Académique Documents
Professionnel Documents
Culture Documents
Quiz
Where do you think Buffett have invested a chunk of their portfolio?
…
..
.
Banking Industry
● Buffett says banks are like a toll gate business. In the future, people would
continue to deposit, borrow and banks would make margin and fees out of every
customer.
So, should we go for private or public?
● Asset Quality in PSU Banks are poor
There has been value migration in banking. Earlier, size used to matter in banking, then
it moved to Speed and Agility and now its Chess - whoever has strategic advantage
wins.
HDFC Bank - Because of a high base, the CAGR growth possibility would be low for
HDFC
Today’s idea is a bank which is in its infancy. It is DCB Bank. The new management led
by Murali Natrajan has turned around the working of the bank. Loan book re-aligned in
favour of secured assets.
● Granularity - how spread out is the loan book - 70% of the loan book is below 3
cr.
● Secured - 96% of the book is secured.
Capacity to suffer
● When the bank said they want to double the branch network, the share price got
halved. Despite that, they continued with their plan - unfazed by street protests.
● “I am assuring investors that if on the way, the journey is wrong, we will be
flexible to change”
October 2012’s Top Management is still majorly intact. In fact, new members have been
added but most of the previous ones are still present.
● DCB’s NPA divergence is 0% compared to 23% for Axis Bank
● Deposits, ROA, ROE, GNPA, NIM, NII, Advances have all improved significantly
from 2009 to 2018. There is no pledged share.
● In terms of retail deposits, DCB is the highest with 79% of total advances to retail
vs corporate.
● DCB Bank is most balanced geographical branch distribution wise.
● The bank had no more than 8% of loan book with the top 20 borrowers. This
reduces client concentration risk. Lowest amongst all banks.
● DCB has negligible 0.1% restructured loan book.
● NIM of DCB is one of the best.
● Cost of borrowing has improved from 8.49% to 6.22%.
● GNPA is 1.79%, in line with other banks. It has reduced significantly after Mr
Natrajan took lead.
● Before branch expansion, they were doing 14-17% ROE and they expect to
return back to those levels soon.
● Market share is 0.18% with a long runway ahead.
● Book value is not as key as ROA to value banks. ROA numbers have
significantly improved.
● If you do a reverse DCF, the book has grown at 20% annually.
● in 2001, HDFC had similar numbers to DCB today. and HFC delivered 30%+
CAGR in PAT. So hopefully, DCB can also deliver the same.
Most of you are well versed with this stock, but given the market correction and the
recent fall in NBFCs, we may take a contra bet on this stock. We need to find out why
NBFC stocks fell and then judge whether those factors are applicable to Mannapuram.
Earlier, this company was giving out majorly long term loans. They would charge 24%
interest on a 75% LTV and take back principal and interest after 12 years. In case of
non repayment, they would take 2 months to auction the gold.
When gold prices started falling, the margin of safety started falling. They started facing
losses after auction. So now the company started low duration loans. 3 months and 6
months loan. So they have better MoS now.
● In FY 14, the auction loss was 524 crores - i.e Interest + Principal due - Value
fetched.
This is not really a stock idea, but a sector idea. Lets look at it through the 2 listed
companies that we have in this space.
1. Asset Management Companies
2. HDFC and Reliance Nippon
Very impressive revenue and profit growth for both these companies. Also, the EBITDA
and PAT margins are significant for these companies. (Revenue for 800+ crores and
PAT of 500cr+ for example)
Growth
● In terms of growth for this industry, we can look at the average AUMs have
grown exponentially.
● How this growth has happened is majorly because of SIPs.
● Inflows come and go. In 2008, unfortunately there was huge outflows and this
industry will keep facing these outflows. But at the end of the day, we have seen
it flourish in the developed markets. So the path is not going to be straight but it
will be long.
● MF vs FD - for FD it has been 14% compared to 16% for MFs.
● Individual and HNI AUM is about half the total industry - this is a good sign.
Changes in Biz Models
● Direct plans allows in 2007 - Growth in direct has probably been coming from
HNIs rather than institutions which is a good thing.
● RIA as a new channel in 2013
● Aggregation of distribution - earlier if we had agents who had 50-60 Lakh AUMs
advising clients who had 20-40K of capital, it is now being aggregated onto larger
brands and also online platforms (FundsIndia, etc).
● This will lead to reduction of intermediaries for the industry.
ETFs
There has been a small shift into passive management. From 2% in 2012 to 3.5% now,
ETFs have seen traction but is still insignificant. However, we need to keep an eye on
this for the next few years.
On average 18% of HDFC revenues and 20% of Reliance revenues have gone into
funding payouts that cannot be debited to funds. New SEBI move on brokerage
restrictions may afford AMCs relief here and improve margins even as fees may
decline.
Impact of TER and Product Mix - Both companies are at around 0.6% of AUM as
revenues.
● Both AMCs together have 5.5 Lakh Crores AUM, grown at 17% CAGR
● Earning 3000crores as fees and at 40% PAT margin, they are earning 1400
crores as PAT.
● Next few years, if we take a conservative growth of 10% and fee rate comes
down from 0.6% to 0.45%, we can see that the current MCAP is at a 35%
discount to what the business can probably be worth.
Investment Case
● Even in a pessimistic scenario, we have valuation comfort
● Margin expansion than revenue expansion as regulator may not be happy with
the latter
● Channel consolidation is going to help
● Linked to capital markets growth - a beta play on markets
● Likely high dividend play over time
Risks
● Abuse of regulatory forbearance
● Growth to be chunky than linear
● Capital abuse in case companies bear losess than pass to investors in case of
default
Speaker #5 - GR Balaji
City Union Bank - survived for 114 years. N Kamakodi joined in 2013, focused on
SME/MSME.
● Advances - Rs. 28000 crores
● Gross NPA - 3.02%
● Net NPA - 1.7%
● Provision coverage ratio - 65%
● 10 Years advance growth - 20%
● and a fine capital adequacy.
● Post GST and E-Way Bill, lot of revenues are coming into the books of
SMEs/MSMEs especially with shift from unorganised to organised.
● Its a 2/3rd Tamil Nadu bank and balance in other southern states. All southern
states are very fertile and prosperous and thus its a good ground for the bank.
10 years
● NII growth @ 20%
● Other Income @ 20%
● Operating Expenses also grew @ 20%.
Its a steady growth play.
● They clearly state that CASA is not their terrain. They are more of a relationship
based banking. However, even that is improving.
● Productivity numbers are also good - 8-9% productivity growth which is decent.
● One metric where they stand out is Cost to Income Ratio - almost 40%. The
management has guided that this is too strong.
● Even though we see slightly elevated NPA, but at 1.7% Net NPAs is smaller
compared to PSUs.
Broad expectation is a 15% growth in stock value.
● Large PSUs and Private Banks are slated to grow well in the future
Growth Drivers
Key Risk
1. Slowdown in economy
2. Geographical concentration
3. Cyber attacks
● Price: 56
● 52 Week h/l : 100/49
● PE: 7
● Current market cap: 1000cr
● Debt: 330cr
● FY 18 Revenue : 2127Crs
● Net Profit: 140crs
● EBITDA: 254Crs
● Highest EBITDA amongst peers of Rs. 8000/tonne
● No loss in past 15 years except in 2013
● CRISIL recently upgraded
● Exports to several countries
Whilst many companies from the sector are stressed, conservative companies like
Sunflag are in a sweet spot.
Investment Summary
Automobile may come down to 50-60% of revenue and they will have higher margins in
other businesses
● They have a JV with Daido Steel. Daido is a 10% equity holder in Sunflag. It is
opening new opportunities in the Japanese market.
● New JV with Stumpp Schuele and Somappa Springs called Ramesh Sunwire. In
the automobile sector but more about import substitutes.
● Last 5 years, nothing has happened. The revenue growth is flat. The ROEs have
depressed.
● But this is due to cycles. Last 40 years, it has created significant wealth.
● With capital goods companies, you have to buy at the right time.
Products:
1. Engines (BS6 complaint engines, therefore they have an advantage)
2. Generators
3. Domestic
4. Exports
Risks
1. Delay in domestic capex recovery
2. Global slowdown could affect exports
1. Significant exports to Middle East could get affected by lower oil prices
3. Deferment in BS VI implementation for HV
1. Most auto companies are not in position to meet the deadline
Speaker #8 Jatin Khemani
The company I’m going to talk about (name revealed at the end):
● Revenue moved from 120crores to 1300crores in 10 years - 25% CAGR
● Margins - Average EBIT margins are 13%.
● ROCE - Average 25%
Starch/Derivatives Industry
● Industry size - Rs. 7000 crore per annum
● Industry growing at 7-8%
● Corn is widely available in India
Key Triggers
● For oil segment, Import duty increase has led to increase of EBIT margins from
0.7% in FY16 to 7.4% in FY18 at 30% capacity utilisation.
● At 0% incremental capital, revenue potential is Rs. 6000 crore.
● We invested because of maize processing division, and not Oil. But the Oil biz
also has potential.
● 0 long term debt, incremental ROCE is 25%.
Mr Manish Gupta is the sole driver of the company - family owns 64% stake, president
of the industry body - encouraging feedback from peers.
● CMP: 110
● MCap: 480Cr
● EV: 1010Cr
● Equity: 8Cr
● It’s not a compounder but a cyclical stock. We’ve had 2 up-cycles and 2
down-cycles in the past 10 years.
● If you look at the 3rd cycle from march 14-15, the accelerated depreciation was
reinstated with 80% benefit and wind energy installations were high.
● In 2017, there was an abrupt change in the wind policy. Earlier it was a feed in
tariff method and later we moved to the auction regime and so the tariffs
collapsed. Tariffs collapsed from Rs. 5 to Rs. 2.5 per unit.
● Earlier we were doing 5400 MW capacity addition and now it is down to 700MW
● Some positive effects to kick in from FY 19.
● Once the regime change happened to auction, the wind energy tariffs fell - its
now in fact cheaper than solar.
● India’s energy target 2022 is 60GW from wind.
Best Case
● Gross Yield was 1.95% in the June 2018 quarter. Annualised is around 22% This
was 3% in FY16 - peak year. Probably was one of their worst months.
● If we take 27% gross yield, it coems to Revenue of 430 cr and 300crs EBITDA
● Giving past average 8x EBITDA - EV @ 2400 Crores vs Current EV of 1010
Crores
● 133% Upside
Worst Case
● If we liquidate, cranes are like ships - its easy to dismantle. At scrap value, we
are left with Rs. 320 crores which is Rs. 73/share. 33% downside
Cyclicals are bought when things are bad, when visibility isn’t great and when visibility is
great, you get out.
Rajan Effect
The company is CRISIL. I like this company because all they have is computers. Once
your paper is rated, its like an AC. Every year you have to pay AMC.
Apparel Retail Chain. For Middle Class, Debt Free, In expansion mode, Learning from
mistake and focus on Tier 2 and 3 cities.
● For 8 years from 2007-2016, nothing happened in the stock because of legacy
issues.
● Originally this company, started as Vishal Retail Limited - did a successful IPO,
borrowed heavily, went bust, forced to sell original venture - it is crawling up
again now.
● Until 2011, when they went bust, they were a multi product outlet. 2012 onwards
after selling their legacy brand Vishal, they got into retail of apparels, added
stores slowly, focused on tier 2 and 3 cities.
● Now they growing out of cash flows, want to minimise high inventories. Using
technology to identify what products are moving, etc. Reducing inventory holding
period from 180 days to 100 days.
● Vishal store size was 20000 sqft, now V2 is just fashion so its just 12000 sq ft.
Led to increase in revenue/sq ft. Working capital days is now at 39 days.
● It is now debt free. They ensured cash break even in 1 month and complete
payback in 42 months.
● Next focus on increasing private labels - currently it is 12.25% of sales, want to
double it by 2010.
● Number of stores increased from 49 to 71 in the past few months.
● Capex
Risks
1. Unique procès for each product, the time to market is quite long
2. Concentrated customer profile, which can lead to a sharp dip in revenues if they
were to lose one
3. Raw materials are crude derivatives and any fluctuations is a pass through to
customers. It may not happen in the future
Investment Banking
1. Robust and growing primary market over long period
2. Increasing M&A and PE activity in India
Broking and Wealth Management - together these businesses have low fixed costs, so
operating leverage will kick in when growth happens and deleverage when there is poor
growth
Other lending Biz - Corporate Credit & Structured Finance, Capital Market Lending,
SME
● Total Loan Book increased from 3000 crore in 2014 to 14300 crore in 2018.
● Their lending practices are more prudent compared to others and competition is
envisaged to decrease.
In terms of ARC, this is a good opportunity, but it is being valued at a very bearish
mindset.
● Basically, ARC business is buying bank’s assets, revive it and if they do it
successfully, they will get rewarded.
● Nearly 12500 crores AUM acquired @ 50-60% discount. Large portion of this
book is 3-4 years old and in the next 3-4 years we will see a good portion come
out of it.
● For a normal person, JM is a broking company but looking at their book, we see
they are more of a lending company.
● In terms of their lending biz, they have grown well.
Total PAT From 121 crore in 2012 to 631 crore in 2018. Asset liability mismatch is not
an issue - they say their balance sheet alone can repay every CP.
Summary
1. Multiple businesses
2. Conservative management, strong relationships
3. Horizon of 4-5 years with the business structure
4. High liquidity, low leverage on balance sheet
5. ARC can provide optionality
6. Valuations comfortable
Agriculture is one of the most important sectors. Just like rice, a small revolution is
happening in Sugar.
● EDM, Balrampur, Dhampur etc all are adding capacities in distilleries. There is a
clear tailwind for ethanol.
● There is more demand thanks to the fuel blending requirement in addition to the
20-25% rise in ethanol sale prices.
● Ethanol blending volumes are rising.
● If the molasses price is Rs. 3000/3500 per tonne for C/B and we estimate
83%/137% (respectively) ROE for distilleries.
Take Balrampur Chini, the sugar segment has seen high sales but EBIT is very poor.
Distillery business has been marginally growing.
● The realisations for Sugar biz has been around Rs. 30, but distillery biz has been
slowly growing.
● The realisation for distillery is growing, and so are volumes - expected to almost
double in 4-5 years time from 8.1 crore litre in 2018 to 17 crore litre in 2022.
Even with Dhampur Sugar, sugar has been facing issues due to profitability. But the
company has plans for capacity expansion in distillery of 100KLPD thus expanding total
capacity to 400 KLPD.
● Their ratio numbers are comparable to Balrampur and Dhampur. So things look
ok there.
● Distillery is where they are making EBIT. Also, edible oil is having a boost due to
import duties.
● Distillery volumes are rising along with 20-25% better realisations.
● The profit could jump for this company from 20 crore to 60 to 100 crore just
because of ethanol.
● If you want to play safe, go to Balrampur Chini.
Risks:
1. Government
2. Execution risk / delays
3. Environmental concerns
Services include:
1. Design
2. Product Engineering
3. Big Data Analytics
4. IoT
5. Content Development
6. Systems Integration
Industries served
1. Automatic - 60% of revenues
2. Broadcast and Media - 30% of revenues
3. Communication, Healthcare, etc
Last 10 years, growth after 2014 has been quite good. TTM is 1500 crores. Last few
years, they have been maintaining 20-25% margins. Net Profit is around 286 crores vis
a vis 240 crores last year.
More than 90% of revenue is from outside India and JLR share is 24%, though it is
expected to be lesser in % terms in the future.
Triggers:
1. Major deal with Panosonic
2. Smart home tech
3. IP based revenues to double from 5% to 10%
4. Positive growth in automotive segment.
P/E of 21, Debt free company with high ROE. Stable stock with consistent
compounding.
● Divis Labs’ focus has been always on niche segments, custom synthesis and
generics.
● Carotenoids, Peptides, etc are product differentiators for them.
● Over the years, they have built very strong R&D capabilities for them. Their
ability to identify niche products.
Investment Case
1. Strong R&D capabilities and cost advantage
2. Niche product portfolio and leadership - 70% market share for 2 crucial products
3. Sound biz model, best in class margins
4. Kakinada capex
5. Current utilisation of 85%
6. Debt free, cash rich company (FCF of 500 crores)
7. Consistant dividend payer - 30% payout ratio
8. Management team
9. Promoter holding at 52%
10. MFs have added the stock over the last 5 months
● Improvement in sales, ROE, asset turns expected over the next few years.
● CRAMS business tend to be bulky - in a quarter with some approval, there will be
higher sales than the average - this is one thing to be kept in mind.
● Currently the stock is trading at 38.8 times.
Risks:
1. Regulatory - they have been typically been able to solve them within 1 year
2. US dependency is high - however, Divis’ supply is critical for the US market too
3. Currency fluctuation
They tied up with IBM for re-selling and systems integration opportunities.
● The company has broken even
● Their revenue growth has picked up
● The cloud subscription model is causing operating leverage to kick In
● In FY18, they did a QIP, so they now have ample liquidity.
● Less than 20 days back, they got a new CEO who is an ex-Computer Associate
management member (is a foreigner) - so right now its a board driven company.
● This company is also listed in NASDAQ. This also helps in terms of compliance.
● Product capex is done - Margins have been jumping 200-300 bps which is typical
of SAAS companies.
Tailwinds
1. Capex done
2. Margins growing with sales
3. Currency depreciation
4. Acquisition of “reference-able” customers
5. IBM Watson Deal gives a $35 MN oprionailty with 60% incremental margins
Headwinds:
1. Consolidation of insurers
2. Potential teething issues with software
3. Loss of 1-2 anchor/reference-able clients
Valuations:
1. At 60-70% to peers
2. Earnings cycle going up rapidly
3. At some point, this sector will catch the fancy of investors and re-rate especially if
a new IPO comes along
Rule of 40 in SAAS
● Gross Profit = Growth + EBITDA - the higher the number the better it is. Ideally
40.
● Majesco has been growing cloud biz by 40-60% with a 15% + margin and hence
scores well.
Scuttle Butt
1. Friends in US Insurance space have spoken good about the product
2. Majesco’s promoters have been SH friendly
3. Majesco’s products score well on the administration size
Triggers
1. Largely self funded Sales & Profit growth
2. Capital allocation/return ratios
3. Industry top 3
4. Competent management
5. SH Friendly mgmt
Sustain Thrust
1. Large size of opportunity
2. Long product cycle
3. Increasing margins, Cash flow and return ratios
4. Land & expand opportunity
5. Recurring revenues/captive consumers
What ZL does not do: Not a software edutech co like Educomp or Everronn.
● Additional revenues straight away travel to EBITDA. Return ratios from low single
digit, now in mid teens.
● Potential to do 3x EBITDA in 5 years and 10x ebitda in 10 years
Risks:
1. Pledging by promoter - Zee group is always a risk
2. High Capex is an entry barrier
3. Govt fixing school fees
4. MT Educare and future acquisitions integration
Today’s stock is about the 30% portfolio of mine where there is no performance for 3-4
years but there’s some story around it.
Apollo Hospitals
1. 10000 bed capacity hospital
2. 3000+ pharmacy chain
3. Clinics - diagnostics, dental clinics, etc
Perception is that since it is a hospital, capex is heavy. Low ROCE, there is a capitalism
- socialism debate, etc.
Why interested?
1. Value can emerge when nothing seems to go right, negativity gets priced in and
positivity gets priced in efforts but not share price
○ Policy Changes
○ Political Intervention
○ Sentiment Impact
○ Profit eating emerging business
○ Bloated liabilities
○ Loss making new hospitals
○ State related issues
○ Rising interest rates
● The more than 8 year old stores work on a 25% return on capital whereas
blended it is around 18%.
● Therefore, new stores have ample space to improve margins.
● For hospitals, fixed asset going 2.5x up but yet to generate sales optimally.
● Pharmacy store count has almost doubled in the last 3 years. Stores which are 4
years old, they work on lesser margins and these stores have scope to expand to
7%+ margins.
● If we see demographic age distribution of India, people in the age band of 30
years+ need more and more healthcare, so that’s a good market opportunity.
Valuation - its a 20-25% CAGR story, mainly driven by the lucrative pharmacy business.
The Company
● Non Discretionary daily use product
● Strong brand
● Legacy company
● Stable Demand
● Asset Light
● Debt Free
● Dominant Position
● Market Leader
Consistently this stock moves up, consolidates, corrects a bit, then moves, etc etc etc
● 2009 - 1758 crore sales
● 2018 - 4300 crores
● Sales is up - 2.45x
● EPS - 2.32x
● MCAP - 4.49x
(The notes for this speaker are courtesy of the twitter handle: @jaganmsna)
● The company in discussion has a 8000 crore mcap and 3% dividend yield
● The financialization space in India is going to look bright as people reduce
additional exposure to RE
● Money going into financial assets - 40% currently, should cross 50% in the next
10 years
● Share of equity in savings will continue to increase
● Likewise, digital infra to also expand
● Convergence is the key - HDFC Bank is trying, but their digital infra isn’t
consolidated
● ICICI Securities is thus a high quality business with a long runway at a good price
● PE: 14 for high ROE
● EV 7300 Crore