Monday, December 31, 2012

Themes for 2013

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Here’s wishing everyone a very happy 2013 ahead. To enhance the happiness further, let me share some useful information regarding some stocks which you might want to add to your New Year shopping list.  This year I believe the focus will be on companies benefitting from government’s reforms drive, consumption on an improving economy and focused on niche areas. With the economy apparently on the verge of a rebound, as market pundits and economists would have us believe and granting them some credit, the companies which are likely to prosper are the ones on the above mentioned themes.


Aditya Birla Nuvo (Bet on Reforms – Financial Services/Retail and Consumption-Retail)

Aditya Birla Nuvo Ltd  is $4.5 bn diversified business conglomerate having presence in Financial services (Life insurance, Asset management, NBFC, Private Equity, Broking, Wealth management and Insurance broking), Telecom, IT & ITES, Fashion & Life style and Manufacturing.

If there is one company which is set to fully benefit from government’s reforms initiatives, it is this. Each of its key businesses is a prime reforms beneficiary – Financial Services doubly from the likelihood of granting of banking license as well as Insurance reforms, Retail from opening of FDI in the sector and Telecom thru clarity in licensing policy. Add to this an established management led by Kumar Birla himself, pedigreed brands in Apparels (through its division Madura Fashion & Lifestyle manufactures and sells apparel, footwear and accessories under various premium brands such as Louis Philippe, Van Heusen and Allen Solly besides a mid-range brand such as Peter England and now with Pantaloons under its fold), a promising mobile operator Idea, and the 5th largest Insurance business in India, it surely has all the ingredients to be a blockbuster in the coming times.

This stock has not gone anywhere over the past 5 years when it was quoting at Rs 2000, though @1100, it is still quoting at its 3-year high. So effectively, @1100, it is quoting 45 percent below the 5 year high and in the same period the company’s profit has gone up by 300%. The company is a store house of deep value but needs management push to unlock that. Agreed that valuation-wise, it is not exactly cheap @39 times ttm earnings, but from the current price of about 1100, it can easily go up by another 30% based on how it goes about value unlocking in each of its businesses which have gained significant size and are in a position to stand on their own. Post the acquisition of Pantaloon and with the Insurance business also doing well, there should be a significant upside in the earnings leading to much better valuations. A bonus will be an uptick in its manufacturing businesses such as VFY, carbon black, fertilizers and services business such as Telecom and IT/BPO.


Max India (Bet on Reforms – Financial Services/Insurance and Healthcare)


Another company which has bet on the right sectors in the Indian context is Max India. Its key operations are in Hospitals (where it operates a chain of hospitals under its subsidiary Max Healthcare) and Insurance. Max India, incorporated in 1988, belongs to Analjit Singh group and operates in the health care, life insurance, and clinical research sectors in India. It also engages in leasing medical and other equipments. It operates in both domestic as well as global market.
Max India operates in 5 businesses:
  1. Max Life Insurance, a JV with Mitsui Sumitomo Insurance where it holds 70% stake
  2. Max Bupa Health Insurance, a JV with Bupa of UK, a leading international healthcare provider with over 60 years of healthcare knowledge
  3. Hospitals under Max Healthcare
  4. Max Neeman International, a Clinical Research services provider offering, services across the value chain of new drug development to a growing list of Pharmaceutical, Biotech and Clinical Research clients, in India and abroad.
  5. Max Speciality Films, specializing in the manufacture of a wide range of sophisticated Packaging unmetallised BOPP films and metallised BOPP films including High Barrier films, Thermal Lamination films and Leather finishing foils. It caters to the needs of diverse packaging industries including food packaging, overwrapping, consumer products, labels and textile industries
That Max has been able to attract the attention of global investors (PE as well as operational entities) indicates the management credibility and the attractiveness of the business segment. Not only that, the management itself has shown great confidence in their own business by subscribing to nearly 80 lakh shares at Rs. 217/share last July/August, increasing their stake by another 3%.

In June ’11, GS Capital Partners, the PE arm of Goldman Sachs picked up over 9% thru conversion of debentures @217/share, at a premium of 30% to the then market price of about 166. What surprised the market was that the fund opted for conversion at a premium even after the company reported a loss of 42 cr. for FY 11.

In Oct ’11, Max India entered into an agreement to sell 26% stake in its subsidiary Max Healthcare to Life Healthcare, the second largest player in South Africa for a consideration of Rs516 cr. Post the deal, the stake of Max India would reduce to 70% in Max Healthcare. The deal is the largest FDI deal in a healthcare business. Max Healthcare will have exclusivity over the business that Life Healthcare does in India for the first three years, post which Max Healthcare will have the exclusivity in northern India.

Recently, it announced that Mitsui Sumitomo Insurance (MSI) proposes to acquire 26% stake in Max New York Life Insurance (MNYL). MSI will acquire 16.6% from New York Life and 9.4% from Max India. NY Life will exit the business and Max India will buy residual 9.4% stake from NY Life at Rs1.9 billion (close to book value). Thus, Max India’s stake in the business remains unchanged.

With the opening up on Insurance sector, more value unlocking looks likely in both Life as well as Health Insurance JVs leading to enhanced returns even from current levels supported by ensuing business growth. @242, a PE of just 12.5 on ttm warnings, Max surely has some way to go yet. Max is a value (BOPP films, CRO) cum growth (Insurance and Healthcare) play giving a very high risk/reward ratio. Looking at the overall scenario, it may not be very surprising if Max looks to exit this business since it doesn’t fit in with the rest of their portfolio. The only thing to be kept in mind is that this won’t happen overnight but over the next few years. Other than Apollo Hospitals, which is not really cheap at current valuations, but is also a pedigreed stock, there is no listed peer for Max and this is an inherent advantage.


CARE (Niche focus, strong fundamentals)

This got a blockbuster response to its IPO getting oversubscribed 41 times overall with retail part being 6 times. And true to the response, it listed at a healthy 25% premium and is currently quoting above 900.

Some of the leading anchor investors of CARE include Goldman Sachs India Fund, DB International Asia, Tata AIA Life Insurance, Birla Sun Life Insurance, Sundaram Mutual Fund. All these are either conservative investors (Sundaram) or long term players (insurance companies). The fact that they have chosen to invest in CARE speaks a lot about its credibility and long-term investment worthiness.

Currently in the ratings space, CARE has 2 other worthy competitors – ICRA and CRISIL. CARE is the second largest rating company in India by rating turnover with strong domestic parents in the form of IDBI & SBI. It offers a wide range of rating and grading services across a diverse range of instruments and industries. CARE has strong brand recognition and credibility in the ratings market gained through years of experience. Fees from rating of debt instruments, bank loans and facilities and deposit obligations form bulk of revenues. In recent years, CARE has expanded its rating product portfolio to include SME/MSE rating, Edu-grade (educational institution rating), Equi-grade (equity research company rating), Real Estate (project rating) and market linked debenture valuation.


There are some fundamentally compelling reasons why this should do well not only in the coming year but many more to come:

  1. It is a proxy play on economic growth likely to materially benefit from rising secular demand for rating services from corporate and banks. Expansion of rating product portfolio would also support a strong revenue growth in the medium term.
  2. It is the most operationally efficient rating company earning significantly higher operating margin than listed peers (65-70% v/s 30-33% for peers during FY12) due to 85% of its revenue coming from ratings business.
  3. The company’s unconsolidated total income grew at a CAGR of 41% during FY08-12 while operating income rose by 41.8% and profit 41.3%, healthy figures by any yardstick. Though competitive dynamics may sober margin going ahead, healthy earnings growth could still continue driven by strong headline growth.
  4. @915, it quotes at a PE of 27 based on annualized H1 FY13 earnings. This is significantly cheaper than valuation of CRISIL (@1045 - 37x annualized 9M CY12 earnings) and ICRA (@1450 - 33x annualized H1 FY13 earnings).

The other attractive point about CARE is its lack of a strong foreign investor at this point of time, in spite of having a good institutional shareholding from Indian banks and financial institutions. Moody’s has bought into ICRA and S&P has a big holding in CRISIL (53%). It may only be a matter of time when it catches the eye of an international rating-related firms (Fitch for one, Bloomberg which is not strictly into rating but in related areas) for investment, given its strong fundamentals. As and when such a development happens, it will surely get a boost from existing levels.


Pipavav Defense & Offshore Company (Niche area)

This company, promoted by Nikhil Gandhi, has seen its fair share of ups and downs over the last year or so. I have already written about it earlier (Midcap Carnage – 26/07/12 as well as Diwali Dhamaka – 12/11/12) and nothing has changed to make me rethink my views on this. If anything, there have been more positive developments which were only possibilities earlier (Mazgaon Doc JV which was challenged and has since been formed in early Dec. ‘12, interest shown by the French defense major DCNS for a stake @110/share, and signing of an agreement with SAAB, an International Strategic Investor @82/share which is touted as a first strategic investment made by a global defence major into an Indian company focusing on defence production).


At 91, it is pretty close or even below the price most global investors have paid for investing in it. While promoters hold about 45% stake, among the major public shareholders, LIC and IL&FS together hold about 16% in the company. So effectively, 16% is in strong hands, Both LIC & IL&FS are known to be long term investors and more so in the infrastructure space. So at the current price, there is not much to lose but a lot to gain i.e. risk/return ratio is pretty attractive.


Dark horse

Though this may look expensive currently, or may have run up significantly, it still holds promise based on valuation and prospects.


Wockhardt


This has run up from about 300 to 1575 currently beyond the wildest imagination of everybody concerned. However, if u look at its 6-month performance, they had an EPS of nearly 76 which makes it nearly 150 for the whole year, which is not unlikely given its operating fundamentals esp. the US business. So at 1575, it is trading at just 10-11 PE for the whole year. For a company of this size and scale if you compare it with its peer groups like Lupin , Glenmark, Dr. Reddys, Ranbaxy, they are trading between 18-20 times. So there is no reason why Wockhardt should trade at a discount considering that turnaround has happened, and that  this is one of the few cases of a management who has successfully delivered and turned around the company with  EBITDA margin which is around top three in the industry.

The only thing which may go against it is the huge run-up that has already happened. But with Obama back in power, and with healthcare as his pet theme, the above scenario doesn’t look unlikely in the next year or so.


And just to check how I did last year, let’s recap my last year’s bets. 


1. Maruti Suzuki was quoting @900 at this time last year, mainly due to the labor unrest at its Manesar plant, which impacted its production and hence profits. I thought it was a screaming buy since the unrest would not have continued for  long and have been proved right with returns of 66% @CMP of 1490 (my conservative estimate was around 50%). Going forward, things don’t appear so bright and it is unlikely to repeat its last year’s performance in a hurry. Also, with fuel prices on an upward trajectory (both petrol and diesel as per govt’s latest pronouncements), things don’t appear so rosy for the country’s largest carmaker. It may be time to log out and take a breather on this one.

2.  Wockhardt – Refer above for my thoughts on this. On the returns front, it was quoting around 250 at this time last year and CMP is 1575. You can do your own calculations. And I will be honest enough to admit that this went beyond my wildest expectation. Mr. Khorakiwala really outdid himself on this one. Just goes on to show that backing a sound promoter does pay even if the business is not doing particularly well at a given time. Eventually it will turn around and in style (look at Godrej Soaps as an example; referred as a soap company in its formative years and indeed it was one, under Adi Godrej, it has transformed itself into a focused FMCG player and more than in just soaps)

3.  Shriram Transport Finance – This is again a great company to stay invested in over the long term. While it has run up from 450-750 in a year’s time, there are still some triggers which may play out over the longer term:

a. The granting of banking license for which STFC is considered a favorite due to RBI’s inclination towards entities which have a strong financial backing.

b. The expected move by RBI to lower interest rates will benefit STFC as it has a presence is in the niche segment of pre-owned commercial vehicle financing .

c. Their Automall initiative (a kind of 1-stop shop for vehicles) has received a huge response and given them access to a much wider customer base which theu would otherwise have struggled to get. Going forward, they plan to launch a host of vehicle-related services in Automalls like insurance, tyre credit, vehicle refurbishment, bill discounting, load placement, which will provide them a good source of distribution income which can be a significant factor, given the volumes. 

     Speculation is that Mr. Ajay Piramal, flush with funds from sale of his key business to Abott last year, is looking at buying out TPG’s stake here and STFC promoters are not averse to it. If this happens, then it should be a great thing – 2 great Indian business families getting together – what  more can u ask for?


4.  Hero Motocorp – This has played out well as expected and is now back to levels where it is likely to remain for some time to come given the current macro environment esp. for 2-wheelers. Add to that the growing competition from the likes of Honda, their erstwhile partner and now a strong rival, and Mr. Munjal has his hands full. Of course a positive change in the environment could well be a breather but Hero is fighting too many battles currently. There is no fundamental issue here, but returns will only accrue over the long term from current levels, and there is every likelihood of the price coming down from current levels when it could merit a re-look.


And may you all have a very happy 2013 after selling off the above at prices at much higher prices than current (though all these can surely prove to be wealth generators for years to come).




Friday, December 21, 2012

Branded hospitality

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Graviss Hospitality is a part of the Graviss group focused on Hospitality and Food & Beverages (F&B) industry verticals. Previously known as GL Hotels, it was incorporated in 1959 and is headed by Ravi Ghai. It has nearly five decades of experience in the hotel business with its pioneering initiative in South Mumbai - the Nataraj Hotel. The 53 year old company started out with the iconic Natraj hotel on Marine Drive, Mumbai, which was demolished and rebuilt to the present day Intercontinental Marine Drive. The hotel was initially (from 2003) managed by the InterContinental Hotels Group, but in 2005 Graviss Hospitality took over the management and is now the franchisee for the hotel brand, housing 58 rooms spread over a total area measuring ~ 70,000 sq. feet. The company has a long term lease for this land from Collector of Greater Mumbai.
The specialties of the 58-room hotel are a series of luxury lifestyle outlets catering to the F&B industry with global specialties including cuisines from Asia, Russia and Italy:
  • Dome – Located on the hotels 11th floor, it is an open air international cuisine rooftop restaurant.
  • Corleone – Corleone is a striking restaurant overlooking the Arabian Sea. The finest cheeses and meats are flown in regularly from Italy and Sicily which are combined with herbs from the hotels own garden to create pastas, risottos, gourmet entrées, hand-tossed pizzas and calzones.
  • Kebab Korner - North Indian dishes made with traditional cooking methods, subtle spices and a dash of contemporary flair. Meats and kebabs are complemented by a delectable
  • Czar the Vodka lounge bar
  • Onyx the Meeting place, a banquet venue for formal and informal meetings
Temasek holds about 26% and Intercontinental Hotels 5% (owners of InterContinental, Crowne Plaza and Holiday Inn brands) in the listed company while the promoter group holds about 60%, thus the floating stock is pretty low. The same group also runs another Foods vertical comprising of well known brands such as Kwality (which not only sells ice-creams but also frozen foods and desserts such as Rasmalai & Paneer) and Baskin Robbins (exclusive ice-cream parlors selling BR-branded ice creams). 

The optimism about this stock (the listed entity) stems from 3 possibilities, none of which have been spoken about either by the promoters or major stakeholders:
  1. Any of the above 2 big investors decide to cash out – in this case, there might be a good upside as the sale, if and when it happens, will surely happen at a premium.
  2. Expansion of any of their existing outlets
  3. Merger with the unlisted F&B company – looking at the success of Dominos and Starbucks and the increasing investor interest in branded retail food outlets, this might be the biggest trigger, if it happens.
This being a small cap stock, the usual risks regarding corporate governance and lack of liquidity (considering that 90% of the shareholding is in the hands of promoters and major investors) remain. Also, its valuations currently are not cheap @ttm P/E of 36. However considering the fancy for the F&B industry, coupled with increasing investor interest in companies in this sector, both listed as well as unlisted, this should be a good bet in times ahead.

Wednesday, December 5, 2012

Consolidation game

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Dhanlaxmi Bank (DB) which was in the news for all the wrong reasons over the last year or so is now in the limelight over the last few days, probably for the right reasons. I had written about this in April ’12 too when it had collapsed below 60 and again rose nearly 25% in no time on the hope that it will be acquired by a bigger bank and RBI may favor the move considering that it found issues with the bank’s books during its inspection. However that did not happen at that time. Now the bank is quoting @67 quite a way below its book value of about 80, a very unreasonable discount compared to its peers who are quoting upwards of 2 times the BV.  They plan to raise Rs 150-200 crore equity capital thru a QIP. It remains to be seen how the response to this is and the price at which it is done.
The bank underwent a management change in February, 2012 after Amitabh Chaturvedi, the former MD & CEO, quit following disagreement with the board on several issues ranging from profitability, high salary to union related problems. P. G. Jayakumar, the then serving ED, was made the new MD of the bank. The current buzz should certainly take the share to new high in the coming period. Even though it has run up nearly 18% already from the lows of 57 it made some time back in mid-Nov after reporting a fourth consecutive quarterly loss, considering its valuation, it should still give returns in the days ahead. However it must be remembered that the bank is not out of the woods yet as far as its financials go. And this may weigh on the minds of the likely predators interested in it.

Another bank which is buzzing on the street is Karnataka Bank (KB). In the last month or 2, it has run up nearly 80% from below 100 to around 172 no in just about 2 months. And even if there is no merit in the speculation, the bank's strong earnings performance in the September quarter may be comforting to investors. The bank could come into play from 2 quarters:
  1. from players keen to enter the banking space, notwithstanding the issue of banking licenses by RBI which could take more than 6 months and involve a string of compliance requirements, L&T Finance being a contender.
  2. from players mandated by RBI to reduce the promoter stake in the current structure, IndusInd Bank being a case in point.
All these smaller south-based players are likely to be acquired at some point, if not now, then some point in the future once the economic situation improves. So it may make a good case to start nibbling at them now rather than wait for the actual news to come in when they will not be available at all. From the valuation perspective, DB could be a good candidate for these reasons, its financials notwithstanding. After all, they won’t remain so forever, more so with a conservative management at the helm now. Even KB is quoting at a P/BV of just 1.25 with good results to boot, its recent spurt notwithstanding Some amount of risk always pays in the long run.

Monday, November 19, 2012

Clean profits

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Jyothy Labs (JL) is widely known for its Ujala brand of fabric whitener used along with washing powders usually in washing machines. The company was started in 1983 as a single-brand company, with Ujala Fabric Whitener as its flagship product. However, over time, JL has grown by diversifying itself, both in terms of its product portfolio and market size across India. The company now is present in 5  different segments with its brands - fabric care (Ujala), household insecticide (Maxo), dish/surface cleaning (Exo), personal care (Jeeva) and air care segment (Maya). The company has 28 manufacturing facilities in 16 locations across India, of which some are tax-efficient units.

It started off with a South India focus but last year has changed that. In August ’11, it acquired an 84% stake in Henkel India, a subsidiary of German MNC Henkel AG. Till its acquisition by Jyothy, Henkel was a JV between the Dusseldorf-based Henkel AG and the Chennai-based A C Muthaiah group (thru its flagship company Tamil Nadu Petroproducts, TPL) with the German firm holding 51%. The JV was said to be the coming together of two formidable forces, one an international major with a strong footprint in Europe and North America, and a local company, which produced the raw materials that went into making detergents. The German parent had a presence in major areas such as laundry, home care, cosmetics, toiletries and hair care with international brands such as Pril, Fa, Mr. White and Henko. This was further consolidated with the acquisition of Shaw Wallace’s Calcutta Chemical Company in 2000, which gave the JV brands such as Chek, Margo and Neem Active toothpaste. Despite this, the company failed to take off and the main reason being cited is the differences between the partners. The Indian partner apparently had a limited role to play in the JV owing to its minority holding, while the German parent simply wasn’t devoting enough time and attention to the business since it was a small dot in their universe.

The company Henkel was grappling with too many problems - an underperforming business, mounting losses, huge debt, and a set of products that hardly evoked recall beyond the south and the east. Henkel operated in laundry & home care and beauty & personal care segments. Increasing competition in these two segments especially from the likes of Hindustan Unilever (HUL) & Procter & Gamble (P&G) led to the drop in sales. Both HUL and P&G waged a price war to capture share. Both dropped prices by almost 25-30 per cent in key brands such as Tide Naturals and Rin. The resultant war hit companies such as Henkel too who had to drop prices to stay competitive. The other major worrisome factor was Henkel’s inability to expand reach beyond the south and the east. Its distributors were mainly concentrated in the urban pockets of the two regions. After trying to revive the JV’s fortunes, the German parent decided to call it quits in the Indian market and sold off its stake to JL. With this acquisition, Jyothy Labs jumped in one shot from being a 5-brand company into the big league with six new brands in its stable, namely, Henko, Mr White, Fa, Pril, Margo and Neem. This has created several advantages for JL:

1. An added advantage of straddling the entire price spectrum from mid-premium, premium and niche.
2. Immense opportunities to explore in terms of achieving revenue and cost synergy, which will result in substantial revenue growth, leading to higher operating margin.
3. A balanced presence in the rural and urban areas, as JL’s ratio of rural and urban presence is 75:25 and that of Henkel was 30:70.

Over the last 15 months since the acquisition, JL management has earnestly put in place a turnaround strategy for Henkel which in turn will boost JL’s fortunes as well. The major steps being taken include:

1.  Decentralization of manufacturing operations of Henkel’s brands
2.  Raw material synergies due to non-dependency on TPL (which Henkel was earlier required to have due to TPL being its promoter). Also better negotiating leverage.
3.  Streamlining sale and distribution costs which were a major factor in Henkel’s problems
4.  Brand re-positioning

And the recent quarter results have validated the above steps with Henkel’s financials improving significantly. It is not out of the woods yet, but neither does it appear to be far off from profitability. Henkel’s return to green should have a cascade effect on JL’s bottom-line since most of the cuts had come from its acquisition.

Recently, JL announced plans to raise Rs. 550 Cr for 20% stake, to retire debts, arising out of last year’s Henkel buy. PE firms like TPG Capital, Advent International, Warburg Pincus and Bain Capital are in the fray to acquire stake in Jyothy Labs. JL is also in talk with GIC Singapore, UK’s Actis and Apax Partners.

A few years back, JL also forayed in the organized service sector with the launch of its laundry business thru a subsidiary Jyothy Fabricare Services. It is now touted as the biggest laundry chain in the country with 122 retail outlets in Bangalore, Delhi, Mumbai, Pune, Chennai and more recently Hyderabad, most of which have come from local acquisitions. This business though is still nascent and doesn’t contribute much to the top-line and/or bottom-line. IL&FS Investment Managers Ltd has invested Rs 100 crore in this business.

Recently, the company has appointed Mr. S. Raghunandan as its Chief Executive Officer (CEO). Mr. Raghunandan has worked with Reckitt Benckiser, Paras Pharma, Dabur India, and HUL, among others, at senior positions. The step seems to be a positive move at the right time since JLL-Henkel consolidation has been completed and the company is now ready for a takeoff. A professional man at the top can only take the company higher.

Though its valuations are not cheap by conventional norms, they are certainly cheap compared to other FMCG companies. While the biggies HUL and P&G (who are in the same business segments) quote at 5.18 and 6.2, and Godrej Consumer quotes at 7.74, JL quotes at just 4.12, though it is on a smaller scale than these. Also while Godrej and P&G quote at P/E multiple in excess of 40, JL is at 30 @170.

Considering the major drivers of increasing profitability with Henkel’s improving financials, foray into niche laundry services business (with value unlocking opportunities) and relatively cheap valuations compared to peers, this should take off over the next few quarters.