Académique Documents
Professionnel Documents
Culture Documents
Vol. XXX/22
CAPITAL MARKET
It took many years of persuasion, prevarication and procrastination for the world to
realize the dangers climate change posed for the survival of the human race. But, for
India, 2015 was a year of sudden changes and contrasts. It took just days for the
crescendo of infallibility and invincibility to crash into a pit of despair and dejection.
If the high point was the feeling of smugness to see the worlds most powerful man
braving smog and a drizzle to catch the Republic Day parade in the capital, the low
point was the bounce-back into the political arena of a crusader from bureaucracy, one
of the three strands choking the common man in its tentacles of quid pro quo. Not
surprisingly, the market, too, took no time to come back to reality after reaching the
zenith as the euphoria of India finally cutting the umbilical cord of giveaways to
farmers and friendly capitalists got punctured by the second consecutive deficient
southwest monsoon. Ironically, it poured and how in some coastal belts even as a
parched Maharashtra continued its tryst with famine and farmers suicides. The
trepidation in waiting for the most powerful woman on earth to act outdid the plot
line of a Hitchcock movie in its twisted suspense even as foreign equity and debt
investors suffered a spell of vertigo. Nonetheless, foreign direct investment made a
beeline on spotting of opportunities in insurance and defense and Make in India even
as China collapsed under the weight of excess capacities and unbridled speculation in
the primary market. If there was unanimity on the cause excessive leverage of
the euro regions recession, there was no such agreement on why Indias growth engine
had lost steam. The reasons ranged from those with substance (the slow pace of
reforms) to bogus (failure to build consensus with a recalcitrant opposition focused
single-mindedly on stalling legislation to trip the economy).
The confusion was evident elsewhere, too. The ghost of Hamlet haunted the Fed
as it wrestled with the dilemma to raise rates or not to without upending the emerging
markets and so also our own central banker: tame food inflation or boost industrial
output. Banks, though, shrugged off the benevolence, obsessed as they were in cleaning up their balance sheets, marked with years of generosity to customers with closeness to the movers and shakers as collateral. Squeezing margins, falling demand and
spirally food prices were not the ingredients to boost the spirits, despite falling
commodity prices proving to be a silver lining. The promise of operational autonomy
in lending was as enchanting as a rainbow. In fact, the hard times exposed the unpalatable underbelly. Despite rapid urbanization, villages held the key to savings and
consumption. No wonder, financial inclusion became a buzzword, with attractive
acronyms coined to capture the essence. Transfer of subsidy benefit and deduction of
pension and accident cover premium were believed to be the recipe to bite into the
banking habit. A welcome sign was the thrift on display, ranging from selling natural
resources through bidding to reluctance in waiving loans and ramping up a minimal the
minimum support price for crops. Yet, there was splash of indulgence. The hefty
increments recommended by pay commissions transformed government and PSUs as
sought-after employers as evident from the clamor to expand reservation quotas.
The Bihar polls demonstrated that getting the mathematics of caste and community
equation right mattered more than the combustible composition of a corruption-free
society. If the results underlined the limits of brand power and the downside of brand
dilution, they also reinforced the adage of what it means to win the battle but to lose the
war. It was triumph of parochialism (Bihari v Bahari), viewed as a legitimate concern
when practiced by one set of players but not by others (presidential campaign in the
US). Hypocrisy was perhaps the most enduring takeout of the year. For the sullen
opposition, the idea of pulling India by the bootstraps came to imply sabka saath, ek
family ka vikas. The indefatigable salesman, logging flier miles to make friends for India,
was ridiculed for being an NRI and enthralling a constituency that was not going to vote.
A 56-day sabbatical to mysterious lands, however, was considered necessary for reinvention and rejuvenation. Unwittingly, the argument exposed the chinks in the intolerant debate. The existential fear stemmed from the attack on holy cows of cronyism and
appeasement of entrenched interests and the emergence of voices that were hitherto
suppressed. There was shock and awe that many might actually like and share a new
growth trajectory based on market intervention rather than the state-knows-best trickledown economics. The climate in India surely underwent a change in 2015.
MOHAN M SULE
3
ReadersReact
the economy, many companies
have exited non-core and
unrelated businesses to focus
on their flagship and/or to
reduce balance-sheet leverage.
Corporate restructuring can be
a long-drawn process and a
painful exercise.
Lallabh Khachara, e-mail
Branching out
If the purpose of forming
subsidiaries and associates is
to trick the minority shareholders, it is not easy to
unearth such instances as the
transactions could be buried
under layers of financial
statements (Stocks: Keeping it
simple, Nov 23-Dec 06,
2015). Such sophisticated
work is executed by professionals and tracing it is not the
small investors cup of tea.
Rajesh Gavridadh, e-mail
It is difficult to value
companies that are having a
range of businesses. A lossmaking business can be a drag
on profit-making sister
concerns. This can adversely
impact the overall valuations
of companies. Therefore,
going for de-mergers make
immense sense.
Raghuvir Pipaliya, e-mail
Small bites
To ensure that the inflows of
foreign funds are spread out
across the board, it is necessary that companies expand
their capital (Editorial: Safe
and sound, Nov 23-Dec 06,
2015). An economic climate
that holds the promise of
increase in consumption can
embolden enterprises to
undertake fund-raising. It is at
a delicate juncture when the
economy is at the crossroads
of bottoming out and bouncing
back that the vacuum of retail
investors is realized.
Bouncing back
Indias initial public offering
(IPO) market is coming back to
life after fragile few years as the
improved macro economic
conditions have given birth to
ray of hope to the companies
that wished to take advantage of
investor ebullience (IPOs:
Blowing hot, blowing cold,
Nov 23-Dec 06, 2015). The
Indian capital market is a lot
more stable compared with
several other emerging economies such as China, Indonesia,
Brazil, Malaysia and Russia.
Demand for Indian IPOs is
coming both from domestic as
well as international investors.
This fact is cheering primary
market participants.
Apart from a secure atmosphere being a basic requirement, optimism about the
direction of the company going
ahead is more important. If
retail investors do not come
into the market in droves, the
Telefolio Gold
Pick right and enjoy
the full ride
see page 7
Poor record
Only six Nifty constituents had
disclosed their dividend policies
in their latest annual reports
(Dividends: Spell it out, Nov
23-Dec 06, 2015). Only four of
them have specifically given the
dividend payout ratio. The
remaining two have commented
about the dividend policy in
generic terms.
Ganesh Pai, e-mail
Send your feedback to
readersreact@capitalmarket.com
Inside
08 | Cover Story
13 | IPO Centre
Narayana Hrudayalaya
Un-affordable for investors
14 | In Focus
Gold & jewelry stocks
Losing glitter
90 | Capitalaline Corner
Insider deals
RPower, Titan see promoter rejig holding
Nelcast
A strong cast
32 | Corporate Scoreboard
69 | Market Watch
60 | Consolidated Scoreboard
Stocks
Edging out
Logistics
The sun rises
Stocks
Catching a falling knife
68 | Stock Watch
www.capitalmarket.com
Hot Pursuit captures market action tick by tick
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66 | Bulletin
67 | Watch List
IPO Ratings
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TCS gains after winning deal from Deutsche Lufthansa AG (16-Dec, 13:33 Hrs IST) More
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L&T inches up after CPPIB invests Rs 1000 cr in L&T IDPL (16-Dec, 11:01 Hrs IST) More
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62 | Company Index
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CoverStory
CoverStory
Stocks
Stocks
Time tested
The stock market is set to enter the New Year with multiple uncertainties. This will be an opportunity
to cherry pick stocks with consistently high ROE
The view of risk in equity market is largely
confined to volatility of stock prices.
Higher the volatility more is considered to
be the risk in investment. The concept of
total risk measured in terms of standard
deviation or market risk as determined by
the beta value are based on the volatility of
a stock price in isolation or in relation to
other stocks or markets.
However, this seems to be a narrow interpretation of risk. In the equity market,
there is risk of losing the entire capital. This
risk is not imaginary but real. If one looks at
the debacles of companies owing to poor
corporate governance and accounting scandals in the domestic and international markets since 2008, practically the entire capital or investment has been wiped off. Worse,
a few companies went bankrupt, leaving investors in lurch.
Now, can the risk be quantified as
money invested? This could be another way
to look at the concept of risk. Investor
putting in Rs 10000 in stocks can lose the
entire amount. Hence, the risk can be
equated to Rs 10000.
Now if the risk is nothing but the amount
of money invested in equities, it is essential
to check what kind of returns this investment is generating. Here the returns are not
about movement in the stock price but the
8
CoverStory
the money invested in the equity capital
measured in terms of ROE. Such a well
crafted consistency in ROE cannot be coincidence. It has to be a result of a well
thought-out business strategy and its meticulous execution. It reflects the fact that
each rupee is being invested in projects
with unambiguous clarity.
Divis is a cash-rich company, with investment of Rs 660 crore and cash of Rs
62.5 crore end September 2015. In August
2015,bonus shares were issued in the ratio
of 1:1. In 2009, bonus shares were issued in
the same ratio.
Largely, the focus is on exports that contributed 87% to the top line as against an
even higher 91% in the previous financial
year. The facilities are approved by various
regulatory bodies and primarily manufacture active pharmaceutical ingredients (APIs)
and intermediates for generics, custom synthesis of APIs and advanced intermediates
for discovery compounds, building blocks
for peptides, building blocks for nucleotides,
carotenoids and chiral ligands.
Capital Market picked companies with
a consistently high ROE over the last five
years. Only fairly liquid ones were chosen.
Next, companies whose latest annual reports
were available till the period ended September 2014 were selected. Further, companies
to have reported ROE of 25% or higher in
the latest financial year were considered.
It emerged that the high ROE is a stringent criterion. There are only 183 companies with ROE equal to or in excess of 25%.
This is out of around 3,200 listed companies. Invariably, this means out of every 100
companies, only six companies have reported ROE equal to or higher than 25% in
the latest financial year.
Next, companies to have reported
ROE of minimum 25% in each of the last
five financial years were shortlisted. With
this filter, only 55 companies emerged.
Considering 3,200 companies, around two
out of every 100 firms have managed to
report ROE equal to or in excess of 25%
in each of the last five years. Last, companies with mutual fund holing of less than
1% were removed. At the end, 40 companies remained in the ring (see table:
High benchmark).
Among these 40 companies, the top five
with the highest ROE were ColgatePalmolive India (82%), Castrol India (76%),
Page Industries (58%), Hawkins Cooker
(56%) and Britannia Industries (55%).
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET
Stocks
A stable player
Divis Laboratories has shown
remarkable consistency in ROE over
the last five years, with the least
quantum of variation
Relative performance of
Divis Laboratories v BSE Sensex
xxxxx
Base=100 as on 14 December 2014
Face Value of Rs 2
The recent correction in the stock market, which is largely across the board, can be
the right time to explore this special set of
companies for investment. In fact, the market is likely to remain weak in the near future and provide a long enough window for
investors to weigh the pros and cons of each
of these stocks before taking the plunge.
The S&P BSE Sensex, the key stock
market barometer, has corrected by 4,705
points, or 15.7%, from its 52-week high of
30,025 reported in March 2015. Similarly,
the Nifty is down by 1,418 points or 15.5%
from its yearly high of 9,119 in March 2015.
The stocks with consistently high ROE have
also witnessed a sizable correction. Therefore, the present times can be the opportune
time to explore such stocks for investment.
The reforms process has came to a grinding halt. The government has not managed
to mend fences with the opposition. New
Delhi seems to be busy with fire-fighting
stray issues that can look pure nuisance a
few years down the line.
The end result is that the policy makers are not able to legislate at the desired
pace and in the desired quantum. Key legislations such as the Land Acquisition Bill
and the Goods and Services Tax (GST) Bill
are stuck and their fate continues to be uncertain. In November 2015, global rating
agency Moodys expressed concerns over
the failure to reform obstacles that might
hamper investment and prove a downside
factor for companies.
The global scenario continues to be hazy
and uncertain. Confused soul Janet Yellen,
the chairperson of the US Federal Reserve,
might or might not increase interest rates in
CoverStory
Among the select companies, Adi
Finechem is the smallest by market value
(Rs 309 crore). The specialty chemical
manufacturer garnered 75% of its revenues
from oleo chemicals and 25% from
neutraceuticals in FY 2015.
In November 2015, plans were disclosed
to invest Rs 100 crore over next five years.
The capital expenditure is to increase capacity, reduce per unit manufacturing cost,
improve efficiency, up- grade current product streams and add new products to the
portfolio. Considering the capacity expansion plans and the domestic and global economic scenario, the target is to achieve
CAGR of around 25% in sales and earnings
before interest, tax, depreciation and amortization (Ebitda) over the next five years.
Sales grew at CAGR of 23% between FY
2015 and FY 2010.
Mutual fund held 3.41% equity end
September 2015. The stock had hit an alltime high of Rs 395 in January 2015 and is
currently available at Rs 224.
Mutual funds owned 13.83% stake in
Credit Analysis & Research (Care) end
September 2015, the highest among the select companies. With no promoters, the largest public shareholders include Life Insurance Corporation (equity stake of 8.21%),
Canara Bank (7.49%), Franklin Templeton
Investment Funds (6.03%), State Bank of
India (5.87%) and IDBI Bank (5.21%).
Commencing operations in 1993, the
second-largest credit rating agency in the
country had rating volume of debt at Rs
68 lakh crore end March 2015. It offers
banks, sub-sovereigns and initial public
offer gradings.
The zero-debt company for the last several years has reported a consistent increase
in the bottom line over the last decade. The
total volume of debt rated increased 12.2%
and the total number of instruments rated
was up 18.6% in the first half of FY 2016
over a year ago. The number of active clients was 10,950 end September 2015 compared with 10,332 end June 2015 and 9,828
end March 2015.
eClerx Services is another stock popular with mutual funds, which controlled
12.11% stake end September 2015 in the
mid-cap counter. The stock scaled an alltime high of Rs 1949 in October 2015. The
knowledge process outsourcing company
incorporated in 2000 and publically listed
in 2007 reported revenue CAGR of 30%
between FY 2015 and FY 2007.
10
Stocks
Growing at a steady pace
Credit Analysis & Research, zero-debt
company for the last several years, has
reported a consistent increase in the
bottom line over the last decade
Relative performance of
Credit Analysis & Research v BSE Sensex
xxxxx
Base=100 as on 14 December 2014
Face Value of Rs 10
CoverStory
Stocks
High benchmark
Only 40 companies have reported ROE of a minimum 25% in each of the last five financial years and have mutual fund
holding in excess of 1%
Company
CMP
(Rs)
MCAP
(Rs cr)
52 WEEK
MUTUAL
HIGH
LOW FUND
(Rs)
(Rs)
(%)
2365.7
463369.7
2810.0
2316.7
317.5
254990.1
409.7
294.5
1029.4
236436.0
1219.0
932.6
307.7
194322.8
447.3
300.8
FY
ROE
(%)
DEBTEQUITY
RATIO
P/E
RATIO
TTM SALES
(Rs cr)
CHG
(%)
TTM RPAT
(Rs cr) CHG
(%)
1.13
201503
40.19
0.01
19.8
101554.5
14.40
20835.5
-3.1
13.29
201503
33.24
0.01
30.4
35299.0
-1.57
9693.0
4.5
6.49
201503
25.98
18.5
57196.0
9.96
12775.0
7.8
1.25
201503
33.17
0.01
14.1
74450.4
5.75
13809.2
-5.1
840.3
80596.8
924.7
693.0
1.86
201503
32.51
0.08
51.5
14402.0
5.97
1563.3
20.0
Bajaj Auto
2390.5
69172.5
2655.0
1913.8
1.07
201503
26.45
0.01
24.3
21629.0
3.95
3431.0
14.4
Dr Reddys Laboratories
2997.3
51136.2
4383.0
2953.4
3.55
201503
26.37
0.5
21.0
15460.3
9.49
2440.9
9.7
Hero MotoCorp
2546.8
50859.6
3212.0
2252.0
4.02
201503
38.62
0.03
25.0
27089.0
-0.28
2582.0
7.4
Cadila Healthcare
385.0
39414.1
454.4
285.0
4.56
201503
30.85
0.7
28.4
9165.3
16.93
1376.6
45.9
Britannia Industries
2798.0
33568.6
3435.0
1670.8
5.44
201503
55.01
0.14
46.5
8240.6
13.24
712.8
20.3
Titan Company
359.6
31920.9
448.0
303.0
2.18
201503
29.12
0.16
41.0
10714.0
-9.63
702.0
-11.0
1121.5
29771.0
1241.8
786.6
13.31
201503
26.37
0.01
37.1
3372.0
16.48
988.0
22.0
Marico
423.5
27319.4
466.3
312.7
2.01
201503
36.72
0.35
41.5
5936.9
11.67
658.5
24.8
Colgate-Palmolive
964.0
26225.0
1099.0
851.0
1.70
201503
82.00
45.0
4045.0
7.90
566.0
11.0
GlaxoSmithkline Consumer
6180.0
25993.0
6564.0
5425.0
1.63
201503
30.00
41.0
4205.0
7.43
668.0
23.2
Torrent Pharmaceuticals
1442.5
24409.1
1720.0
966.0
5.95
201503
34.19
0.88
19.2
5831.0
29.81
1314.0
53.5
421.0
20816.0
540.0
416.0
1.68
201412
76.00
34.0
3353.0
0.66
606.0
29.2
5631.0
18278.0
7435.0
5575.0
7.60
201506
31.00
52.0
2354.0
10.46
354.0
14.6
Divis Laboratories
Castrol India
Procter & Gamble Hygiene
Amara Raja Batteries
839.0
14328.0
1132.0
709.0
8.70
201503
27.00
32.0
4421.0
15.43
449.0
17.8
12693.0
14152.0
16995.0
10030.0
5.18
201503
58.00
66.0
1641.0
21.83
215.0
23.6
1884.4
13418.3
2365.0
1771.6
4.36
201412
35.25
49.9
1321.6
7.33
268.9
0.1
668.6
12603.1
791.7
381.9
1.69
201503
36.24
0.24
25.2
2603.0
30.93
499.8
85.7
Ajanta Pharma
1260.6
11093.0
1720.0
890.0
1.70
201503
43.20
0.14
31.1
1592.3
32.03
351.0
30.0
GRUH Finance
257.0
9342.0
317.0
215.0
3.34
201503
31.00
11
42.0
1182.0
21.73
221.0
13.9
Supreme Industries
641.7
8152.2
745.0
540.0
6.78
201506
27.71
0.38
25.3
4237.3
6.98
321.8
21.2
Kajaria Ceramics
934.4
7425.6
960.0
540.8
4.90
201503
29.11
0.38
36.7
2292.2
15.60
202.2
35.0
Symphony
2095.7
7330.3
3270.0
1632.2
2.94
201506
37.25
77.7
514.0
9.13
124.0
17.0
Bajaj Corp
412.5
6083.6
522.0
326.6
1.85
201503
40.65
35.6
867.0
20.25
191.0
32.6
eClerx Services
1810.2
5528.7
1949.2
1172.3
12.11
201503
35.23
19.8
1119.7
26.42
279.9
15.5
CARE
1261.8
3659.2
1808.0
1050.0
13.83
201503
27.17
48.8
267.0
8.54
117.0
-20.9
Page Industries
CRISIL
Alembic Pharmaceuticals
Zydus Wellness
807.1
3153.3
1130.3
730.1
1.02
201503
30.39
31.8
425.6
5.96
113.2
21.9
382.3
2639.6
1077.0
380.0
5.64
201503
47.36
12.7
888.1
-26.14
208.0
-31.2
VST Industries
1598.0
2467.0
1969.0
1400.0
9.92
201503
46.00
18.0
808.0
-0.86
134.0
-22.1
Vinati Organics
384.0
1979.0
668.0
370.0
6.91
201503
31.00
16.0
664.0
-11.82
125.0
21.4
Mayur Uniquoters
420.0
1943.0
515.0
376.0
5.52
201503
34.00
26.0
502.0
3.08
74.0
17.5
Hawkins Cooker
2301.0
1217.0
4650.0
2030.0
10.30
201503
56.00
36.0
506.0
3.27
34.0
-12.8
Swaraj Engines
895.0
1112.0
1033.0
745.0
9.60
201503
25.00
23.0
510.0
-20.19
48.0
-29.4
Atul Auto
501.0
1100.0
722.0
330.0
9.78
201503
38.00
27.0
508.0
9.25
41.0
5.1
Orbit Exports
357.4
512.1
494.8
302.2
1.79
201503
32.33
0.52
19.3
152.0
6.29
29.0
31.8
Adi Finechem
224.0
309.0
395.0
175.0
3.41
201503
26.00
39.0
144.0
-9.43
8.0
-60.0
CMP (current market price) is closing as on 9 December 2015. Mutual fund holding as of September 2015. FY: Financial year. Consolidated financials considered wherever available.
ROE : Return on equity. P/E : Price to earnings. TTM RPAT : Trailing 12 months reported profit after tax is for period ended 30 September 2015.
Change in TTM sales and RPAT over the previous corresponding period.
Source: Capitaline Databases
11
CoverStory
Recently, several new products were
launched including Colgate 360 Toothbrush, Colgate Total Charcoal Deep Clean
Toothpaste, Colgate Active Salt Neem
Toothpaste, Colgate Zig Zag Black Toothbrush and Colgate Sensitive Pro-Relief
Enamel Repair Toothpaste. Bonus shares
were allotted in the ratio of 1:1 in September 2015. What is special about the debtfree for the last several years is the fact
that ROE was in triple digits in six of the
last 10 financial years.
Public sector undertaking Coal India
is among the top-ranking companies by
cash hoard. The Maharatna coal miner had
cash and cash equivalent of Rs 57593 crore
end September 2015. From a 52-week high,
which also happens to be the all-time high
of Rs 447, the stock has corrected 31%.
The largest producer of coal in the
world operates through 82 mining areas
spread over eight states in the country.
There are 430 mines, of which 227 are underground, 175 opencast and 28 mixed.
Further, there are 15 coal washeries: 12
coking coal and three non-coking coal. There
are eight direct Indian subsidiaries and one
foreign subsidiary in Mozambique: Coal
India Africana Limitada.
Indeed, there is monopoly status in coal
mining, with production of around 82% of
the countrys coal output. About 78% of
the production goes to power utilities, with
97 out of 100 thermal power stations in the
country receiving the coal. Coal production
was 494.24 million tonnes (mt) and off-take
489.38 mt in FY 2015.
Kaveri Seed Company is facing
headwinds owing to multiple negative developments, with the prime being belownormal monsoon. The deficiency in rainfall has spoiled the prospects of rabi crops
as well. Also, FY 2016 has been one of the
most challenging years for cotton, with a
significant drop in volumes and acreage.
The cropping pattern has shifted unfavorably from corn and millet to pulses and
oilseeds. There is a liquidity crunch, with
farmers and dealers resulting increase in
receivables. Mirroring these negatives, the
stock plunged to the current level of
Rs 382 from a 52-week high of Rs 1077
in March 2015.
Nonetheless, ROE has increased significantly over the last five years. The next
fiscal is expected to be favorable. There is
a diversified product portfolio with cotton, maize, paddy, millet, sunflower and
12
Stocks
Remarkable pace
Kaveri Seed Companys ROE has
increased significantly over the last
five years. The next fiscal is expected
to be favorable
Relative performance of
Kaveri Seed Company v BSE Sensex
xxxxx
Base=100 as on 14 December 2014
Face Value of Rs 2
IPOCentre
IPOCentre
Narayana Hrudayalaya
CM Rating 40/100
working at around 45% of capacity, generating around 5% Ebidta margins. The remaining 14 hospitals are operating at negative
Ebidta and are operational for less than three
years. Typically, a hospital breaks even in
three-four years and then the operating leverage starts. Thus, there is plenty of scope
for margin improvement going forward.
13
InFocus
InFocus
Losing glitter
Frequent interventions by the government and unstable policies
continue to be the biggest impediment
The gold jewelry and diamonds industry is
among the biggest in the country. India is the
largest consumer of gold and accounts for 20%
of the worlds gold consumption. Gold jewelry forms around 80% of the domestic jewelry market. The fabricated studded jewelry,
which includes diamond and gemstone studded jewelry, accounts for the rest. As per a
study conducted by the consultancy firm AT
Kearney, Indias gems and jewelry industry
is expected to double in the next five years to
reach Rs 5 lakh croreRs 5.3 lakh crore by
2018 from Rs 2.51 lakh crore in 2013.
India is the largest cutting and polishing
center for diamonds in the world. According
to the Gems and Jewelry Export Promotion
Council, the country exports around 95% of
the worlds diamonds. The gems and jewelry industry contributes around 6%-7% of
the countrys gross domestic product. The
diamond industry is referred as one of the
fastest growing sectors. It is actively supported by the government because of high
export potential and labor-intensive nature.
The gross exports of the gems and jewelry
sector stood at US$ 39.9 billion in the fiscal
ended March 2015 (FY 2015).
The future outlook for the domestic jewelry market continues to be bright. The major
growth drivers for the gold and diamond jewelry industry includes large-scale migration,
shift in business from local jewelers to organized players, increasing affluence of popu14
InFocus
Three companies made losses in the last two
years considering the TTM performance.
Five stocks have touched all-time highs
in 2015, including Titan Company, Rajesh
Exports and PC Jeweller. Lypsa Gems &
Jewellery is an interesting case. The stock
marked an all-time high as well low in the
current calendar year. From its all-time low
of Rs 57.6 in July 2015, it is up 115.3% to
the current level of Rs 124.1. The company
is in the business of trading, importing, exporting, making and polishing diamonds,
gems and other precious stones. In terms of
price to earnings (P/E) ratio, the stock is
moderately valued at 12.3. However, considering the price to BV (P/BV) ratio of five
times, it is among the most expensive stocks.
The small-cap stock is finely leveraged, with
debt of Rs 38.1 crore and a debt-to-equity
ratio of 1.03 times end March 2015. Turnover increased 4.5% and profit by 65% in
the TTM ended September 2015.
The debtors-to-turnover ratio points to
potential trouble. For instance, there are six
companies with debtors-to-turnover ratio
below one. This ratio is determined as turnover divided by trade receivables or debtors.
An abnormally low ratio indicates inordinate
delay in realizing money from debtors. This
could be even owing to manipulation of the
top line to keep investors in good mood.
The statutory auditors have highlighted
a hefty quantum of debtors that might be
doubtful and require provisioning. In fact, the
audit report can provide glimpse of concerns
and apprehensions surrounding a stock.
The auditors of Gitanjali Gems have
drawn attention to overdrawn position of
Rs 70.3 crore in working capital borrowing
from a consortium of bankers, mainly on
account of non-servicing of interest. The total
outstanding balance of working capital borrowing from the consortium of bankers stood
at Rs 4357.4 crore end March 2015. The
facility carries interest ranging from 5% to
14.5% per annum. The working capital borrowings are secured against immovable properties of the company and its subsidiaries.
In 2013, changes were made in the Reserve Bank of India (RBI) policy on issuance of bank guarantee and letter of credit
for purchase of gold. According to Gitanjali,
due to this restriction, there was a sudden
and severe impact on cash flows that continues till date. In FY 2015, there were delay in servicing the interest on working capital borrowing and repayment of principal
amounts. To reschedule external commerDec 21, 2015 Jan 03, 2016 CAPITAL MARKET
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cial borrowings (ECB) and to provide additional margin for working capital borrowing, Gitanjali provided for additional security of property of subsidiaries and second
charge on certain property and pledged
shares of the promoters. Additionally, the
promoters provided interest-free unsecured
loan of Rs 64.2 crore.
Gitanjali had issued 12% non-convertible debentures (NCDs) for an aggregate
amount of Rs 125 crore to Life Insurance
Corporation (LIC) in June 2009. The NCDs,
with five-year tenure, are secured by first
pari passu charge over immoveable properties in Hyderabad belonging to subsidiary
Hyderabad Gems SEZ. As the company
failed to repay the NCDs, the terms of the
debentures were revised. Gitanjali has not
paid overdue principal of Rs 2.4 crore. Further, it has not created cash deposit as required by circular issued in February 2013
by the Ministry of Corporate Affairs for
debenture installments maturing in FY 2015.
As per the company, its business and the
cash flows continued to be affected due to
the changes effected last year in the RBI
policy on gold import. Considering the cash
flow constraints, cash deposit of Rs 2.1 crore
was not created.
The auditors drew attention to non-payment of self-assessment tax of Rs 21.6 crore
for assessment year 2013-14 (FY 2013).
Gitanjali incurred cash losses in FY 2014
but not in FY 2015.
Similarly, Thangamayil Jewellery incurred cash loss in FY 2015 and in FY 2014
as well. The auditors of Renaissance
Jewellery have drawn attention to the litigation relating to service tax of Rs 1.8 crore
payable on lease rent of immovable properties for which no provision has been made.
InFocus
posite corporate debt restructuring with the
banks. The banks decided to withdraw their
support for restructuring the credit facilities offered to the company in the consortium meeting held in January 2015. The company again requested for reconsideration of
restructuring proposal by all the lenders in
February 2015.
SGJHL incurred cash losses in FY 2015
and FY 2014. The current liabilities are more
than the current assets and there are negative cash flows. The management is in the
process of restructuring and is confident that
measures taken by it are expected to result
in sustainable cash flows. Thus, accounts
were prepared on a going-concern basis.
C Mahendra Exports is one peculiar
case and can be even treated as case study.
Statutory auditors RH Modi & Co have refused to sign the audit report. The auditors
have approached capital market regulator
Securities and Exchange Board of India (Sebi),
Without backup
Renaissance Jewellery made no
provision for litigation relating to
service tax of Rs 1.8 crore payable on
lease rent of immovable properties
240
220
Renaissance Jew.
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180
160
140
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Fading charm
Considering the latest trailing 12 months ended September 2015, 21, or over 50% of the companies, recorded a decline in turnover.
Growth in turnover was in single digit in case of four firms and 10 registered losses
COMPANY
DATE
CMP
CMP
(Rs)
M-CAP
(Rs cr)
52-WEEK (Rs)
HIGH
LOW
ALL-TIME (Rs)
HIGH
LOW
MF
(%)
P/E
RATIO
Titan Company
09/12/2015
359.6
31921
448
303
448
1.1
2.18
41
34.7
-9.6
-11
Rajesh Exports
PC Jeweller
09/12/2015
09/12/2015
682.7
376.5
20159
6743.1
729
494
136.1
165
729
494
1.7
66
0.69
0
23
19
113.8
111.1
152.1
31.5
108.3
29.8
Vaibhav Global
09/12/2015
521.5
1695.3
859
353
975
7.5
22
100.9
-1.9
-34.2
03/12/2015
672
1075.9
1300
653.3
14
392.7
-15.2
-10.5
09/12/2015
09/12/2015
88.7
20.55
591.9
572.5
187.8
27
87.2
9.4
301
30.7
87.2
9.4
0.03
0
36
14
69.5
22.7
5.9
6.6
-50
-40.7
09/12/2015
28.2
543
64.8
27.5
77.5
1.1
0.01
10
47.4
15.5
-45.6
Gitanjali Gems
09/12/2015
40.1
393.5
59.2
32.7
649.5
32.5
419.5
31.6
LP
Thangamayil Jewellery
Lypsa Gems & Jewellery
09/12/2015
09/12/2015
210
124.1
288
261.4
250
141.5
155
57.7
351
141.5
62
57.7
7.51
0
193
12
94
24.9
15.3
4.5
LP
65
Renaissance Jewellery
09/12/2015
117.4
224
139.7
57.9
200
18.2
4.6
209.1
5.9
47
Goldiam International
09/12/2015
42.9
106.9
51.8
20.3
182.8
2.6
0.01
6.1
102.6
-2.1
-26.8
Mahadushi International
Tara Jewels
02/12/2015
09/12/2015
271
39.1
106
96.3
545
95
95
30.7
581
245.5
95
30.7
0
2.11
0
2.4
8
237
200
-1.5
0
-10.1
Kanani Industries
09/12/2015
7.4
73.2
11.5
5.9
97.6
0.1
44
4.7
37.9
LP
09/12/2015
9.54
68.6
29
9.1
286
9.1
32.7
-95
PL
Swarnsarita Gems
Goenka Diamond & Jewels
09/12/2015
09/12/2015
24.1
1.47
50.3
46.6
43.9
2.7
14.6
1.1
195
35
0.4
1.1
0
0
14
65
37.8
10.5
53.8
-12.6
63.9
LP
SJ Corporation
08/12/2015
34
29
74
23
204
262
11
24.3
09/12/2015
21.3
26.6
21.9
6.1
51.9
0.7
56
20
-30
92
Zodiac-JRD-MKJ
Golkunda Diamonds
09/12/2015
09/12/2015
47
23
24
16
83
23
29
14
210
36
4
1
0.02
0
36
5
123
31
-5.3
-16.7
-85.7
0
C Mahendra Exports
26/11/2015
1.29
15.6
8.9
1.2
171
0.1
98.6
-58.7
358.1
08/12/2015
18
15
19
48
CMP: Current market price. MF: Mutual fund holding as on 30 September 2015. Consolidated financials considered wherever available. P/E: Price to earnings. BVPS: Book value per share. TTM RPAT:
Trailing 12 months reported profit after tax. LP: Loss to profit. TTM: Trailing 12 months ended September 2015. Change in TTM net sales and RPAT is over the corresponding previous period.
Source: Capitaline Databases
16
InFocus
called the financial facilities and took symbolic possession of the premises and due
to stoppage of work at factory. These
events cast significant doubts on the ability of the company to continue as a goingconcern as the volumes of business have
also drastically dropped. The firm needs
to raise adequate funds and recover money
from debtors to meet its short-term and
long-term obligations and to establish consistent business operations. As per the auditors, in absence of any convincing audit
evidences, no positive steps have been taken
by the management, there is non-recovery
of trade receivables and non-payment of
liabilities including income tax dues. Hence,
they were unable to determine the possible
effects on the financial statements. Also,
the auditors were unable to conclude about
the ability of the company to carry on as a
going-concern.
C Mahendra defaulted in payment of
loans to banks and incurred cash losses in
FY 2015. Most banks have not provided
balance confirmations. The auditors were
unable to confirm the bank balances including working capital facility and overdraft and
interest as the accounts are frozen by the
consortium of banks. The company has received notice under Section 13(2) of The
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. No provision for interest
amounting to Rs 91.5 crore was made as all
the bank accounts have become non-performing assets (NPAs).
C Mahendras trade receivables amounting to Rs 1194.9 crore are outstanding for
more than one year. This amount is significant considering the turnover of Rs 583.5
crore in FY 2015 and Rs 4030.4 crore in
FY 2014. The recoveries from these trade
receivables have been almost negligible.
There have been defaults on the payment
obligations by the debtors. As informed by
the management, no reply was received
from any parties to whom legal notices were
sent. No confirmations were obtained. Despite the realizations of the debtors being
in doubt, no provision was made in the
books of accounts.
In the absence of audited or unaudited
results of subsidiaries and step-down subsidiaries of C Mahendra, the auditors were
unable to obtain sufficient audit evidence
about the carrying amount of investment in
various subsidiaries end March 2015. Investments continued to be valued at cost.
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET
In the dark
SGJHLs short-term borrowings of
Rs 446.5 crore were not confirmed end
March 2015. The auditors were unable to
comment on the consequential impact
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Reverse flow
Both the subsidiaries of Tribhovandas
Bhimji Zaveri incurred cash losses
on a standalone basis last fiscal
and in FY 2014
120
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InFocus
Stocks
Edging out
Banks are losing out to niche, well managed and profitable
NBFCs as investment option
The business and revenue model of commercial banks is far superior as compared
with that of non-banking financial companies (NBFCs). This is a widely held view.
Probably, it is undeniable. However, the
scenario is fast changing. The prevalent perception might turn out to be wrong if one
looks at hardcore numbers and developments
in the last few years.
Gruh Finance outperformed HDFC
Bank, the countrys most valuable bank in
each of the last 10 years on the parameter of
return on equity (ROE). The NBFCs latest
numbers are superior compared with HDFC
Banks. Gruh reported ROE of 31% in the
financial year ended 31 March 2015 (FY
2015) and 32% in FY 2014 as against HDFC
Banks ROE of 19.94% in FY 2015 and
21.63% in FY 2014. Even Indiabulls Housing Finance (IHFL) has delivered higher ROE
compared with HDFC Bank at 30.8% in FY
2015 and 28.4% in FY 2014.
ROE measures returns generated on the
equity capital contributed by the shareholders, the real owners of an enterprise. Thus,
ROE is among the vital ratios while analyzing and comparing businesses.
Over the last five years, Gruh reported
robust growth of 2.96 times in profit after
tax (PAT) which is lower compared with
HDFC Bank, which has achieved superior
18
growth of 3.56 times. However, the difference is not much. Gruh was ahead with a
growth of 3.44 times in turnover as against
HDFC Banks 3.12 times during the last five
years. But HDFC Bank deserves praise as
the growth in on a higher base.
On asset quality, HDFC Bank reported
net non-performing assets (NPAs) to net
advances ratio of 0.25% in FY 2015 and
0.27% in FY 2014. These numbers are
among the lowest and finest among the
Racing past
Gruh Finance outperformed HDFC Bank,
the countrys most valuable bank,
in each of the last 10 years on the
parameter of ROE
Relative performance of
Gruh Finance v BSE Sensex
* 11 December 2015
InFocus
rapid inroads into this important segment
and are challenging the deeply entrenched
commercial banks. May be the banks are
not feeling the pinch yet as the housing
finance market is too gigantic. Ironically,
though the real estate market is facing
headwinds, housing finance companies and
banks are doing brisk business owing to
the buoyant resale market.
The pertinent question is whether
NBFCs are better bets for investors than
banks? Consider the following facts.
HDFC is the second most valuable company among banks and NBFCs. Only
HDFC Bank and SBI are ahead of HDFC.
HDFC is seven times more valuable than
Punjab National Bank (PNB). PNB is
among the oldest PSBs, with one of the
Changing times
Brokers are expanding their portfolio to derisk from market volatility
The traditional stock broker business is
pass. There is a too much of competition with miserable rewards. No need to
mention the fact that the stock broking
witnesses wild swings mirroring the
movement in the stock market. Online
brokers and competition from wellheeled banks has added to the woes.
Ever-dropping brokerage means
revenues remain vulnerable.
The palpable solution is to diversify
and enter into new business segments.
Brokers such as Motilal Oswal Financial
Services (MOFSL), Edelweiss Financial
Services and IIFL Holdings (formerly
known as India Infoline) have precisely
done this. These three companies have
undergone significant changes in their
business profile.
Apart from the traditional capital
market business, which includes retail
and institutional broking and distribution, wealth management and investment banking, MOFSL has forayed
into the businesses of private equity,
asset management, wealth management
and home finance. Its most recent
business diversification includes
housing finance. The loan book stood
at Rs 990 crore across 9,700 accounts
end September 2015. There are 37
branches across four states.
After its IPO in 2005, IIFL entered
the financing business in 2006. This
* 11 December 2015
19
InFocus
side, it appears that banks are working as
collecting agents of NBFCs. It is not that
banks are not making money by offering
loans to NBFCs. Indeed, they are making
good profit by onward lending. However,
they are losing money elsewhere, particularly in wholesale banking.
SKS is valuable compared with several
PSBs and old private sectors banks (PVBs).
It is ahead of Indian Overseas Bank, Karur
Vysya Bank, City Union Bank, UCO Bank,
Oriental Bank of Commerce, Allahabad
Bank, Andhra Bank, Jammu and Kashmir
Bank, Corporation Bank, State Bank of
Bikaner and Jaipur and Bank of Maharashtra
by market value.
It is clearly the profitable business model
and robust outlook that is giving an edge to
SKS over banks that are in the business for
several decades with unmatched branch and
ATM network. Sans a few banks, it is a
sorry state of affairs for the banking industry. The bad loan menace faced by PSBs is
of historic dimension. It is not only government-owned banks that are in a mess. Professionally-run private sector banks, too,
have started feeling the heat.
The norms for overseas borrowings have
been liberalized by the Union government
and the Reserve Bank of India (RBI). The
overseas market has turned out to be a major source of funding for NBFCs. The lower
interest rates foreign loans is one key benefit for NBFCs. IHFL has fully utilized and
drawn down the RBI-approved external
commercial borrowing (ECB) limit of US$
200 million. Like SKS, for IHFL, the banking industry is key source of funding. Its
132 lenders include 26 PSBs, 17 PVBs and
foreign banks and 89 mutual funds, provident funds, pension funds, insurance companies and others. Its outstanding bank loans
stood at Rs 28138 crore end March 2015 as
against Rs 21710 crore end March 2014.
DHFC is another prime case. It availed
ECBs of US$ 125 million from Asian Development Bank for seven years and US$
50 million from Deutsche Investitions-und
Entwicklungsgesellschaft (DEG-Germany)
for eight years in FY 2015. The principal
amount has been hedged by way of currency swaps to protect from foreign currency risk and converted into rupee liability of Rs 784.2 crore and Rs 311.3 crore,
respectively, as per the statutory stipulation. DHFC had availed ECB of US$ 70
million from IFC Washington for a period
of eight years in FY 2014. This was con20
* 11 December 2015
InFocus
amounted to 92% and shareholders fund
the remaining 8%.
Indiabulls Housing Finance (IHFL)
is the second largest private housing finance
company in the country and is one of the
most alluring success stories among the
NBFCs. Since July 2013, the stock has appreciated 2.6 times. On a cumulative basis,
loans have been offered to 7.96 lakh retail
customers, with cumulative loan disbursement of Rs 117319 crore end September
2015. The loan book increased at a six
CAGR of 26% and loans outstanding were
at Rs 58225 crore end September 2015.
There are 220 branches in 110 towns
and cities across the country and two representative offices in Dubai and London. These
offices offer home loan products to nonresident Indians and persons of Indian origin. In terms of assets, mortgage loans accounted for 76%, corporate mortgage loans
23% and commercial vehicle loans 1% end
September 2015, with net NPAs of 0.35%
and gross NPAs of 0.84%. Bank loans comprised 47% of the funding mix, followed by
bonds (33%).
A qualified institutions placement (QIP)
was concluded in September 2015, collecting Rs 3996.8 crore at Rs 702 per share including premium of Rs 700. The net worth
was Rs 10367 crore end September 2015,
the second highest among private housing
finance companies and NBFCs.
Dewan Housing Finance Corporation
(DHFC) is on a secular growth path. It reported growth of 20.4% in turnover in FY
2015 and 22.3% in FY 2014. Profit grew
17.4% in FY 2015 and 17% in FY 2014.
The stock reported an all-time high of Rs
285 in March 2015.
The focus of the housing finance company established in 1984 is on low- and
medium-income groups, which are among the
largest- and fastest-growing mortgage segments. Also, there is presence in the education loan segment. A joint venture, DHFL
Pramerica Life Insurance, has been formed
with Prudential Financial for the life insurance business. Other products include loan
against property, lease rental financing, financing of commercial premises and small
and medium enterprise loans.
The loan portfolio was Rs 56312 crore
end September 2015. The distribution network consists of 361 company-operated
locations and 357 locations through alliances with emphasis on tier II and tier III
towns and cities. The gross NPAs ratio
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET
Robust show
Over the last decade, LIC Housing
Finance reported a growth of 8.5 times
in total income and 6.7 times in profit.
NPAs are down
Relative performance of
LIC Housing Finance v BSE Sensex
* 11 December 2015
InFocus
Deterioration in the asset quality is a
matter of concern, with gross NPA ratio at
9.4% (6.3% in the previous period) and net
NPAs 4.6% (3.1%) in the first half of FY
2016. However, the capital adequacy ratio
remained at a comfortable level of 18.2%
(17.9%). Consolidated total income increased 8.4%, while profit declined 32% in
the first half of FY 2016.
Established in 1979 and listed in 1984,
Shriram Transport Finance Company
(STFCL), the flagship company of the
Shriram group, is among the largest asset
financing NBFCs. Offerings include affordable finance on pre-owned CVs with expertise in loan origination, valuation and collection. Commanding leadership position, with
a market share of 25-27% in the pre-owned
CVs market, the distribution network covers 770 branch offices, 765 rural centers and
9,400 field officers. There is established
partnership with over 500 private financiers.
Piramal Enterprises held a strategic 9.96%
stake end September 2015.
The expanded product portfolio includes
financing of tractors, small commercial vehicles, three-wheelers, passenger-CVs and
construction equipment. There was a customer base of 1.2 million end June 2015.
The total assets under management consisted of pre-owned CVs (Rs 55810 crore),
new CV (Rs 4680 crore) and others (Rs 36
crore) end June 2015. The gross NPAs remained almost stagnant at 3.8% in FY 2015
compared with 3.9% in FY 2014. The net
NPAs remained static at 0.80% in FY 2014
and FY 2015. The capital adequacy ratio
was placed at a comfortable level of 20.05%
end June 2015.
Murugappa
group
company
Cholamandalam Investment & Finance
Company, incorporated in 1978, commenced
business as an equipment financing company.
The comprehensive product profile includes
vehicle finance, home loans, home equity
loans, SME loans, investment advisory services and stock broking. Operating from 534
branches, with assets under management of
over Rs 29,100 crore and cumulative customer
base of 7.5 lakh, 90% of the branches are
located in tier-II, tier-III and tier-IV towns.
Key subsidiaries include Cholamandalam Securities and Cholamandalam Distribution Services (CDSL), which has been granted in-principle approval by the RBI to set up a payments bank.
The capital adequacy ratio was 20.80%
as against the regulatory requirement of 15%
22
Good health
Cholamandalam Investment & Finance
Companys capital adequacy ratio
was 20.80% and net NPAs 3% end
September 2015
Relative performance of
Cholamandalam Investment v BSE Sensex
* 11 December 2015
Conclusion
The financial services industry encompasses
a diverse set of businesses, with lending being the major revenue segment. This is a significant business opportunity, with enough
space to grow, for incumbents and new comers as well. Despite so many new entrants,
a few segments such as home loans are growing at a decent pace. In India, mortgage penetration is still extremely low at 8% of the
gross domestic product compared with
Thailands 17%, Chinas 20%, Koreas 26%,
Malaysias 29%, USAs 69% and United
Kingdoms 81%.
Additionally, the automobile finance
market is expected to report significant
growth over the next five years, between
FY 2015 and FY 2020. As per estimates
given by MMFSL, new vehicle finance disbursements are likely to grow 18%-20%
for utility vehicles, followed by cars 17%19%, CVs 15%-17% and two-wheelers
14%-16%. In addition, in India, ownership
of car is low 17 per thousand individuals as
against 39 in China, 93 in Thailand, 147 in
Brazil and 196 in Mexico. This spells huge
opportunity for NBFCs operating in extending vehicle finance.
On the flip side, like commercial banks,
the deteriorating asset quality is a spot of
bother for NBFCs as well. Among these select NBFCs, MMFS is witnessing mounting bad loans.
Risk-averse investors can evaluate
NBFCs that are focused on segments such
as housing finance, while those with
higher loss-bearing capacities can access
NBFCs that are diversified, fast growing
and ambitious for investment. Select diversified NBFCs are as good as commercial banks for all practical purposes and
can deliver robust growth over the medium to long term.
Moreover, certain niche plays such
as micro finance, home loans to unorganized sector and financing of old vehicles
are interesting themes for investment.
The specialized players have developed
expertise in their own businesses that
may look easy to replicate but could
prove to be a hard nut to crack. In all,
NBFCs seems to be emerging as a highly
profitable business model and can be seen
challenging the traditional banking industry. Nimble-footed NBFCs can generate
greater wealth than age-old banks weighed
under mounting NPAs.
S Khedekar
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET
InFocus
Logistics
InFocus
Logistics is the backbone of the
economy, providing the efficient, cost-effective flow of goods on which other commercial sectors depend. The logistics industry in India is evolving rapidly and it is the
interplay of infrastructure, technology and
new types of service providers that will
define whether the industry is able to help
its customers reduce their logistics costs and
provide effective services.
Despite weak economic sentiments, the
logistics and warehousing industry continued to witness growth largely due to growth
in retail, e-commerce and manufacturing sectors. The global logistics sector is expected
to grow at around 10%-15%. With this forward-looking attitude and a promise of growth
and improvements, the service oriented logistics industry is all set to expand beyond
the horizons in the latter half of this decade,
utilizing this fiscal year as its launch pad.
The key challenges faced by logistics industry include a highly fragmented market
along with below par infrastructure and low
IT penetration, resulting in acute operational
inefficiencies.
The Indian logistics industry is characterized by an unfavorable modal mix, which
is skewed towards road as a major mode of
transportation, along with under utilization
of other modes such as rail, coastal shipping
and ports.
Lack of unified regulatory logistics body
for integrated planning at a national level
across shipping, road, aviation and warehousing segments somewhat slows the Indian logistics growth.
One of the critical issues faced by companies today is that of insufficient integration of transport networks, IT, warehousing and distribution facilities.
Regulations exist at a number of different tiers, imposed by national, regional and
local authorities. Regulations often differ
from city to city, hindering the creation of
national networks.
Trained manpower in both the third
party logistics sector and the manufacturing
and retailing sectors is very weak at a practical level, i.e., IT, driving and warehouse as
well as at a higher strategic level.
The disorganized nature of the logistics
sector in India, its perception as a manpower-heavy industry and lack of adequate
training institutions has led to a shortfall in
skilled management and client service personnel. There is lack of IT standards and
poor systems integration and equipment.
24
Lack of modern warehousing and storage facilities and management are to blame
for high levels of loss, damage and deterioration of stock, especially in the perishables sector. Part of the problem is insufficient specialist equipment, i.e. proper refrigerated storage and containers, but it is
also partly down to lack of training.
Although both the practitioners and the
academicians are increasingly aware of the
importance of logistics and supply chain,
however the field is still under penetrated
as far as research is concerned. It is important to prioritize research and development
so that various weaknesses in the industry
could be identified and improved.
Regulatory challenges include lack of
policies to push development in coastal shipping, inland waterways and ports to develop
these modes, which are not fully used. The
delay in the implementation of GST has been
impacting the readiness of the logistics service providers and end users.
Needless to say, infrastructure is the
backbone of every countrys growth and
prosperity and for the logistics industry to
flourish in the developed countries, special
emphasis has to be laid on the enhancement
of the infrastructural facilities. Particular focus needs to be given on building world-class
road networks, integrated rail corridors, modern cargo facilities at airports and creation of
logistics parks which need to be given a status equivalent to special economic zones.
Focus on infrastructure development in the
logistics industry to help organize the sector, boost private investment and accelerate
the supply chain. Developing time-bound
action plans decongest airports and seaports,
shift cargo-clearance activities to inland ports
or airport locations, in addition to providing
hinterland connectivity.
Overcoming the skill gap in Indian logistics industry requires establishing training institutions. It is necessary to realize
the benefits which best practice in logistics can bring to the companies so that the
overall service quality of the sector is improved. Gaps in training have to be filled
not only at the entry level but also in the
management cadre which could be made
possible through specialized graduation and
post graduation courses focused on operations and supply chain management. Augment the current skill development initiatives by focusing on transportation, warehousing and the cold chain sector. This
would include setting up of aeronautical and
maritime universities that focus on providing sector-specific knowledge and exposure
to individuals.
Good storage and warehousing facilities are essential to the growth of the logistics industry. With the increase in the transportation of perishable products, agencies
associated with logistics will have to give a
lot of importance to enhancing the warehousing facilities. Warehousing will also
need to go to the next level taking into account the changing dynamics of manufacturing, global procurement and new models of sales and distribution.
Emphasizing on R&D is essential mainly
because it encourages the use of indigenous
technology which can make the industry
more cost competitive and it also leads to
the improvement in services due to the use
of better and more streamlined services. Particular focus needs to be given on research in
process excellence which can help eliminate
inefficiencies and bring Indian logistics on
par with global practices.
The Indian logistics sectors growth depends on the growth of its soft infrastructure like education, training and policy
framework as much as the hard infrastructure. To support Indias fast paced economy
growth of logistics industry is very essential. It is estimated that the Indian logistics
sector will continue to show robust growth
of 10-15% annually, leading the pace of
growth of the economy at large.
There is need to formalize a regulatory
logistics body by uniting key policy stakeholders across ministries for an integrated
approach towards project planning and development. Also, there should be focus on
improving the ease-of-doing- business in
the transportation sector by easing licensing requirements.
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET
InFocus
Policy driven promotion of the publicprivate partnerships and engineering, procurement and construction models for infrastructure development in the transport sector are needed for robust growth of the logistics industry.
Thrust has to be provided to the transportation sector in tandem with the Makein-India program that promotes innovation,
investment and skill development in the
country, across sectors.
Clarity is required on various direct tax
issues such as procedural tax assessment for
regular and occasional shipping business and
transfer pricing on the outbound and inbound legs of freight forwarding transactions,
which are currently bunged in litigation.
The global economic outlook and indeed
that of India is expected to significantly improve as India Inc begins to tackle the economic downturn. With the government implementing many policies giving fresh impetus
to Indias growth engine particularly in the
corporate and small and medium enterprise
(SME) sector which in turn will expand demand for the logistics sector. The biggest boost
to the growth of the industry is coming from
the increasing consumer demand, particularly
in the tier 2 and 3 sections of the country.
This is being further fueled by the revolutionary growth being seen in e-commerce
which is leading to logistics companies responding with new innovations in service
since logistics is the most critical ingredient
in the success of an online business.
Indias e-commerce retail market is
booming at an expeditious pace. According
ther intensify. Both these international players come with deep pockets and the patience
to drive the Indian e-commerce market. Also,
their strong domain knowledge and best practices from their international experience give
them an additional edge.
Both Amazon and Alibaba have grown
in size and influence to such large levels,
that currently both of them are larger than
Wal-Mart in terms of market capitalization.
Amazon is valued at US$300 billion, Alibaba
is valued at US$200 billion, whereas WalMart is valued at US$190 billion. Some of
the key market drivers influencing growth encompass a rapid rise in internet and digital
device penetration, favorable shifts in user
demographics, easing market regulations and
compelling propositions offered by the ecommerce retail companies.
Indian companies realize this and, therefore, are aiming to continue their focus on
expanding sellers and selection on their platforms, innovating on multiple customer touch
points, and providing seamless and rapid delivery services in order to compete with the
international entities. While the market is still
in a nascent stage, it has made a discernible
impact on the countrys logistics sector and
is among the fastest growing markets. There
is a growing recognition of the role of logistics in enabling this sector as well as catering
to the rising demand more efficiently and profitably. As a result, many of the e-commerce
retail companies are also investing in building
their logistics networks and capability.
In India, the e-commerce retail industry
is presently witnessing approximately six
Untouched by slowdown
Despite weak economic sentiments, the logistics and warehousing industry continued to witness growth largely due to growth in retail,
e-commerce and manufacturing sectors
COMPANY
MCAP
(Rs cr)
CMP
(Rs) (FY 2015)
(FY 2013)
PAT
(FY 2015) (FY 2014) (FY 2013)
% RETURN
(2 YEARS) (3 YEARS)
1511
1382
1055
944
931
85.75
124.36
60.55
(5 YEARS)
Container Corporation
26349
1351.5
16549
6973.8
249
212
309
129
123
193
108.62
247.27
617.91
Allcargo Logistics
4420
350.7
535
432
426
240
149
170
222.14
174.70
135.41
VRL Logistics
3813
417.9
285
225
205
91
57
46
NA
NA
NA
Gateway Distriparks
3498
321.7
341
276
262
188
136
127
147.46
143.25
216.32
Transport Corp.
2251
295.9
203
179
183
81
72
70
377.26
267.12
186.03
Snowman Logistic
1424
85.2
52
40
27
25
22
20
NA
NA
NA
Gati
1378
157.5
151
95
92
41
23
10
466.55
323.39
155.89
739
133.0
125
114
106
16
141.82
98.66
73.29
Sical Logistics
1749
PBIDT
(FY 2014)
* CMP and market cap are as of 10 December 2015. Year end March.
Source: Capitaline Databases
25
InFocus
to seven lakh transactions per day, led by
categories including apparel (43%), electronics (24%), books (22%) and home furnishings (8%). With rapidly rising scale of operations, e-commerce retailing players have
been strategically opting for viable operating models depending on the nature of products and operations.
As the e-commerce industry is fast rising, changes can be seen over a year. The
sector in India has seen CAGR of 34% since
2009 to touch US$16.4 billion in 2014 as
per Internet and Mobile Association of India. The sector is expected to be in the range
of US$22 billion in 2015.
Currently, e-travel comprises 70% of the
total e-commerce market. e-tailing, which
comprises of online retail and online marketplaces, has become the fastest-growing
segment in the larger market having grown
at a CAGR of around 56% over 2009-2014.
The size of the e-tail market was pegged at
US$6 billion in 2015. Books, apparel and
accessories and electronics are the largest
selling products through e-tailing, constituting around 80% of product distribution. The
increasing use of smart phones, tablets and
internet broadband and 3G has led to developing a strong consumer base likely to increase further. This, combined with a larger
number of homegrown e-tail companies with
their innovative business models has led to
a robust e-tail market in India rearing to expand at high speed.
An analysis of the demographic profile
of internet users further testifies that ecommerce will rise rapidly in India in coming years. Around 75% of Indian internet
users are in the age group of 15 to 34 years.
This category shops more than the remaining population. Peer pressure, rising aspirations with career growth, fashion and
trends encourage this segment to shop more
than any other category and India, therefore, clearly enjoys a demographic dividend
that favors the growth of e-commerce. In
coming years, as internet presence increases in rural areas, rural India will yield
more e-commerce business.
A sustained growth of over 50% in the
Indian e-commerce retailing industry underlines the need for efficient and sustainable
logistics operations for all sizes of e-commerce retailers in India. The market place
model is expected to continue to gain prominence and a combination of delivery speed,
upgraded warehousing infrastructure, better service capabilities, technological ad26
graphic reach and, hence, managing operations in-house was relatively less complex.
Moreover, higher costs and limited external capability in case of outsourcing fulfillment also drove several e-commerce retailers to manage their fulfillment in-house.
However, with increase in scale of business and emergence of mid-tier e-commerce
retailers, the industry seems to be undergoing a modular shift towards outsourcing
the fulfillment process.
Shift to the market place model and convenience to vendors are expected to drive
the demand for outsourced fulfillment centers. Category-specific focus and concerns
are further driving e-commerce retailers towards outsourcing fulfillment.
Online retailers jostling for a chunk of
Indias US$13 billion e-commerce trade are
so desperate to avoid snarled roads and inefficient railways that they fly their packages in the passenger cabin of costly commercial flights.
Indias largest domestic e-tailer Flipkart
India Pvt Ltd as well as bigger global rivals
like Amazon and eBay Inc. are widening their
supplier networks or racing to build multimillion dollar logistics networks to circumvent crumbling infrastructure, keen to attract customers by shrinking delivery times
to same-day or even as short as nine hours.
With a population exceeding 1.1 billion, a
burgeoning middle class and better Internet
access, Indias e-commerce potential is huge.
Online retail sales are expected to surge to
US$76 billion by 2021, according to consultants Forrester.
The biggest advantage of e-commerce
is the instant nationwide reach it enables
sellers of all sizes. However, it is the delivery of that opportunity that requires significant focus and investment from the industry. With Indias perennial infrastructure failings far from being resolved, most
e-tailers are focusing their investment on
setting up their own capital-intensive logistics businesses.
Flipkart, founded by two former Amazon executives in 2007, is aggressively growing its logistics arm E-Kart. Amazon, the
worlds biggest online retailer, is pumping
up the capacities at Amazon Logistics. Thats
in addition to existing partnerships with
third-party logistics firms including Gati,
Blue Dart Express and FedEx Corp. Having
its own network now means Flipkart can
handle delivery rescheduling requests better, manage product returns faster and help
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET
InFocus
customers exchange products, services that
are time-consuming when handled by a
third-party operator.
Amazon is using a similar strategy. In
addition to building its own warehouses, it
is trialing using neighborhood grocery stores
and petrol stations as delivery points. It
also struck agreements with the Indian
Postal Service to reach far-flung places in
the country.
eBay, by contrast, is working with external logistics firms to cut back on multiple
state taxes for products shipped by road
and the excessive documentation required
to move every parcel. It is also intensively
training its 45,000-strong supplier base,
which holds all the inventory eBay sells on
its platforms, to improve efficiency.
The anticipated boom in online retail is
encouraging logistics firms to better their
services, but it will take several years before
India gets an efficient network.
For many Indian e-tailers that lack the
deep pockets of Amazon and Flipkart, air
freight and couriers are not an option. Instead, they are altering their packaging and
product lines to ensure they can reach customers via road and rail. Pepperfry, one of
Indias largest online furniture and home
products retailer, is training suppliers to
make knock-down, foldable products, similar to Ikea furnishings. Flat-packaged goods
reduce shipping costs. The company also
provides carpenters to assemble the items
once delivered.
Industry consultants say companies like
Pepperfry that are able to adapt their business to the ailing infrastructure are better
placed to take advantage of the expected ecommerce boom. Indias roads and railways
are not going to get better any time soon,
and commercial airlines can only carry so
much cargo.
Building of dedicated rail freight corridors will promote efficient haulage of containerized cargo by rail. One key advantage
of the dedicated freight corridor is that
freight trains could be run on time tables
similar to passenger trains, and the frequency
can be theoretically increased to one train in
10 minutes. Also, setting up of various industrial corridors along the dedicated freight
route will metamorphose the warehousing
business, from small warehouses spread
across the country to large, global-size warehouses concentrated in a few hubs.
The proposed GST regime and e-commerce will alter the landscape in warehousDec 21, 2015 Jan 03, 2016 CAPITAL MARKET
InFocus
Stocks
The mother of all the flash sales continues to be Satyam Computer Services. The
rise and fall of the software solutions provider was the biggest accounting and corporate scam that the Indian stock market ever
witnessed. This is not taking into considering the manipulation of stock markets. In
2009, Chairman Ramalinga Raju disclosed the
fudging of cash and bank balances. This was
done to hide the manipulation of the top line
and the bottom-line to keep the markets in
good humor. On the day of the earth-shaking
disclosures, the stock collapsed like a pack
of cards. In subsequent trading sessions, as
more information came to light, it touched a
multi-year low of Rs 11.5.
The Satyam stock eventually managed
to recover some lost ground on the strength
of its business including the clientele, marketing muscle and employee base. The company was acquired by the Mahindra &
Mahindra group company Tech Mahindra at
Rs 58 per share in April 2009. Satyam was
merged with Tech Mahindra in 2013. Satyam
is one of the rare cases of the stock managing
to bounce back significantly post acquisition
by Tech Mahindra despite the massive manipulation of the books of accounts and related contingent liabilities and uncertainties.
The Satyam episode created an embarrassing situation for many. For instance, the
software sectors growth estimates went
haywire as Satyam was counted as one of
InFocus
tently earned high return on equity, ranging
between 46% and 124%, over the last decade. Mutual funds held 0.83% stake in
Nestle end September 2015.
Motherson Sumi Systems is another
stock that witnessed bear hammering in September and October 2015. This was owing to
the possibility of its business being get adversely affected over the emission issue at its
key European client Volkswagen, a Germanyheadquartered manufacturer of luxury cars.
In September 2015, Volkswagen plunged
into crisis triggered by one of the biggest scandals in the automobile industry world over
when it disclosed that it had fixed cheat device on diesel powered vehicles to show lower
toxic emission during regulatory tests. These
vehicles were sold across the world including
the US and Europe. The tremors of this sudden and tragic events at Volkswagen were felt
on the domestic turf as Motherson reported
a steep correction of 45% from its 52-week
high of Rs 396 in August 2015 to a 52-week
low of Rs 217 in October 2015. The company supplies auto components to multiple
brands of Volkswagen.
In a conference call in September 2015 to
assure and update the investors about the
developments and its impact on Motherson,
the management clarified the entire revenues
from the Volkswagen group was not at stake.
The Volkswagen group contributed around
40% to the revenues. The diesel models are
under cloud and not the petrol ones. Further,
Audi is the biggest customer of Motherson.
As per multiple estimates, the fiasco at
Volkswagen will have an impact of around
2% to 3% on the consolidated revenues.
The Motherson stock bounced back on
the trading floor and is now available at Rs
277, a recovery of 27.5% from its annual
low. The company is among the major success stories in the auto component sector and
stock market as well. It has been disclosing
its medium-term targets, i.e., five-year targets, and, importantly, sharing achievements
of targets within the set time-frame. The performance is quite good if the targets are compared with the actual numbers. Indeed, the
stock continues to be a prized asset and a
promising bet. During the last decade, consolidated turnover increased 34 times and net
profit eight times. The market value appreciated 16 times in this period.
The corporate strategy of mergers and
acquisitions has been effectively deployed
by the management to improve its clout in
the market. Motherson, a joint venture beDec 21, 2015 Jan 03, 2016 CAPITAL MARKET
* 11 December 2015
InFocus
speculation that remains. The business of
betting is not retail investors cup of tea
and should be avoided. Ideally, it is better
to opt for strong and quality stocks offering safety of capital rather than go for reckless speculation.
Can the falling knife be considered an
investment opportunity? There are no
straight answers. This strategy might work
if companies are not facing any corporate
governance issues and manipulation of books
of accounts. Nestle and Motherson managed
to recover as the problems were never about
mis-management and the quality of the books
of accounts.
Indeed, the most difficult part of such
instances is the fact that it is impossible to
lay rules based on these case studies. Hindsight wisdom is of no use in such cases.
Each case is unique. Only a broader framework can be built based on several instances
that the market has witnessed in the past.
The most important issue is the reasons for the sudden and sharp fall in the
stock price. There might not be simple and
straight answers. It could take days or
months for the story to be completely told.
Such as the debacle of Financial Technologies India (FTIL) owing to scam at subsidiary National Spot Exchange (NSEL) was
unfolding for many months. Fresh information was flowing almost daily. Somewhat
similar is the case with the Amtek group
companies, with new developments taking
place on a daily basis.
Additionally, check whether an enterprise is forthcoming about the reasons. Investors should assess whether the answers
provided by the management are convincing. Are enough data and information offered?
If investors fail to unearth the real reasons
for the steep and unexpected fall in price, it
is better to stay away from such stocks. It
could be just a precursor to future crisis.
The retail investors can look at the reaction of institutional investors such as the
mutual funds, foreign institutional investors and private equity investors. Institutional investors are street smart, with lot
of interesting bits of stories that are not in
public domain.
Institutional investors might even have
insider information. The privileged information might be driving their investment activities. FTIL was gradually moving south
without any apparent reason. Also, mutual
fund holding was on decline. Subsequently,
the scam at subsidiary NSEL came into light.
30
This means some investors smelled something fishy even prior to the scandal broke
out in the public domain. Mutual fund holding was 8.06% end December 2012 in FTIL.
It declined to 7.52% end June 2013. FTIL is
still to recover from the flash sale, while
erstwhile group company Multi Commodity Exchange of India (MCX) has managed
to recoup significant losses. FTIL exited
MCX in favour of Kotak Mahindra Bank in
September 2014.
But even institutional investors can be
caught off guard by street-smart management. Thus, the decline in institutional holding can be just a raw indication of the possible future carnage. In fact, the management
can manage to push the matter under the
carpet and even emerge unscratched.
KS Oils can be an appropriate example.
The firm had high profile and marquee investors including New Silk Route, Citigroup
Venture Capital and Baring Private Equity
Partners Asia, which lost significant amount
of money. The firm was plunged into crisis
due to mismanagement, misrepresentation
and misadventures. As with Kingfisher, the
story is over for KS Oils as well.
Also, investors should carefully evaluate the response of the management to the
adverse developments. The body language,
reaction and response can provide some inkling about the gravity of issues faced by an
enterprise. In rare instances, the statutory
auditors can offer valuable inputs for taking
informed decisions.
Though too late, the statutory auditors
of C Mahendra Exports have highlighted issues pertaining to accounting practices in
their audit report for FY 2015 and also declined to sign the audit report. Going one
step further, in October 2015, the auditors
issued a public notice informing the general
public that they have not signed the
auditors report. The gems and jewelry maker
plunged from a two-year high of Rs 129.5 in
December 2013 to the present level of Rs
1.29 on 14 December 2015.
Keep in mind the fact that the management can make every effort to rescue the
situation and emerge from the crisis. C
Mahendra had issued bonus shares in the
ratio of 1:1 in June 2015 to boost market
sentiments and give an impression that all is
well with the company.
Similarly, Deccan Chronicle Holdings
had gone for multiple buyback offers just
before the debacle. The buyback was undertaken to improve the morale of the market participants, showcase the balancesheet strength and administer a booster dose
to the stock. This attempt met with failure. Like Kingfisher, Deccan Chronicle has
been suspended from trading. This means
the entire capital of investors has evaporated in air. Again, it is story of greed of the
promoters and mismanagement and accounting misadventures.
In short, corporate actions such as bonus issues and buyback might be a trap for
individual investors. These can be desperate attempts to create a false sense of security and safety among the investors. No
point in expecting charity from companies
in their hour of crisis.
There are multiple scenarios. First comprises investors waiting on the fence for
correction to invest. Other is of investors
already holding the stock. In the first instance, investors should strictly stay clear
if the concerns pertain to poor corporate
governance practices and accounting issues.
In other cases, investors can avoid bullet
investments and take exposure in small installments. This will help to get a better deal
(lower average price). When the buying takes
place in small tranches, investors can react
better to fresh information that emerges.
Falling stocks can be extremely volatile
and quickly burn a significant portion of the
capital or even the entire capital. It is not
possible to feel the jitters unless one has
firsthand experience. The key lesson is to
stay away from such stocks if nerves are
not made of steel and there is no stomach to
digest the fluctuations.
S Khedekar
Dec 21, 2015 Jan 03, 2016 CAPITAL MARKET