged in mfg. and trading of specialty chemicals. It has factories in Shahjahanpur (Raj.) and J&K. The FY’16 revenues and profits were Rs 312 cr. and 26 cr. and these have grown 21% & 29% CAGR over 6 years. Products are niche, high value and eco-friendly, many are import substitutes. Exports are growing and are 49% of revenues. Current operations are lean.
  • Why buy now: VET is commissioning new plants in Noida SEZ, Kandla SEZ and Dahej (Guj) as well as extensions at Shahjahanpur. It expects a revenue growth of 35% CAGR in the next few years as outlook is strong.
  • Key risks: 1) Competition from large Indian players or Chinese firms can affect business. 2) The raw materials for VET are crude derivatives and any rise in crude oil prices will increase input costs. 3) VET has been free cash flow negative for 5 of the last 6 years. This has raised debt.
  • The Target Price is Rs. 52.7 by May 2019, a growth of 143% over 25 months. This is a High Risk but High Gain opportunity for aggressive investors.

Here is a note on Vikas Ecotech Ltd. (VET).

VIKAS ECOTECH – DESCRIPTION AND PROFILE 

  • VET does mfg. and trading of specialty polymer compounds & additives like Polymer compounds, Organotin stabilizers, Plasticizers and Flame retardants.
  • The FY’16 revenues were Rs 312 cr., profits Rs 26 cr. and market cap is Rs 610 cr.
  • Located in Delhi, VET has factories located in Shahjahanpur (Raj.) and Samba (J&K).
  • VET started as a trader/ agency for chemical products, then expanded into mfg.
  • VET has 250+ work force and products are exported to 20 countries, like B’desh, Pakistan, Sri Lanka, China, UAE, Turkey, Spain, S’pore, Germany, Ukraine and USA.
  • VET makes chemical products used in Agricultural Pipes, Auto Parts, Wires & Cables, Artificial Leather, Footwear, Organic Chemicals, Polymers, Pharma and Packaging, and distributes specialty chemicals and polymers of MNCs. 3 categories:
    • Specialty Additives – toxin free high perf. additives for mfg. applications.
    • Plastic Compounds – polymer compounds like Thermoplastic Rubber (TPR), Thermoplastic Elastomer (TPE) and Specialty compounds of PVC, PET and EVA.
    • Recycling – It recycles material to create virgin-grade PVC compounds.
  • Clients – RR Kabel, Relaxo F’wear, Liberty, Escorts, KEI, Havells, Apollo Pipe & SRF.
  • In FY15, VET sold stake (and exited) from a subsidiary, Moonlite Technochem. It also acquired the balance 25% stake of Sigma Plastic Industries thereby having 100% stake. By Q4FY15, VET became a standalone firm without any Subsidiary. In 2015 the firm rebranded itself from Vikas Globalone to Vikas Ecotech Ltd.
  • Leadership team is Vikas Garg (MD), Vivek Garg (Dir.), Ashutosh Verma (CEO), and Pankaj Gupta (CFO). Vikas Garg has been with VET (group) for 18 years and provides hands on leadership.
  • Shareholding % is: Promoter and Group-41.6%, Institutions-29.25%, individual-8.9%, others-20.25%.

JainMatrix Investments, Vikas Ecotech

Fig 1 – Segment and Geographic Revenue

Recent Events, Business Plans and Strategies

  • VET commenced construction of a mfg. plant and R&D center at Dahej, Gujarat. It will provide import substitution for additives and stabilizers. The plant will add capacity and produce 6,000 MT of organotin stabilizers (methyl tin mercaptide or MTM) and 5,000 MT of specialty polymer compounds annually. The plant cost is Rs. 30 cr. Production was to start by Apr2017, but a delay in environmental clearances may delay it by 6 months.
  • VET is also setting up plants at Noida SEZ and Kandla SEZ Guj. as well as extensions at Shahjahanpur (Raj.) to handle higher volumes and get exports benefits at SEZs.

JainMatrix Investments, Vikas Ecotech

Fig 2 – VET Capacity Growth  

  • Prince Pipes and Fittings Pvt Ltd’s CMD, Jayant Chheda, and his associates have acquired, in their individual capacity, 2.63 crore shares of VET or over 8%. PPF is a strategic customer of VET. The funds received of Rs 34 cr. are to be utilised for expansion of R&D facilities, new plants and marketing for domestic and exports.
  • VET formed a strategic tie up with PPF, India’s 3rd largest PVC pipes mfg. firm for supply of specialty chemicals to replace current with eco-friendly variants.
  • VET produces Organotin Stabilizers which are required to produce Lead free non-toxic, safe and eco-friendly PVC pipes. It’s a valuable tech. available with only few producers worldwide.
  • VET aims to produce bio plastic by using waste cooking oil through a technology called Wastol-P, and grow as one of India’s leading eco-friendly firms. It has entered into a contract with Haldiram, the large snack mfg. for supply of waste cooking oil.
  • Exports may grow around 30-40% for FY17. VET expects revenues to grow 35% CAGR for a few years, as per management.
  • VET’s mfg. plant in Raj. was affected by a fire in Apr2017. But damage was limited to only one building that housed the polypropylene section and a material warehouse; 4 other units in the same factory are safe and fully operational. The unit contributes 3% to sales. It may take 4 months to restore full production. According to estimates, damages could be Rs. 15-20 cr. but the factory is fully insured.
  • During the current year VET’s market share in India for Organotin Stabilizers was 10%. Their vision is to attain 25% share of the expanded market in the near future.
  • VET allotted 2.56 cr. equity shares of Re 1/- each at a premium of Rs. 16/- in Mar2017 to non-promoters on preferential basis. Promoter holding fell 4% in the Company.
  • Crisil rated VET a BBB for long Term Borrowings; A3+ for Short Term in Feb2017.
  • In Feb2016 Merrill Lynch Capital Markets bought 19 lakh shares of VET.
  • Employee strength has grown rapidly from 63 (FY15) to 81 (FY16) and 250+ today.

Industry Outlook

  • The Indian Specialty Chemical Industry is experiencing a good growth and is fast emerging as global specialty chemicals mfg. hub. Total production was 2.1 crore tons in FY’16. Industry delivered 13% growth over the 5 years led by domestic consumption; more recently it was 30% growth over FY13-15 to $2.67 bn.
  • India is 3rd after China & Japan in Asia and 6th globally in volumes.
  • The Industry is expected to grow at CAGR of 15% for next 5 years.
  • Indian specialty chemicals firms will gain over China due to strict implementation of environmental norms & safety standards there, which may lead to closure of many firms. Exports have already slowed. This may help boost exports from India.
  • Make in India initiative will facilitate growth and flow of FDI to this sector.
  • Indian specialty chemical firms will have 6-7% share globally by 2023, double the current level.
  • The India demand for Organotin Stabilizers at 6,000 MT p.a. (growth 20%) and PVC heat stabilizer (60,000 MT p.a.); and global PVC heat stabilizer market demand are growing fast, and VET expansion plans are in line with domestic and int’l. demand. This year VET’s market share in India for Organotin Stabilizers was 10%. The vision is to attain 25% share of the expanded market in the near future.

Stock Evaluation, Performance and Returns

JainMatrix Investments, Vikas Ecotech

Fig 3 – Price History

  • See VET’s 5 year price history in Fig 3. Investors for 5 years gained by 51.4% CAGR.
  • The share price shot up sharply in 2015. The recent one year low is Rs. 10.85 in Jun 2016, and the high was Rs 23.3 in Mar2017. The share price is 9% below this high.
  • Dividends have been consistent for 4 years at 5% giving 0.24% yield. This is low.
  • The Revenues, EBITDA and Profits have grown 21%, 35% and 29% CAGR over 6 yrs.
  • In Q3 FY17 VET had revenue of Rs. 84.8 cr. and growth of 0.3% YoY due to demonetization and fall in trading. But the mfg. revenue grew 17%. See Fig 4.
  • DE ratio is 1.41 which is high. VET will fund expansions through internal accruals.
  • Note: VET data in Fig 4 is consolidated until Mar 2015 and standalone thereafter.

JainMatrix Investments, Vikas Ecotech

Fig 4 – Quarterly Financials/ Fig 5 – Cash Flow  

JainMatrix Investments, Vikas Ecotech

  • VET has weak cash flow position. It has been FCF positive only in 1 of last 6 years. This is a negative. See Fig 5. However the reason is investments in R&D and mfg. capacities. The firm raised funds through preferential stock issue and promoter holding dilution. As a result the debt position is still moderate.
  • In Fig 6a, the 6 year PE chart for VET has a historic average PE of 15. Current P/E is 15.74 times (TTM earnings), while the P/B is 8.25 times. In Fig 6b we see that EPS TTM had an upward trend in last 2 years in a channel. But in Q3FY17 there was a drop due to challenges like demonetization.

JainMatrix Investments, Vikas Ecotech

Fig 6 – a) Price and PE Chart Above and b) Price and EPS Chart 

  • The DE ratio reduced in Mar’16, Fig 7. Interest coverage ratio improved. The inventory turnover ratio rose, operating & profit margins are higher, ROCE doubled to 32%. Similarly RoNW. These are positive.
  • Beta of the stock is 0.93 (Reuters) which is indicates low volatility.

JainMatrix Investments, Vikas Ecotech

Fig 7 – Financial Metrics

Benchmarking and Financial Estimates

Exhibit 8 – Financial Benchmarking

In a benchmarking exercise we compare VET with listed peers in similar businesses.

  • In terms of valuations, VET has a low PE ratio in spite of a recent rise in the share price. However P/B is high at 8.25 times. VET has the lowest dividend yield, however this is OK for a high growth company. D/E ratio is high among peers, however it is at manageable levels.
  • VET’s 3 year CAGR PAT has grown at 86.8%. This is good, but on a small base. VET has return ratios over 35%, that are likely to sustain. This is excellent.
  • The numbers show that the firm that is moving to a high growth / high profit phase.

Exhibit 9 – Projections  

The financial projections have been made based on following assumptions.

  1. Production starts at Dahej plant in mid FY18 and ramps up to full capacity in 2 years. Noida and Bhuj plants too start contributing to revenues in FY18.
  2. Exports and domestic demand continue to grow at a combined 30-35%.
  3. R&D continues to develop new products; demand for lead free chemicals grows; eco-friendly mfg. processes for PVC compounds from recycled materials gain in visibility and demand.
  4. Analyst judgement.

Strengths of Vikas Ecotech

  • Good R&D that works with prospects and customers to develop new products & solutions. The recent revenue upswing was the result of years of R&D work.
  • Capacity additions will start from Dahej, Noida and Bhuj plants in FY18.
  • A domestic focus on substitution for expensive imported niche chemicals.
  • Exports focus will continue and build on the current 49% share of revenues.
  • There exists a good synergy between trading chemicals business and mfg.
  • Remarkable cost consciousness including salaries for promoters and employees.
  • Current customer base is derisked across a large number of firms and industries, providing stability.

Weaknesses and Risks

  • The raw materials used by VET are crude oil derivatives. Any rise in crude oil prices will increase the input cost and margins. However crude is in a 45-55 $ range.
  • VET has weak cash flow position. It has been FCF negative. The D/E ratio at 1.4 times is moderate, but any further capital raise can push D/E to excessive levels.
  • Promoter shareholding is low at 42%. However the promoter has sacrificed holdings to raise funds for expansion. He may be in a position to raise this in a few years. He still has sufficient holdings today that provide him a good incentive to grow and develop the firm VET.
  • In terms of valuation, the P/B ratio looks expensive.
  • VET’s mfg. plant in Raj. suffered in a fire in April 2017. The damage could be Rs. 15-20 cr. But these assets were insured. One plant in J&K is in a sensitive area, there have been terrorist attacks recently.
  • Chinese chemical producers can be competitive on price and volume. The other massive player in the sector is Reliance Industries. VET has potential as a niche chemicals player as long as other larger players do not enter these segments. However these segment volumes may not be attractive for RIL.
  • VET can in future be a takeover target by large players. But it will benefit investors.
  • VET sales are B2B, used as raw material, so it’s difficult for analysts to verify & validate output.

Opinion, Outlook and Recommendation

  • The chemicals sector is a massive market, and specialty chemicals can be a valuable and large niche within this. India offers many competitive advantages to this sector.
  • VET has taken this strategy and has ample room to grow in this niche.
  • VET is rated highly on lean business operations, aggressive growth – both mfg. capacities and workforce, good R&D team, eco-friendly products and growth in domestic & export markets.
  • Valuations are reasonable as VET is a largely undiscovered firm. With a turnover of Rs 312 cr., VET has ample room to grow in domestic and exports markets.
  • Key risks are: 1) As VET is a small firm, competition from larger players or Chinese firms can affect business. 2) The raw materials are crude derivatives and any rise in crude oil prices will increase input costs. 3) VET has been free cash flow negative for 5 of the last 6 years. This has raised debt.
  • The target price is Rs. 52.7 by May 2019, a growth of 143% over 25 months.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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

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  • 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 and Additional Details

The target price basis is 1) Financial projections – Exhibit 9, 2) A target P/E of 20 times, higher than current 15.74 times 3) Analyst judgement.

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 and JM have no current shareholding, and no known financial interests in Vikas Ecotech & Co 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. Equity investments are subject to market risks. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, we recommend that investors looking to invest in equity should take advice from a Registered Investment Adviser. Punit Jain is certified and registered 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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CPSE ETF FFO 2 – An Energizing Offer – BUY

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

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

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

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

Offer Differences

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

Description

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

Investment Details of the Scheme

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

jainmatrix investments, CPSE ETF

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

Source: Reliance Mutual Fund FFO 2 document

Analysis of the ten PSUs as part of this ETF:

jainmatrix Investments, cpse ETF

Table 3 – CPSE ETF FFO PSUs analysis

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

The ETF structure is explained below.

JainMatrix Investments, CPSE ETF

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

Past Performance since launch in March 2014

jainmatrix investments, cpse

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

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

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

PROS

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

CONS

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

Overall Opinion

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

JAINMATRIX KNOWLEDGE BASE

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer

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

Why are Indian stock markets attractive for Investments?

In this 5 minute video, JainMatrix Investments founder Punit Jain presents a few reasons for investing in Indian stock markets. This is part of the Investor Education section of http://www.jainmatrix.com.

DO YOU FIND THIS SITE USEFUL?

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

DISCLAIMERS

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

CPSE ETF FFO – An Energizing Offer – Post Listing Note

Date: 3rd Feb 2017 

Hi investors,

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

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

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

Disclaimer

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

CPSE ETF FFO – An Energizing Offer – A Video

Hi Investors,

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

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

Happy investing,

Punit Jain

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

DISCLAIMER

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

CPSE ETF FFO – An Energizing Offer

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

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

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

Here is a note on the CPSE ETF Offer 2017.

Offer Description

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

Investment Details of the Scheme

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

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

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

Table 3 – CPSE ETF FFO PSUs analysis

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

The ETF structure is explained below.

JainMatrix Investments, CPSE ETF

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

Past Performance

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

JainMatrix Investments, CPSE ETF

Table 5 – Past Performance of CPSE ETF 2014

PROS

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

CONS

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

Overall Opinion

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

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

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

DO YOU FIND THIS SITE USEFUL?

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

Disclaimer

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