Category: IPO/FPO ANALYSIS

Opportunities provided in IPO and FPO situations are analysed

Aadhar Housing Finance IPO – Constructive

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  • Date 08th May; IPO Opens 8-10th May, at ₹ 300-315/share
  • Mid Cap: ₹ 13,500 cr. Mkt cap
  • Sector – NBFC, Affordable Housing
  • Valuations: P/E 18.4, P/B 2.9 times
  • Opinion: Subscribe
  • Summary: Aadhar Housing Finance is a leader in independent affordable housing finance firms. The industry has high growth and AHF is likely to grow in line. Post covid, AHF has enjoyed high growth and improved metrics. It is the largest affordable HFC in India in terms of AUM. The company also has a geographically diversified AUM. The IPO has a fresh issue part, which will strengthen the balance sheet and support loan growth. The firm is professionally run.
  • Risks: 1) micro home loans can be affected by political, social and weather disruptions 2) Blackstone as promoter is an asset manager, and can exit its holdings over the next few years 3) Regulatory risks like RBI norms compliance and policy changes 4) rising interest rates can put pressure on margins 5) Housing is a cyclical industry
  • Opinion: Subscribe to Aadhar Housing Finance IPO.

Here is a note on Aadhar Housing Finance IPO – AHF.

IPO highlights

  • The IPO opens from 8-10th May 2024 in a Price Band of ₹ 300-315 per share
  • It is a Fresh Issue of ₹ 1,000 cr. & OFS ₹ 2,000 cr., total ₹ 3,000 cr., which is 22.3% of share capital post IPO. (OFS – offer for Sale by the promoter of existing holding).
  • Promoter is Blackstone Asset’s fund BCP Topco VII Pte whose 98.7% will fall to 76.5% post-IPO.
  • The main objects of the OFS part of IPO are 1) ₹ 750 cr. towards maintaining higher Tier 1 capital towards lending and 2) Rest for General Corporate purposes.
  • The lot size is 47 shares and Face Value ₹ 10 per share.
  • The IPO share quotas are Institutional: Non-Institutional Investors: Retail of 50:15:35%.
  • The unofficial/ grey market premium of AHF is ₹ 90 /share over IPO price. This is a positive.
  • The IPO allotment is likely to be finalized on 13 May, refunds and crediting of shares will be on 14 May. AHF shares will list on BSE and NSE, on 15 May.

Introduction

  • AHF is a retail-focused affordable housing finance company, serving economically weaker and low-to-middle-income customers, who require small-ticket mortgage loans.
  • Revenue from operations grew from ₹ 1,575 cr. in FY’21 to ₹ 2,043 cr. in FY’23 at a CAGR of 13.89%, PAT CAGR was 26.56% and EBITDA CAGR was 10.44% over last three years.
  • It is the largest affordable HFC in India in terms of AUM.
  • The firm has been operational since Feb 2011, but underwent a transformation when it merged into DHFL Vysya in Nov’17. Subsequently, it was rebranded as AHF Ltd.
  • BCP TOPCO VII PTE. LTD. (a Blackstone Group Company) is the holding company of AHF Ltd. Blackstone is the world’s largest alternative asset manager, with more than $1 trillion in AUM based in New York City.
  • AHF has a total of 3,885 employees and its 100% owned subsidiary has a total of 1,875 employees.
  • The company has solidified its position as the leading housing finance company in India’s low-income housing market (ticket size less than ₹ 15 lakhs), due to good metrics in this fast growing sub-segment.
  • AHF has the most geographically diversified AUM and the highest operating expenditure ratio efficiency. The company has a network of 487 branches including 109 sales offices (Dec’23), with branches spread across 20 states and UTs. During the year, 59% of the total loans disbursed were through in-house channels.
  • No single state accounts for more than 15% of the gross AUM. See Fig 1.1.
  • Management – Rishi Anand (MD/CEO), Rajesh Viswanathan (CFO) and O. P. Bhatt (Chairman). The firm is professionally run, and management is impressive in terms of work experience. See Fig 1.2.

Fig 1.1 – AUM by States / Fig 1.2 – Key leaders

Industry Outlook of Indian Housing Sector

  • Affordable home loans is nothing but a form of microfinance but secured against housing collateral.
  • High Growth: Post Covid in 2020, the housing sector has emerged with high growth. The pandemic established the importance of owned housing, and also drove the Work From Home habits that are widely accepted in the software and tech industry, and have made inroads across the industrial landscape. Its helped by the GoI focus on housing. Following a period of subdued growth in FY20 through FY22, AHFCs experienced good growth during FY23, expanding by 27% year-over-year. This growth trajectory is expected to continue, with CareEdge Ratings forecasting a 29% growth in FY24 and 30% in FY25 for AHFCs.
  • Contribution to Economy: The Indian housing sector is a crucial aspect of the country’s economy, contributing nearly 11% to the GDP and providing employment opportunities to millions of people. However, in the last decade, the sector has faced various challenges such as a shortage of affordable housing, a lack of adequate funding for developers, and limited access to mortgage finance for consumers.
  • Industry data: public sector and private sector banks held the largest market share in housing loans, with a share of 69%. Housing finance companies had 29%, followed by a 2% market share by Affordable Housing Finance companies. Although affordable housing loans constitute around 6% of the overall housing finance industry (Dec’22), the market remains severely underpenetrated. (ICRA, April 2023).
  • Priority Sector Lending Benefits: The RBI has also provided incentives to the housing finance industry by extending priority sector status to housing loans. In addition, pursuant to Section 36(1)(viii) of the Income Tax Act, 1961, up to 20% of profits from eligible business computed under the head “profits and gains of business or profession”, may be carried to a “Special Reserve” and are not subject to income tax.
  • Pradhan Mantri Awas Yojana: The Indian government has initiated a Housing for All scheme by 2022 to promote affordable and low cost housing in the country. To achieve this objective, the government has introduced several measures, including the PMAY for rural and urban regions aims to provide affordable housing for lower-income groups and economically weaker sections of society.
  • Relaxed ECB guidelines: The GoI has also relaxed External Commercial Borrowing (ECB) guidelines to help finance homebuyers. In addition, GoI has announced tax incentives to promote the housing sector. The RERA has been implemented to improve transparency, timely delivery, and organized operations in the sector. GoI also announced a last-mile affordable housing funding package to complete ongoing housing projects in affordable and middle-income categories.
  • Increase in Non-Housing Portfolio Share: Amidst intense competition and the imperative to maintain margins, the share of the non-housing portfolio among AHFCs has risen from 17% as of March 31, 2019, to 26% as of March 31, 2023. This trend is anticipated to persist, with the non-housing portfolio share projected to reach 27% by March 31, 2024. (CareEdge ratings report).
  • Gruh Finance, an affordable housing finance subsidiary of HDFC was acquired by Bandhan Bank in October 2019. It used to enjoy excellent valuations, and can be remembered as an excellent industry case study.
  • NBFC Share Steady: NBFCs have grown at 16-18% overall, see Fig 2.1.

Fig 2.1 NBFC Industry

Aadhar Housing – Financials

  • AHF Revenue, EBITDA & PAT grew by 13.89%, 10.44% and 26.56 % resp, see Fig 3.1.
  • The chart indicates high growth in the last three years from AHF. Margins too are improving.
  • EBITDA Margin is for 3 years ranges between 75% to 80% and PAT margin around 21%-27% for 3 years.
  • The EPS for the company has increased from 8.62 in FY21 to 13.80 in FY23.
  • Gross NPAs and Net NPAs are – 1.4% and 1.0 % (of AUM) in FY23.

Loan services offered are-

  • Home Loan for Salaried Employees, Self-Employed
  • Loan for Purchase of Non-Residential Property, Loan for Plot Purchase & Construction, Composite Loan
  • Balance Transfer and Top-Up  
  • Home Construction Loan, Loan for Construction of Non-Residential Property, Home Improvement Loan, Home Extension Loan, Loan Against Residential and Commercial Property (LAP)
  • Aadhar Gram Unnati

Fig 3.1 – Financials

Fig 3.2 – Product-wise Revenue, Fig 3.3 Assets under Management

Fig. 3.4 – Shareholding pattern pre and post IPO

  • The Fig 3.2 shows Customer Wise Revenue; and Fig 3.3 Assets under Management. As of Dec’23, salaried customers accounted for 57.2% and self-employed for 42.8% of Gross AUM, resp. and the company had 255,683 live accounts (including assigned and co-lent loans).
  • We can see that Blackstone which was the dominant shareholder is selling some stake in the Offer for Sale, and taking the firm public through the IPO process. See Fig 3.4 Shareholding pattern.
  • For Blackstone / Topco, the average cost of acquisition per Equity Share in AHF was ₹ 80.54 (RHP). This indicates a 3.9X gain for promoter in the OFS part of IPO.

News, Updates and Strategies

  • IPO resurgence: Indian IPO market has been buoyant over 2-3 years, and most mid/large offerings have been successful. We now worry about excessive valuations and demand in IPO offerings.
  • In Nov 2023, AHF announced its AUM had crossed the $2 billion (₹16,300 cr.) milestone.
  • 07th May – AHF has raised ₹898 cr. from anchor investors a day ahead of the IPO, to 61 anchor investors at the upper price band. Morgan Stanley Asia, Amundi Funds, Neuberger Berman Emerging Markets Equity Fund, Theleme India Master Fund, SBI Life Insurance, ICICI Prudential Life Insurance, HDFC MF, ICICI Prudential MF, Axis MF and Quant MF are among the anchor investors.
  • Blackstone-backed AHF decided to reduce the size of its initial public offer to ₹ 3,000 crore from the originally planned ₹ 5,000 cr. (Source- April, Money Control)
  • This week, primary market is abuzz with anticipation as 3 prominent firms, AHF, Indegene (₹ 1,800) and TBO Tek (₹ 1,500) will launch IPOs to raise nearly ₹ 6,300 cr. (Source- May, Republic World)
  • Mar 2023 – Yes Bank and AHF ink co-lending partnership, in accordance with the co-lending framework of the RBI that enables banks and non-banking companies to jointly bring forth financial solutions that cater to the requirements of the unserved and underserved sections of the society.
  • June 2022 – AHF awarded an IT deal to TCS for an end-to-end business process transformation project, which will use the integrated and collaborative blockchain-based cloud platform.
  • The IPO is for selling 22.3% of the stake of AHF. However a SEBI mandate is that minimum 25% of the listed company should be available to public and institutions in a few years after IPO. Thus we feel that AHF may have a QIP or Follow-on Public Offer (FPO) in a year or two.

Benchmarking

Fig 4.1 – Benchmarking

In a benchmarking exercise we compare AHF to industry peers, to understand it better. See Fig 4.1.

  • Positives: AHF has achieved robust sales growth, outperforming the industry average of 6.08%. While AHF profit growth of 10.4% is respectable, it falls slightly below the industry average of 14.21%.
  • AHF maintains a lower D/E ratio (3.10x) compared to the industry average (4.14x), indicating lower reliance on debt financing and better financial stability. This is positive.
  • AHF demonstrates a strong net profit margin of 26.7%, exceeding the industry average of 21%, indicating efficient cost management and operational efficiency.
  • On Returns parameters of RoE and RoCE, AHF is excellent, while not leading the peers. A positive.
  • Negatives: In terms of Valuation, PE of AHF is on the high side, so it’s expensive. AHF’s price-to-book value ratio of 2.93x, a premium over the industry average of 2.05x. This is also true for EV/EBITDA.
  • EBITDA margin of 75.19% is lower than the industry average of 81.42%, suggesting lower operating profitability.

AHF hasn’t stood out as either very good or bad on the benchmarking section. It appears to be stable and improving steadily on current performance. The high valuations can be interpreted as the cost of quality.

SWOT Analysis

Fig 4.2 – SWOT

Risks

  • Similar to microfinance, micro-home loans can be affected by political, social and weather disruptions, which can affect customers’ livelihoods and their ability to repay loans.
  • Blackstone is the promoter and asset manager and may be interested in exiting its holdings in AHF over the next few years. If this happens, it may be an unstable promoter, and there may be pressure on share prices on every exit, or until the firm is taken over by a stable new promoter.
  • Regulatory risks include RBI intervention, changes in Priority Sector policy, KYC issues, etc.
  • Window dressing: Many companies present improved financials pre-IPO, and these unwind after listing. We are unable to ascertain if AHF has done this, but it remains a risk.  
  • AHF is a party to certain legal proceedings and any adverse outcome can be an issue.
  • An increase in the NPA will adversely affect the company and its financials. NPA resolution can be long drawn out and involve litigation and friction.
  • AHF is exposed to adverse fluctuations in interest rates and credit spreads. Inflation too can affect demand for loans from this firm.

Overall Opinion and Recommendation

  • The Real Estate & housing industry is now in a multi-year upcycle, following a downcycle from 2010-20.
  • Microfinance has been a high-performing sector but affected by political & social disruptions.
  • AHF has been sharply focused on rural Housing finance and is structured to grow in this segment.
  • AHF has a high expertise in the low-income housing segment which makes it the largest player in the low-income housing market in India. It enjoys a Pan India presence, so extensive branch networks, geographical penetration, and good sales channels contribute significantly to loan sourcing and servicing. The company posted steady growth in its top and bottom lines for the reported periods. AHF is well placed to leverage its dominance to tap the growth potential of the industry.
  • The future growth of the affordable housing finance market looks positive aided by government policies, an increased supply of affordable homes, rising demand in tier 2/3/4 cities, and fair home loan interest rates.
  • Key Risks – 1) micro home loans can be affected by political, social and weather disruptions 2) Blackstone as promoter is an asset manager, and may exit its holdings over the next few years 3) Regulatory risks like RBI norms compliance and policy changes 4) rising interest rates can put pressure on margins 5) Housing is a cyclical industry
  • Opinion – Subscribe to Aadhar Housing Finance IPO

Disclaimer

Punit Jain discloses that he has no positions in Aadhar Housing Finance or Blackrock Asset as on date of this report. But inline with this report, he intends to subscribe to the Aadhar Housing Finance in the IPO.

This document has been prepared by JainMatrix Investments Bangalore (JMI), 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 JMI. 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, JMI has not independently verified the accuracy or completeness of the same. Neither JMI 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 a RIA Registered Investment Advisor. Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. Registration granted by SEBI, and certification from NISM in no way guarantee performance of the RA or provide any assurance of returns to investors. JMI has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at [email protected]  Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logo/brand name –

RP Tech – The ICT Distribution Leader – IPO

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  • Also known as Rashi Peripherals Ltd.
  • 07th Feb, IPO Opens 7-9th Feb
  • Pricing range – ₹ 295-311/share
  • Valuations: P/E 16.6, EV/EBITDA – 2.07, P/B 2.6 times
  • Small Cap: ₹ 2,000 cr. Mkt cap
  • Sector – Technology

Summary

  • RP Tech distributes global technology brands in India. They specialize in ICT products and have a 9.5% market share in India sales. Part of the ICT global supply chain. The organization and structure set up looks good to handle the growth. At current pricing range, RP Tech looks fairly valued. We expect margin expansion after reduction in debt levels even as it grows rapidly in revenues. Once this happens, valuations will look reasonable.
  • Risks: 1) Thin operating margins, high working capital and high debt 3) Supplier Concentration – top eight brands accounted for 82% of revenue 4) Indirect Tax contingent liabilities.
  • Opinion: Medium rated. Aggressive Investors can SUBSCRIBE for short-term gains.

Here is a note on RP Tech IPO.

IPO highlights

  • The IPO opens from 7-9th Feb 2024 in a Price Band of ₹ 295-311 per share
  • It is a Fresh Issue of ₹ 600 cr. of 6.58 cr. shares, which is 36.6 % of the equity share capital.
  • The promoters are Choudhary & Pansari families that own 89.65% which will fall to 63.41% post-IPO.
  • The main objects of the IPO are 1) Repayment of debts of ₹ 326 cr. and 2) Funding working capital requirement ₹ 220 cr. 3) The remaining 50+ cr. is for general corporate purposes.
  • The lot size is 48 shares and Face Value ₹ 5 per share
  • The IPO share quotas are QIBs: Non-Institutional Investors: Retail is 50:15:35%.
  • The unofficial/ grey market premium of RP Tech is ₹ 70 /share over IPO price. This is a positive.
  • The IPO allotment is likely to be finalized on 12 Feb, refunds will be on 13 Feb, and also crediting of shares to eligible allottees. RP Tech shares will list on BSE and NSE, on 14 Feb.

Introduction

  • RP Tech distributes global technology brands in India. They specialize in products related to Information and Communication Technology (ICT). It has value-added services such as pre-sales, technical support, marketing services, credit solutions and warranty management services.
  • Revenue from operations grew at a CAGR of 26.32% from ₹ 5,930 cr. in FY’21 to ₹ 9,468 cr. in FY’23, PAT generated CAGR of -4.80% and EBITDA with CAGR of 11.38% over last three years.
  • RP Tech is the national distributor for 53 global technology brands and has 50 branches, and 63 warehouses across India, with 8,657 distributors across 680 locations in 28 States and UTs.
  • These 50 branches operated as sales & service centres and warehouses, and distributed and sold 10,508 SKUs and 34.38 million units in FY23. Exports are just 2.6% of the business, rest is domestic.
  • It had 1,433 employees, including 549 in Sales & Marketing and 64 in the technical support team.
  • The company has two business verticals –
  • Personal computing, Enterprise and Cloud Solutions (PES): This includes personal computing devices, enterprise solutions, embedded designs/products and cloud computing.
  • Lifestyle and IT essentials (LIT): This includes products such as (i) components such as graphics cards, central processing units (CPUs) and motherboards; (ii) storage and memory devices; (iii) lifestyle peripherals and accessories such as keyboards, mice, webcams, monitors, wearables, casting devices, fitness trackers and gaming accessories; (iv) power devices such as UPS and inverters; and (v) networking and mobility devices.
  • The Fig 1.1 below shows the Revenue By Vertical; and Fig 1.2 the Market Share by Product

Fig 1.1 – Revenues by Vertical and Fig 1.2 Market Shares

  • The company’s clients include ASUS Global., Dell International, HP India, Lenovo India, Logitech Asia Pacific, NVIDIA Corp, Intel Americas, Western Digital (UK), Schneider Electric IT Business, Eaton Power Quality Pvt. Ltd., ECS Industrial Computer Co. Ltd., Belkin Asia Pacific, TPV Technology India, LG Electronics India, and Toshiba Electronic Components, Taiwan Corporation, among others.
  • RP Tech has a good relationship with marquee customers for a very long time.
  • RP Tech differentiate itself by offering end-to-end services such as pre-sale activities, solutions design, technical support, marketing services, credit solutions and warranty management services.

Fig 1.3 Locations

Fig 1.4 – Distribution and 1.5 – Shareholding pattern

  • RP Tech distributes products through several channels or networks – General Trade (81%), e-commerce 13% and Modern trade 6%. Above Fig 1.4 shows the distribution network and channels.
  • See shareholding pattern pre-IPO in Fig 1.5.
  • Below Fig 1.6 – Strong Customer Relationships in years with prominent brands.

Fig 1.6 Clients

  • Fig 1.7 – Key leaders:
  • (L- R) Himanshu Kumar Shah CFO, Krishna Kumar Choudhary, Chairman, Kapal Pansari MD, Sureshkumar Pansari, Vice-Chairman and Rajesh Goenka, CEO.

News, Updates and Strategies

  • In a pre-IPO placement, ace investor Madhusudan Kela’s wife Madhuri Kela invested ₹ 50 cr. and Volrado Venture Partners Fund-III-BETA, a venture capital fund, invested ₹ 100 cr. and were allotted 48.23 lakh equity shares at an issue price of ₹ 311 apiece.
  • A day before the IPO, the firm made allotments to Anchor investors. It allotted 57.88 lakh shares to 18 funds at ₹ 311 per share, at the upper limit. The anchor investors who participated in the bidding process include prominent foreign and domestic institutions such as White Oak Capital, Ashoka India, ICICI Prudential MF, Volrado Venture Partners Fund, and Bajaj Alliance Life Insurance Company. Other notable participants in the bidding round were Aditya Birla Sun Life Insurance Company, SBI General Insurance Company, Singularity Growth Opportunity Fund, and Authum Investment and Infra.
  • Out of the total allocation of 57.88 lakh equity shares, domestic mutual funds were allotted 19.61 lakh equity shares through a total of 8 schemes, amounting to ₹ 61 crore.

Industry Outlook of ICT in India

  • India has a young population, and is a developing nation, so it has a faster growing market than developed nations such as USA, UK, and Canada in terms of retail consumption. They are better exposed to media and technology, which presents an opportunity for domestic consumption in the form of branded products and organized retail.
  • Govt. of India has an initiative of Make in India and is also promoting Electronic Mfg. Clusters throughout the country to provide world-class infrastructure and facilities.
  • The GoI is aiming to increase the production of electronic items to USD 300 billion by Fiscal 2026. The domestic consumption of products is expected to increase from USD 75 billion in Fiscal 2022 to USD 150- 180 billion by Fiscal 2026.
  • India’s ICT Industry size is about 1 lakh cr. now and is expected to reach ₹ 1,08,700 cr. by 2025.

Fig 2 – ICT Industry Size

  • Govt. of India’s Production-linked Incentive (“PLI”) scheme provides Incentives to boost domestic mfg. and attract large investments in IT Hardware value chain with target segments of laptops, tablets, all-in-one PCs, and servers, and boost the export market for the same. In electronic/technology products and telecom and network products, the approved financial outlay over the five years period is ₹ 12,200 cr.
  • We estimate that RP Tech has a Market Share of 9.5% of the Indian ICT distribution market.

Financials of RP Tech

  • RP Tech revenues, EBITDA and PAT over the years are in Fig 3a. Revenue, EBITDA & PAT grew by 26.36%, 11.38% and (4.80) % respectively.
  • Increase in interest costs is hurting their PAT.
  • In below Fig 3b Cash Flow we can see that the Free Cash Flow FCF is negative. The firm has made many investments in inventories, assets and payables that have made FCF negative.
  • EBITDA Margin is constant over 2.8-3.5% and PAT around 1.30-2.29% variation due to externalities. This is average industry margins.
  • Considering ₹ 326 cr. will used from IPO proceeds for repayment of Debt, the firm’s debt to equity will reduce from current pre-IPO 1.82 to 1.30 post IPO.

Fig 3a – Financials

Fig 3b Cash Flow

Benchmarking

We benchmark RP Tech against listed ICT distribution and mfg. firms, See Fig 3c below.

Fig 3c – Benchmarking

  • P/E currently at 15.74 looks priced overpriced. Its EV/EBITDA is 2.07, which looks reasonable. Thus the valuations of RP Tech looks mixed.
  • The 3 year Sales and Profits growth look low. There was a massive sales growth for RP Tech in FY21 and FY22 during covid, and that is now normalizing.
  • D/E ratio is high, but post IPO, debt should fall as a main object of IPO is to reduce debt.
  • Margins are on par with competitors.
  • Return on Equity and RoCE are fair and in line with industry.
  • Putting this together, we sense that RP Tech will return to steady industry plus growth now, and improve its financial parameters in the next 1-2 years.
  • The strong business relationships, wide distribution network and digital growth of the economy will reflect well on RP Tech.

Positives for RP Tech

  • Strong technical expertise of firm across a range of ICT products for sales, service and support.
  • Long term relationship with marquee global tech clients to ensure availability of products.
  • Reputation as Leading and fastest growing Indian distribution partner for ICT products.
  • Repeat orders constitute 70-80% of business, this showcases the stickiness and moat of RP Tech.
  • Diversified portfolio offering with 10,000+ SKU’s and value-added solutions.
  • Pan-India and multi-channel distribution footprint backed by dedicated in-house infrastructure.

Risks and Negatives

  • High dependency on various vendors, who are global technology brands, revenues generated from distribution of products mfg. by top eight global technology brands amounted to 82% of revenue from operations. Any delay or failure on part of such global technology brands to supply products may materially and adversely affect business, profitability and reputation.
  • Good relationships with Channel Partners and enterprise customers is important as if any of these parties change the terms of their arrangements business could be materially and adversely affected.
  • RP Tech is operating on thin margins, an increase in debt or interest rates can affect the financials. There has been an increase in Debt to equity from 1.23 in FY21 to 1.82 in six month ended Sep’23.
  • Reduction in EBITDA margin from 3.63% in FY21 to 2.83% in FY 23 was due to higher interest rates.
  • Continued negative cash flows can affect the financials of the business. RP Tech will certainly have to stabilize their working capital needs while handling growth.
  • Risk of liability claims. Failure to maintain quality of customer service and deal with customer complaints could materially and adversely affect business and operating results.
  • RP Tech has Contingent Liabilities of ₹ 592 cr. (RHP), of which for Indirect Tax is ₹ 281 cr.
  • A Subsidiary ZNet Technologies Pvt. Ltd., has incurred losses in the last three Fiscals. There is no visibility on profitability.

Overall Opinion and Recommendation

  • India has a large and growing software and Tech industry, and it is an exports leader. Many global firms are setting up Global Competence Centers here. Within India too, technology is permeating the population through devices and internet, at work and leisure.
  • RP Tech is an important player in the ICT industry. It has a strong grip and 9.5% market share in sales. We expect growth at RP Tech to be strong. RP Tech have strengths of stickiness of customer with 70-80% of business from repeat orders and strong relationship with brands. Company management and board looks solid with rich experience in this field.
  • RP Tech is well set and a solid growth prospect in future.
  • However the firm is just settling down from 2-3 years of an unusual post covid business situation. Financials are in a recovery process and may take a few quarters to stabilize. This IPO helps to rest some of the debt. The recovery process needs to continue by controlling the working capital.
  • We expect reduction in debt to equity after IPO even as it grows rapidly in revenue and offerings. Once this happens, RP Tech valuations will rise and this IPO entry price will look reasonable.
  • Risks: 1) Thin operating margins, high working capital and high debt 3) Supplier Concentration – top eight brands accounted for 82% of revenue 4) Indirect Tax contingent liabilities.
  • Opinion: Medium rated. Aggressive Investors can SUBSCRIBE for short-term gains.

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 stake ownership or financial interests in RP tech or any group company. Punit Jain intends to apply for this IPO. 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 a RIA Registered Investment Advisor. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. Registration granted by SEBI, and certification from NISM in no way guarantee performance of the RA or provide any assurance of returns to investors. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at [email protected]. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logo/brand name –

TCS – Share Buyback – Nov 2023

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  • Date 21st Nov 2023
  • CMP: ₹ 3,530/share
  • Large Cap with ₹ 13,00,000 cr. Mkt cap
  • Buy Back price: ₹ 4,150/share; Record Date: 25th Nov

Introduction

TCS is a well-known Large Cap stock. TCS has announced a Buyback offer, here is a note on this. The offer is attractive.

About the Offer

  • TCS approved a buyback offer at ₹ 4,150 /share for the repurchase of 4 cr. shares comprising 1.1% of the share capital for up to ₹ 17,000 cr. It is at a premium of 18% to its current price of ₹ 3,530. The record date is 25th Nov.
  • Objective: The firm has offered to reward and return cash to shareholders. Post-buyback, the equity share capital will reduce, and so the ROE (Return on Equity) of TCS will rise.
  • This is a shareholder-friendly activity. The firm has a healthy balance sheet already, and so uses the fresh cash generated from the business, to buy back shares, as it is a better use of these funds. IT services is a high cash-generating business that has a low requirement of capex or fresh investments.
  • It’s the 4th buyback in 5 years.
  • SEBI has mandated TCS to reserve 15% of the buyback amount for Retail (small shareholders with holdings under  ₹ 200,000 of shares). Current shareholding pattern indicates TCS has 5% Public shareholders, so Retail may have this additional benefit in this buyback.
  • TCS is well-valued and is trading at a PE multiple of 29 times today, above the historical average of 25 times. Its Q2FY24 result was good. The share has however underperformed the Nifty since early 2022.

Opinion

  • If you do not hold TCS shares, you can Buy 48 shares of TCS now as retail, and Offer your shares through the buyback to TCS, and sell the rest soon after for short-term gains. Or sell the shares after 1 year for Long Term Capital gains.
  • There is a good probability that TCS share could rise to the buyback price ₹ 4,150 in a few months.
  • If you already hold TCS shares, then two options:
    • If you hold 48 or fewer shares (i.e. you are a Retail investor in TCS), offer your shares in the buyback, and purchase from the open market after record date 25th Nov to take advantage of the discount.
    • If you hold more than 48 shares, take part in the buyback to the full extent, and purchase shares from the market now to take advantage of the 18% discount, and average down on your holding cost.  
  • Investors can take advantage of tax benefits, as the income generated from this buyback of shares is tax-exempt.

Process of buyback

  • Investors holding Shares in Demat Form can tender shares through their Stock Broker. If you have online access, there will be a BUYBACK page option for TCS, once the offer opens. TCS will inform shareholders about this soon.
  • For more details, see FAQ from TCS on buyback attached.
tcs-buyback-2023-frequently-asked-questionsDownload

Disclaimers and Disclosures

Punit Jain discloses that he is a long term investor (less than 1%) in TCS since 2012. Punit Jain was an employee of TCS from 1995 to 2001. He will also take part in this BUYBACK. Other than these, Punit Jain and JainMatrix Investments Bangalore (JMI) and its promoters/ employees have no direct or financial interest in TCS, and no known material conflict of interest as on date of publication of this report. This document has been prepared by JMI, 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 JMI. 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, JMI has not independently verified the accuracy or completeness of the same. Neither JMI 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 a RIA Registered Investment Advisor. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. Registration granted by SEBI, and certification from NISM in no way guarantee performance of the RA or provide any assurance of returns to investors. JMI has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at [email protected]. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747.

LIC IPO – Buy the Family Silver

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JainMatrix Investments presents an Investment Report on RACL Geartech Ltd.

  • 03rd May 2022
  • Sector – Life Insurance
  • IPO Opens 4-9th May
  • Price range ₹902-949 /share; discount for policyholders is ₹60, and for employees is ₹45
  • Large Cap: ₹ 6,00,000 crore Mkt cap

Summary

  • Positives: 1) High life insurance market share 2) massive Assets Under Management and equity market ownership 3) LIC is a solid brand  4) low operating cost 5) good all India sales presence 6) the IPO can be transformative to make LIC more flexible, competitive and profitable.
  • Risks: 1) govt. initiatives and directives that are unprofitable 2) capital and profit ratio restructuring makes financials unpredictable 3) competition from private players and falling market share 4) High NPA ratio 5) attrition in sales agents team 6) Periodic FPOs can subdue the share price.
  • Opinion: Conservative Investors can SUBSCRIBE to this IPO with a 2 year perspective.

Other related IPO reports

Here is a note on LIC IPO.

IPO highlights

  • LIC IPO will have a price band of ₹ 902-949 and will open from May 2 for anchor investors and May 4-9 ‘22 for others.
  • The firm will raise ₹ 21,000 cr. by selling 3.5% stake sale through Offer for Sale (OFS) by promoter. LIC market cap at this pricing is ₹ 6 lakh cr.
  • Promoters of LIC are the President of India, acting through the Ministry of Finance, Government of India. Currently GoI holds 100% stake and post-IPO this will come down to 96.5%.
  • The IPO quotas are: Policy Holders 10%, employees 0.7%, QIB 44.6%, Non Institutional 13.4% and retail 31.25%. The total number of shares in IPO are 22.14 crore shares. This discount for policyholders is ₹60, and for employees is ₹45.
  • Objects of the issue: GoI unloads stake to list LIC. Since it is an OFS, it will not receive any funds in IPO
  • The grey market premium (GMP) of LIC is ₹85 as of today. 
  • One lot is 15 shares and Face Value is ₹10. Retail investors can bid for 1 to 14 lots i.e. 210 shares.
  • The anchor investor portion of Life Insurance Corporation of India’s (LIC) initial public offering (IPO) was oversubscribed on Monday, raising around ₹5,620 crore from anchor investors.

Introduction to LIC

  • LIC is the largest public life insurance companies in India, and took its current form in 1956.
  • It has a 64.1% market share in Gross Written Premium (GWP) in FY21 (CRISIL). It is the #5 largest life insurer globally by GWP, see Fig 1b. LIC has a distribution network of 5,004 offices spread across 36 states and UTs, with 28 cr. policies served as on FY22. It has a workforce of 1,05,207 employees.
  • The proposed IPO will make it the biggest Indian IPO ever.
  • In India, LIC has the largest agent network of 13.5 lakh individuals in 2021, which is 55% of the total agent network in the country and was 7.2 times the number of agents of the second largest life insurer.
  • LIC is the largest asset manager in India (Dec’21) with AUM (includes policyholders’ investment, shareholders’ investment and assets held to cover linked liabilities) of ₹ 41 lakh crores, which was (i) 3.2 times the AUM of all private life insurers in India, (ii) 15.6 times the AUM of the #2 player in Indian life insurance industry in terms of AUM, (iii) 1.1 times the entire Indian MF industry AUM and (iv) 17% of India’s GDP for FY22. (CRISIL). LIC’s investments in listed equity represented 4% of the total market capitalisation of NSE as at that date. (CRISIL). See Fig 1a. Close to 25% of this is equity oriented, and they own more government bonds than the RBI. Thus it is a mega player that can dominate and profit from the growing Indian capital markets. Thus it is India’s Family Silver, which is made available in the IPO.
  • LIC is thus both a Life Insurance and an Asset Management firm.

The rest of the report is available as a download, see PDF –

Do read our insightful research, we attach the complete Investment report in PDF format here.

LIC IPO – Buy the Family Silver
PDF FILE

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 stake ownership or financial interests in LIC or any group company. Punit Jain has been a retail – insurance and annuity customer of LIC for 20+ years. Punit Jain intends to apply for this IPO. 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 a RIA – Registered 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 [email protected].

Star Health IPO – A Toast, to your Health!!

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  • Date 30th Nov; IPO Opens 30-2nd Dec, at ₹ 870-900/share
  • Large Cap: ₹51,800 cr. Mkt cap; Sector – Insurance, Health
  • Advice: SUBSCRIBE
  • Why Buy Now: The waves of Covid have pushed SHI into losses but 1) we do not anticipate more severe waves in future, and 2) SHI should be able to recover through faster business growth and adjustment of prices for the covid pandemic. By having an IPO at this time, investors have an opportunity to buy SHI at low valuations We expect profitability in SHI by 2022, even as it grows rapidly in revenues and network. Once this happens, this IPO entry price will look reasonable.
  • Risks: 1) Loss making entity, so this is a risky investment opportunity 2) Uncertain covid outlook 3) high competition 4) New infectious diseases 5) regulatory uncertainty.  
  • Opinion: Investors with a risk appetite can SUBSCRIBE to this IPO with a 2 year perspective.  

Here is a note on Star Health and Allied Insurance IPO (SHI).

IPO Highlights

  • Star Health IPO will open from Nov 30 – Dec 2 with a price band of ₹ 870 – ₹ 900.
  • The firm will raise ₹ 7,249 crores, including fresh issue ₹ 2,000 cr. and offer for sale 5.83 cr. shares by promoters & shareholders, for max. ₹ 5,249 cr., together 14% of post IPO shareholding.
  • Star Health is looking for a market cap of ₹ 51,796 cr.
  • Promoters currently hold 66.22% stake and post-IPO this will come down to 58.3%. Public holding will increase from the current 33.78% to 41.70%. The quotas are QIB 75%, NII 15%, and Retail 10%.
  • Promoters of Star Health are Safecrop Investments India LLP, WestBridge AIF I and Rakesh Jhunjhunwala. The shareholders selling shares in the IPO include promoter Safecrop Investments India LLP, and many other (public) shareholders.
  • The grey market premium (GMP) of SHI has declined sharply to below ₹ 10 per share, according to people who deal in unlisted stocks; it has fallen from ₹ 90 per share last week.
  • Objects – with the funds raised from fresh offering, SHI plans to augment the company’s capital base and maintain solvency levels.
  • One lot size is 16 shares and Face Value is ₹ 10. Retail investors can bid for one or more lots, and a minimum of ₹ 14,400 or multiples of this, upto a maximum of ₹ 1,87,200 for 13 lots and 208 shares.

Introduction to Star Health and Allied Insurance

  • Star Health and Allied Insurance is the largest private health insurer in India with a 15.8% share in FY21 (CRISIL Research). Started in 2006, it is #1 based on health GWP over 3 years.
  • It had retail health GWP of ₹ 9,349 cr. in Fiscal 2021. SHI made a loss for the first time in 3 years in FY21 even as revenue rose, due to Covid.
  • Its health insurance product suite insured 2.05 cr. lives in retail and group health, which accounted for 89.3% and 10.7%, resp, of total health GWP (Gross Written Premium) in FY21.
  • It has a distribution network of 779 health insurance branches spread across 25 states and 5 UTs. Its agency distribution channel also includes corporate agent banks and other corporate agents, which accounted for ₹ 220.9 cr. and ₹ 19.1 cr., resp., of its GWP in FY21.
  • Promoter of SHI are Safecrop Investments India LLP, WestBridge AIF I and Rakesh Jhunjhunwala.
  •  The proposed IPO will make SHI the fourth private sector insurance provider to list on Indian stock exchanges, following HDFC Life, ICICI Prudential Life and ICICI Lombard General.
  • Star Health’s total number of individual agents grew at a CAGR of 27.3% from 2.9 lakh (Mar’19), to 4.6 lakh (Mar’21) and 5.1 lakh (Sept’21). Under the IRDA (Appointment of Insurance Agents) Regulations, 2016, insurance agents are only permitted to sell the policies of three insurers: one life insurance company, one non-life insurer and one health insurer.
  • SHI has enabled online purchase of policies in as less as 5 minutes on website Starhealth.  
  • SHI has already allocated ₹ 3,217 cr. to 62 anchor investors today.
  • Key leaders: V Jagannathan, Chairman & CEO, Dr. S. Prakash, MD (since ‘19), Anand Roy MD (‘19)

Fig 1a) Revenue Segments in FY21 and b) Industry Market Shares

Insurance 101, and Health Insurance in India

  • Insurance is a very useful product. There are several types – Life, Health, Automobile, Property, Farm/crop, and all kinds of asset insurance products. Products are for retail or business consumers.
  • Health insurance is a long term product. Having a health problem is not highly predictable, so it is bought so that in case a hospitalization happens, you are protected to the extent of Sum Assured.
  • Salaried employees may get Group health insurance from their employer. They should check if their families are also covered – this may be an add-on. Non salaried need to buy on their own.
  • The health insurance penetration in India is low at just 0.36% of GDP whereas the global average comes around 2% of GDP. Countries like the UK, China, Argentina and the United States have higher penetration level of 0.61%, 0.65%, 0.78% and 4.1%, respectively.
  • The players are regulated by IRDAI (Insurance Regulatory and Development Authority of India) and is subject to regulatory uncertainty and compliance requirements.

Fig 2a) Penetration

Fig 2b) Premium per person

Fig 2c) Industry segments  

  • The average premium paid per person in India at $5 / ₹ 375 per year on average for the population.
  • Health in India is a split sector – the govt. of India does offer public hospitals and facilities that are free, but there are insufficient facilities in most places to cover the population. Wherever govt. facilities are insufficient or inadequate, people have to pay and use private medical services.
  • The Covid crisis of FY21 & FY22 has shown the importance of Health insurance. At the same time we can see India has low penetration of health cover, high out-of-pocket expenses, and only 10% of the population has insurance policies outside of government plans, according to CRISIL Research.
  • The total expenditure spent on healthcare by the centre and states for FY20 was 1.6% of GDP, including establishment expenditure of salaries, gross budgetary support to various institutions and hospitals and fund transfers to states under centrally sponsored schemes such as Ayushman Bharat.
  • Health insurance industry data shows the types of companies and product segments.
  • Personal experience: As a customer of the Family Floater product from SHI, I had it for several years with no claims. About 3 years ago, I suddenly had to use the insurance for a hospitalization and operation. It was a relief that these were covered. The process was easy and a doctor came to verify the patient, operation and hospital. SHI finally reimbursed about 90% of my claim.

Financials of SHI

  • Revenues have grown steadily, but PAT fell in FY21 & H1FY22 due to Covid.
  • The cash flow for SHI is shown in Fig 3b. It’s clear that FY20 and FY21 have been negative for FCF.

Fig 3a) Financials, and Fig 3b) Free Cash Flow

Benchmarking

We benchmark SHI against listed insurance firms in India, and PolicyBazaar. See Fig 4.

Fig 4 – Benchmarking

  • As a loss making firm, the PE is negative for SHI. As are the profits.
  • On sales growth we can see that SHI is close to the leader, SBI Life. New India lags here.
  • As a result, the key valuation parameters are P/B, EV/Sales and Mcap / GWP.
  • The P/B of SHI is about average. New India is valued low partly as it’s a PSU. HDFC Life is expensive.
  • On EV to sales, SHI is a value leader. Highest is SBI Life. On Market Cap to GWP, again SHI is the leader while HDFC Life is most expensive. On revenues, we can see that SHI is the leader. However, the loss making situation is marring the valuations of SHI on traditional parameters of PE and ROE.
  • Putting this together, we sense that SHI is a valuable asset available at low valuations due to the covid related losses. It’s entirely possible that post covid, SHI may emerge quite profitable.
  • Star Health stands out among other standalone health insurers (SAHI) in terms of size, strong growth rates (32% Gross Written Premium CAGR over FY18-21) and better operational performance which is reflected in pre-Covid numbers for the company (~93% combined ratio).

Positives for SHI and the IPO

  • Largest private health insurance firm in India with leadership in the attractive retail health segment.
  • There is low penetration of health insurance in India. Also Post covid, awareness of health insurance has risen. This category may continue to see high growth.
  • The famous Indian investor Rakesh Jhunjhunwala has backed SHI as promoter. As he has a large following in India, this helps with publicity and investor confidence.
  • India has an aggressive plan for vaccination and has covered a good proportion of population. The one dose number has crossed 100 cr. and two doses 37 cr. There is a plan for a booster dose too.
  • SHI has a good brand, a national presence, and the largest network distribution in health industry.
  • Diversified product suite with a focus on innovation and launch of new and specialized products.
  • Strong risk management with superior claims ratio and quality customer services.
  • Demonstrated track record of operating and financial performance.   
  • Low valuations as per benchmark analysis.
  • The sector is divided 46-54% between PSU and private. There is ample opportunity to grow for SHI.
  • The second wave was better handled by people & hospitals compared to the first. With this experience, any further waves should be handled better in terms of prevention and cure.

Risks and Negatives for SHI and the IPO

  • In India we appear to be in a recovery from Covid, but we cannot accurately predict any 3rd/4th wave in India and the business impact of the same. Omicron is a new variant found recently also.
  • The company has suffered a setback for the last 18 months due to covid, and has run into losses.
  • In order to emerge from this crisis, SHI may have to raise the prices of its products.
  • There are 29 active health insurance companies in India. It’s a competitive space and thus it may be difficult for any one company to dominate or win a 40%+ market share.
  • Post covid, GoI may be forced to raise spending on healthcare, which is mostly free services.
  • The Medical Council of India has been replaced by the National Medical Commission in FY20 for the purpose of medical education and medical professionals. The poorly regulated sector has seen shortages of doctors and nurses, and hopefully this will improve in future.
  • Recent loss making firms that have IPO’ed had uneven results. Zomato and PolicyBazar have done well, but Paytm had a rough first week.

Overall Opinion and Recommendation

  • Public sector healthcare is inadequate and of insufficient capacity. With rising medical services and medicine costs there is ample demand for health insurance.
  • SHI has grown rapidly and is well focused on the health insurance sector.
  • The waves of Covid have pushed SHI into losses but 1) we do not anticipate more severe waves in future, and 2) SHI should be able to recover through faster business growth and adjustment of prices for the covid pandemic.
  • There is a massive growth opportunity for health insurance in India as affluence grows. This will also be driven by higher inflation in medical services.  
  • As the largest private player, SHI has an opportunity to grow the market and service the demand.
  • We expect profitability in SHI by 2022, even as it grows rapidly in revenues and network. Once this happens, this IPO entry price will look reasonable.
  • Risks: 1) Loss making entity, so this is a private equity type, risky investment opportunity 2) Uncertain covid outlook 3) high competition 4) New infectious diseases
  • Opinion: Investors with a risk appetite can SUBSCRIBE to this IPO with a 2 year perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or financial interests in Star Health or any group company. He has been a retail customer of SHI for 5+ years. Punit Jain intends to apply for this IPO. 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 a RIA – Registered 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 [email protected].

Shyam Metalics and Energy IPO – will Rise and Shine

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  • Date: 12th June 2021
  • Small Cap: ₹7,800 cr. Mkt cap
  • Sector –  Steel industry
  • IPO Opens 14-16th Jun, at ₹303-306/share
  • Valuations: P/E – 12.8, EV/EBITDA – 8.1
  • Advice: SUBSCRIBE

Summary:

  • The global steel cycle is on an upswing. Global and domestic demand for steel is rising, and many India based steel plants are running at good capacity utilizations.
  • SMEL have a good financial strength, low debt, fair cash and ability to invest in their balance sheet.
  • Integrated operations, proximity to RM sources, in house power generation and captive railway sidings build into a low cost operating model, which is good in a commodity industry.
  • Growth plans are good including new products launch and doubling of mfg. capacity over 5 years.
  • This IPO will also help SMEL to reduce debt and strengthen the balance sheet for planned growth.
  • Key risks are 1) dip in steel cycle or Indian steel prices 2) high competition 3) steel price control by GoI 4) Rising iron ore and power costs.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 1-2 year perspective.

JainMatrix Investments Service – PRICING OPTIONS

IPO Offering highlights

  • The IPO opens from 14-16th Jun 2021 in a Price Band of ₹303-306 per share
  • Total IPO size is ₹909 cr. of 2.97 cr. shares, about 12% of the equity shares. The IPO includes a fresh issue of ₹657 cr. and an Offer for Sale (OFS) of the remaining value, making up 0.82 cr. shares.
  • The lot size is 45 shares and Face Value is ₹10 per share.
  • Objects of the offer: Table 1: The Fresh Issue of up to ₹657 cr. will be utilized in following manner:
Particulars  Amount which will be financed from Net Proceeds Estimated Utilisation of Net Proceeds in Fiscal 2022
Repayment and/or pre-payment of debt of Company and SSPL, one of its Subsidiaries470 cr.470 cr.
General corporate purposes187 cr.187 cr.
  • The promoters own 100 % in SMEL which will fall to 88.35% post-IPO.
  • The IPO share quotas for QIBs: 50%, Non-Institutional Investors 15% and Retail is 35%.
  • In the grey market, the price of SMEL is at ₹436, a 42% premium to IPO price.  

Do read our insightful research, we attach the complete Investment report in PDF format here.

Our Work
PDF FILE

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 stake ownership or financial interests in SMEL or any group company. Punit Jain intends to apply for this IPO. 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 [email protected].

Burger King India IPO – Try the Whopper!!

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  • Date 01st Dec; IPO Opens 2-4th Dec, at ₹59-60/share
  • Small Cap: ₹ 2,438 cr. Mkt cap
  • Sector – Restaurant chain, QSR
  • Valuations: P/E negative, P/B 10.5 times, EV/EBITDA 4.4.
  • Loss making entity; profit looks 2 years away, so this is a private equity type, high risk investment
  • Advice: SUBSCRIBE

Summary

  • Why Buy Now: The Burger King chain is at an early stage of growth in India. The organization and structure set up looks good to handle the growth imperatives.  
  • The Burger King brand is quite strong in India.
  • We expect profitability in BKG in 2 years, by FY23, even as it grows rapidly in revenues and outlets. Once this happens, BKG valuations will rise and this IPO entry price will look attractive.
  • Relative to other MNC QSR chains in India, BKG valuations look reasonable.  
  • It has handled the covid period well, reducing costs and getting by. We expect normalcy in revenues to return in H2FY21.
  • Risks: 1) Loss making entity; profitability looks 2 years away, so this is a private equity type, high risk investment 2) Intense competition from Indian and MNC QSR chains in Tier 1 towns 3) Covid induced challenges – demand from customers as well as employee health. 4) High royalties to Principal.
  • Opinion: Investors can SUBSCRIBE to this IPO with a 2 year perspective.

JainMatrix Subscription Pricing and Payment Options

JainMatrix Investments reports….

Here is a note on Burger King India IPO (BKG) IPO.

IPO Highlights

  • The IPO opens from 2-4th Dec 2020 in a Price Band of ₹ 59-60 per share
  • The IPO includes a Fresh Issue of ₹ 450 cr. and Offer for Sale (OFS) of 6 cr. shares. So the total IPO size is max 810 cr. of about 13.5 cr. shares, and about 35.5% of the equity share capital.
  • The promoter is QSR Asia and it owns 94% in BKG which will fall to 60% post-IPO.
  • The main objects of Fresh Issue are funding new Company-owned Burger King Restaurants by 1) Repayment of borrowings taken for this of ₹ 165 cr. and 2) Capex for new Restaurants ₹ 177 cr. 3) Remaining ₹ 108 cr. are for general corporate purposes like paying for this IPO.
  • The promoter is a PE firm and the listing will help to monetize and profit from investments. 
  • The lot size is 250 shares and Face Value ₹ 10 per share
  • The IPO share quotas for QIBs: Non-Institutional Investors: Retail is 75:15:10%.
  • The unofficial/ grey market premium of BKG is ₹ 20-25 /share over IPO price. This is a positive.

Introduction

  • Burger King India is one of the fastest growing international QSR (Quick Service Restaurant) chains in India, started in Nov 2014.
  • In FY20 the Revenues, EBITDA and Profits of BKG were ₹ 847 crore, ₹ 105 cr. and ₹ (77) cr. resp.
  • It already has 261 restaurants across 57 cities, including Delhi-NCR, Mumbai, Pune, Chennai, Hyderabad, Bengaluru, Chandigarh and Ludhiana.
  • The restaurants serve food and beverages, see Fig 1a, with offerings like:

Fig 1a – Menu Range, Fig 1b – Cluster Map and Fig 1c – Outlets by Region

  • The globally recognized Burger King brand, also known as the “HOME OF THE WHOPPER®”, was founded in 1954 in USA and is owned by Burger King Corp., a subsidiary of Restaurant Brands Intl. Inc. The Burger King brand is the #2 largest fast food burger brand globally by number of restaurants, with a network of 18,000 restaurants in 100 countries and USA.
  • BKG has used a well defined restaurant roll out and development process. The Principal (BKG AsiaPac) helps and supports in this process.
  • BKG AsiaPac has to be paid monthly royalty (of 4-5% of sales annually). BKG is also required to pay BKG AsiaPac a non-refundable one-time fee on opening each new BK Restaurant of US$15k (₹11.25L), increasing to $25k (19L) from CY 2020-22 and US$35k (26L) for all periods thereafter.
  • Everstone Capital, the Singapore-HQ India-focused mid-market PE firm, owns 99.39% stake in BKG India, through investment vehicle QSR Asia Pte Ltd.
  • As of Sept 30, the number of BKG employees was 4,836.
  • Key leaders: Shivakumar Pullaya Dega (Chairman and Independent Director), Rajeev Varman (CEO and Whole Time Director) and Abhishek Gupta (Chief of Biz. Dev. and Operations).

News, Updates and Strategies

  • Burger King India aims to have 370 stores (101 additional) by Dec 2022. Under the Master Franchise and Development Agreement (MDA), BKG is required to develop and open 700 restaurants (both Company-owned and Sub-Franchised) by Dec 2026. This agreement renewal is by Dec 31, 2039.
  • Fund raising through the IPO will be used for expanding its store base in India and reducing debt.
  • The Indian promoter is a private equity firm Everstone Capital, even as BKG works under a MDA with Burger King Corp. USA.
  • Based on the FIFO methodology, Everstone will earn 3.58 times returns on its 7-year investment. Its cost of investment (of the IPO shares) is pegged at ₹ 110 cr. In return, it will fetch ₹ 360 cr. from the partial exit at upper end of IPO band, per VCCircle.
  • The company’s average meal ticket size is ₹ 500-550.
  • Covid had a massive impact on BKG, as first a lockdown, and later the containment zones, lack of permission from authorities and public fear of infection kept away dine in customers.
  • BKG responded by reducing costs: it negotiated with landlords on rentals, reduced inventories, etc.
  • In Sept 2020, the number of BKG employees decreased to 4,836 employees compared to 6,141 in Mar due to attrition, effect of Covid, and redundancies.
  • On date of RHP of 25th Nov., out of 268 total restaurants, only 249 are operational.
  • BKG has a strong supply chain for all food ingredients and raw materials, to ensure traceability, freshness, long term contracts, low prices and quality ingredients.

Food Industry Outlook in India

Fig 2 – Food Services Segments
  • The Indian food service sector can be divided into 4 segments, see Fig 2.
  • QSR have fast food cuisines and minimal table service, and cater to youngsters and working professionals, offering quick delivery of food, good ambience and option of home delivery. QSRs generally target people in the 16-35 years range. Frequency of eating out (4-5 per month) is low so there is headroom to grow.
  • QSRs are the most preferred destination, followed by casual dining restaurants when it comes to eating out, per the India Food Services Report 2016, made by the National Restaurants Association of India (NRAI) and consulting firm Technopak Advisors Pvt. Ltd.
  • The most popular eating out options in India are North Indian food (28% of the time), followed by Chinese (19%) and South Indian style (9%), according to a Livemint.com report.
  • Restaurants, cafes and international fast food outlets have proliferated in India and eating out has become popular. About 81% of consumers prefer to eat out, and 19% get delivery or takeaway.
  • The QSR segment is nascent and has a lot of scope for growth in India. A large number of global QSRs have established their outlets with franchise rights of various companies like McDonalds, KFC, Pizza Hut, Subway, Taco Bell, Burger King and Domino’s, in addition to Indian QSRs.
  • BKG has a 5% market share in India’s ₹ 34,800 crore QSR market.
  • With factors such as urbanization, rising income levels and improved investment climate, the food service sector holds a huge opportunity. The sector has observed tremendous development in the past 3 years, which grew at 11% CAGR during 2015-19. The sector is estimated to grow at a 9% CAGR by 2022-23 (Source: NRAI India Food Services, IFSR 2019).
  • GST rate cut from 18% to 5% for the restaurant business was a significant tailwind for the sector, and generally led to a sharp recovery in SSSG’s.

Financials of BKG

  • BKG revenues, EBITDA and PAT over the years are in Fig 3a. The firm grew revenues well over 3 years, and is EBITDA positive but loss making.
  • A possible profit in FY21 quickly became a loss in H1 due to Covid.
  • In Fig 3b we can see that from a FCF positive FY18, the firm has made many investments and become FCF negative in FY19-20. We can also see the number of outlets by FY.

Fig 3a – BKG Financials and Fig 3b – Free Cash Flow

Benchmarking

We benchmark BKG against listed food service firms, entertainment firms and the principals. See Fig 4.

Fig 4 – Benchmarking

  • As a loss making firm, PE is negative for BKG. So valuations are tracked using P/B and EV/EBITDA. On these parameters, the valuations of BKG are lower than the others. This is positive.
  • Sales growth has been good at BKG. On Profits BKG is in the negative.
  • D/E ratio is low, may fall after IPO. One of the objects of the fresh issue in IPO is to reduce debt.
  • Margins are still on the lower side as BKG is building scale for its operations.
  • Return ratios are low due to losses.
  • The Revenue per outlet is low, perhaps reflecting BKG is a newer restaurant chain.
  • Putting this together, we sense that BKG is an asset available at low valuations due to current losses. It’s entirely possible that if not for covid, BKG may have been much less lossmaking by now. Post covid, BKG should focus on growth, with branch expansion, brand building and consumer loyalty.

Positives for BKG and the IPO

  • Burger King is a strong global brand. It’s been handled well so far in India with high street, airport and malls locations of restaurants, good visibility and positive customer reviews.
  • As a customer, my visit to BKG in 2018 in Bangalore was memorable and the focus is excellent with burgers available in both veg. and non veg. It was tasty and fairly priced, and a good experience.
  • The core offering of burgers can work for both snacks and meals for the Indian palate. Traditional consumers may not be satisfied as it’s a light fried meal, but others can find it novel and tasty. The BKG brand is well positioned for the millennial customers.
  • The global franchise model has succeeded for competitors in Indian markets, and the BKG rollout looks like a lower risk proposition that has a fairly unique offering and good chance of success.
  • The growth plans of 700 outlets by 2026 looks achievable and necessary to get a scale of operations.
  • The firm has an experienced, passionate and professional management team
  • Due to the covid infection, BKG has been able to bring down its costs structures. In particular, real estate costs for QSR may reduce and stay low for some time. Employee nos too have reduced.
  • BKG has an MDA with Burger King USA is till 2039, giving a good visibility.

Risks & Negatives for BKG in the IPO

  • The covid pandemic has been a blow as BKG has switched from a growth mode to a ‘cutting costs’ and survival mode for H1, to get by during this dip. Even today after most of the outlets reopened, there is a demand issue as customers are worried about public gatherings and infection spread. The economic impact of covid means that people celebrate less and even eating out may be done at more ‘economic’ or ‘reasonable’ priced outlets than BKG. At the luxury end, demand is down.
    • Having said this, our opinion is that in T1 cities, demand will normalize in Q3FY21 and a combination of takeaway and home delivery should be able to bring demand back.  
  • BKG has not declared a profit so far in all these years. As a result, the IPO has been allowed by SEBI but the Retail portion is retained at the lowest, 10% of shares offered, due to higher risks.
    • So on PE we have a negative value, but on other valuation parameters like PB and EV/EBITDA, BKG looks attractive and undervalued.
  • BKG directly competes with McDonalds and Subway in India on bread based light food options. Thus this QSR food subcategory looks a little crowded and top heavy.
  • BKG is at an early growth phase in its Indian network. There is a possibility that it may take several years to make a profit or dividend as it opens new outlets and invests in branding and supply chain.
  • Investors looking for normal valuation parameters may not find this attractive. Conversely this investment may only give good gains over several years.
  • Food delivery aggregators like Swiggy and Zomato intensify competition by offering massive choice and delivery to customers. BKG partners with them, but they get large commissions on orders.
  • Royalties for BK USA are high and a big hurdle to franchisee profitability. In FY18-20 they were ₹ 12, 24 and 34 crores for BKG.

Overall Opinion and Recommendation

  • QSR has a good future in India with improving affluence, and a growing eating out culture. Beyond the FY21 covid blip, this category should grow fast.
  • The social type businesses like BKG have been hardest hit by covid. As a result, the BKG IPO offering is undervalued. Most stock investors today are ignoring H1FY21 results, and high but temporary valuations, and expecting a full recovery by H2.
  • On a big picture basis, BKG is at an early stage of growth in India. The organization and structure set up looks good to handle the growth imperatives.  
  • We expect profitability in BKG in 2 years, by FY23, even as it grows rapidly in revenues and outlets. Once this happens, BKG valuations will rise and this IPO entry price will look reasonable.
  • Risks: 1) Loss making entity. Profitability also looks 2 years away, so this is a private equity type, risky investment opportunity. 2) Intense competition from Indian and MNC QSR chains in Tier 1 towns 3) Covid induced challenges – demand from customers as well as employee health. 4) High royalties.
  • Opinion: Investors with a risk appetite can SUBSCRIBE to this IPO with a 2 year perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or financial interests in BKG or any group company. Punit Jain intends to apply for this IPO. 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 [email protected].