First among equals

Capital First (CF) is a Warburg Pincus (WP) company with WP holding close to 70% of its stake. And it has a top class management team led by ex-ICICI honcho Mr. Vaidyanathan. The coming together of these 2 top class entities, one bringing its global reach and expertise and the other sound leadership is already doing wonders to this company, and it can only prosper from here. 

I had written about this as a theme for 2015 and it has justified its faith, moving up by close to 22% from 366 in Jan. ’15 to 446 this week, a return of 22% in 6 months. However, I believe that there is more to come yet.

This company missed out on bagging a banking license this year which ultimately went to IDFC. Last four years, they have shown very good growth, beating the expectations and their own guidance and that too not at the cost of quality of assets, one of the things which have hit ICICI Bank badly in the last 2 years. So gross as well as net non-performing assets (NPA) numbers are minimal (net NPA of 0.17%). They appear to be taking a leaf out of the book of Baja Finance, another superb growth story over the last 3-4 years. 

CF has not only defined its strategy well but is also executing it systematically. As a part of this strategy, they 1) moved out of non profitable business like securities and commodity broking, 2) focused on core business of SME financing and 3) ensured best in class asset quality with higher provisioning than regulatory requirement. CF has steadily increased the composition of retail financing from 10% in FY10 to 84% currently, while it has grown its AUMs at 25% CAGR over FY12-FY15.

Also, it hasn’t failed to move into all the right areas at the right time, the latest one being into Housing Finance, thru a subsidiary Capital First Home Finance Pvt. Ltd (CFHFPL). As can be seen, housing finance companies have been on fire on the bourses for the last 2 years with many of them even tripling from their levels then. And with the Modi govt.’s thrust on housing with schemes such as Housing For All, affordable housing etc., this run should continue for a long time. The other major factor that is likely to work in favour of CF is the falling interest rate scenario which will lead to an increase in the demand for loans and disbursements.

An HDFC Sec report points out that Capital First is quoting at ~2.3x FY16E ABV (adjusted book value) and 19.5xFY16E EPS which compares favorable with its larger peers Bajaj Finance (3.4-3.5xFY16E BV and 16-17xFY16E EPS) and Sundaram Finance (3.6-3.7xFY16E BV and 19.5-20xFY16E EPS). Of course, the larger peers deserve the premium because they have higher RoEs and RoAs. However, there is a chance for the gap to narrow under the stewardship of V. Vaidyanathan. In an earlier interview in November 2014, V Vaidyanathan, CMD, CF, asserted that he is confident of achieving 25-30% over the next 2-3 years.

All in all, all the ingredients for a superb growth story are firmly in place.

Cool growth

The recent IPO of Snowman Logistics, at an issue price of 47,  was oversubscribed nearly 41 times by retail investors and listed at a huge premium of 68% today. Considering the over-subscription, very few people who would have applied even for more than 1000 shares would have received a few shares.  The response therefore is not really surprising. Snowman is promoted by a major logistics player, Gateway Distriparks. This is another promising company considering that the state of logistics infrastructure in India currently.  You just have to look at the valuations CONCOR (Container Corp) gets,  and that too with the govt. running it.

Other major shareholders of Snowman are Mitsubishi Corporation (9.4 %), Mitsubishi Logistics Corporation (2.18 %) International Finance Corporation (9.3 %), Norwest Venture Partners VII-A Mauritius (10.3 %).

Snowman is the largest cold chain solutions provider (also referred as an integrated temperature-controlled logistics services provider), currently in India. The company, which operates 23 temperature-controlled warehouses across 14 locations in India (including Kolkata, Mumbai, Delhi, Chennai and Bengaluru), proposes to set up another such 6 and 2 ambient warehouses at 6 cities.

It has a pan-India presence with warehousing capacity of 58,543 pallets and 3,000 ambient pallets, which is expected to increase to 85,000 pellets in current financial year (FY15) and further to 1 lakh pellets by FY16 (all this info is from their IPO prospectus). Revenue and profit growth of the company in last 4 financial years was very strong, up 40-50 % on compounded annual growth rate (CAGR) basis. Total income from operations and reported profit after tax in FY14 grew by 35 % to Rs. 153.41 crore and 18 % to Rs 22.48 crore while operating profit margin (OPM) expanded to 24.7% from 22.4 % year-on-year.

Even though it has listed at a huge premium, it still makes sense to buy it if u can get it in the next few days (once it comes out of circuit and stabilizes). The reasons are not too far to see:

1.  It is the only listed company in this space and hence would continue to command a substantial premium over similar companies (though there isn’t one in the same space, it would be compared with other logistics providers such as CONCOR, Sical, Gateway Distriparks - its promoter, etc. )
2.  GDL is an established player in the logistics business. Its experience and expertise in the logistic sector has instilled confidence in SLL’s customers, who prefer dependable and established service providers. Further, SLL  can leverage its corporate, institutional and banking relationships for its business operations.
3.  Its big expansion plan (of raising capacity to 1 lakh pallets by next financial year) is expected to boost the operating performance of the company over the next two years.
4. Strong and credible foreign shareholders such as Mitsubishi, IFC, and established PE such as Norwest.

Given all the above, it would be a good idea to keep an eye on this, and buy it when it stabilizes after the pent-up demand is done.

Also, as a proxy, get into GDL. It is equally promising and also holds 40% in Snowman. So u can ride bith the growth stories.

Star cuppa

Formerly Tata Tea, this company has transformed itself into a global non-alcoholic beverages company with local and international brands in its kitty, the latest entrant being the global coffee chain Starbucks. It is the world's second-largest manufacturer and distributor of tea and a major producer of coffee. This company however spans almost the entire range of beverages:

• Tea (Specialty – green & herbal, in addition to the Tetley brand sold globally and local brands Tata Tea, Tetley, Kanan Devan,Chakra Gold,& Gemini in the branded boxed packed tea market). KANAN Devan, Chakra Gold and Gemini are regional brands with market leadership. ‘Tata Tea’ is the market leader in the retail tea market with above 20% volume market share.
• Coffee (thru the listed plantation and instant coffee subsidiary Tata Coffee -  Eight o’Clock and other brands under its fold)
• Water (thru a listed company Mount Everest Mineral Water with its Himalayan brand).

The company has thrived on brand acquisitions which have complemented its portfolio

• The company acquired Mount Everest in June 2007 to gain foothold in the niche naturally sourced packaged water. Himalaya has since grown its brand and per unit price in a bid to become the nation’s largest spring sourced packaged premium drinking water. The brand is now present in both India and Singapore. The company is focusing on export opportunities for the Himalayan brand. With Starbucks Himalaya has also got a new source to increase distribution.
• TGB has an equal Stake JV with Pepsi Co. in India, Nurischo, which will enable it to leverage on Pepsi’s distribution network.
•  Joekels in South Africa (third largest player)
•  Good Earth in US (21% volume share)
• Jemca, the market leader in Czech Republic
•  Vitax in Poland (16% share of fruit tea market)

The company recently increased stake in its US based JV Rising Beverages’ in the Water business to ~47%.

On a consolidated basis, TGBL derives 70% of its revenue from tea and balance from coffee segment. Tetley, its largest brand contributes 38% to the topline, main geographies being UK and Canada. Eight O'Clock is a gourmet whole bean coffee brand in USA. It contributes 17% to the topline.

TGB has a balanced market share globally:

•  India (22 percent value share of Tata Tea),
• Canada (Tetley)
• UK (27% value share of Tetley),

Not too long back, TGB ventured into the Indian cafe market with a 50:50 JV with Starbucks Coffee Company. The coffee shops branded as "Starbucks Coffee – A Tata Alliance" will source coffee beans from Tata Coffee, a subsidiary company of TGB.

Starbucks, which has just completed 1 year in India, is still in a start-up stage with only 25 cafes in the major metros – Mumbai, Pune and NCR. But from what has been reported, it has got a rousing reception wherever it has opened. Once this chain attains critical mass over the next few years, returns should start flowing in. This will benefit TGB in 2 ways – directly thru its stake in the company and from improvement in Tata Coffee’s financials on the back of this growth since Starbucks will be sourcing coffee directly from them.

And recently TGB announced the merger of its 50% subsidiary Mount Everest Mineral Water (owner of Himalayan brand) with itself. This will now give it full control over the Water portfolio as well. It remains to be seen if Tata Coffee goes the same way.

TGB stock has been moving up on investment buying based on the fact that international tea prices have been softening and demand for tea continues to grow as well as robust coffee business. From about 168 around Diwali, it has come down about 14% to 145 now in line with the general market sentiment. Considering its pedigree and the star brands it owns in a growing consumer space and with not too many listed players of the same ilk, as well as not too many focused players in this space (Georgia, Kinley from Coke and Aquafina from Pepsico are fringe players in the market and will continue to be so since they do not form the core focus areas of their respective parents) it is not expensive @ ttm PE of 24. It must be remembered that this is a branded consumption space with high growth rates; hence though in absolute terms, it may not be cheap compared to the market, it certainly is when compared with FMCG space focused on consumption though not in the same area. And the bonus is that this is a nascent space yet and TGB has a huge head-start over others planning similar forays. So things can only improve from here.