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.

CAREful investment

CARE (Credit Analysis and Research), another niche player in the ratings space, has been another favorite of mine for a long time now, right from its IPO days when it was launched @540 in Dec ’12, slightly more than a year back. It had also listed at a huge premium @900 then. You can read my initial post about it here.

As I had mentioned then, one of the attractive points about CARE is its lack of a strong foreign investor, 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%). I had also stated that it may only be a matter of time when it catches the eye of international rating-related firms (Fitch for one, Bloomberg which is not strictly into rating but in related areas, for another) for investment, given its strong fundamentals. It looks like that time has now come. CARE is the most profitable ratings agency in India in terms of margins. It clocked a 48% profit margin for 9 months ending December 2013 more than double of ICRA's at 23% in the same period. Rival Crisil, the largest in India, posted 28% margins for 9 months ending September 2013.

IDBI Bank holds a 16.69% stake in the ratings firm, while Canara Bank owns 13.25% and SBI 6.31%.  While IL&FS Financial Services own 5.9%, a 3.4% block is owned by IL&FS Trust.

All these banks have crossed their one-year lock-in period (after the company's IPO in Dec ‘12) on December 23, 2013. They are now free to sell their ownership at their discretion. And they have decided to sell their stake jointly to monetize their investment so that they get a better price and better leverage. These banks, burdened by stressed assets on their books, want to complete the divestment by March 31^st and reflect the sale on their financials. Depending on the final offers, even IL&FS may join in and offload its shares.

A clutch of high street PE funds, General Atlantic Partners, Actis, Baring Private Equity Partners Asia and Apax Partners have been sounded out and have shown a keen interest in buying into CARE. The price negotiations too are expected to firm up shortly.  According to market sources, some of the lenders are looking at a price of around Rs 900/share as control premium. This would mean a 7-8% mark up on the current market price of Rs 845/share. It must however be remembered that CARE was quoting at around 725 when this process started. At that price, the premium amounted to about 25%.

Though it has run up since the announcement of change in promoter, considering the pedigree that CARE will acquire post this process, it will surely prove rewarding to shareholders who log on to it now. Just to illustrate my point, CRISIL was quoting around 50-55 10 years ago in Feb. ’04. And in the last 10 years it has multiplied 20 times to nearly 1100 now. And in this journey, it has attracted the attention of not only astute investors such as RJ, but also international ratings firm S&P which has a more than 50% stake in it currently. There is no reason why CARE should not go the same way from here on considering its fundamentals and likely promoters.

Regaining lost glory

MCX, being the niche player it is, and operating in a space where there are no listed peers, has been a favorite of mine for some time now. I had mentioned it as a contrarian bet in Oct '13 when it had plunged to levels around 400. You can read about it here.

It had run into rough weather a few months ago and had dipped to abysmal levels. But mind you, this had nothing to do with its own performance, but that of its promoter company Financial Technologies (FT). Both of these shares had crashed to a fraction of what they were quoting few days back from when the NSEL scam broke out. Much water has flown under the bridge since then. Though the investigations have pointed fingers at FT and its headhoncho Jignesh Shah, there has been some sanity restored with the tainted members in MCX board being given the marching orders. MCX thus sports a clean board now with a decent standing. And FT and Jignesh Shah have been declared ‘not fit-and-proper’ to run MCX, which has since been challenged in court and the decision awaited. Whatever be the fate of FT and Jignesh Shah, it can certainly be said that for all practical purposes, MCX is now starting with a clean slate.

With all that has happened in the last few months, it would have indeed been surprising if it had been business-as-usual (BAU) at MCX. MCX reported a substantial decline in earnings for a second consecutive quarter. For the 3 months to December 2013, both topline and net earnings dipped as trading volumes fell by nearly 65% against the year-ago period. The dismal performance has been attributed to the application of commodity transaction tax (CTT) and the Rs. 5,600-crore scam at the group entity NSEL, which impacted the sentiments.

With the regulator FMC ordering MCX to throw out FT and Jignesh Shah as promoters, and their respective stakes to be reduced to not more than 2%, all that is set to change now. The stage is also set for a new promoter to take its reins. So it would be fair to expect that with all the clean-up having happened, MCX will now regain the premium it commanded not too far ago.

And people who reposed faith in MCX over the last few months and bought into it at 400-430 levels (or even lower at its 52-wk low of 238 in Aug ‘13) would have been laughing all the way to the bank. Since hitting those levels about 6 months ago, with all these developments happening, it has splendidly bounced back to levels of 550 currently, an absolute return of more than 25% in close to 6 months. And with its murky past behind it, a new management in place, and a new promoter likely to come in, it wouldn’t be too much to expect MCX to go some distance yet. So those who did not board it earlier still have a chance to do so now. And this opportunity may not last too long since the market is likely to discount the new-found potential as soon as the new promoter comes in.

Clearly Hospitable

Sayaji Hotels, India's leading premium three star hotels and food chain, operates a chain of restaurants and hospitality properties in India. Sayaji currently operates three properties in Vadodara, Indore and Pune. In fact, Indore property enjoys dominant position in Indore city with its central location and enjoys very little competition. It also has two subsidiaries - Barbeque-Nation Hospitality Ltd. and Malwa Hospitality Pvt Ltd.

The 6-year old Barbeque Nation, with the concept of Live Grill allowing customers to make food on their personal grills, is fast gaining reputation as a fine dining restaurant especially for non-vegetarians. It is growing at a rate of 25% on the same store basis and is present in 14 cities, including 7 top cities, already. Sayaji plans to concentrate on the same for its growth.

In May 2006, Clearwater Capital bought 14.92% stake for Rs.11.81 Cr by purchasing 17.9 lakh shares at a price of Rs. 66 per share. It had also invested in FCCBs worth $7.5 million which were converted into equity at Rs 75 per share last year, giving it 32.87 per cent stake with the promoter stake at 38.1%. It also came up with an open offer last year at a price of Rs 115.73 (including interest payment for delay in the offer), but could not find many takers.

In June ’11, Clearwater sold 4.85 % stake which has brought down its stake to about 28%. Promoters hold close to 40% and the US-based foreign FII Acacia Partners holds 7.54% in Sayaji Hotels

About 3 years ago it was @40 and currently @135 – more than 3 times in 3 years is certainly not a bad return by any standard.

There could be 2 scenarios (or a combination of both) which could play out here:

1. They spin off Barbeque Nation into a separate company/subsidiary (former will be a shareholder friendly move) so that everyone can participate in the growth of both the hotels as well as restaurants business. My feeling is that the restaurant business will surely grow well compared to the hotels business. Also note that there is no specialty restaurant company in India, so that will command a premium valuation in itself (you don’t have to look far; just look at how Jubilant, Dominos, is faring, and you will know what I mean). Following the spinoff, they can sell a partial stake or the whole business itself at premium valuations for reasons just mentioned. That there will be enough takers is a given.

2.   Clearwater Capital decides to sell its stake in Sayaji to another entity again at a decent profit (remember it paid 75 last year, so you can make your own calculations as to how much it will command). Or it may decide to execute step 1 and buy out one of the 2 businesses.

Post the de-merger, the sum of parts will surely be greater than the whole. Look at how things have panned out at Reliance and others where such actions have happened. At least one of the parts gives enough returns to cover the other and the investor may take a call on which part is to be retained.

The only variable is when the above can happen. Looking at the turbulence in the market currently, nothing may happen in the short term. But the future certainly looks fairly bright if not shining already.