tag:blogger.com,1999:blog-6633377645228589522024-03-18T18:14:45.163+05:30DalalStreetBullsA blog to research on the stocks listed on the Indian stock markets.Unknownnoreply@blogger.comBlogger121125tag:blogger.com,1999:blog-663337764522858952.post-3973096994927227592022-08-01T02:31:00.005+05:302022-08-01T02:33:51.657+05:30How are gold coins priced?<p>Ever wondered why gold coins are expensive compared to the price of gold on the MCX? Typically, the spot price of a commodity is lower than the futures price as the futures price is effected by the duration to expiry and interest rates. However, in India it is common to see the spot price of gold trade at a premium to the MCX price of gold. Also, lets say that you see gold’s price as Rs. 50,000 per 10 grams on the MCX and rush out to buy a 10 gram gold coin, you come to know that the coin costs Rs 55,000! You wonder why gold in the market is costlier than the price on the screen.. In this blog, we will try to break down the pricing of gold coins for you. All calculations done are for a 10 gram gold coin.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGwVAh4CqwgE819KeaZmK600drxgWOHqxP0g4JSUJXQoC18s4_ClidVEatOSzBw4f2hve2Qa7rp4oQN7pZDsya6QKAWoa_uonwUKbqvRsDimJZgpXboZRwRZSoTT7ezDF_LAArgox-aDIJfM4LW2GB8GJvXplITKF9rhT6szfGs-VqFeTDNB2uVUM5/s451/Screenshot%202022-08-01%20022819.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="369" data-original-width="451" height="262" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGwVAh4CqwgE819KeaZmK600drxgWOHqxP0g4JSUJXQoC18s4_ClidVEatOSzBw4f2hve2Qa7rp4oQN7pZDsya6QKAWoa_uonwUKbqvRsDimJZgpXboZRwRZSoTT7ezDF_LAArgox-aDIJfM4LW2GB8GJvXplITKF9rhT6szfGs-VqFeTDNB2uVUM5/s320/Screenshot%202022-08-01%20022819.png" width="320" /></a></div><p><br /></p><p><strong>Step 1: Convert the international price of gold in USD to INR</strong></p><p>On 31 July, 2022 gold was trading at USD 1,760 per oz. First, gold is measured in troy ounces and 1 troy ounce is 31.1034768 grams. Next, the value of $1 is Rs. 79.32. After doing some <em>abra-cadabra</em> (nah! simple maths), I get the value of international price of gold in Rupee per 10 grams as 44,883. </p><p><strong><br /></strong></p><p><strong>Step 2: Landed price of gold in India - add the taxes!</strong></p><p>There is a 12.5% custom duty and 2.5% agriculture infrastructure and development cess on Gold imports in India. So, after taxes, the price of 10 grams of gold in India comes to Rs. 51,616 and this is usually close to the futures price of gold on the MCX.</p><p><strong><br /></strong></p><p><strong>Step 3: Find out the spot price of gold</strong></p><p>The MCX price of gold should only be used as reference and typically the spot price of gold is 2.5% to 3% above the landed price of gold in India. This is because of the costs incurred to transport and store gold, coupled with the premiums and discount on gold. </p><p>The spot price varies from city to city by 100-200 Rupees and can be found out using a simple google search <em>“Spot price of gold in Hyderabad today”. </em>You don’t want the spot price and MCX price to have a wide gap.</p><p><strong><br /></strong></p><p><strong>Step 4: Making charges and GST</strong></p><p>The jeweler (Tanishq, Joy Alukas, TBZ, etc.) or refiner (MMTC, BRPL, etc.) charges a making charge for making the gold coin or bar and this varies from brand to brand. Tanishq usually charges a high making charge compared to other brands. You wouldn’t want to pay a very high making charge because this doesn’t affect the purity or quality of the gold. The making charge is a percentage of the spot price of gold and ideally should be between 3% to 5%.</p><p>There is also a 3% GST on gold coins that you have to pay on the gold price + making charge.</p><p></p><p><strong><br /></strong></p><p><strong>Final price of the gold coin</strong></p><p>So, once you add the premium, making charges and GST to the MCX price of gold you will get the price of a gold coin.</p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiO2vRv934nwZoBzaARkKWwovtKaq5DXwF_gwm5F4kmETPMBxGlaX6CluancytGb9_g8mKwniPShoXQGnls4M0CqH-ZYTBsidzu5bpYv7knRAAToHR3-Uq0xfuE-eUXkRTI3C9I0AGd5II3XK6_1zC3Eo7hi5oPu2ZTyRaun0RFMBMxWH_MKP2WQbHU/s565/Picture3.png" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="543" data-original-width="565" height="385" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiO2vRv934nwZoBzaARkKWwovtKaq5DXwF_gwm5F4kmETPMBxGlaX6CluancytGb9_g8mKwniPShoXQGnls4M0CqH-ZYTBsidzu5bpYv7knRAAToHR3-Uq0xfuE-eUXkRTI3C9I0AGd5II3XK6_1zC3Eo7hi5oPu2ZTyRaun0RFMBMxWH_MKP2WQbHU/w400-h385/Picture3.png" width="400" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Price break-up of a 10 gram gold coin price</td></tr></tbody></table><p><br /></p><p>If you want to buy a 24k 999 purity 10 gram gold coin, check the price what different brands are selling for and check how much premium to the MCX price / spot price you are paying. Do not compare a 22k gold coin’s price with a 24k gold coin’s price.</p><p><i>Tanishq</i> is selling a 24k 10gram gold coin at Rs 60,000 on 31 July, 2022 which translates to a 16.2% premium while other brands are selling between Rs 55,800 to Rs 56,600 which translates to a premium of 8.1% to 9.7%.</p><p>Hope this helps you understand why gold coin prices trade way above gold prices on the commodities exchange!</p><p></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-17489723745104284972022-07-02T15:14:00.004+05:302022-07-02T15:15:20.672+05:30Term insurance: Limited pay vs Regular pay<p>While comparing a 3 Crore term insurance cover for a 28 year old till the age of 85, I see that there is an option to pay a Rs 1,54,000 premium for 5 years (till the age 33) and another option to pay a Rs 39,000 premium every year till the age of 85. If I choose to pay for 5 years, the total premium works out to Rs 7.73 Lakhs while if I choose to pay life-long, the total premium works out to Rs 22.7 Lakhs. Either ways the buyer gets a 3 Crore term cover till the age of 85, so isn’t it better to pay 7.73 Lakhs versus 22.7 Lakhs? Well, numbers can be deceiving. In this post, we will not only see the numbers to identify the better opportunity but also other aspects to be checked.</p><p><br /></p><p></p><blockquote><p>Opportunity cost is the value of the next-best alternative when a decision is made.</p><p></p></blockquote><p><br /></p><p>In the above scenario, I can either pay Rs 1.54 Lakhs for 5 years or pay Rs 39,000 every year till age 85 and invest the Rs. 1.15 Lakhs that I save (1,54,000 <em>minus</em> 39,000) in the first 5 years. First, lets consider the non-quantifiable factors.</p><div class="separator" style="clear: both; text-align: center;"><img border="0" data-original-height="422" data-original-width="748" height="181" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVVeAUon9JGk1nCFJs2Px2TiaAoA2i_iK8wLHP95Pd2l8KgpOWy-wWvlJxmmEx0Yv1waWazZkEehPOVMfKyKTNznl2lMaIw6gb_68YlLWCnQ4TYrD0h1BLLrzVG3KoQti9T40evWjqwJNFOdifZUJpnyRY8UwKGXC2tqy5dBzMb66Zksk-C6IwsKK5/s320/Building-wealth-through-regular-investing.jpg" width="320" /></div><div class="separator" style="clear: both; text-align: center;"><br /></div><h4 style="text-align: left;"><span style="font-size: medium;">Why can someone consider paying off the premiums in limited pay vs regular pay?</span></h4><p></p><ul style="text-align: left;"><li><em>Cash flow predictability</em> - If you have a predictable flow of income now and you believe that this may not be the case 5-10 years down the line because you will want to take a sabbatical or startup your own venture, then you can consider paying off the premiums early</li></ul><ul style="text-align: left;"><li><em>Retirement</em> - If you don’t want to take the burden of paying premiums after retiring, you may consider taking a limited pay option spread over your working career (15-20 years, if available)</li></ul><p></p><h4 style="text-align: left;"><span style="font-size: medium;">Why would someone consider paying through out the policy tenure rather than a limited pay?</span></h4><p></p><ul style="text-align: left;"><li><em>Less chances of forgetting</em> - If you are paying a premium every year, your family will be able to notice it in the bank statement, policy communications or simply you mentioning it to them. While it would be tough for the family to remember of a policy whose premium was paid off 20 years back</li></ul><ul style="text-align: left;"><li><em>Option to surrender and buy a new policy</em> - Lets say 10 years after buying a term insurance policy you feel that the coverage is less. You have the flexibility to surrender the existing policy before buying a new policy</li></ul><p></p><p><br /></p><p>Now lets see what the numbers say. To compare different streams of cashflows over different periods, we can use the Net Present Value. NPV is used to calculate the current total value of a future stream of payments. We will assume both a 6% rate and a 10% rate to discount the cash flows. 6% because that is what a conservative portfolio can earn on a post tax basis and 10% because that is what I expect to earn from index funds post tax in the long run.</p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOcKp3p9XtkyAW24a3dCQC2p4H7ZFk8qtzM-k_RGFhC-UyU3DvY2FZGzyHaE5euoOVONFNHj9nmaq7oNPQyjgLOtZZI9psny7s84ugbHO0a8zaTwP5oMrgTdpbafNrsk-1mXeli6iuO0_jnT3wwUQ4QURoHqgECM0NMqzo65a7LA7JQxwd3wTZGj0Q/s682/NPV.png" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="84" data-original-width="682" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOcKp3p9XtkyAW24a3dCQC2p4H7ZFk8qtzM-k_RGFhC-UyU3DvY2FZGzyHaE5euoOVONFNHj9nmaq7oNPQyjgLOtZZI9psny7s84ugbHO0a8zaTwP5oMrgTdpbafNrsk-1mXeli6iuO0_jnT3wwUQ4QURoHqgECM0NMqzo65a7LA7JQxwd3wTZGj0Q/s16000/NPV.png" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">NPV calculations paint a different picture</td></tr></tbody></table><div class="captioned-image-container"><br /></div><p>Clearly, the regular pay option is cheaper on an NPV basis assuming a discount rate of 6% and 10%. It means, the higher you expect to earn on your investments, the better a regular pay option is. In this example, the rate at which both options remain the same is ~5.73%. It means that if you expect to earn < 5.73% p.a., pay off the premiums in 5 years and if you expect to earn more than 5.73% p.a. then opt for the regular pay.</p><p><br /></p><p>The insurance company would like you opt for the limited pay option as it gives them significant cash flows upfront and they can earn more than 6% p.a. on their investments. I personally believe that the regular pay option is a better value proposition both in terms of NPV and other factors mentioned above.</p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-23100440706364891362022-06-14T20:56:00.000+05:302022-06-14T20:56:59.422+05:30How XIRR and CAGR can mislead<p><span style="font-family: arial;"> XIRR and CAGR are fancy terms which ultimately tell you how much returns you are making on your investment. XIRR is used for SIPs or investments where there is periodic cash outflow and CAGR is used when there is a one time investment.</span></p><p><span style="font-family: arial;">Absolute returns are like the total score in cricket. India scored 250 in 50 overs. CAGR / XIRR is like the run rate. India scored 5 runs per over. Your investments might have grown 100% - great! But have they grown 100% in 10 years (CAGR: 7%) or in 3 years (CAGR: 26%). But why am I talking all this?</span></p><p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgV8yjWcSIrvyXrmo0q7C4_5YSx0gsXY1QwL9YH0HgoFvFztbxcfA8TTHjhBpiutTFM86KUI2XM1jeRAScFyo0PE3dwrCRcs9_hk4cF4DX-4xlLenNWLGuM545SKUb3COnWqnGtftxoLXMGNAEdcZKwzbKBaoJNeeASbP1McCUXMzoj5JiyFmtbJ3JI/s2000/time-is-money-scales-money-time-balance-scale-clock-money-bag-symbols-scale-scales-bowls-scales-balance-time-is-money-business-concept_435184-363.webp" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="1142" data-original-width="2000" height="183" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgV8yjWcSIrvyXrmo0q7C4_5YSx0gsXY1QwL9YH0HgoFvFztbxcfA8TTHjhBpiutTFM86KUI2XM1jeRAScFyo0PE3dwrCRcs9_hk4cF4DX-4xlLenNWLGuM545SKUb3COnWqnGtftxoLXMGNAEdcZKwzbKBaoJNeeASbP1McCUXMzoj5JiyFmtbJ3JI/s320/time-is-money-scales-money-time-balance-scale-clock-money-bag-symbols-scale-scales-bowls-scales-balance-time-is-money-business-concept_435184-363.webp" width="320" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Time can tilt returns</td></tr></tbody></table><span style="font-family: arial;"><br /></span></p><p><span style="font-family: arial;">A lot of new investors started investing through SIPs in Mutual Funds in the last 2-3 years and while the initial euphoria showed them XIRR of 25%-30% and more, they felt good! A few of them probably knew that the returns would normalize to ~12% to 15% over the long term but even they couldn’t gauge what that normalization would look like. In just 6-7 months, the SIPs have gone from an XIRR of 25% to an XIRR of -15% and so has the sentiment. A simple analysis of the google search trends shows that the interest in volatile assets such as MFs and Cryptos has come down while that of real estate has gone up! <em>Seasons change…</em></span></p><div class="captioned-image-container"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><span style="font-family: arial;"><img alt="No alternative text description for this image" class="sizing-normal" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/03786056-29b7-41b8-bcbd-f214a7701431_1735x474.jpeg","fullscreen":null,"imageSize":null,"height":398,"width":1456,"resizeWidth":null,"bytes":null,"alt":"No alternative text description for this image","title":null,"type":null,"href":null}" height="110" sizes="100vw" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F03786056-29b7-41b8-bcbd-f214a7701431_1735x474.jpeg" srcset="https://substackcdn.com/image/fetch/w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F03786056-29b7-41b8-bcbd-f214a7701431_1735x474.jpeg 424w, https://substackcdn.com/image/fetch/w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F03786056-29b7-41b8-bcbd-f214a7701431_1735x474.jpeg 848w, https://substackcdn.com/image/fetch/w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F03786056-29b7-41b8-bcbd-f214a7701431_1735x474.jpeg 1272w, https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F03786056-29b7-41b8-bcbd-f214a7701431_1735x474.jpeg 1456w" style="margin-left: auto; margin-right: auto;" title="No alternative text description for this image" width="400" /></span></td></tr><tr><td class="tr-caption" style="text-align: center;"><span style="text-align: left;"><span style="font-family: arial;">Google search trends for mutual funds, real estate and bitcoin</span></span></td></tr></tbody></table></div><h3 style="text-align: left;"><span style="font-family: arial;">So, why is XIRR misleading?</span></h3><p><span style="font-family: arial;">Well, for starters - vintage. How long have you been investing? If just 2-3 years then prepare for XIRR to be volatile. If for 10+ years then XIRR can be stable. </span></p><p><span style="font-family: arial;"><br /></span></p><p><span style="font-family: arial;">Lets take the case of 3 investors. One started investing in 2010, the other in 2015 and the last in 2020. They’ve invested Rs 10,000 per month and earned an XIRR of 15% p.a. How much has each made till now? </span></p><div class="captioned-image-container"><figure><a class="image-link image2" href="https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5e4ca1fd-6aaf-4492-9293-3a71b3c435ef_575x109.png" rel="nofollow" target="_blank"><picture><span style="font-family: arial;"><source sizes="100vw" srcset="https://substackcdn.com/image/fetch/w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5e4ca1fd-6aaf-4492-9293-3a71b3c435ef_575x109.png 424w, https://substackcdn.com/image/fetch/w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5e4ca1fd-6aaf-4492-9293-3a71b3c435ef_575x109.png 848w, https://substackcdn.com/image/fetch/w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5e4ca1fd-6aaf-4492-9293-3a71b3c435ef_575x109.png 1272w, https://substackcdn.com/image/fetch/w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5e4ca1fd-6aaf-4492-9293-3a71b3c435ef_575x109.png 1456w" type="image/webp"></source><img alt="" class="sizing-normal" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/5e4ca1fd-6aaf-4492-9293-3a71b3c435ef_575x109.png","fullscreen":null,"imageSize":null,"height":109,"width":575,"resizeWidth":null,"bytes":8485,"alt":null,"title":null,"type":"image/png","href":null}" height="109" sizes="100vw" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5e4ca1fd-6aaf-4492-9293-3a71b3c435ef_575x109.png" srcset="https://substackcdn.com/image/fetch/w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5e4ca1fd-6aaf-4492-9293-3a71b3c435ef_575x109.png 424w, https://substackcdn.com/image/fetch/w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5e4ca1fd-6aaf-4492-9293-3a71b3c435ef_575x109.png 848w, https://substackcdn.com/image/fetch/w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5e4ca1fd-6aaf-4492-9293-3a71b3c435ef_575x109.png 1272w, https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5e4ca1fd-6aaf-4492-9293-3a71b3c435ef_575x109.png 1456w" width="575" /></span></picture></a></figure><figure><span style="font-family: arial;"><br /></span></figure></div><p><span style="font-family: arial;">Now imagine the market falls and this fund NAV is down 20%, will the XIRR that each investor is making remain the same?</span></p><p><span style="font-family: arial;"><br /></span></p><div class="captioned-image-container"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><span style="font-family: arial;"><img alt="The Hangover Math GIFs | Tenor" class="sizing-normal" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/94eb4d8e-0bbc-4e0a-8134-302a9207e19e_498x216.gif","fullscreen":null,"imageSize":null,"height":216,"width":498,"resizeWidth":null,"bytes":null,"alt":"The Hangover Math GIFs | Tenor","title":null,"type":null,"href":null}" height="216" sizes="100vw" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_lossy/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F94eb4d8e-0bbc-4e0a-8134-302a9207e19e_498x216.gif" srcset="https://substackcdn.com/image/fetch/w_424,c_limit,f_auto,q_auto:good,fl_lossy/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F94eb4d8e-0bbc-4e0a-8134-302a9207e19e_498x216.gif 424w, https://substackcdn.com/image/fetch/w_848,c_limit,f_auto,q_auto:good,fl_lossy/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F94eb4d8e-0bbc-4e0a-8134-302a9207e19e_498x216.gif 848w, https://substackcdn.com/image/fetch/w_1272,c_limit,f_auto,q_auto:good,fl_lossy/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F94eb4d8e-0bbc-4e0a-8134-302a9207e19e_498x216.gif 1272w, https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_lossy/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F94eb4d8e-0bbc-4e0a-8134-302a9207e19e_498x216.gif 1456w" style="margin-left: auto; margin-right: auto;" title="The Hangover Math GIFs | Tenor" width="498" /></span></td></tr><tr><td class="tr-caption" style="text-align: center;"><div class="captioned-image-container"><figure><figcaption class="image-caption"><span style="font-family: arial;">Yeah, the math is tough!</span></figcaption></figure></div></td></tr></tbody></table></div><p><span style="font-family: arial;">No. The XIRR will not remain the same even though the pre-crash XIRR is same, NAV is same for all and the fall in NAV is also same for all!</span></p><div class="captioned-image-container"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><span style="font-family: arial;"><img alt="" class="sizing-normal" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/94398e22-73ef-4b63-8cee-b7c962e1ca52_744x135.png","fullscreen":null,"imageSize":null,"height":135,"width":744,"resizeWidth":null,"bytes":16154,"alt":null,"title":null,"type":"image/png","href":null}" height="117" sizes="100vw" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F94398e22-73ef-4b63-8cee-b7c962e1ca52_744x135.png" srcset="https://substackcdn.com/image/fetch/w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F94398e22-73ef-4b63-8cee-b7c962e1ca52_744x135.png 424w, https://substackcdn.com/image/fetch/w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F94398e22-73ef-4b63-8cee-b7c962e1ca52_744x135.png 848w, https://substackcdn.com/image/fetch/w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F94398e22-73ef-4b63-8cee-b7c962e1ca52_744x135.png 1272w, https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F94398e22-73ef-4b63-8cee-b7c962e1ca52_744x135.png 1456w" style="margin-left: auto; margin-right: auto;" width="640" /></span></td></tr><tr><td class="tr-caption" style="text-align: center;"><span style="text-align: left;"><span style="font-family: arial;">The XIRR before and after the crash</span></span></td></tr></tbody></table><span style="font-family: arial;"><br /></span></div><p><span style="font-family: arial;">The investor who started 2 years back saw their XIRR come down from 15% to -9%</span></p><p><span style="font-family: arial;">The investor who started 7 years back saw their XIRR come down from 15% to 9%</span></p><p><span style="font-family: arial;">The investor who started 12 years back saw their XIRR come down from 15% to 12%</span></p><p><span style="font-family: arial;">In short, the longer you invest the more stable the XIRR gets. Keep reading for a better example.</span></p><p><span style="font-family: arial;"><br /></span></p><div class="captioned-image-container"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><span style="font-family: arial;"><img alt="Akshar Pathak on Twitter: "someone: *does something cool* everyone on linkedin: https://t.co/n4hTQX4Q1j" / Twitter" class="sizing-normal" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/872a9526-0e92-4ad7-ac87-5073bcfac115_1098x662.jpeg","fullscreen":null,"imageSize":null,"height":662,"width":1098,"resizeWidth":354,"bytes":null,"alt":"Akshar Pathak on Twitter: \"someone: *does something cool* everyone on linkedin: https://t.co/n4hTQX4Q1j\" / Twitter","title":null,"type":null,"href":null}" height="213.43169398907105" sizes="100vw" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F872a9526-0e92-4ad7-ac87-5073bcfac115_1098x662.jpeg" srcset="https://substackcdn.com/image/fetch/w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F872a9526-0e92-4ad7-ac87-5073bcfac115_1098x662.jpeg 424w, https://substackcdn.com/image/fetch/w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F872a9526-0e92-4ad7-ac87-5073bcfac115_1098x662.jpeg 848w, https://substackcdn.com/image/fetch/w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F872a9526-0e92-4ad7-ac87-5073bcfac115_1098x662.jpeg 1272w, https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F872a9526-0e92-4ad7-ac87-5073bcfac115_1098x662.jpeg 1456w" style="margin-left: auto; margin-right: auto;" title="Akshar Pathak on Twitter: "someone: *does something cool* everyone on linkedin: https://t.co/n4hTQX4Q1j" / Twitter" width="354" /></span></td></tr><tr><td class="tr-caption" style="text-align: center;"><span style="text-align: left;"><span style="font-family: arial;">Only Sarabhai vs Sarabhai fans get this</span></span></td></tr></tbody></table></div><p><span style="font-family: arial;">Assume Team India has scored 240 runs in 40 overs (Run rate: 6 per over) and then there is a maiden over, the run rate falls to 5.85. However if there was a maiden over when Team India was at 30 runs in 5 overs (Run rate: 6 per over), the run rate would have fallen from 6 to 5!</span></p><p><span style="font-family: arial;">So, do not get excited / disappointed with your returns from SIPs in Mutual Funds in the initial years. Also, can you please check out my <a href="https://www.youtube.com/c/dalalstreetbulls" rel="noopener noreferrer nofollow" target="_blank">YouTube channel</a>? </span></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-71199796023898022262021-12-18T20:22:00.002+05:302022-06-14T20:58:31.546+05:30Grip Invest: 22% IRR - Review<p><em style="color: #1a1a1a;"><span style="font-family: arial;">TLDR: The pre-tax IRR of 22% translates to a post-tax IRR of 11% and is comparable to a return of 7.6% p.a. post tax. This investment is risky and is not a replacement for FDs and debt funds because it is locked-in till maturity (30-36 months).</span></em></p><p><em style="color: #1a1a1a;"><span style="font-family: arial;"><br /></span></em></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">I’ll try not to make this post too technical, but if 22% IRR turns out to ~ 7.6% p.a. then there will be fancy terms like IRR, CAGR and some mumbo jumbo involved.</span></p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><span style="font-family: arial;">Background</span></h4><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Lease finance & inventory finance is not new. For investors, these are high return avenues with large ticket sizes and carry moderate to high risk. Why moderate? <em>Keep reading..</em> New age platforms such as gripinvest, wintwealth and others are bringing these investment avenues to retail investors. And on their website, investors see XIRR of 22% and most of them think they will make 22% post tax returns. This is not true! By the end of this post, you will understand how this investment model works, who it is for and how much can you expect to make?</span></p><div class="separator" style="clear: both; text-align: center;"><span style="font-family: arial;"><br /><img border="0" data-original-height="1255" data-original-width="1920" height="209" src="https://blogger.googleusercontent.com/img/a/AVvXsEjf1IVW0C153OYw4kfX9_DbJ63TfBxiDWwv53EqhGivd_On-6JJjioRcpAtqDlJ-IGYa4bhiSDMZB9ZpgQo_36woOhkSTk1C8EucHXdqcpuox45S1MgAgFpHsirvZLYbaTQkM0JgnhbUzZfhCABgk1pujOtdCqWmm8vSplp7MfwqFSFGbEoJ_pOyGaC=s320" width="320" /></span></div><div class="separator" style="clear: both; text-align: center;"><span style="font-family: arial;"><br /></span></div><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><span style="font-family: arial;">How it works?</span></h4><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Businesses need funds to function and sometimes raising through equity or debt is not an option. So, if a company needs furniture or a machine for their office/factory, they can lease it. A lease can be an operating lease or a financing lease. Imagine, one of your friends wants to start a cab company but he doesn’t have any money to buy a car upfront and no bank will lend him money! So 5 of you pool in Rs 1 lakh each and buy a car worth Rs 5 lakhs and lease it out to him on the condition that at the end of every month, he will pay Rs 20,000 for the next 3 years. This is a win-win situation as:</span></p><ul style="text-align: left;"><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-family: arial;">You all make money and the monthly returns are predictable</span></li><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-family: arial;">He doesn’t have to borrow and can repay from his monthly earnings</span></li></ul><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">What if he can’t repay? The 5 of you simply sell of the car and divide the proceeds amongst yourselves.</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Companies raise funds through this route to keep their balance sheets asset light and their debt on balance sheet low. Lets say an EV startup wants to raise 10 Crores for buying batteries. Earlier the startup would approach HNIs and take lease finance from 2 partners contributing 5 crores each! But now platforms like Grip Invest bring this opportunity to retail investors by creating an LLP and taking contributions from retail investors (Minimum of 10,000 to 20,000) and making them partners. For the startup, they have to handle just 1 lessor and for Grip, they get bargaining power with OEMs (Original Equipment Manufacturers) to purchase assets and lease them.</span></p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><span style="font-family: arial;">How much money do you actually make?</span></h4><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Lets talk of what’s in store for you. Is it 22% p.a.? No. Is it 22% IRR? No. Are these companies lying? <em>No, not really.</em> For better explanation, let me take you through an active deal on Grip Invest’s website.</span></p><div class="captioned-image-container" style="background-color: white; color: #1a1a1a; margin-bottom: 16px; text-align: center;"><figure style="display: inline-block; margin: 0px auto; width: 728px;"><span style="font-family: arial;"><img alt="" class="sizing-default" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/bd856653-5af4-4837-9c4c-ffbdf10963da_546x667.png","fullscreen":null,"height":667,"width":546,"resizeWidth":326,"bytes":58301,"alt":null,"title":null,"type":"image/png","href":null}" height="398.24542124542126" src="https://cdn.substack.com/image/fetch/w_1100,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fbd856653-5af4-4837-9c4c-ffbdf10963da_546x667.png" style="display: block; height: auto; margin: 0px auto; max-height: 398.245px; max-width: 326px; width: 326px;" width="326" /><figcaption class="image-caption" style="color: var(--print_secondary, var(--print_secondary_on_web_bg_color, var(--print_secondary, #757575))); line-height: 1.4em; margin-top: 10px; padding-left: 109.198px; padding-right: 109.198px; width: 509.594px;">Snapshot of a deal on Grip Invest’s site</figcaption></span></figure></div><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">First of all - Why IRR? Why not CAGR?</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;"><em>CAGR</em> is used when there are few cash inflows and outflows. You invest Rs 50,000 in Dec ‘21 and you get back Rs 80,000 in Dec ‘24. Simple, your CAGR is 16.96%.</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">IRR is used when there are multiple cash flows. You invest Rs 50,000 in Dec ‘21 and you get back Rs 2,000 per month till Dec ‘24. Although you have received Rs 72,000, your IRR is ~ 29%. IRR as a number looks higher than CAGR but the final amount is lower. But before you jump to conclusions, IRR and CAGR comparison is apples to oranges kind of situation.</span></p><blockquote style="background-color: white; border-left: 4px solid var(--background_pop); color: #1a1a1a; margin: 1em 0px;"><p style="color: var(--print_on_web_bg_color, #1a1a1a); line-height: 1.6em; margin: 0px 0px 1em 1em;"><em><span style="font-family: arial;">On excel, IRR is different from XIRR. Under IRR formula we don’t consider the dates of inflows and outflows but under XIRR formula we consider both cashflows and the dates of these cashflows. Thus when using excel, use the XIRR formula.</span></em></p></blockquote><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;"><strong>An example:</strong> Lets say you invest Rs 1,00,000 in December ‘21 in the active Furlenco deal on Grip Invest’s website. It mentions a pre-tax IRR of 22%. So, pre-tax you earn Rs 1,37,699 and post tax you get back Rs 1,20,063. While the pre-tax IRR is 22.00%, the post-tax IRR is 11.58% only. Yes - almost half!</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">By putting in Rs 100,000 in Dec ‘21 I am getting Rs 1,20,063 post tax by Jun ‘24. This translates to just a 7.59% p.a. over 2.5 years. Debt mutual funds give ~ 6% p.a. post tax.</span></p><div class="captioned-image-container" style="background-color: white; color: #1a1a1a; margin-bottom: 16px; text-align: center;"><figure style="display: inline-block; margin: 0px auto; width: 728px;"><span style="font-family: arial;"><img alt="" class="sizing-default" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/e0df60e0-84d7-40a6-a747-d2e953c5a076_1162x439.png","fullscreen":null,"height":416,"width":1100,"resizeWidth":null,"bytes":39169,"alt":null,"title":null,"type":"image/png","href":null}" height="416" src="https://cdn.substack.com/image/fetch/w_1100,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fe0df60e0-84d7-40a6-a747-d2e953c5a076_1162x439.png" style="display: block; height: auto; margin: 0px auto; max-height: 416px; max-width: 728px; width: 728px;" width="728" /><figcaption class="image-caption" style="color: var(--print_secondary, var(--print_secondary_on_web_bg_color, var(--print_secondary, #757575))); line-height: 1.4em; margin-top: 10px; padding-left: 109.198px; padding-right: 109.198px; width: 509.594px;">Computing returns pre-tax and post-tax</figcaption></span></figure></div><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">The last payout is of ~ Rs 41,000. At the end of the lease, as per the agreement Furlenco will buy the asset from the LLP at a pre-determined price and the last expected payout is based on the assumption of the LLP getting this amount. If at all Furlenco isn’t able to pay or underpays, then you might make significantly lower returns.</span></p><blockquote style="background-color: white; border-left: 4px solid var(--background_pop); color: #1a1a1a; margin: 1em 0px;"><p style="color: var(--print_on_web_bg_color, #1a1a1a); line-height: 1.6em; margin: 0px 0px 1em 1em;"><em><span style="font-family: arial;">Someone whom I explained the above calculation to laughed it off saying how come I am getting only Rs 20,000 over 2.5 years when the company is paying Rs 2,400 per month! Won’t I make 20,000 in 9 months itself? I had to remind them that if the company stopped paying anything back after the 9th month, they would have paid 100,000 and got back 20,000 and thus lost a net of 80,000.</span></em></p></blockquote><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><span style="font-family: arial;">Taxation & Structure</span></h4><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">The platforms at their end analyze and shortlist companies that they believe won’t go bankrupt and will pay lease timely. Then, they create an LLP (for each deal, a new LLP) in which the platform (or some one from their team) is the designated partner and all the retail folks (like you and me.. the Rs 20,000 investing people) are partners.</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">The platform takes a security deposit from the company they’ll be leasing assets to (usually 5% to 15%) and from whatever monthly lease they get, they charge a management fee and other expenses (ranging from 2% to 4% in total). Whatever remains is then distributed to all partners as profit! At the end of the lease, the lessee purchases the asset from the LLP at a price mentioned in the agreement.</span></p><blockquote style="background-color: white; border-left: 4px solid var(--background_pop); color: #1a1a1a; margin: 1em 0px;"><p style="color: var(--print_on_web_bg_color, #1a1a1a); line-height: 1.6em; margin: 0px 0px 1em 1em;"><em><span style="font-family: arial;">As a partner in an LLP, you don’t have to pay any taxes on profits distributed. So, whatever monthly payout you get from this investment is tax-free but you have to disclose it in your ITR.</span></em></p></blockquote><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">In the below table, we have taken an example of a 5 crore lease by an LLP with 1000 partners. Each partner has put in Rs 50,000 and they will receive Rs 1,604 post tax as profit from the LLP. They don’t have to pay any tax on this Rs 1,604 per month.</span></p><div class="captioned-image-container" style="background-color: white; color: #1a1a1a; margin-bottom: 16px; text-align: center;"><figure style="display: inline-block; margin: 0px auto; width: 728px;"><span style="font-family: arial;"><img alt="" class="sizing-default" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/37ea0ca0-9b5c-4ca4-aaa6-b08dfcb750fd_1014x383.png","fullscreen":null,"height":383,"width":1014,"resizeWidth":null,"bytes":40212,"alt":null,"title":null,"type":"image/png","href":null}" height="383" src="https://cdn.substack.com/image/fetch/w_1100,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F37ea0ca0-9b5c-4ca4-aaa6-b08dfcb750fd_1014x383.png" style="display: block; height: auto; margin: 0px auto; max-height: 383px; max-width: 728px; width: 728px;" width="728" /><figcaption class="image-caption" style="color: var(--print_secondary, var(--print_secondary_on_web_bg_color, var(--print_secondary, #757575))); line-height: 1.4em; margin-top: 10px; padding-left: 109.198px; padding-right: 109.198px; width: 509.594px;">Sample computation</figcaption></span></figure></div><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><span style="font-family: arial;">Is the company legit?</span></h4><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Grip Invest has raised funds from marquee VCs and Wint Wealth is backed by Zerodha. What they are doing is not Ponzi and they indeed are democratizing investing. They provide a platform to retail investors to diversify their fixed income portfolio with a high risk, high return product.</span></p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><span style="font-family: arial;">Risks</span></h4><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><em><span style="font-family: arial;">Credit Risk</span></em></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">These investments carry risk as the underlying companies are usually startups and most of them aren’t profitable. However, the platforms vet them well and seem to select only well-funded startups, which have achieved scale. There is moderate to high risk in this investment.</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Almost 30-35% of the returns are in the last installment. If the lessee fails to pay the terminal value of the asset at the end of the lease to purchase it and keep it, you may lose money or make significantly lower returns.</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><em><span style="font-family: arial;">Liquidity Risk</span></em></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Once invested, there is almost no chance of redeeming your investments before maturity. The only way is to find someone else who is willing to buy the investment from you at the present value of all future cashflows. Basically, almost no liquidity. Some deals might have an exit opportunity after 24 months or the platform can provide and exchange for you to find buyers. Still, no to very low liquidity.</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><em><span style="font-family: arial;">Tax</span></em></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Although the returns from this investment are tax-free in your hand, they are still taxed at the LLP’s level and the tax reduces the IRR by almost half.</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><em><span style="font-family: arial;">Returns</span></em></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Currently, the returns are ~ 11% IRR and this at a time when these platforms don’t seem to be charging any fee (to get more investors onboard). Once they start charging a fee, the IRR would go down further to 7%-9%.</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><em><span style="font-family: arial;">Reinvestment risk</span></em></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Where will an investor put the money he/she receives from these investments? Will you end up spending it? Or will you start an SIP of this value? If I invest Rs 20,000 and get like a Rs 200 payout per month as payouts, there is nowhere I can invest Rs 200!</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">If you are below 40-45 years of age, your financial goal is majorly to grow your wealth and not make a monthly income out of it.</span></p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><span style="font-family: arial;">Alternative to debt mutual funds and FDs?</span></h4><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">The CAGR of 7.59% p.a. as calculated is for comparing different investment avenues for a person who doesn’t need any monthly income from their investments. Lease finance would earn me an extra 1.5% p.a. but the are much riskier than debt funds AND you cannot redeem them in case of an emergency. For most investors debt investments are to meet short term liquidity or keep cash to shift to equities in case of a market fall.</span></p><div class="captioned-image-container" style="background-color: white; color: #1a1a1a; margin-bottom: 16px; text-align: center;"><figure style="display: inline-block; margin: 0px auto; width: 728px;"><span style="font-family: arial;"><img alt="" class="sizing-default" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/2674e9f8-3ea2-48d0-ae8d-9ac04b04c914_487x130.png","fullscreen":null,"height":130,"width":487,"resizeWidth":null,"bytes":7854,"alt":null,"title":null,"type":"image/png","href":null}" height="130" src="https://cdn.substack.com/image/fetch/w_1100,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F2674e9f8-3ea2-48d0-ae8d-9ac04b04c914_487x130.png" style="display: block; height: auto; margin: 0px auto; max-height: 130px; max-width: 487px; width: 487px;" width="487" /></span></figure></div><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Debt funds are diversified into papers of different companies and are always under regulator’s radar. My investment in lease finance could run into trouble if the company defaults payments or goes into a cash crunch. <em>Startups are risky</em>.</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Even the hybrid-conservative funds (65 debt, 35 equities) can deliver higher returns over 3 years, than ~ 7.59% p.a.</span></p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><span style="font-family: arial;">Who should invest?</span></h4><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Typically if you are cash rich, have adequate exposure to equities and fall under the 30% tax bracket (for < 3 years investment), this investment might hold merit. It offers you more returns than FDs and most debt mutual funds. However, do take these points into consideration:</span></p><ul style="text-align: left;"><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-family: arial;">Don’t put all funds into a single asset, diversify into 4-5 assets</span></li><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-family: arial;">Don’t invest in assets that are longer than 3 years in duration</span></li><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-family: arial;">Don’t think of this as an alternate to FDs and Debt funds, you can put ~ 10% to 15% of your fixed income portfolio for diversification</span></li><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-family: arial;">Don’t expect to have liquidity on this investment</span></li><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-family: arial;">Re-invest the monthly payouts if you don’t need it for your living expenses</span></li></ul><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><span style="font-family: arial;">Referral:</span></h4><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Even after considering the above risks, if you choose to invest / try out this investment, then click on this referral code and you will get Rs 2,000 (Dec ‘21 only, Rs 1000 after Dec ‘21) in your bank as a bonus after making your first investment.</span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px 0px 1em;"><span style="font-family: arial;">Link: <a href="https://www.gripinvest.in/?referralCode=RB6153&utm_medium=Copy&utm_source=referralLink" rel="nofollow ugc noopener" style="text-decoration-line: none;">Grip Investment Referral Link</a></span></p><p style="background-color: white; color: #1a1a1a; line-height: 1.6em; margin: 0px;"><span style="font-family: arial;">Referral code: RB6153</span></p>Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-663337764522858952.post-69541864940867908372021-12-14T20:00:00.005+05:302021-12-14T20:03:25.262+05:30Power Grid Corporation of India - Fundamental Analysis<p><span face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; color: #1a1a1a; font-size: 19px;">In this post, we will study the business model of Power Grid Corporation of India and try to analyze what the stock price is worth as per academic models. This is not a research report or recommendation to BUY/HOLD/SELL the discussed stock.</span></p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em; text-align: left;">Company Snapshot</h4><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Power Grid Corporation of India Ltd. was incorporated in 1989 with an aim to consolidate all power transmission assets of the country into a single entity. The company is a <em>Maharatna</em> PSU in which the Government of India owns a 51.34% stake. Power Grid sets up extra high volatage alternating current and high voltage direct current transmission lines and moves large blocks of power from power plants to load centers across different regions.</p><div class="separator" style="clear: both; text-align: center;"><img border="0" data-original-height="584" data-original-width="820" height="228" src="https://blogger.googleusercontent.com/img/a/AVvXsEg9Pb0-AJE69OUsSIyMa_f663u6ho5SfiaASFvgrvtYfaAGTsMkMeu9W6m0xSuf6M_l7RR612cdLp8ih4gWZ9QlRfBVe-ZK9AreT4AcLKR4lNrCFrY-JJC4bjHs393S9M8aWc7OjgeqiQ1UzdXV0Us48aK1A-uMUOxPZ3E4Md9iEmIDUzzzJnQupcAI=s320" width="320" /></div><br /><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">The company owns 1,70,724 circuit kilometers of transmission lines and 262 sub-stations.</p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em; text-align: left;">Industry</h4><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">The core players in the power sector are companies who generate, transmit and distribute power. Transmission companies like Power Grid connect the power generators to the distribution companies. And for this, they have to create transmission networks. The transmission sector in India comprises of inter-state and intra-state grids.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Private players have a 7.4% share (2020) of the total line length. Power Grid has a ~ 85% market share of the inter-state transmission market basis tariff charges and a ~45% share of the total power transmitted in the country, making it a critical asset for the Government of India. Of the new transmission lines added in 2021 (circuit kms), State Government owned companies had a 46% share, Central Government owned (Mostly Power Grid) had a 43% share while private players had a 11% share.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>An issue that plagues this industry</em></p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Distribution companies, a.k.a “discoms”, enter into long-term purchase agreements with the power generation companies, a.k.a “gencos” and then sell this power to end users - industries and domestic consumers. However, due to political pressure and inefficient operations, they end up making losses. This spirals into discoms not honoring their purchase agreements and owing a lot of money to power generators.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">This is largely the case with state-run discoms. Private discoms have better operating efficiencies and are able to pass on increase in costs to the end users. The Government of India came up with the UDAY scheme in 2015 with the aim to turnaround the state-run discoms by improving operational efficiency, reducing the cost of power and restructuring and refinancing the finances. The Covid pandemic came as a setback to the slowly improving fortunes of these discoms and the Government of India had to announce a special package of Rs 1.25 Lakh crores to help these discoms repay power generation companies. The Government has planned an outlay of Rs 3.03 lakh crore between FY22 and FY27 to make the state run discoms financially sustainable and operationally efficient.</p><h5 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">Revenue Model</h5><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">The company gets almost all its transmission revenues from state power utilities (SPUs). Although the company has other sources of income such as consultancy services and telecom networks, transmission charges contribute >90% of the income.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">The other sources of income for the company are consultancy services (Rs 501 Crores in FY21) and telecom (Rs 707 Crores in FY21). The company operates in the telecom segment under the brand name <em>PowerTel</em>, providing Pan India overhead optical fiber network. The company is exploring business opportunities such as setting up data centers, using transmission lines for telecom purposes, etc. Currently, PGCIL is one of the companies helping implement Bharat Net, a project to connect Gram Panchayats by broadband.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>Transmission business</em></p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">The company builds transmission networks (grids) and maintains it. It then charges a fee from customers using its grid. Capex and Capitalization are two important terms to understand when studying Power Grid. Capex is the capital expenditure incurred towards building new assets. Capitalization is when the assets are ready-to-use and start generating revenues and cashflows for the company. So, there are years when the company incurs high capex and later years when these assets start making money for the company.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">There are two types of projects: Regulated Tariff Mechanism (RTM) and Tariff Based Competitive Bidding (TBCB). The period of agreements are ~ 35 years, and the tariff charges are pre-decided by CERC. The revenue doesn’t depend on the volume of power flowing but on the availability of lines. Before the TBCB route came, Power Grid would work on a <em>cost plus</em> basis which meant that the company would recover the project cost. Off late, the incoming orders are equally split between RTM and TBCB. Under the TBCB route, the bidder with lowest annual levelized tariff is given the project for 25 years under a Build, Own, Operate and Maintain (BOOM) format. Reports peg Power Grid’s share of TBCB projects at 42% to 48%, showing its financial might. RTMs have a higher ROE of ~ 15% while TBCBs have a lower ROE of ~ 14%. The contribution of TBCBs to the PAT is currently 3% but is expected to be significant by the end of the decade.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>Welcome InvITs - National Monetisation Pipeline</em></p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">The Government is looking to monetize assets so that they have more money available for public welfare expenditures. As a part of this initiative, they planned a Rs 45,000 Crore transmission asset monetization by 2025.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Power Grid plans to use InvITs to monetize its TBCB assets. Why cannot RTM assets be monetized? Because they are regulated by CERC and ROEs can be tinkered with. So, investors might not really be open to putting money in RTM assets. The money that Power Grid receives from InvITs can be used to repay debt, undertake capex for growth or give dividends to shareholders. And the Government would really like dividends, to serve the purpose of this entire exercise.</p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em; text-align: left;">Financial Analysis</h4><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">The company’s revenues have grown at a CAGR of:</p><ul style="text-align: left;"><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-size: 19px;">Between FY18-21: 9.79% (Revenues) and 4.79% (PAT)</span></li><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-size: 19px;">Between FY16-21: 13.93% (Revenues) and 15.41%(PAT)</span></li></ul><div class="captioned-image-container" style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; margin-bottom: 16px; text-align: center;"><figure style="display: inline-block; margin: 0px auto; width: 728px;"><div class="separator" style="clear: both; text-align: center;"><img border="0" data-original-height="289" data-original-width="1312" src="https://blogger.googleusercontent.com/img/a/AVvXsEiZCWOw5Cdt3Aj06OETeRWnjDVVn4ZuG5IGCxyduyT5cPy9suly56ITz4Q0Hqz3ZEM91eNTo5rX2djy0WryKr9CJAtjdQzqNVf_nBpRvs8wO6FRRLsW8J7GHJLjgd9JlDq7GGvD4jB3Rao6cB2MT8BEObwSfahiqckTj2HOHGVAvPVHi8YV3LJ7oKoh=s16000" /></div><figcaption class="image-caption" style="color: var(--print_secondary, var(--print_secondary_on_web_bg_color, var(--print_secondary, #757575))); font-family: sans-serif; font-size: 14px; line-height: 1.4em; margin-top: 10px; padding-left: 109.198px; padding-right: 109.198px; width: 509.594px;"><span color="var(--print_secondary, var(--print_secondary_on_web_bg_color, var(--print_secondary, #757575)))">Financial Snapshot: 5 years data</span></figcaption></figure></div><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Power grid uses a 30% equity, 70% debt split for projects in most projects. The firm has maintained a debt equity ratio in the range of 2x-2.5x and enjoys a AAA rating. This helps improve the ROE for shareholders even though the IRR of some projects is a little above 10% and ROCE is ~ 11%.</p><div class="captioned-image-container" style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; margin-bottom: 16px; text-align: center;"><figure style="display: inline-block; margin: 0px auto; width: 728px;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEi1OzshXkRKvmknZ7HTsGiL5nWPn932sC9LIc29e2bm2Ss_jgXEOKMcckrq8cK3pqGP6TOS_tN3w7o6Vp5HfY2-MlUXulQY0ctpzqR_utLm8mZI_1WcHomDTBnu8d-Gr5MZoWLF_68codnGtuIZ5eudZ-TITVLP6Dunm_v9tc1801WZC4GL_HPNzS0H=s814" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="391" data-original-width="814" height="309" src="https://blogger.googleusercontent.com/img/a/AVvXsEi1OzshXkRKvmknZ7HTsGiL5nWPn932sC9LIc29e2bm2Ss_jgXEOKMcckrq8cK3pqGP6TOS_tN3w7o6Vp5HfY2-MlUXulQY0ctpzqR_utLm8mZI_1WcHomDTBnu8d-Gr5MZoWLF_68codnGtuIZ5eudZ-TITVLP6Dunm_v9tc1801WZC4GL_HPNzS0H=w640-h309" width="640" /></a></div><figcaption class="image-caption" style="color: var(--print_secondary, var(--print_secondary_on_web_bg_color, var(--print_secondary, #757575))); font-family: sans-serif; font-size: 14px; line-height: 1.4em; margin-top: 10px; padding-left: 109.198px; padding-right: 109.198px; width: 509.594px;"><span color="var(--print_secondary, var(--print_secondary_on_web_bg_color, var(--print_secondary, #757575)))">Snapshot of performance ratios over 5 years</span></figcaption></figure></div><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">The ROE and ROCE is in an improving trend. If we do a DuPont analysis of the ROE, we see that the improvement in ROE is from an improvement in Net-profit margins from 28.99% in FY17 to 30.36% in FY21 and increase in asset turnover ratio from 0.1371 to 0.1554. If the FY21 asset turnover is reduced to 0.14, the ROE falls from 17.88% to 16.18%.</p><div class="captioned-image-container" style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; margin-bottom: 16px; text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjzMMvaDxj_i3MsZrLQo-9EHIsfuNcPuQWBHFwHW7oYVr92EuCRMSTX50_NbrrtuAkOsnkbRFl9eVhcITNkZfCKSPJRViMp6mAv-_MabW_DB-1rV5xaVaMpVFOOm6EKREn54HPiy9UV2qkhUbGPOl2SsAeeyJfqXcIivqG9-Hr5xJv-9YJtyM2oJiE1=s469" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="259" data-original-width="469" height="221" src="https://blogger.googleusercontent.com/img/a/AVvXsEjzMMvaDxj_i3MsZrLQo-9EHIsfuNcPuQWBHFwHW7oYVr92EuCRMSTX50_NbrrtuAkOsnkbRFl9eVhcITNkZfCKSPJRViMp6mAv-_MabW_DB-1rV5xaVaMpVFOOm6EKREn54HPiy9UV2qkhUbGPOl2SsAeeyJfqXcIivqG9-Hr5xJv-9YJtyM2oJiE1=w400-h221" width="400" /></a></div><figure style="display: inline-block; margin: 0px auto; width: 728px;"><figcaption class="image-caption" style="color: var(--print_secondary, var(--print_secondary_on_web_bg_color, var(--print_secondary, #757575))); font-family: sans-serif; font-size: 14px; line-height: 1.4em; margin-top: 10px; padding-left: 109.198px; padding-right: 109.198px; width: 509.594px;">ROCE in red and ROE in blue</figcaption></figure></div><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>Capitalization to Capex</em></p><div class="captioned-image-container" style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; margin-bottom: 16px; text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgzhQJ3P-5SQXre4OoCki_C8VGJNM10rhhu7YNJWi2W3CZF3-P5hJAFZXV2E6yzribm-sHeOwkSy62p73dlmMC6_yLcHETg6cBsgl8f8m1kvnnbxJsq4S0lVlqSsmAM3cM0k77KpCeEB0XqodiMhutinZr2URsCzql46yqzEFkU4EphPJdo7tHa_HgV=s1090" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="115" data-original-width="1090" height="69" src="https://blogger.googleusercontent.com/img/a/AVvXsEgzhQJ3P-5SQXre4OoCki_C8VGJNM10rhhu7YNJWi2W3CZF3-P5hJAFZXV2E6yzribm-sHeOwkSy62p73dlmMC6_yLcHETg6cBsgl8f8m1kvnnbxJsq4S0lVlqSsmAM3cM0k77KpCeEB0XqodiMhutinZr2URsCzql46yqzEFkU4EphPJdo7tHa_HgV=w640-h69" width="640" /></a></div></div><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Over the last decade, we see FY11-FY15 where the Capex was higher than the capitalization and then we have the FY16-FY21 period where the capitalization increased. Over the next 4-5 years, the capitalization is expected to be higher than the Capex.</p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em; text-align: left;">Future Outlook</h4><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">The per-capita consumption of electricity grew ~ 15% between 2016 and 2020 but is expected to grow ~ 30% between 2020 and 2025.</p><div class="separator" style="clear: both; text-align: center;"><img border="0" data-original-height="523" data-original-width="1344" height="250" src="https://blogger.googleusercontent.com/img/a/AVvXsEidJAMKXm6JxUORqmpxmWs_d6z-59fAEF4IoEvsjd5nwtjkp8yN7g2CvYB2rIMOYrXP2SGP57xCBFuV4pctJR0kq4GxgfuurpTCHNUvOulg9qpdOH8BDpsMacbWa88ADFvlyTXeeJ0lxSPJT8A1-amHAWRvl7zS7k3WcNWN8O070p5yODh4xN8J3rFi=w640-h250" width="640" /></div><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">India’s installed capacity as per 2021 data is 382 GW but is expected to rise to 817 GW by 2030. The share of renewables is expected to increase from ~ 25% to ~54%. Power Grid is working on Green energy corridors in different phases and this segment provides a growth opportunity for the company. Other policies provide growth opportunities related to smart meters (to curtail AT&C losses), grids to support EV charging, battery storage, etc.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEgqBd70tfZ6ZKbaMFCh9_2TJx1FVTB65WZZe35WwpbDvwn_LngTyJ4fdae5EkBWDf0uGPZu5O9XpT3bD6o-Y-PUncpNR3ZTPGZQfBzhrYdd9iYbgJxBhpgdKnHsyDxsylknZGmBHPNlgk1dhNCeg06lz4ETmDUVghqzhXK_ABX5Hujts-p2y4GqosJZ=s1261" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="495" data-original-width="1261" height="252" src="https://blogger.googleusercontent.com/img/a/AVvXsEgqBd70tfZ6ZKbaMFCh9_2TJx1FVTB65WZZe35WwpbDvwn_LngTyJ4fdae5EkBWDf0uGPZu5O9XpT3bD6o-Y-PUncpNR3ZTPGZQfBzhrYdd9iYbgJxBhpgdKnHsyDxsylknZGmBHPNlgk1dhNCeg06lz4ETmDUVghqzhXK_ABX5Hujts-p2y4GqosJZ=w640-h252" width="640" /></a></div><br /><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><strong>Smart Meter Project:</strong> The Government of India has a planned outlay of Rs 22,500 Crores for 25 Crore smart meters to be installed. This ~900 per meter will cover 15% of the cost of Smart Meters. The ROE on the smart meter project is pegged at ~ 14% and of the opportunity size of ~ Rs 1.5 Lakh Crores, Power Grid is targeting a capex of ~ Rs 15,000 Crores over the next 3-4 years in this segment.</p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em; text-align: left;">Risks</h4><ul style="text-align: left;"><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-size: 19px;">The CERC regulates the ROE that power transmission companies earn. This ROE fixed at 15.5% for 2019-24 can be lowered in the future by reducing the price charged to discoms. Any reduction in ROEs can hit the top-line, bottom-line and dividend payout to shareholders.</span></li><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-size: 19px;">The Government can step in and ask Power Grid to give discounts and rebates to discoms. The company gave a Rs 1,075 Crore rebate in Q1FY20 because of a fall in demand from the Covid-19 disruptions.</span></li><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-size: 19px;">In 2019, the private transmission companies approached the Competition Commission of India alleging that Power Grid has unfair advantages of access to funds and support from Government because of which it is indulging in predatory pricing in biddings.</span></li></ul><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em; text-align: left;">Valuations</h4><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>Current Market Price: Rs 204</em></p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Power Grid trades at a PE of 11.74x (5Y median 13.4) and an EV/EBITDA of 7.12. At current price, the stock trades a dividend yield of ~ 4.81%. The stock trades at a price-to-book ratio of 1.84.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Going forward, with lower capex, increasing capitalization, planned monetization of TBCB assets and the removal of DDT, the management should maintain a dividend payout ratio of ~ 55%. This would translate to dividend per share of ~ 14.5 per share as calculated. This results in a dividend yield of ~ 6.97%. Over the next 3 years, the company could pay out dividends of Rs 44.10 per share.</p><div class="separator" style="clear: both; text-align: center;"><img border="0" data-original-height="434" data-original-width="1100" src="https://blogger.googleusercontent.com/img/a/AVvXsEiv2c-ijKHGlhJ9Y4be1CnrVtWOF-rJhW8nELy7-32ryKXfgACTn_uFJYVHByrA0deZn_F9d7XnZrw1-X2oczktdqpzDher4b-DSD9NNQUL-Fxfg5QojRiaP13Du_EtMCIaSorBsiYPTee01jxqPl54cswHMlEA-337iMZ7egLHmmczvlTCYTCYJopU=s16000" /></div><br /><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Upside in dividend yield is possible if the company’s revenues grow faster than 5% p.a. and the dividend payout ratio is 60% - 65%.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>If we value the company basis Dividends:</em></p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Assuming the above dividends for first 3 years, a terminal growth rate of ~ 5% and WACC of ~ 11.35% for dividends, we get the value of the stock at Rs 200 per share.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>If we value the company basis Cashflows:</em></p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Taking the risk-free rate as 6.35% (10Y yield) and market risk premium of ~ 6.85%, we get an intrinsic value of Rs 268 per share. The market risk premium for India has been taken from Prof. Aswath Damodaran’s website. At current price, the stock trades at a ~ 24% discount to its intrinsic value.</p><h5 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">Remarks</h5><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">I believe that I have been conservative assuming the growth numbers and that the company will deliver higher growth numbers, basis improving financial fortunes of the discoms and higher capitalizations for PGCIL. Also, with the asset monetization the dividend payout ratio should be quite liberal. A dividend yield of ~ 6.5% to 7% and an upside potential in the stock price by ~ 8% p.a. is what investors can expect.</p><h5 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">Disclaimer</h5><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px;"><em>This post is a breakdown of the discussed company’s business model. Raghav Behani has a holding in the stock discussed and can close positions in the future without intimation. The views and opinions are Raghav Behani’s personal and do not reflect his employer’s views.</em></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-37691377419768017812021-11-07T14:36:00.003+05:302021-11-07T14:36:54.414+05:30A 10 step guide to the adequate insurance cover<p>If you are a regular reader of personal finance blogs, the odds are high that you know you need a term insurance cover. With step 1 sorted, investors make a mistake on step 2 - They buy a 1 Crore term cover. The <em>Crorepati</em> dreams were instilled in our minds while growing up and thus, Rs 1 Crore is a psychological number for the Indian middle class. But is a Rs 1 Crore term cover adequate? Probably not.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5t-TjYgPmgzwdmsKqQJ6mJhLdmH9STcm8WB1VIfubV8aPLmX4JTQ_-bPipb99l3DIq19HodV07j3kVVG-8k8h7cKH0zLtONJ8Kzs3ICxm1xoTCfXLreW_mj12LMO0YgVzMMMwKr_8n1Y/s2048/41_22.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="2048" data-original-width="2048" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5t-TjYgPmgzwdmsKqQJ6mJhLdmH9STcm8WB1VIfubV8aPLmX4JTQ_-bPipb99l3DIq19HodV07j3kVVG-8k8h7cKH0zLtONJ8Kzs3ICxm1xoTCfXLreW_mj12LMO0YgVzMMMwKr_8n1Y/w320-h320/41_22.jpg" width="320" /></a></div><br /><p>Consider a few points:</p><ul style="text-align: left;"><li>In your absence, will a Rs 1 Crore cover be sufficient enough to cover outstanding loans, credit card bills and other liabilities?</li><li>After covering the liabilities, will the left-over amount be sufficient enough to provide for monthly expenses of your family for a decade or 2?</li><li>After providing for monthly expenses, will the left over amount be sufficient enough to put your next generation through college?</li></ul><p>The purpose of this post is to get you thinking on the correct lines. By the end of this post, you won’t know how much cover you need but you’ll know how to calculate the same.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfG0I-7PTBM5MKS00pozvRiERTtE9hiKZYaYF4DnEjBX43IoENjVxDERk0LQHm5wtysfYrzfi3l68T5M63Rwm6ApbwuKjsQfsHsRPYkK9-M1pzyZWYHPx8DywNij8tF7h5bielDgwnqpM/s1047/Think.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="499" data-original-width="1047" height="191" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfG0I-7PTBM5MKS00pozvRiERTtE9hiKZYaYF4DnEjBX43IoENjVxDERk0LQHm5wtysfYrzfi3l68T5M63Rwm6ApbwuKjsQfsHsRPYkK9-M1pzyZWYHPx8DywNij8tF7h5bielDgwnqpM/w400-h191/Think.png" width="400" /></a></div><h4 style="text-align: left;"><span style="font-size: medium;"><u>What is wrong with a 1 crore term cover?</u></span></h4><p>Insurance isn’t a one size fits all product. Your current situation may also not be the right parameter of calculating your financial needs.</p><p>For example, you are a 26 year old earning 12 LPA and then you go for an MBA. 18 months later, you’re a 27 year old earning 25 LPA and you also have an education loan of Rs 25 Lakhs. Would the same term cover you bought pre-MBA be adequate for your post MBA goals?</p><p>Or you’re a single 28 year old earning 15 LPA and 4 years later you’re married and have an infant and you’re now earning 30 LPA. Won’t the insurance requirement too have evolved over time?</p><p>A 10 step guide to calculate the adequate insurance cover:</p><p><br /></p><h4 style="text-align: left;"><u>Step 1: Open an excel sheet</u></h4><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMMFV9cUzDoOCluxE4OGo8_DjbYiYnjYjCCtde4uexQdKDo-M1aDVYPhDRQNB6JuOUole9OVOXMdoyZuMiRofNP2Yag5IdqRpYTgbPTvx0W4Vky4eql77CyfGr9ERrmJeRsdZyGD8VtpY/s604/Excel+sheet.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="377" data-original-width="604" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMMFV9cUzDoOCluxE4OGo8_DjbYiYnjYjCCtde4uexQdKDo-M1aDVYPhDRQNB6JuOUole9OVOXMdoyZuMiRofNP2Yag5IdqRpYTgbPTvx0W4Vky4eql77CyfGr9ERrmJeRsdZyGD8VtpY/s320/Excel+sheet.png" width="320" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Good old excel sheet</td></tr></tbody></table><div><br /></div><h4 style="text-align: left;"><u>Step 2: Note down your liabilities</u></h4><p>Preferably in order of the interest rate: Personal loan, EMIs, education and home loan. It is wiser to repay the loans costing more first. Also, bifurcate the share of loans between yourself and the co-payee (spouse, parent, etc.)</p><h4 style="text-align: left;"><u><br /></u></h4><h4 style="text-align: left;"><u>Step 3: Note down your investments</u></h4><p>Note down the debt and equity funds, equities, PPF, Gold, etc. that you have invested in. Do not count your own house in this because you wouldn’t want your family to sell off their own house and go live on rent.</p><h4 style="text-align: left;"><u><br /></u></h4><h4 style="text-align: left;"><u>Step 4: Compute the net liability</u></h4><p>Subtract the amount under step 3 from the amount under step 2. This is the amount that will be needed by your family to extinguish all liabilities.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0f-Ij1M4Rbk-WbipmkC4cUlNQvow9WJNSPr7q9Pek-CN1rJ-bMy5eEyCk4NLzLPqP91v9aCzbuKPcq4rzL50QVQHDWY0LxamQkJuwNjI4p2esrw7i5i4a8XDQ0w26FJKntWuMHkAM5XY/s1087/Net+Liabilities.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="579" data-original-width="1087" height="341" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0f-Ij1M4Rbk-WbipmkC4cUlNQvow9WJNSPr7q9Pek-CN1rJ-bMy5eEyCk4NLzLPqP91v9aCzbuKPcq4rzL50QVQHDWY0LxamQkJuwNjI4p2esrw7i5i4a8XDQ0w26FJKntWuMHkAM5XY/w640-h341/Net+Liabilities.png" width="640" /></a></div><p><br /></p><div><hr /></div><p>Next, we need to compute how much money your family will need to meet their monthly expenses.</p><h4 style="text-align: left;"><u><br /></u></h4><h4 style="text-align: left;"><u>Step 5: Compute the monthly household expenses</u></h4><p>This may sound like a budgeting exercise, but you will have to note down the monthly expenses incurred by your family: Groceries, school fees, electricity, fuel, medical expenses, health insurance premiums, clothes and accessories, etc.</p><p>At this stage, only consider the household expenses that are met by you. If your spouse is paying some bills then they would be able to continue paying those in your absence too.</p><h4 style="text-align: left;"><u><br /></u></h4><h4 style="text-align: left;"><u>Step 6: Decide till when should monthly expenses be met</u></h4><p>If your spouse is working, then they should be able to save for their retirement. In this case, the monthly expenses would be required to be met till your youngest dependent turns 25 i.e., of an income earning age. However, if your spouse is not earning then the household expenses would have to be met till the spouse turns 80.</p><h4 style="text-align: left;"><u><br /></u></h4><h4 style="text-align: left;"><u>Step 7: Assume the inflation rate and portfolio returns rate</u></h4><p>TLDR: Inflation 6% p.a. and portfolio returns 8% p.a.</p><p>Currently, the long term inflation is expected to range between 4.5% and 6%. This is the rate at which your monthly expenses will grow because of rising prices of food, fuel, etc. If your household expenses are Rs 75,000 p.m. today then they won’t be the same even after a year right?</p><p>For portfolio returns, one can assume 7% to 8% on a conservative portfolio of 60% fixed income (5% returns post tax) and 40% equities (10% returns post tax). You might think that your family will put all the money in a fixed deposit (least risk) but then it would be very tough to beat inflation in the long run.</p><h4 style="text-align: left;"><u><br /></u></h4><h4 style="text-align: left;"><u>Step 8: Dirty Math</u></h4><ul style="text-align: left;"><li>Multiply the monthly household expenses <em>with </em>12 to get the annual household expenses</li><li>Then multiply this annual expense figure <em>with</em> the Step 6 figure to get the corpus required</li><li>Now, compute the present value of this corpus by using the Present Value formula in excel</li><ul><li><p style="display: inline !important; text-align: left;">For PV formula:</p>rate = [(1 + portfolio returns) / (1 + inflation rate)] - 1</li><li>period = Step 6 number</li><li>pmt = annual household expenses (negative as its a cash outflow)</li></ul></ul><p style="text-align: left;">This gives us with the corpus that your family will need to meet their inflation adjusted household expenses. We’re not done yet!</p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvwJ01NbX8BbiSxfdBRdL6E9HD_Xe9SUjcJIyrcpqCk26cRvL_1tamBJ7TxUXWFHaUhqdUWWzzBBJoQumuFzXKB5FakvshdjELPLWwl2wOZ-QF8LjO20_uvzF7gnHR_HXXcB46fVIForY/s724/Monthly+Corpus.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="322" data-original-width="724" height="178" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvwJ01NbX8BbiSxfdBRdL6E9HD_Xe9SUjcJIyrcpqCk26cRvL_1tamBJ7TxUXWFHaUhqdUWWzzBBJoQumuFzXKB5FakvshdjELPLWwl2wOZ-QF8LjO20_uvzF7gnHR_HXXcB46fVIForY/w400-h178/Monthly+Corpus.png" width="400" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Corpus needed to meet monthly expenses</td></tr></tbody></table><br /><div><hr /></div><h4 style="text-align: left;"><u><br /></u></h4><h4 style="text-align: left;"><u>Step 9: Compute the amount required for long term goals</u></h4><p>Would you need money to put your children through college, or your spouse to afford a 2bhk flat, or your elderly parents to have a monthly cashflow in your absence? While it is tough to predict the future, it is wise to think of the low hanging obvious goals.</p><p>Here, you can also factor in other points such as - If your spouse has investments of Rs 50 Lakhs, they can contribute some amount to your child’s education. If your parents have savings of Rs 30 Lakhs, then the monthly expenses contribution from your corpus would be lower. This is a personal finance situation that varies from person to person.</p><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1cKtRP_xrq1aUC-xRSOgCZCr2oMqvvJbm9y4LisJfDKO329jUeK3S-P-cn9OrcPZDA9lL5gW-z9qXnbZ45vetMlP9Eby6EcObfQfY13Gd0oHSqFbBC4WdYCpU71ZuN56OUaBRzbfZcbU/s1047/Goals.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="118" data-original-width="1047" height="72" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1cKtRP_xrq1aUC-xRSOgCZCr2oMqvvJbm9y4LisJfDKO329jUeK3S-P-cn9OrcPZDA9lL5gW-z9qXnbZ45vetMlP9Eby6EcObfQfY13Gd0oHSqFbBC4WdYCpU71ZuN56OUaBRzbfZcbU/w640-h72/Goals.png" width="640" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Critical life goals and the amount required</td></tr></tbody></table><h4 style="text-align: left;"><u><br /></u></h4><h4 style="text-align: left;"><u>Step 10: A+B+C</u></h4><p>Now add up the amounts from Step 4, 8 and 9. This gives you the ideal insurance cover that you require. In the example we have taken (the screenshots posted), the ideal insurance cover works out to ~ Rs 3 Crores (rounded down from Rs 3.18 Crores).</p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhM0nHchISAingPq-C0bVbxzAvhxDSyqee_zy5ZNAVFj3fXJvOVhWXr3YctfM9yqZ7BPaw9_pu8tr_4QYPjlz7nrx9-GzeQwo1RoZJNkVzdVPkI9hOTF7Ntdk2bITbumOhZE9j_wkoCEII/s870/Summary.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="142" data-original-width="870" height="104" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhM0nHchISAingPq-C0bVbxzAvhxDSyqee_zy5ZNAVFj3fXJvOVhWXr3YctfM9yqZ7BPaw9_pu8tr_4QYPjlz7nrx9-GzeQwo1RoZJNkVzdVPkI9hOTF7Ntdk2bITbumOhZE9j_wkoCEII/w640-h104/Summary.png" width="640" /></a></p><div><hr /></div><h4 style="text-align: left;"><br /></h4><h4 style="text-align: left;">What if I am not eligible to get the required life insurance cover?</h4><p>A lot of life insurance companies give you an option to take insurance coverage of 25x your CTC. If you’re not eligible to take the adequate coverage, you can adjust for factors such as long term life goals (your children can always go for an education loan to fund their college), check for possible reductions in monthly expenses, etc. and take the maximum eligible coverage. Once your income increases in a few years, you can go for a higher term cover too or take an additional term cover.</p><p>You can even consider opting for a separate insurance policy that covers your home / education loan and this would significantly reduce the cover required from the term insurance.</p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-44889158020751163302021-11-06T20:02:00.004+05:302021-11-06T20:09:13.727+05:30Startups and their IPOs<p> <span face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; color: #1a1a1a; font-size: 19px;">It is crazy but think of it - There is so much hype/buzz/chatter about IPOs but at the end of the day for most good IPOs, you have a small chance of allocation (~1% to 5%) and then if you get the allotment, the maximum value would be around Rs 15,000</span><span face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; color: #1a1a1a; font-size: 19px;"> </span><em style="color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px;">(no, applying 12 lots instead of 1 lot neither increases the probability of allocation nor the quantum of allocation)</em><span face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; color: #1a1a1a; font-size: 19px;">. So much discussion for a < 5% allocation chance of Rs 15,000 worth of shares? Even if the stock doubles on listing you’ll make only Rs 15,000 worth of notional gains. Think of it - How much money have you made by investing in IPOs over the last 5 years? So when you analyze consumer tech companies, think beyond just the IPO. Think from a long term perspective too.</span></p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOAdV3J5fi4xi92QIy2KpaVwuxKaMgHAlK524U-ny0izYsfVnKPVJT6fU_EiA-ji2ozI8YL2e-aJc-jeUA66Ky6O8O2EhXI5NYWyZToM__e2Pguwq5IKSuz152oRtCUNd99wALzQ7-mJk/s2048/Vector_IPO.jpeg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="2048" data-original-width="2048" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOAdV3J5fi4xi92QIy2KpaVwuxKaMgHAlK524U-ny0izYsfVnKPVJT6fU_EiA-ji2ozI8YL2e-aJc-jeUA66Ky6O8O2EhXI5NYWyZToM__e2Pguwq5IKSuz152oRtCUNd99wALzQ7-mJk/s320/Vector_IPO.jpeg" width="320" /></a></div><span style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px;">IPOs are expensive (most of the times). Naturally - the promoter and early investors want to squeeze the last possible penny off their stake sale. The management wants to raise maximum possible cash with minimum dilution to fund their business ambitions. The merchant / investment bankers want the maximum possible commissions / fees. And when a bull market sets it, when every investor is making money, it opens up opportunities for companies to come up with their IPOs.</span><p></p><h2 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.625em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">It is the IPO season on Dalal Street!</h2><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">One successful IPO of a much awaited business, where everyone (including retail investors) makes money, creates the demand for more IPOs. The media goes into a frenzy (to grab maximum eye balls), the bloggers and tweeters use this opportunity to grow their viewership and the stock brokers use this opportunity to onboard first time investors.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Like in every bull market, there is an IPO frenzy on Dalal Street this time too! This bull market we are witnessing the coming of age of Indian startups in the consumer technology space, that has influenced our daily lives. The likes of Zomato, Nykaa, PayTm, Policy Bazar, Oyo, Delhivery are either listed or in the pipeline. Companies which have made losses in the last 3 years can have only a 10% allocation to retail category in the IPO. 75% allocation is for QIBs and 15% for HNIs. So, the over-subscription for these IPOs is going as high as 50-100x meaning meagre odds of allocation for the retail investor.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Platform business + under-penetration in India viz-a-viz China and USA + growing share of online spends is one template you need to tell investors: <em>Listen folks, don’t see the valuation. See the story, see the opportunity. </em>And I won’t deny it. Some of these companies have the potential to create immense value for all stakeholders and money for shareholders.</p><div class="captioned-image-container" style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; margin-bottom: 16px; text-align: center;"><figure style="display: inline-block; margin: 0px auto; width: 728px;"><a class="image-link image2 image2-264-1093" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F672a051d-abde-41fe-a466-a4e15d2af7fb_1093x264.png" rel="nofollow ugc noopener" style="border: 0px; display: block; height: 0px; margin: 0px auto; padding-left: 0px; padding-right: 0px; padding-top: 0px; padding: 0px 0px min(24.1537%, 264px); text-decoration-line: none; width: 728px;" target="_blank"><img alt="" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/672a051d-abde-41fe-a466-a4e15d2af7fb_1093x264.png","height":264,"width":1093,"resizeWidth":null,"bytes":43212,"alt":null,"title":null,"type":"image/png","href":null}" height="264" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F672a051d-abde-41fe-a466-a4e15d2af7fb_1093x264.png" style="display: block; height: auto; margin: 0px auto; max-height: 264px; max-width: 1093px; width: 728px;" width="1093" /></a><figcaption class="image-caption" style="color: var(--print_secondary, var(--print_secondary_on_web_bg_color, var(--print_secondary, #757575))); font-family: sans-serif; font-size: 14px; line-height: 1.4em; margin-top: 10px; padding-left: 109.198px; padding-right: 109.198px; width: 509.594px;">Startup IPOs and their valuations</figcaption></figure></div><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Phew! Trust me, while making the above table I was suprised. From talking of 15-18x PE a decade back, to talking 40-50x PS today! Soon we will be valuing on price to story.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">BAAP (<strong>B</strong>uy <strong>A</strong>t <strong>A</strong>ny <strong>P</strong>rice) works if the runway for high growth is long enough. But again, if there is scope for 30% p.a. growth over the next 10 years, won’t competition kick in and bring down growth to normal levels?</p><h2 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.625em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">Life before and after listing.</h2><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Most of these companies are not making profits now and don’t even have a roadmap to profitability. Justified, as VCs never really asked for profitability - they wanted scale. However, the public markets will sooner or later demand a roadmap to profitability and won’t allow for quick pivots from one business model to another. You can compare it with life before marriage (random plans, flexibility, experimentation, etc.) vs. life after marriage (need prior approvals, need to communicate what’s on your mind, etc.).</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">These companies have reached a scale relying on deep discounts but cannot keep burning cash and diluting equity by raising more funds after listing. For them, the next task is to make existing users pay for services and at the same time maintain a 20%-30% p.a. or so growth rate for a decade.</p><h2 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.625em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">Don’t boycott these IPOs</h2><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>“On one side, there will be some who view a value of close to $20 billion (Rs 1,50,000 crore) for a company with a pittance in revenues, a history of operating losses and distracted management as insanity. On the other side, there will be some who feel that I am not giving the company credit for all of the new businesses it can enter, using its vast platform of users, and thus undervaluing the company,”</em> - Aswath Damodaran on PayTm.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">I believe that most of these startups will eventually destroy shareholder wealth, given their cash guzzling nature, the absence of a profitable core product and the limited pricing power. Out of these, we need to identify the ones that make long term investment sense. Every business model runs the risk of becoming obsolete or outperformed by new entrants. WazirX and Coinswitch Kuber have scaled up quickly to have a user base lager than Zerodha’s. This shows that in a tech driven world, moats aren’t strong enough.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">We are anyways not going to get allotment for all the IPOs we apply to. So, as investors we have to study if these companies are worth investing in for the long term post listing. The post-listing valuations will be crazier than the IPO valuations (as these get listed at a premium to their issue price). Why miss out on potential listing day gains even if you don’t believe the long term story? But if you want to invest for the long term in the IPO and after listing, consider this:</p><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); display: inline; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em; text-align: left;"></p><ul style="text-align: left;"><li><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); display: inline; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em; text-align: left;"><strong>Growth</strong></p></li></ul><p></p><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Can the company grow at 20% to 30% p.a. over the next 8-10 years? While analyzing growth, you will also have to consider the user base that the company has. Presence across millions of smartphone users in India gives the company other avenues of growth, apart from their core business.</p><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); display: inline; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em; text-align: left;"></p><ul style="text-align: left;"><li><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); display: inline; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em; text-align: left;"><strong>Road to profitability</strong></p></li></ul><p></p><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Does the company have the ability to increase prices and reach breakeven / profitability? Or will users use the app less frequently if prices go up. Think on lines of this - Tomorrow if PayTm starts charging me a fee on money transfer, I’ll use Google Pay! Or if PayTm increases merchant fees, then the merchant will ask me to pay through Google Pay or debit card. If Zomato increases the delivery fee, I might Swiggy or Dunzo my food order.</p><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); display: inline; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em; text-align: left;"></p><ul style="text-align: left;"><li><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); display: inline; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em; text-align: left;"><strong>Competition</strong></p></li></ul><p></p><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Capital has flowed to the top 2 players in each segment and it is very tough for anyone beyond the top 3 to survive and scale up. But even duopolies are no guarantee of profitability. Look at Jio Vs Airtel or the Swiggy vs Zomato.</p><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); display: inline; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em; text-align: left;"></p><ul style="text-align: left;"><li><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); display: inline; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em; text-align: left;"><strong>Founder</strong></p></li></ul><p></p><p style="background-color: white; color: var(--print_on_web_bg_color, #1a1a1a); font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">There is no metric you can judge the founder on. But charisma to raise capital when the going gets tough, the ability to negotiate hard on deals, the ability to build a strong team, the ability to see the future and serve the customers for what they want are some factors on which you can judge the founder.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px;">End of the day, there will be backers and naysayers for all of these IPOs and companies post listing. The backers will talk of growth, the naysayers will talk of valuations. It is you as an investor who will have to take a call based on your conviction.</p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-86806898244686053922021-05-27T15:42:00.003+05:302021-05-27T15:45:04.398+05:30International funds and ETFs for the Indian investor<p><span face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; color: #1a1a1a; font-size: 19px;">AMCs are rushing to introduce new funds and ETFs which give Indian investors exposure to international stocks. In this post, we analyze the multiple ways to get this exposure, existing schemes, the inherent risks and potential rewards, and the taxation of these funds and ETFs. Some advisors and financial planners advocate for a 15% to 20% exposure to international stocks for diversification. At the end of the post we also highlight some funds that investors can track and further research.</span></p><p><span face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; color: #1a1a1a; font-size: 19px;"><br /></span></p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHfMEpFh1GTCXVv2moE3NkvkFmRRqa2g-mVEnQU9f4M3-izyLzs74eaz1Uy8fxs56FtcKbx5MtmXKyK1PTc6keQ1CGCORBVGyOLbTR7u3FY3futBK3b2vgt6KAWhS9-PBbeA7vN04mnAo/s626/character-illustration-people-with-global-network-concept_53876-59874.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="500" data-original-width="626" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHfMEpFh1GTCXVv2moE3NkvkFmRRqa2g-mVEnQU9f4M3-izyLzs74eaz1Uy8fxs56FtcKbx5MtmXKyK1PTc6keQ1CGCORBVGyOLbTR7u3FY3futBK3b2vgt6KAWhS9-PBbeA7vN04mnAo/s320/character-illustration-people-with-global-network-concept_53876-59874.jpg" width="320" /></a></div><span style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px;"><p><span style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px;"><br /></span></p>International funds are not new to the Indian markets. SEBI gave approval to these funds back in 2007. But it wasn’t until recently that the investor appetite for “foreign stocks” grew and AMCs started serving them with international funds and ETFs. As an investor today, you have multiple ways of getting exposure to international stocks. First, we discuss the taxation of international funds.</span><p></p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.125em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">The case for international stocks & geographical diversification</h4><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Although 20% to 25% of Nifty 50 revenues come from exports, a fall in domestic revenues won’t cushion share price performance. American companies derive revenues from exports to different countries and also from a large domestic market. Chinese companies contribute significantly to the global supply chain apart from their domestic market’s consumption.</p><div class="captioned-image-container" style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; margin-bottom: 16px; text-align: center;"><figure style="display: inline-block; margin: 0px auto; width: 728px;"><a class="image-link image2 image2-728-1456" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff4d0b2a0-1076-4e0d-9272-692ee0869905_6000x3000.jpeg" style="border: none; display: block; height: auto; margin: 0px auto; padding: 0px; text-decoration-line: none; width: auto;" target="_blank"><img data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/f4d0b2a0-1076-4e0d-9272-692ee0869905_6000x3000.jpeg","height":728,"width":1456,"resizeWidth":null,"bytes":2751233,"alt":null,"title":null,"type":"image/jpeg","href":null}" height="200" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff4d0b2a0-1076-4e0d-9272-692ee0869905_6000x3000.jpeg" style="display: block; height: auto; margin: 0px auto; max-height: 728px; max-width: 1456px; width: 728px;" width="400" /></a></figure></div><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Geo-politics, domestic issues in every country, differential economic growth rates, innovation and future potential of each region make up a case from international diversification. India might be going through a slow growth phase but China and USA may be growing fast. India might grow fast between 2022 and 2025 but the larger economies might see tapering growth rates! Currency depreciation also adds to the returns that international funds can deliver to Indian investors. If you invest when $ is at 75 and withdraw when $ is at 85, you would have earned around ~ 13.3% simply from the currency depreciation!</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Indian markets don’t allow exposure to new age companies like Facebook, Apple, Netflix, Google, Amazon, etc. Investors would want to benefit from these futuristic companies.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>Risks:</em> Tax structures, high expense ratios, currency risk. What if $ slipped from INR 75 to INR 65? The value of your $ investments will go down!</p><div class="subscribe-widget is-signed-up" style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; margin: 0px 0px 1em;"><form action="https://dalalstreetbulls.substack.com/api/v1/free?nojs=true" class="form" method="post" novalidate="" style="margin: 0px auto; max-width: 290px; position: relative;"><div id="error-container"></div><div class="subtle-help-text below-input"></div></form></div><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.125em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><br /></h4><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.125em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">SEBI’s guidelines</h4><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">The Asset Management Companies have to follow monetary limits in their international funds.</p><ul style="text-align: left;"><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-size: 19px;">On a macro level, the entire mutual fund industry in India can at most invest $7 Billion in international stocks</span></li><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-size: 19px;">Each mutual fund house can invest $600 Million in international stocks</span></li><li><span color="var(--print_on_web_bg_color, #1a1a1a)" face="Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"" style="background-color: white; font-size: 19px;">For international ETFs, the industry limit is $1 Billion and per mutual fund limit is $200 Million</span></li></ul><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.125em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><br /></h4><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.125em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">Taxation of international funds and ETFs in India</h4><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">International funds are taxed as debt funds. Meaning, if you book profits before 3 years, you pay a short term capital gains tax of 15%. If you book profits after 3 years, you pay long term capital gains tax at 20% with the benefit of indexation.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Domestic equity funds are taxed at 15% if profits are booked in less than a year and at 10% above Rs 1 Lakh if profits are booked after 1 year. This tax structure makes domestic funds a little more tax efficient than international funds.</p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.125em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;"><br /></h4><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.125em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">How to add the international flavor to your portfolio?</h4><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>Via domestics funds:</em></p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">An Indian investor can add the international diversification and still use the tax structure of domestic equity funds. How? Simple. Invest in equity schemes that primarily invest in Indian equities and have some international stocks too! Some examples are: PPFAS Flexicap, Axis Growth Opportunity, Kotak Pioneer Fund, etc.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">These funds have exposure to international stocks ranging from 30% to 35% of their portfolio and in a way give the investors the required diversification. The downside is that you have no control on the sectors and countries the fund manager will invest in.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>Via pure play international funds:</em></p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">You can invest in funds and ETFs that primarily invest in equities of a given region / country / sector. You can even choose to invest in the indices of other countries like S&P500, NASDAQ 100, etc. Your investments via this route will be taxed as debt funds.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">While some funds invest in international stocks directly, other funds act as <em>feeder funds</em> and invest in other funds and ETFs only and not in stocks directly. Keep reading to understand…</p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.125em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">Are these funds and ETFs expensive?</h4><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Yes, these funds are expensive. Infact, there is an element of double charge in few of the international funds. For example, the Edelweiss Greater China Fund has an expense ratio of 1.43% in its direct plan. However, investors need to keep in mind that the fund actually invests in JPMorgan Funds - Greater China Fund which in turn charges investors with a 1.5% management fee.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">The index funds like Motilal Oswal S&P 500, MOSL Nasdaq 100, Mirae Asset FANG+ ETF, etc. have lower expense ratios than the feeder funds or fund of funds.</p><h4 style="-webkit-font-smoothing: antialiased; background-color: white; color: #1a1a1a; font-family: var(--font_family_headings, var(--font_family_headings_preset, "SF Compact Display", -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol")); font-size: 1.125em; font-weight: var(--font_weight_headings_preset, bold); line-height: 1.16em; margin: 1em 0px 0.625em;">International funds to track</h4><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">I believe that USA and China should be the preferred diversification options for Indian investors. Both these countries have resilient economies and lead globally in innovation and also giving the world next wave of wealth creating companies like Alibaba, Amazon, etc. Europe, Japan and South Asian countries can come next. There are even funds which give you a chance to invest in the emerging markets theme.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><u>Funds with exposure to USA:</u></p><ol style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; margin: 1em 0px;"><li style="margin: 7.5px 0px 7.5px 15px;"><p style="color: var(--print_on_web_bg_color, #1a1a1a); line-height: 1.6em; margin: 0px;">MOSL S&P 500 fund</p></li><li style="margin: 7.5px 0px 7.5px 15px;"><p style="color: var(--print_on_web_bg_color, #1a1a1a); line-height: 1.6em; margin: 0px;">MOSL Nasdaq 100</p></li><li style="margin: 7.5px 0px 7.5px 15px;"><p style="color: var(--print_on_web_bg_color, #1a1a1a); line-height: 1.6em; margin: 0px;">Mirae Asset FANG+ index fund</p></li></ol><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">These funds give you exposure to America’s bluechip index and technology stocks. Given the low expense ratios, these make a good addition to the portfolio.</p><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><u>Funds with exposure to the China:</u></p><ol style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; margin: 1em 0px;"><li style="margin: 7.5px 0px 7.5px 15px;"><p style="color: var(--print_on_web_bg_color, #1a1a1a); line-height: 1.6em; margin: 0px;">Edelweiss Greater China fund</p></li><li style="margin: 7.5px 0px 7.5px 15px;"><p style="color: var(--print_on_web_bg_color, #1a1a1a); line-height: 1.6em; margin: 0px;">Edelweiss emerging markets opportunity fund</p></li></ol><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;">Here is a list of international funds with AUM > Rs 200 Crores.</p><div class="captioned-image-container" style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; margin-bottom: 16px; text-align: center;"><figure style="display: inline-block; margin: 0px auto; width: 728px;"><a class="image-link image2 image2-551-1212" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F7dbfe0d3-2953-4acc-b94f-fad94a0211b1_1212x551.png" style="border: none; display: block; height: auto; margin: 0px auto; padding: 0px; text-decoration-line: none; width: auto;" target="_blank"><img alt="" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/7dbfe0d3-2953-4acc-b94f-fad94a0211b1_1212x551.png","height":551,"width":1212,"resizeWidth":null,"bytes":89249,"alt":null,"title":null,"type":"image/png","href":null}" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F7dbfe0d3-2953-4acc-b94f-fad94a0211b1_1212x551.png" style="display: block; height: auto; margin: 0px auto; max-height: 551px; max-width: 1212px; width: 728px;" /></a><figcaption class="image-caption" style="color: var(--print_secondary, var(--print_secondary_on_web_bg_color, var(--print_secondary, #757575))); font-family: sans-serif; font-size: 14px; line-height: 1.4em; margin-top: 10px; padding-left: 109.198px; padding-right: 109.198px; width: 509.594px;">Direct schemes only.</figcaption></figure></div><p style="background-color: white; color: #1a1a1a; font-family: Spectral, serif, -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol"; font-size: 19px; line-height: 1.6em; margin: 0px 0px 1em;"><em>So what are your views on international diversification for a retail investor in India? What regions / themes would you choose for investing in to diversify?</em></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-13640507705830968632021-05-17T02:11:00.003+05:302021-05-17T02:11:42.105+05:30ABB Power Products<p>In this post, we discuss ABB Power Products (NSE: POWERINDIA) which is not a new business but with a major change in corporate and business structure, is expected to clock high revenue growth rates. The power grids market presents an opportunity because of increasing adoption of renewable energy, electric vehicles, storage batteries, etc.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjBRIKL0y77zkmjS0J14pt9uAFTQf_sNlF44_iiK3EI6CDGaEEg5ASVarZEv9se3oOtG6pwueX9Uv9KRU3PCTnTAG1-FBxO9iH1L88SmeU_0v7qUctcLyDxLw2JZ5NGK76g12iGpb5Sns/s626/battery-energy-storage-from-renewable-solar-wind-power-station_335657-3217.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="417" data-original-width="626" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjBRIKL0y77zkmjS0J14pt9uAFTQf_sNlF44_iiK3EI6CDGaEEg5ASVarZEv9se3oOtG6pwueX9Uv9KRU3PCTnTAG1-FBxO9iH1L88SmeU_0v7qUctcLyDxLw2JZ5NGK76g12iGpb5Sns/s320/battery-energy-storage-from-renewable-solar-wind-power-station_335657-3217.jpg" width="320" /></a></div><p><b>ABB & Hitachi’s deal</b></p><p>ABB is a Swiss company operating in the automation, power, robotics and heavy electrical equipment space. Hitachi is a Japanese conglomerate operating in power and heavy electrical equipment, amongst many other business verticals. In December 2018, ABB Ltd. announced the divestment of its power grids business into a JV in which Hitachi would be a majority stake holder (~80.1%). Hitachi paid $6.85 Billion for this acquisition in July 2020. Hitachi has an option to make the JV a wholly owned subsidiary in 2023.</p><p>Back home in India, <em>ABB Power Products and Systems India Ltd.</em> (APPSIL) was demerged from ABB India in Feb ‘19 and the Hitachi-ABB JV became the promoter, with a 75% stake.</p><ul style="text-align: left;"><li>ABB’s power grid business made more than $10 Billion in revenues in 2019 and employed 36,000 people globally.</li><li>The enterprise value at the deal price worked out to $11 Billion.</li><li>The deal was valued at 1.02x revenues and 11.32x EBITA (2017)</li></ul><p><br /></p><p>ABB power grid was strong in utilities, industries and infrastructure. Hitachi had a strong presence in mobility, data center and smart city projects. Both companies together with Hitachi’s LUMADA digital platforms have a chance to unlock synergies in terms of high revenue growth rates through long term client contracts and cross selling of different products and services across the value chain of the power distribution sector.</p><p><br /></p><div style="text-align: left;"><b>What does the company do?</b></div><p>The company’s four business lines are <em>Grid automation, Grid integration, Transformers and High voltage products. </em>APPSIL’s provides products, system, software and service solutions across the power value chain. Products contribute ~ 78%, projects ~ 17% and services ~ 5% of the revenues respectively.<em> </em>The company makes 15% to 18% from exports but plans to increase the share of exports to ~ 25% of revenues.</p><ul style="text-align: left;"><li>The company’s main products are high voltage products and transformers. 1 in 4 high voltage switchgears in the world are from Hitachi-ABB. Renewable sources of energy are often generated far away from where they are consumed. This requires smarter HVDC grid connectivity systems. APPSIL manufactures products like GIS, transformers, switchgears, digital substations, etc.</li></ul><ul style="text-align: left;"><li>On the service side, APPSIL helps digitalize the power assets and create smart connected grids. APPSIL expects to capitalize on Hitachi’s digital solutions capabilities and LUMADA IOT platform. Through these services, APPSIL helps clients reduce manual intervention and costs associated with running power systems.</li></ul><div><br /></div><div class="captioned-image-container"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><img alt="" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/cabda546-f8b0-4981-95a2-15bc71b48e48_1815x672.png","height":539,"width":1456,"resizeWidth":null,"bytes":1032711,"alt":null,"title":null,"type":"image/png","href":null}" height="237" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fcabda546-f8b0-4981-95a2-15bc71b48e48_1815x672.png" style="margin-left: auto; margin-right: auto; max-height: 539px; max-width: 1456px;" width="640" /></td></tr><tr><td class="tr-caption" style="text-align: center;">The 4 business lines of APPSIL</td></tr></tbody></table></div><h4><b>What are the avenues of growth for APPSIL?</b></h4><p>The company stands to benefit from a growing demand for smart grids. The tailwinds for this sector come from the following sources:</p><ul style="text-align: left;"><li>Growing market for renewable energy (solar and wind)</li></ul><ul style="text-align: left;"><li>Electrification of railways and phasing out of diesel locomotives</li></ul><ul style="text-align: left;"><li>Expansion of metro network and mass rapid transit systems in urban cities</li></ul><ul style="text-align: left;"><li>Growth of data storage centers in India</li></ul><ul style="text-align: left;"><li>Growth of electric vehicles and demand for charging stations</li></ul><ul style="text-align: left;"><li>Outsourced orders from holding company</li></ul><p style="text-align: left;">A Japanese promoter group gives APPSIL significant advantage over Chinese competitors in India, on account of current geo-political sentiments. The company stands to benefit from infra spending on 100 new airports, Delhi-Mumbai expressway, etc.</p><p style="text-align: left;"><br /></p><blockquote><p>To meet its growing electricity demands, India needs to add a grid network as large as Europe’s over the next two decades. Also with the aim of carbon neutral emissions, a better grid infrastructure is needed.</p></blockquote><h4><br /></h4><div style="text-align: left;"><b>Financials</b></div><p>ABB Power Products follows a January to December financial year.</p><div class="captioned-image-container"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a class="image-link image2 image2-267-376" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1230da3e-5ae8-4225-bc09-f4c00e2b1869_422x299.png" style="height: 0px; margin-left: auto; margin-right: auto; padding-bottom: min(70.8531%, 266.408px); width: 100%;" target="_blank"><img alt="" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/1230da3e-5ae8-4225-bc09-f4c00e2b1869_422x299.png","height":299,"width":422,"resizeWidth":376,"bytes":23020,"alt":null,"title":null,"type":"image/png","href":null}" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1230da3e-5ae8-4225-bc09-f4c00e2b1869_422x299.png" style="max-height: 266.408px; max-width: 376px;" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Financials - INR Crores</td></tr></tbody></table><figure><figcaption class="image-caption"><br /></figcaption></figure></div><ul style="text-align: left;"><li>The EBITDA margins shrank from 10.4% to 7.9% because of gratuity costs and business restructuring costs</li></ul><ul style="text-align: left;"><li>Despite a de-growth of -41% in the June 2020 quarter, the 2020 revenues ended up 5.6% higher than the 2019 revenues</li></ul><ul style="text-align: left;"><li>The company has high royalty payments ~ 5% of revenues; this significantly impacts margins as the company mostly can expectedly make margins in the 8% to 10% range</li></ul><p><em><br /></em></p><p><em>Q1FY21 numbers</em></p><ul style="text-align: left;"><li>The revenues grew 24% on a YOY basis; the EBITA improved from 7% (Q1FY20) and 6.3% (Q4FY20) to 7.4% in Q1FY21</li></ul><ul style="text-align: left;"><li>The new orders de-grew by 9%; However, excluding a one time large order of Rs 282 Crores in Q1FY20, the new orders grew ~ 30.06% (Rs 652 Crores in Q1FY20 vs Rs 848 Crores in Q1FY21)</li></ul><ul style="text-align: left;"><li>The total order book at the end of Q1FY21 stood at ~ Rs 4,777 Crores. Around 50% of orders are from utilities, 27% from heavy industries and 23% from transportation infra.</li></ul><h4><br /></h4><div style="text-align: left;"><b>Valuation</b></div><p>India contributed 5% of ABB’s power grid business EBITA. Given the transaction price, the valuation of the Indian business works out to ~ Rs 4,100 Crores.</p><p>The 2020 revenues and EBITA stood at Rs 3,348 Crores and Rs 195 Crores. The EBITA margins fell from ~9% in 2019 to 5.7% in 2020. At current enterprise value of ~ Rs 7,050 Crores, the stock trades at 37x EBITA and 26x EBITDA.</p><p><em><br /></em></p><div style="text-align: left;"><i>Projections</i></div><p>Given the expected GDP growth rate of 9% to 12% for FY21 to FY24, we believe that the Government will spending heavily on infrastructure. The revenues can grow at ~ 14% CAGR over the next 3 years (CY21 to CY23). The EBITDA margins were lower in 2020 to due restructuring costs and higher employee expenses; the EBITDA margins should consolidate around the 10% mark. In 2021 itself, the employee expenses should reduce to 8% from 10% of revenues.</p><p><br /></p><div class="captioned-image-container"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a class="image-link image2 image2-150-587" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc72bdea5-cfdf-479f-999e-14eeff334314_587x150.png" style="height: 0px; margin-left: auto; margin-right: auto; padding-bottom: min(25.5537%, 150px); width: 100%;" target="_blank"><img alt="" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/c72bdea5-cfdf-479f-999e-14eeff334314_587x150.png","height":150,"width":587,"resizeWidth":null,"bytes":15190,"alt":null,"title":null,"type":"image/png","href":null}" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc72bdea5-cfdf-479f-999e-14eeff334314_587x150.png" style="max-height: 150px; max-width: 587px;" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Projections in INR Crores</td></tr></tbody></table></div><p>The current multiples at are a significant premium to the multiples at which the ABB - Hitachi transaction happened. However, India is a small part of ABB’s global power grid business and has higher expected growth rate in the coming years versus the larger markets.</p><p><br /></p><div class="captioned-image-container"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a class="image-link image2 image2-149-244" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F03ddd86d-fa2e-4626-a55f-b4c6a7fd0577_244x149.png" style="height: 0px; margin-left: auto; margin-right: auto; padding-bottom: min(61.0656%, 149px); width: 100%;" target="_blank"><img alt="" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/03ddd86d-fa2e-4626-a55f-b4c6a7fd0577_244x149.png","height":149,"width":244,"resizeWidth":null,"bytes":7199,"alt":null,"title":null,"type":"image/png","href":null}" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F03ddd86d-fa2e-4626-a55f-b4c6a7fd0577_244x149.png" style="max-height: 149px; max-width: 244px;" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">LTM Multiples</td></tr></tbody></table></div><p>The current multiples look stretched because of the pressure on the margins. The market is discounting a return back to ~ 10% EBITDA margins in the coming quarters. Assuming a Rs 500 Crore EBITDA by CY23; then for the stock to double from current levels, it would have to command a 30x EV/EBITDA multiple in 2023. Companies that rely on heavy capex spends don’t usually trade at EV/EBITDA multiples of 20+ but if the sector is an upcycle then the valuations can expand. The revenue growth and margin expansion too could surprise on the higher side (Honeywell went from 11% to 19% operating profit margins in 5 years).</p><p><br /></p><div class="captioned-image-container"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><img alt="" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/1ebc6170-dded-4649-af2c-95698f68cfa0_1572x835.png","height":773,"width":1456,"resizeWidth":672,"bytes":122415,"alt":null,"title":null,"type":"image/png","href":null}" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F1ebc6170-dded-4649-af2c-95698f68cfa0_1572x835.png" style="margin-left: auto; margin-right: auto; max-height: 356.769px; max-width: 672px;" /></td></tr><tr><td class="tr-caption" style="text-align: center;">Momentum on its side</td></tr></tbody></table></div><p>The stock has strong momentum on its side and has delivered close to 70% gains over the past 5 months. Given the bright prospects over the next 3-5 years, investors who want good stocks with momentum can keep this stock in the watchlist. Is this a value stock? Probably not! The valuations are rich and a lot of good news has been factored in.</p><p><br /></p><p><span></span></p><a name='more'></a><p></p><p><em>Disclaimer: The above post is not to be constituted as a recommendation to BUY OR SELL the discussed stock. This post is just a aggregation of publicly available data.</em></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-80240527963976964142021-05-09T11:00:00.023+05:302021-05-17T02:12:49.913+05:30Nominee vs Legal Heir - Who gets the cake?<p> “Always mention the Nominee’s name in the form when you open a bank account, fixed deposit or any investment” - <em>Anonymous</em>.</p><p><br /></p><p>You have a fixed deposit of Rs 50 Lakhs and your wife is the Nominee of this fixed deposit. One day you decide to make a WILL and put your Mother’s name as the legal heir of the above mentioned fixed deposit. In case of your demise, who gets this money? The nominee - your wife, or the legal heir - your mother?</p><p><br /></p><blockquote><p><strong>Answer: </strong>The legal heir, in this case your Mother, gets the money from the fixed deposit.</p></blockquote><p><br /></p><p>We come across so many suggestions to always mention the nominee but not so much awareness is spread about making a Will. What role does the nominee play in succession? And what is the difference between a nominee and a legal heir?</p><p><br /></p><div style="text-align: left;"><b>Nominee</b></div><p>The concept of nomination is common in most assets. A nominee is somebody who will receive the asset on the death of the owner. Legally, nomination is only a provision to receive the asset as a custodian. So, the nominee is a the custodian for a temporary period and once the legal heir is established, the nominee’s duty is to transfer the asset to the legal heir. The nominee can be the legal heir if it is mentioned so clearly in the Will.</p><p><br /></p><p>The nominee should ideally be someone who can be trusted, and is capable enough of tending to the deceased person’s family and their needs. In case of multiple nominees mentioned in an asset (Bank account, insurance policy, etc.) the first nominee is usually given the entire amount but this could end up in a dispute. So now days the concept of beneficial nominee is catching up. However, even the beneficial nominee is simply a custodian till the legal heir is established as per the Will.</p><p><br /></p><div style="text-align: left;"><b>Legal Heir</b></div><p>The legal heir is the individual who has the right and is entitled to assets and property of the owner after the owner’s death. A legal heir can be a single person or multiple people as specified in the Will OR as per the Succession Act.</p><p><br /></p><p>What if there is no Will or the legal heir isn’t specified?</p><p>If there is no will or legal heir mentioned, then the property will be distributed equally as per the <em>Hindu Succession Act</em>, under the following levels:</p><ul style="text-align: left;"><li>Class 1 heir: Equal distribution if no legal heir mentioned in the Will</li><li>Class 2 heir: Equal distribution if there is no Class 1 heir</li><li>Agnates and Cogantes: If there is no Class 2 heir</li><li>Government, if none of the above 3 are present</li></ul><p><br /></p><p>Now each Class has pre-defined set of relations and a simple google search will yield you the chart. You will be surprised to know that Father, Brother, Sister, etc. are Class 2 heirs.</p><p><br /></p><div style="text-align: left;"><b>How to make a Will?</b></div><p>A lawyer, fancy legal terminologies and a notary to notarize - you don’t need any of these really. All you need is a paper, simple words clearly specifying the legal heir / heirs, their share in property and two witnesses to sign the prepared Will. Ofcourse, hiring a professional can make the task easier for you in case you have multiple assets and multiple legal heirs.</p><div class="separator" style="clear: both; text-align: center;"><div class="separator" style="clear: both; text-align: center;"><img border="0" data-original-height="1138" data-original-width="1456" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmLFaojtOn6MO0k3St4RYC0tbsUMKBEzC0yY-NSoEUkiheqL4LHlJ66whS-4UKk3-ncocAlWsSEJD23SjcMt0t5Pawopqg65W_EAlz5Eh_0E-KUmn-l21QqQCU7ZUMYWNDUTjXo4yJQdI/s320/https___bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com_public_images_a587eac3-7384-4cc1-ad1a-cc15ca746f16_5500x4300.jpeg" width="320" /></div><br /><figure style="margin-left: 1em; margin-right: 1em;"><span style="text-align: left;">We spend a lifetime working hard to earn money and create wealth. Creating a Will goes a long way to ensure that succession issues don’t arise after we are gone. Other wise, instead of enjoying the fruits of our hard work the next generation would end up fighting over the property.</span></figure></div><p><br /></p><p>If you found this post insightful, then you will definitely find our post on <a href="https://www.dalalstreetbulls.com/2021/04/health-insurance-guide-india.html">Health Insurance Guide</a> insightful. In that post we talk about the MUST haves, Good to have and checks while buying a health insurance policy.</p><p><br /></p><p><em>Do share this post with those who might find this topic helpful. A simple share can go miles in spreading financial awareness.</em></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-75962891284232037852021-05-05T16:46:00.000+05:302021-05-05T16:46:28.781+05:30Sugar Industry 101: Industry deepdive<p><span style="color: #38761d;"><b>Don't miss out on insightful articles from DalalStreetBulls. Subscribe to our substack newsletter to get weekly insights straight to your mailbox!</b></span></p><p><span style="color: #38761d;"><b><br /></b></span></p><p><span style="color: #38761d;"></span></p><div class="separator" style="clear: both; text-align: center;"><span style="color: #38761d;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRIMKouwTOwt7IJOeCHx2YxYmLyc9XvFv48Na8Z6YfWf3Z6Qe-Ad03lU9owuWoeFT04DEB1PQfglf_Z-zaBhWrinasUVjBHEGuAI3LEg8iKC9Rkf7ImXCWsAbifhDDMwsen0aqb8bDZy0/s900/196-1961584_brown-sugar-clipart-png-transparent-cartoons-brown-sugar.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="884" data-original-width="900" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRIMKouwTOwt7IJOeCHx2YxYmLyc9XvFv48Na8Z6YfWf3Z6Qe-Ad03lU9owuWoeFT04DEB1PQfglf_Z-zaBhWrinasUVjBHEGuAI3LEg8iKC9Rkf7ImXCWsAbifhDDMwsen0aqb8bDZy0/s320/196-1961584_brown-sugar-clipart-png-transparent-cartoons-brown-sugar.png" width="320" /></a></span></div><span style="color: #38761d;"><br /><b><br /></b></span><p></p><p>It is estimated that 5 crore farmers in India are involved in sugarcane farming. India is the 2nd largest producer of sugar in the world, with a 20% share of the global sugar industry. Brazil dominates the global sugar market with a ~ 42% share. Asian countries account for 34% of the global sugar production and 41% of the global sugar consumption. As per Jan ‘21 data, India had 487 operational sugar mills (up from 440 a year back). The number of installed mills is 700+. Nearly 80% of India’s sugar mills are in 3 states - Maharashtra, Uttar Pradesh and Karnataka.</p><div style="text-align: left;"><b><br /></b></div><div style="text-align: left;"><b>The money in Sugarcane farming</b></div><p>Sugarcane is a long duration crop and is labour intensive. The crop can be harvested just once a year and the farmer lets go of two crops (Rabi and Kharif) to grow sugacane. It is also extremely water intensive and the Marathwada region of Maharashtra faces scarcity of water (and experts say it could be headed towards desertification) because of the sugar plantations. So why do farmers love sugarcane farming?</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLRSesW1RnW_SkkkdlEcITtkaahIirOss9Sez66NlDl7yKdr8UpdwvGvJMRZC9ZSzNrjShQhTFJHvUqGSKzmAXEwVZyThodADAopKEhLzEhmapW9Fyo1q4mjPcFOmORxIQsRIF__Uu6a8/" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="800" data-original-width="800" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLRSesW1RnW_SkkkdlEcITtkaahIirOss9Sez66NlDl7yKdr8UpdwvGvJMRZC9ZSzNrjShQhTFJHvUqGSKzmAXEwVZyThodADAopKEhLzEhmapW9Fyo1q4mjPcFOmORxIQsRIF__Uu6a8/" width="240" /></a></div><br />Well, it yields more to the farmers. The sugar mills also pre-book the harvest which provides better revenue visibility to the farmers. The cost per hectare for sugarcane is around Rs 40,000. The per hectare <em>net returns</em> from Sugarcane is around Rs 55,000 to Rs 65,000 depending on the region and the same from cotton and grams is just Rs 2,100 to Rs 3,100! If a farmer in Uttar Pradesh grows paddy and wheat instead of sugarcane, his net return per hectare would be ~ Rs 15,000 only. Because of higher MSP from the Government, sugarcane provides financial stability to the farmers. The domestic price of sugarcane in India is much higher than it is in other countries and it makes exporting sugar difficult for India as the pricing isn’t competitive. Although the Government has set a 60 lakh tonnes target in FY21 for sugar exports, the mills have been able to book only 25 lakh tonnes, despite the subsidies from the Central Government.<p></p><div style="text-align: left;"><b><br /></b></div><div style="text-align: left;"><b>Enter Sugar Mills</b></div><p>Sugar mills and sugarcane farms are usually in close proximity because of restrictions on the area where a farmer can sell. The mills pay a FRP (Fair and remunerative price) to the sugarcane farmers and the mills process the sugar canes into sugar and sell it in the market. Sugar recovery is around 10% to 12% of the sugarcane crushed. One key byproduct of the production process is <em>Ethanol</em> and the Government fixes the minimum selling price of Sugar. The FRP and MSP follow calculations set by the Government and have many variables. Some of India’s biggest sugar companies are <em>EID Parry, Balrampur Chini, Dhampur Sugar and Dalmia Bharat Sugar</em>.</p><div style="text-align: left;"><b><br /></b></div><div style="text-align: left;"><b>Cyclicality, Ethanol and changing fortunes</b></div><p>If you look at the chart of international sugar prices in INR, you will see a strong element of cyclicality. Adjusted for the MSP, ex-mill prices in India too fluctuate every year. Its simple economics, when there is a bumper harvest, the prices go down and when there is a low output then prices go up.</p><div class="captioned-image-container"><figure><img data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/d4459296-f278-408c-a061-b408744dd1dc_955x409.png","height":409,"width":955,"resizeWidth":null,"bytes":55331,"alt":null,"title":null,"type":"image/png","href":null}" height="171" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fd4459296-f278-408c-a061-b408744dd1dc_955x409.png" style="max-height: 409px; max-width: 955px;" width="400" /></figure></div><p>Sometimes, the selling price of sugar drops well below the cost of production, leaving the sugar mills with losses. Mills end up selling the sugar below the MSP to clear the inventory and also pay the FRP dues to farmers. (if not, they would be in deep trouble with the Government - Sugarcane farmers make up a major voter base). However, the dues to the farmers can build up and these arrears run in thousands of crores.</p><p><b><br /></b></p><p><b>Ethanol</b></p><p>Ethanol is the key by-product for the sugar mills. 1 tonne sugar can produce around 11 litres of Ethanol as the byproduct. B-Heavy molasses have a higher yield but this category of molasses weren’t used much earlier. </p><p>Crude oil is India’s biggest import. This costs us a lot of foreign exchange and also makes us a net-import nation. To reduce dependency on Crude Oil, the Government in 2017-18 came up with the National Policy on Biofuels (2018)<a class="footnote-anchor" href="#footnote-1" id="footnote-anchor-1">1</a>. Under this ambitious plan, the Government aims to achieve a target blend rate of 10% by 2022 and 20% by 2030 for petrol and 5% for biofuels. <em>The target has now been revised to 20% by 2025.</em> Till 2017, the blend rate was ~ 2% only for petrol. A blend rate of 20% would mean 80% petrol and 20% fuel. This blending would reduce our dependency on crude oil imports. India has enough capacity to meet its Ethanol demands.</p><p></p><blockquote>1 Crore litre of ethanol helps save ~ Rs 30 Crores of forex. In 2020-21, around 300 Crore litres of ethanol had been contracted, helping India save ~ Rs 9,000 Crores of forex.</blockquote><p></p><p>Ethanol blending has played a key role in making the Brazilian sugar industry financially sustainable and stabilizing the cyclicality of the industry. Over the last 4 decades, ethanol production in Brazil has jumped from 0 to more than 500 million litres. Now, less than 50% of sugarcane is used for producing sugar and majority of the crop is for producing ethanol.</p><p>To achieve a 10% blend, India would need ~ 685 Crore litres of ehtanol. To achieve the 2030 (now revised to 2025) target, India would need an additional 1000 Crore litres capacity. To aid this capacity expansion, the Government has come up with a Rs 8,640 Crore package wherein the Government would either subsidize by 50% or completely bear the interest charged by banks on loans taken for capex in ethanol value chain.</p><div style="text-align: left;"><b><br /></b></div><div style="text-align: left;"><b>How can ethanol help the sugar industry?</b></div><p>India’s sugar production is around 320 Lakh MT against a domestic consumption of 260 Lakh MT. The excess 60 Lakh MT causes Rs 19,000 crores of arrears for the industry and affects the ex-mill prices of sugar. By encouraging ethanol production, the Government would incentivize the reduction of sugar production by diverting capacities towards ethanol production. The prices set by the Government for various sources of ethanol in 2021 are as follows<a class="footnote-anchor" href="#footnote-2" id="footnote-anchor-2">2</a>:</p><ul style="text-align: left;"><li>C-heavy molasses: 45.69 / ltr</li><li>B-heavy molasses: 57.71 / ltr</li><li>From sugar: 62.65 / ltr</li></ul><p>As long the price gap with petrol is attractive enough for OMCs to buy the ethanol, transport it to depots and mix it with petrol, the demand will help cushion the cyclicality in the sugar industry.</p><div style="text-align: left;"><b><br /></b></div><div style="text-align: left;"><b>Sugar companies in India</b></div><p>The sugar companies in India have diverted capacities to B-heavy molasses and direct cane route, thus leading to higher profitability. Increasing diversion to ethanol over next few years, will help stabilize the inventory in the industry and keep the sugar realizations stable, thereby reducing the volatility. Ethanol currently makes up ~ 12% to 17% of the revenues of the sugar mill companies.</p><p>From 2017-18, the companies have aggressively shifted capacities from sugar to ethanol and increased the share of B-heavy molasses to boost EBITDA margins.</p><div class="captioned-image-container"><figure><a class="image-link image2 image2-264-868" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fb8640c6e-b82e-4e40-a245-12b859cec58d_868x264.png" style="height: 0px; padding-bottom: min(30.4147%, 264px); width: 100%;" target="_blank"><img data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/b8640c6e-b82e-4e40-a245-12b859cec58d_868x264.png","height":264,"width":868,"resizeWidth":null,"bytes":30794,"alt":null,"title":null,"type":"image/png","href":null}" height="195" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fb8640c6e-b82e-4e40-a245-12b859cec58d_868x264.png" style="max-height: 264px; max-width: 868px;" width="640" /></a></figure></div><p>The revenues of these companies are prone to sugar prices, which have been under pressure in India since 2017-18 because of excess supply of sugar. However, increasing revenue share from ethanol, reduced sugar production in the industry (as capacities move towards ethanol) and higher selling price for this ethanol is expected to improve the margins for the companies between FY21 and FY25.</p><div class="captioned-image-container"><figure><a class="image-link image2 image2-593-1086" href="https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F598931f3-44c3-49b7-ae5e-5300f073abb6_1086x593.png" style="height: 0px; padding-bottom: min(54.6041%, 593px); width: 100%;" target="_blank"><img data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/598931f3-44c3-49b7-ae5e-5300f073abb6_1086x593.png","height":593,"width":1086,"resizeWidth":null,"bytes":221862,"alt":null,"title":null,"type":"image/png","href":null}" height="349" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F598931f3-44c3-49b7-ae5e-5300f073abb6_1086x593.png" style="max-height: 593px; max-width: 1086px;" width="640" /></a></figure></div><div style="text-align: left;"><b><br /></b></div><div style="text-align: left;"><b>Factors to consider before investing</b></div><p>Being a cyclical industry, the EV/EBITDA is the key valuation ratio. Some players like Shree Renuka have high levels of debt while the more efficient players have debt to equity ratio < 1.</p><ul style="text-align: left;"><li>On an EV/EBITDA basis, Balrampur Chini and Bannari Amman are 1000+ Crores marketcap companies trading at 10x to 12x multiples. Stocks like Dhampur Sugar, Dalmia Bharat Sugar and Triveni Engineering are trading at 5x to 6x multiples. These 5 mentioned names have a comfortable debt-equity ratio and free-cash flows that allow for capital expenditure on ethanol capacities.</li><li>When a cyclical industry, such as Sugar, turns around towards favourable times, it is usually the smaller, debt-ridden players (who were making losses or had very low margins), who experience the best tailwainds as they are able to improve profitability, reduce debt and this delta gives them a re-rating.</li><li>In cyclical stocks, timing is of utmost importance as the cycle can turn quickly. You wouldn’t want to be stuck with debt ridden and inefficient companies for the long term.</li></ul><p><br /></p><p>Balrampur chini is one of the best run sugar companies in India and the company generates strong cash flows, with which it has reduced debt in recent years. Dhampur sugar is a stock that we believe can get re-rated in this upcycle as the company has reduced the debt-equity ratio and EBITDA margins can improve with increase in Ethanol mix in revenues and improved realization from sugar. Investors may want to study the sector and stocks closely before taking an informed decision.</p><p><em>Disclaimer: None of the stocks discussed in the above post are recommendations to BUY or SELL. The discussion is simply done to study the Sugar industry in India.</em></p><p><span></span></p><a name='more'></a><div class="footnote" id="footnote-1"><br /><a class="footnote-number" contenteditable="false" href="#footnote-anchor-1">1</a><div class="footnote-content"><p>http://petroleum.nic.in/sites/default/files/biofuelpolicy2018_1.pdf</p><p></p></div></div><div class="footnote" id="footnote-2"><a class="footnote-number" contenteditable="false" href="#footnote-anchor-2">2</a><div class="footnote-content"><p>https://pib.gov.in/PressReleasePage.aspx?PRID=1668399</p></div></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-27714215062463436132021-04-30T15:18:00.007+05:302021-04-30T16:20:18.797+05:30A guide to choosing health insurance<p>This blog first appeared on our substack newsletter: <a href="https://dalalstreetbulls.substack.com/">https://dalalstreetbulls.substack.com/</a></p><p><br /></p><p>Health insurance policies are tough to understand and that could be one of the reasons why 70% of medical expenses in India are out-of-pocket. Even the brilliant corporate executives out of India’s top universities have little idea about health insurance and believe that their “employer has them covered”. Your company’s health insurance is not adequate and you should buy one policy for yourself. Why? Read on.</p><p><br /></p><p>A medical emergency where you had to pay Rs 2.5 Lakhs out of the Rs 4 Lakhs hospital bill, despite having a Rs 5 Lakhs insurance cover, could make you understand how health insurance works - or you could just do some research and make smart buying decisions when shopping for health insurance. This would save you lakhs! and also provide some respite in tough times.</p><div class="captioned-image-container"><figure><img data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/cffa3304-a9bb-4551-92d9-7a0f3c6fa1c8_1006x274.png","height":274,"width":1006,"resizeWidth":null,"bytes":39871,"alt":null,"title":null,"type":"image/png","href":null}" height="174" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fcffa3304-a9bb-4551-92d9-7a0f3c6fa1c8_1006x274.png" style="max-height: 274px; max-width: 1006px;" width="640" /></figure></div><p><br /></p><p>In this post, we will focus on the must haves and explain what it means for you. Lets start off with a scenario:</p><p><br /></p><div></div><p><em><span style="color: #990000;">One day, your father complains of discomfort and chest pain. You sense something isn’t right and you rush him to the hospital. While admitting him, you know that he has a health insurance cover of Rs 5 Lakhs and it allows for 1% room rent allowance. The doctor informs you that your father will have to undergo a surgery and would be in hospital for 4-5 days. You have to select a room and you see that the Rs 5,000 per day room isn’t comfortable enough and you prefer the private AC room which costs Rs 7,500 per day. You assume that the extra Rs 2,500 per day would cost just Rs 10,000 to Rs 12,500 from your pocket for 4-5 days which isn’t a big sum for you. But when the final bill comes, you are in for a shock. The insurance company will play only a part of the bill and you will have to shell ~ Rs 1.04 Lakhs from your pocket.</span></em></p><p><em><br /></em></p><div style="text-align: left;"><b>Room rent: Why is it important</b></div><p>Hospitals charge different sums for each service based on the rooms. The doctor visit, diagnostic charges, etc. will have different rates for a shared room, deluxe room, private room, etc. Only MRP products like medicines are charged same for all room types. Typically, a health insurance policy allows for a room that charges 1% of the insured amount (base coverage amount, not including top ups and bonus). So if you have a 5 Lakh insurance, then at 1% allowance you can choose a room that charges upto Rs 5,000 per day. Otherwise, the proportionate deduction kicks in at the time of claim settlement.</p><div class="captioned-image-container"><figure><img data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/10d0d8aa-88dc-4e7b-bd63-857d7053f2d9_604x293.png","height":293,"width":604,"resizeWidth":null,"bytes":29473,"alt":null,"title":null,"type":"image/png","href":null}" height="310" src="https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F10d0d8aa-88dc-4e7b-bd63-857d7053f2d9_604x293.png" style="max-height: 293px; max-width: 604px;" width="640" /><figcaption class="image-caption"><br /></figcaption></figure></div><p>So what should you do?</p><ul style="text-align: left;"><li>Go for a policy that has no cap on room rent; yes the premium might be higher but in the long run, you could save lakhs!</li><li>If for some reason you are unable to take a policy with no cap, then choose a higher base coverage amount.</li></ul><p>Your company’s health insurance policy of Rs 3 to 5 lakhs might have a cap on room rent and thus you could end up with a hole in your pocket in case of an emergency. In case of an emergency, will you go searching for a room that falls in your room rent budget? It won’t even be possible for you to decide which hospital to go to and you’ll end up going to the nearest possible hospital.</p><p><br /></p><div style="text-align: left;"><b>No copay: Don’t be penny wise pound foolish</b></div><p>The insurance company offers you a sweet deal: A discount of 20% on the annual premiums if you opt for a 20% copay. You love discounts! And so you opt for a 10% copay.</p><p>At the time of admitting your father, you chose a room which falls in the limit specified by the insurance policy and now you’re expecting the insurance company to settle the entire bill. However, at the time of settlement, the insurance company tells you - <em>We will pay only 80% of the bill, you have to pay 20% of the bill as you opted for copay of 20%. So lets share the bill!</em></p><p>You might have saved Rs 3,000 per year on the premiums but you end up paying 20% of Rs 2.46 Lakhs (Rs 49,200) because of the “copay” clause.</p><h3 style="text-align: left;"><br /></h3><div style="text-align: left;"><b>Restoration benefit: Excuse me, refill please!</b></div><p>So your father walks out of the hospital fit and fine. The insurance company has paid Rs 2.46 Lakhs of the Rs 5 Lakhs. This policy had covered both of your parents. A couple of months later, your mother falls ill and needs hospitalization. The doctor tells you that the treatment might end up costing Rs 3 to 3.5 Lakhs. Now you’re worried that you will have to shell out a significant sum from your own pocket as only Rs 2.54 Lakhs of the policy remain unused. However, to your surprise, the insurance company says that because of the “restoration” feature provided by the policy, the assured amount has been restored to Rs 5 Lakhs. You heave sigh of relief!</p><p>For family floater plans restoration benefit is a MUST! Even for individual policies, you should have the restoration benefit.</p><h3 style="text-align: left;"><br /></h3><div style="text-align: left;"><b>No claim bonus</b></div><p>If you don’t claim insurance in a year, the insurance company gives you a no claim bonus ranging from 10% of the sum assured to 50% of the sum assured. This step results in your coverage amount increasing step by step over 3-5 years. There is an upper limit till which your coverage can increases, usually 50% to 100% of the base assurance amount. Check the policy details for the no claim bonus percentage and upper cap. This bonus not just increases your coverage for the same amount of premium but also helps cope with the inflationary effects of medical costs.</p><h3 style="text-align: left;"><br /></h3><div style="text-align: left;"><b>Day care treatments</b></div><p>Imagine paying Rs 80,000 for removal of appendix or some other surgery which didn;t require you to get admitted. You go to the insurance company to claim the money but they say - Well, you weren’t admitted for more than 24 hours so we aren’t giving you a penny. Yeah, some policies do not cover cost of surgeries that do not require hospitalization of more than 24 hours. These surgeries could be expensive and a lot of insurance holders are shocked when they realize that their policy doesn’t cover day care treatments. It is advisable to select a policy that covers day care treatments as well.</p><h3 style="text-align: left;"><br /></h3><div style="text-align: left;"><b>No disease wise limits</b></div><p>Some policies include the maximum limits on the amount they would pay for a surgery. For example, some policies mention that they will pay a maximum of Rs 2.5 lakhs for knee replacement, Rs 3 lakhs for a slip disk or only upto 50% of the sum assured in case of cancer.</p><p><br /></p><div><hr /></div><p>Phew! While there are many more features that you can seek or details you can check before buying a policy, we have covered the features we believe are a MUST! As an individual, you need to evaluate your requirements, your premium budget and take a calculated decision based on the above must have’s.</p><p>Most plans do offer pre and post hospitalization expenses which would help you meet costs related to tests, checkups, etc. A critical illness add-on would give you a lumpsum amount if you are diagnosed with a critical illness. You may even want to choose a policy with a lower waiting period. If your premium budget allows then you can go well beyond the above mentioned must have’s.</p><p><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgInHwZkh1FIMvAETkTBWKSaGZy4pil885JPgmgbKjuNGzVcvs8lzVUfRI2dTbkfE63RkBT41ac2KW8Tk6xzeXW6bz8OFdk3Hj2I5sB0xaHe6XjnWdpStf6VGDoy_bZTXA5EvRDJVQdjF4/s512/healthcare-clipart-health-insurance-1-original.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="512" data-original-width="512" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgInHwZkh1FIMvAETkTBWKSaGZy4pil885JPgmgbKjuNGzVcvs8lzVUfRI2dTbkfE63RkBT41ac2KW8Tk6xzeXW6bz8OFdk3Hj2I5sB0xaHe6XjnWdpStf6VGDoy_bZTXA5EvRDJVQdjF4/s320/healthcare-clipart-health-insurance-1-original.png" /></a></div><br /><p><br /></p><div class="footnote" id="footnote-1"><div class="footnote-content"><p></p></div></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-75080460327576730472020-05-11T17:10:00.000+05:302020-05-11T17:10:09.962+05:30Pharmaceutical sector - Bullish times ahead?The Pharmaceutical sector stocks in India have rallied sharply in the last 1-1.5 months. On the charts, the sector is gearing up to give a breakout after a multi-year consolidation. If the breakout is confirmed then the Indian pharma stocks could be decent wealth creators in the coming years.<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNBvBi9Cf9FAgB9615rOvQcmsXnfjU9ISgLnWrtcFLyGEVyG801w4v4d-_TNoG0EazwITHzSVcNZ_npf5TEP0-1DMx4J_wjKgtlcVrjCpQJ75nVbE8TY3QJ3zL3R7ChWciVyuohkcUBIs/" style="margin-left: auto; margin-right: auto;"><img alt="Pharma Stocks India" border="0" data-original-height="857" data-original-width="1307" height="420" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNBvBi9Cf9FAgB9615rOvQcmsXnfjU9ISgLnWrtcFLyGEVyG801w4v4d-_TNoG0EazwITHzSVcNZ_npf5TEP0-1DMx4J_wjKgtlcVrjCpQJ75nVbE8TY3QJ3zL3R7ChWciVyuohkcUBIs/w640-h420/Pharma+Index.png" title="Pharma Index" width="640" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Indian Pharma stocks are on the verge of a breakout</td></tr></tbody></table><div>After a 700% run in 7 years from ~ 2000 to ~ 14,000 the pharma index has been consolidating. The index had corrected to ~ 6000 levels, down nearly 55% from its peak in 4 years. The interesting point is that the Pharma sector till 2015 was seen as a defensive sector to invest in. However, few sectoral headwinds hit the fundamentals of the pharma companies in India. Some of these headwinds were:</div><div><ul style="text-align: left;"><li>Falling prices of generics in USA</li><li>Rising cost of API imports from China</li><li>FDA notices to manufacturing units in India</li></ul><div>However, the COVID-19 situation has renewed investor interest in the pharma sector once again. The pharma index is up by ~ 50% in the last 1.5 months alone. Investors should note that in mid 2018, the pharma index had rallied 35% but fell back again. If the pharma index sustains above 9,500 on a weekly basis or closes above 10,000 then the breakout will be confirmed on charts.</div></div><h3 style="text-align: left;">How to play the Pharma theme as a retail investor?</h3><div>Investing in good pharma funds is the best way a retail investor can play the pharma theme. We would recommend investing in more than one fund to diversify. Most of the Pharma funds in India were setup in the last 1-2 years thus don't have a comparable track record yet. The pharma funds list is as given below.</div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9N2ctwDTRv42Cj_YG5EjcH4HWlY82UXNwGRGA25Uqu22hHOZWRnQ067Hci6RCZKrYV8EbxS53E24Pnt9KP_sqXVaMaNQ6IjnjGhq_-3DY8Piq-QgSs5hdDkRDxASXCfLCvplwTNrKees/" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="323" data-original-width="1093" height="189" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9N2ctwDTRv42Cj_YG5EjcH4HWlY82UXNwGRGA25Uqu22hHOZWRnQ067Hci6RCZKrYV8EbxS53E24Pnt9KP_sqXVaMaNQ6IjnjGhq_-3DY8Piq-QgSs5hdDkRDxASXCfLCvplwTNrKees/w640-h189/Pharma+Funds.PNG" width="640" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">List of Pharma funds in India - Direct plans<br /></td></tr></tbody></table><div>We would recommend investors to select 2-3 good funds from the list and invest with a horizon of 1 to 3 years. While selecting the right funds to invest in, the expense ratio should not be ignored. The funds that we like from the above list are <i>Mirae Asset Healthcare fund, Nippon India pharma fund, IDBI Healthcare fund and DSP Healthcare fund</i>.</div><h3 style="text-align: left;">Best Pharma stocks in India?</h3><div>The pharma sector stocks in India are often misunderstood by investors. The business model is not as simple as "medicines will always be consumed" hence pharma is a long term buy and forget. This is one of the toughest sector for any retail investor to understand and it would require months of reading industry reports, annual reports, etc to get a grip on the sector. Investors can either choose to buy the pharma stocks with good momentum in stock price or leave the job to the experts. A list of pharma stocks in India held by the top performing pharma sector funds is given below.</div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto;"><tbody><tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheklaumUl_I993Le-z2OSc28EM3R9jERpzc53r7OsjVt28rBo5EkkG6B0Qk3kgmSCiTOf-jGm8WHs0qjt8BcejlZ73uq8VsYi6LbhICZXwJwjVZgdXiwBvS1J2I2l9xesA_k-gR9B4sW8/" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="442" data-original-width="469" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheklaumUl_I993Le-z2OSc28EM3R9jERpzc53r7OsjVt28rBo5EkkG6B0Qk3kgmSCiTOf-jGm8WHs0qjt8BcejlZ73uq8VsYi6LbhICZXwJwjVZgdXiwBvS1J2I2l9xesA_k-gR9B4sW8/s320/Pharma+Stocks.PNG" width="320" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Top 15 Pharma stocks held by MFs</td></tr></tbody></table>The above list has been created by taking the average holdings of the top 4 pharma funds. Investors can cherry pick the stocks they intend to study and make an informed investment after studying the stocks accordingly. The fund managers can change allocation at their will and stocks with 2% to 3% allocation now can see higher allocation in the future if the business model and performance of the company is good.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-663337764522858952.post-60111499320675420072020-04-17T20:06:00.001+05:302020-04-17T20:06:50.994+05:30Suprajit Engineering Stock Analysis<div dir="ltr" style="text-align: left;" trbidi="on">
Suprajit Engineering Ltd. has delivered multibagger returns over the last decade. However, in the current market correction, the stock has fallen sharply. Infact, the stock is down 66% over the last 2 years. This correction warrants a deeper look into the stock.<br />
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<span style="font-size: large;"><b>Industry Overview</b></span><br />
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The auto ancillary industry in India is around 60% of the OEM industry. In developed markets, the auto ancillary industry is anywhere between 100% to 200% of the OEMs. The auto ancillary industry in India has low pricing power and high working capital requirements as evident from the low ROCE. Of the major auto ancillary companies in India (Market cap > Rs 250 Crores), only 17 out of 42 have made a ROCE of > 15% in atleast 7 out of 10 years. There is a lag of 3 to 6 months in passing on raw material price hikes to the customer.<br />
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<tr><td class="tr-caption" style="text-align: center;">OEMs have the largest market share</td></tr>
</tbody></table>
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<span style="font-size: large;"><b>Business Overview</b></span><br />
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Suprajit Engineering Ltd. is an auto ancillary company that manufactures cables primarily for the 2&4 wheelers. The company was established in 1985 and is headquartered in Bangalore. The company has its manufacturing presence in India, Europe and North America. The promoter family, led by chairman Ajith Rai, holds a 44.56% stake in the company. The company supplies cables to the leading 2 wheeler and 4 wheeler companies across the globe.<br />
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In FY19, 41% of the revenues came from exports. 82% of the revenues came from the cable division and the balance 18% from bulbs. The 2 wheeler segment contributes ~ 36% of the revenues. The auto, non auto and aftermarket contributes ~ 21% to 22% of the revenue each.<br />
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In 2014, the company purchased a majority stake in Phoenix lamps, India's largest automotive halogen light maker to de-risk the dependence on cables. In 2016, Suprajit had purchased Wescon Controls, a USA based cable maker for $44.4 Million. This was a move to diversify into the outdoor power equipment sector and de-risk from the dependence on the auto sector. The company has over the last two decades acquired companies to fuel growth.<br />
<span style="font-size: large;"><b><br /></b></span>
<span style="font-size: large;"><b>Financial Overview</b></span><br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqUL67afvLPCKDyJrASrP4jHCSbk2aMP_rIKoMWqmlMzbAQPknYwqlDMbWZpG267qSRNK0MWlz4cRnn9UK7UHKZTVYgiZC8Mdtg-xlloCfDfgK-mud7smUu4cNQn_lo6ZEXhlYtOIqewE/s1600/Finance.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="562" data-original-width="1378" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqUL67afvLPCKDyJrASrP4jHCSbk2aMP_rIKoMWqmlMzbAQPknYwqlDMbWZpG267qSRNK0MWlz4cRnn9UK7UHKZTVYgiZC8Mdtg-xlloCfDfgK-mud7smUu4cNQn_lo6ZEXhlYtOIqewE/s1600/Finance.PNG" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Financial Snapshot</td></tr>
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<ul style="text-align: left;">
<li>The company has delivered a revenue growth > 10% in the last 9 out of 10 years</li>
<li>The revenue CAGR is 10% for 3 years and 21.55% for 5 years</li>
<li>The operating margins have been in the 13% to 18% range but have been trending lower</li>
<li>The average tax rate is > 30%, thus lower tax rate will boost the bottom line</li>
<li>The last 10 years cumulative PAT is ~ Rs 700 Crores and cash flow from operations is ~ Rs 812 Crores</li>
<li>The company has spent ~ Rs 343 crores on Capex over the last 10 years</li>
<li>The company has maintained a high ROE of > 20% for the last 10 years except 2019, where the ROE was ~ 18% due to pressure on margins</li>
</ul>
<div>
<span style="font-size: large;"><b>Valuations</b></span></div>
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The stock trades at a market capitalization of Rs 1,647 Crores. The M.cap to sales is ~ 1.03x and with a trailing PAT of Rs 144 Crores, the PE ratio works out to be ~ 11.5x. As per the September 2019 results, the company had liquid investments and cash balance of ~ Rs 320 Crores. The borrowings stood at ~ Rs 326 Crores. The company enjoys a low debt-equity ratio.</div>
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Suprajit Engineering has a strong balance sheet and has delivered a good financial performance over the last decade. The company is a free cash flow generating business. Suprajit has relied on inorganic avenues of growth and the management seems to be prudent about capital allocation. At current valuations, it makes an attractive BUY although the auto industry fundamentals are weak at the moment and post COVID-19 recovery will take time. Suprajit is a long term investment and investors </div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-67396956270802734972020-04-10T17:02:00.003+05:302020-04-10T17:02:31.911+05:30Frontier Springs Ltd Stock Analysis<div dir="ltr" style="text-align: left;" trbidi="on">
Frontier Springs Ltd. is a Kanpur based company that manufactures coil springs, primarily for the railways. The springs are majorly used in the manufacture of the LHB coaches (Link Hofmann Busch) that are now replacing the ICF coaches (Integral Coach Factory). The promoter group is the Bhatia family, which owns a 51.76% stake in the company. The company's revenues depend on the tenders floated by the Indian Railways.<br />
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<h3 style="text-align: left;">
Business Overview</h3>
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India has been using the ICF coaches since the 1950s and from 2000s, the LHB coaches started replacing the ICF coaches on selective premium trains. The LHB coaches are safer as they don't topple after an accident, thus resulting in fewer deaths from train accidents. These coaches are also lighter and have a higher speed than their ICF counterparts. The BJP led Government took a decision in 2016 to replace all ICF coaches with the LHB coaches and in 2017 it decided the manufacture the LHB coaches in India itself, under the <i>Make in India </i>initiative.</div>
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The ICF coaches can travel at an average speed of 110 KPMH vs the LHB coach's 160 KPMH (Tested upto 200 KPMH). Between 2011 and 2017, nearly 4020 LHB coaches were manufactured while in 2017 and 2018 a total of 5500 LHB coaches were manufactured. The faster pace of manufacturing coaches was also because of removing bottle necks by giving each department more independence.</div>
<h3 style="text-align: left;">
Financial Snapshot</h3>
<div>
Frontier Spring's financial performance has taken a leap after the LHB coach manufacturing increased. The other boost was the decision to stop imports of these coaches. We can see the drastic improvement in performance between FY16 and FY20.</div>
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Rapid rise in revenues and profits</div>
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The revenue has grown at a 3Y CAGR of 30.06% till FY20. The PAT margin improved from 4.63% in FY14 to 11.97% in FY20 (TTM). Along with an improvement in growth, there has been an improvement in efficiency and return ratios too. The ROE has expanded from 7.59% to 24.9%. The debtor days have reduced from 102 days to 50 days because of which the working capital requirement has come down from 38.1% in FY14 to 16.1% in FY20.</div>
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Over the last 10 years, the company has generated a PAT of Rs 29.5 Crores while the cash flow from operations has been Rs 43 Crores. The company has spent Rs 37 Crores in Capex and has paid a dividend of Rs 6.3 Crores. Although the debt has gone up from Rs 4.6 Crores in FY10 to Rs 8.86 Crores in FY19, the debt equity ratio is relatively low at 0.23x and the interest coverage ratio is at a comfortable 11.12 (FY19).</div>
<h3 style="text-align: left;">
Corporate Governance</h3>
<div>
In the micro cap companies, we have seen that the promoters take away a large pie of profits in form of salaries to family members, interest payment on loans, related party transactions, etc. In the case of Frontier Springs, we have observed the same. Some issues that are red flags:</div>
<div>
<ul style="text-align: left;">
<li>A company called <i>Vishpa Rail Equipments</i> appears in the top 10 shareholders. However, it is not categorized as a promoter company despite a director of FSL holding additional directorship in VRE.</li>
<li>VRE also has given a loan to FSL and FSL has repaid it in FY19. The interest rate is > 10%</li>
<li>VRE has provided job work services worth Rs 2.21 Crores</li>
<li>There are other related party transactions to the tune of ~ Rs 12.8 Crores in sales and ~ Rs 14 Crores in purchases. However, there is no evidence that these purchases and sales have been on unfavorable terms to FSL. These transactions are also < 15% of the top-line numbers.</li>
<li>The promoter have also provided loans to the company at high rates of interest (> 10% p.a.)</li>
<li>The managerial remuneration exceeds the 11% of profits ceiling provided by The Companies Act.</li>
</ul>
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<h3 style="text-align: left;">
Verdict</h3>
<div>
The revenue growth visibility is high as the production of LHB coaches increases over the next few years. The stock currently trades at very cheap valuations.</div>
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Once the ICF to LHB shift is finished, the company's revenue growth will cool off as the number of coaches being manufactured will go down too. The budget of the Indian railways also depends on the policies of the ruling Government. However, the next 3-4 years for the company look bright.</div>
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As a retail shareholder, the high remuneration the directors and other payments made to the promoter family raise a big red flag on the corporate governance. Thus I would give this stock a miss from a long term investment perspective. This doesn't qualify as a buy and forget stock.</div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-56326365403712030912020-04-09T16:38:00.000+05:302020-04-09T16:38:47.211+05:30Associated Alcohols Stock Analysis<div dir="ltr" style="text-align: left;" trbidi="on">
Associated Alcohols & Breweries Ltd. is a part of the Associated Kedia group which is into the business of manufacturing and bottling of liquor. The company has understandings with companies liked Diego, Mason and Summers, who buy a large chunk of the IMFL produced by AABL. The company's distillery is located in Khodigram in Madhya Pradesh. The promoters hold a 58.45% stake in the company. The Indian alcohol industry is growing at a 8.8% CAGR and is expected to reach 16.8 Billion litres by FY22.<br />
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<h3 style="text-align: left;">
Business Overview</h3>
<div>
The company's capacity as per the FY19 data was 45 MTPA. The management has undertaken capex plans to double this capacity to 90 MTPA by FY21. The company sells 80% of its potable alcohol in Madhya Pradesh. In FY19, the company started geographic diversification by entering into agreements with local distilleries in different states and now sells its own branded IMFL to Delhi, Karnataka, Kerala and Chhatisgarh. Following this, Madhya Pradesh's contribution to the IMFL sales reduced from 84% in FY18 to 50% in FY19.</div>
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The company derives 45% of its revenues from IML (Indian made liquor), where the realisation is fixed by the Government. While the raw material prices are volatile, the selling price is regulated and unfavourable movement in raw material prices can put pressure on the margins. The competition in this segment is intense.</div>
<h3 style="text-align: left;">
Financial Snapshot</h3>
<div>
Prima facie, the company has a solid track record with a 5 year CAGR of 13% for revenues and 38.96% for PAT. The company has generated operating cash flows of Rs 175 Crores against 10 year cumulative PAT of Rs 114 Crores.</div>
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Over the last decade, the revenues have gone up 4x and the PAT has gone up nearly 30x. During this period, the company has undertaken capital expenditures of ~ Rs 168 Crores. The operating margin has gone up from 6.76% in FY12 to 14.47% in FY20. The PAT margin has also gone up from ~ 1.87% in FY12 to 7.59% in FY19.</div>
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The company has a very healthy balance sheet with a low debt-equity ratio. The company has increased capacity through internal accruals and did not have to rely on borrowings. The debtor days are at a comfortable 28 days and the working capital to revenue requirement is ~ 14%. From FY15 to FY19, the company has maintained a high ROE, >19%. This coincides with the company's diversification of revenue sources (franchising, selling in-house brands, etc).</div>
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Red flags in Corporate Governance</h3>
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The Kedia family, which is the promoter group, is not part of the board. However they have been withdrawing salaries at a large percentage of the net profits.</div>
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When the promoter family is literally taking away 40% to 50% of the profits of a company as way of salaries which are beyond the limits stated by law, it is a major red flag. The family has a ~ 58% stake and can also take dividends, which would also benefit retail shareholders. The Companies Act, 2013 specifically puts a 11% cap on the managerial remuneration. Moreover, this payment is made without the approval of shareholders.</div>
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The promoter family runs a breweries business called <i>Mount Everest Breweries Ltd</i> which uses the supply chain of AABL. Associated Alcohol has made a 3 Crores investment in MEBL and has given an unsecured guarantee of Rs 52 Crores. AABL has also given a loan of ~ Rs 10 Crores to MEBL. In FY15, the company wrote off a Rs 1.3 Crore investment in a promoter company ~ <i>Vedant Energy Ltd.</i></div>
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There have been instances of IT raids on the promoter company which had unearthed cash transactions, undisclosed incomes, etc. Investors can search the internet for detailed versions of the same.</div>
<h3 style="text-align: left;">
Verdict</h3>
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The company trades at a PE of just 7x and is available at a market capitalization of ~ Rs 300 Crores. The company's turnover is above Rs 500 Crores (FY20 TTM). This implies a sales to M.Cap ratio of ~ 0.6. Looking at the past performance of the company, the financials look strong and the valuations seem cheap. However, there are severe corporate governance issues where the promoter group is siphoning away profits meant for the retail shareholders. In the long run, the retail shareholders wouldn't get the benefits of the company's business performance. <u>We would advice investors not to make any investment in the stock </u>and if you believe in the long term alcohol consumption story, you can look at other listed players like USL and UBL.</div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-88521423370444286232020-04-09T00:33:00.001+05:302020-04-09T00:33:51.478+05:30Alkyl Amines Stock Analysis<div dir="ltr" style="text-align: left;" trbidi="on">
Alkyl Amines is into the business of manufacture and supply of amines, amine derivatives and other specialty chemicals. The company's products are used in industries like pharmaceuticals, agro-chemicals, rubber, etc. Incorporated in 1979, the company has manufacturing plants in Raigad, Bharuch and Pune. The Kothari family led by Yogesh Kothari hold ~ 74.19% of the company.<br />
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Business Overview</h3>
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Amines are a class of nitrogen containing organic compounds derived from ammonia. The size of the aliphatic amines industry is touted to be $4 Billion. India's amine industry is duopolistic in nature with Alkyl amines and Balaji amines being the major players. Globally, BASF and Eastman Chemicals are the major players. The top 6 players control 50% of the industry. 61% of aliphatic amines are used in the pharmaceutical industry. Due to the hazardous nature of the chemical, long distance transport is challenge and thus most customers prefer to source these chemicals locally.</div>
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Alkyl Amines derives ~ 80% its revenues from amines & amines derivatives. The compy gets ~ 78% of its raw materials from the domestic market and alcohol products constitute ~ 67% of the raw material consumption.</div>
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The company supplies its products to API manufacturers. Over the last few quarters API manufacturers in India have been expanding capacity. This is primarily because of stricter pollution norms in China which pushed several specialty chemical and API manufacturers towards plant closures.</div>
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Financial Overview</h3>
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The company has seen a rapid growth in revenues post FY18 because of higher demand from API units in India. The company has been able to convert its profits to cash and re-deployed it towards expanding capacities thereby increasing the turnover. The company has earned a cumulative 10 year PAT of Rs 410 Crores against which the cash flow from operations is at Rs 643 Crores.</div>
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The average tax rate is ~ 33% and the company stands to benefit from the lower corporate tax regime. The interest coverage ratio has gone up from 4.53 in FY14 to 6.83 in FY19. The company has sustained a ROE of > 20% since FY14. The working capital to revenue ratio has fallen from 29.8% in FY14 to 12.9% in FY19 as the debtor days (73 in FY14 vs 66 in FY19) and inventory days (68 in FY14 vs 46 in FY19) have both improved.</div>
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Peer Analysis</h3>
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Balaji Amines is the other listed company from the Amines space. A deeper look at the numbers show that both the companies have grown at a similar pace and have generated similar cash flows.</div>
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Alkyl Amines has grown at a faster pace over the last 4 years. Balaji Amines operates a hotel called <i>Balaji Sarovar </i>in Solapur and these numbers are included in the standalone numbers. (I have stayed in this hotel for few days during my audit days, I was auditing a listed company). Both the companies have similar operating margins but Alkyl Amines has grown faster than Balaji Amines. In FY20, the revenues of Alkyl Amines outgrew those of Balaji Amines.</div>
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While both companies are similar in fixed assets turnover and margins, Balaji Amines has a working capital to revenue ratio of 22.5% against the 12.5% of Alkyl Amines. Over the last 5 years, the companies have made similar capital expenditures but Alkyl has been a better performer, as reflected in its share price. What has put investors off-guard in case of Balaji Amines is that in 2018, the company purchased 55% of <i>Balaji Speciality Chemicals Pvt. Ltd. </i>from the promoter group for Rs 66 Crores. This company had no operations at the time of purchase. Further more, the Balaji Amines also gave a loan of Rs 32 Crores to the subsidiary company as per the FY19 annual report. The market hasn't taken well to this subsidiary hoopla. BAL expected Rs 100-200 Crores contribution to the topline by FY20 from this subsidiary. Maybe not of significance but Balaji Amines annual reports have errors such as - trade payable movement shown under financing activity in the cash flow statement, different shareholding patterns on different pages, etc.</div>
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Alkyl Amines spends ~ 1.3% of its revenues on R&D while Balaji Amines spends less than 0.1% of its revenues on R&D.</div>
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Valuations</h3>
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Alkyl Amines commands double the valuation of Balaji Amines despite similar fundamentals. The current market capitalization of the company is Rs 2,742 Crores.</div>
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Adjusted for an extra-ordinary income in FY20, the stock trades at a PE of ~ 18.3 and a Sales to M.Cap of 2.75. The company has delivered excellent results over the last few years because of the structural change in the specialty chemicals and API space. Till when this momentum survives is not predictable but the recent expansion in the API sector in India indicates that tailwinds exist for the immediate future for Alkyl Amines.</div>
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Alkyl Amines has sustained a high ROCE for the last decade and the management has made wise capital allocation decisions. Over the next 3 years the company plans a capex of Rs 100 Crores per annum with an asset turnover of ~ 1.5 to 1.8. There is a risk that despite rising volumes, the revenue doesn't increase because of pressure on the selling price. We have a positive view on the stock but would recommend investors to have a limited exposure to the stock because the pharmaceutical space is way too technical and unpredictable.</div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-72094718042205897922020-04-07T16:24:00.001+05:302020-04-07T17:53:47.589+05:30Supreme Industries Stock Analysis<div dir="ltr" style="text-align: left;" trbidi="on">
Supreme Industries is a market leader in India's plastic industry. The company was established in 1942 and has its head office is Mumbai. The Taparia family is the promoter of the company and they hold ~ 49.7% of the company. As per FY19 data, the company recorded a consolidated turnover of Rs 5,611 Crores and had a capacity of 400,000 MTPA.<br />
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<span style="font-size: large;"><b>Business Overview</b></span><br />
The company's core business activity is processing polymers into finished plastic products.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8P1r0rYdjB3sZl0ncV_wPUM5Bu4q2J8OiAJuUx-20v-zWdLrFqunVq3iAnnZA2H06VqUPAynYAzOwJEWEgI1cH6IKSbUptH-YU23vUxhn53qa7pJdzHVDeh_m7Q91KbajuNwM-SQ8BVA/s1600/1.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="410" data-original-width="788" height="332" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8P1r0rYdjB3sZl0ncV_wPUM5Bu4q2J8OiAJuUx-20v-zWdLrFqunVq3iAnnZA2H06VqUPAynYAzOwJEWEgI1cH6IKSbUptH-YU23vUxhn53qa7pJdzHVDeh_m7Q91KbajuNwM-SQ8BVA/s640/1.PNG" width="640" /></a></div>
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<ul style="text-align: left;">
<li>India's piping market (Worth Rs 32,000 Crores) is very competitive with the organised sector having a 65% to 70% market share</li>
<li>The PVC pipe segment is expected to grow in high single digits over the next 5 years primarily on demand from Government's measures that target affordable housing, piped water to all houses and better irrigation facilities</li>
<li>Piping segment contributes ~ 56% of Supreme's revenues; the company faces competition from companies like Astral, Finolex, etc. This segment has low entry barriers and thus faces intense competition from local players</li>
<li>In the packaging space, the company derives majority revenues (~45%) from XFILMS</li>
</ul>
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<span style="font-size: large;"><b>Financial Overview</b></span></div>
<div>
The company changed its financial year end from June 30 to March 31 in FY16. We have not adjusted the effects of the same in the snapshot given below.</div>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhoz07Iyu9Xj7NOF0tUrqpDlVxW7b0sov84e7m_LTYHzXuiC0AbnLu8gad8mLCpBrZLHokmK71WdI53YR5NnUtIXnUvDgCKKo3DbrzA_uujlXc9Q4_8pHIAbGYt6V0pg4Pn92H2JaI8QOQ/s1600/Financials.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="312" data-original-width="1320" height="151" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhoz07Iyu9Xj7NOF0tUrqpDlVxW7b0sov84e7m_LTYHzXuiC0AbnLu8gad8mLCpBrZLHokmK71WdI53YR5NnUtIXnUvDgCKKo3DbrzA_uujlXc9Q4_8pHIAbGYt6V0pg4Pn92H2JaI8QOQ/s640/Financials.PNG" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">10 Year Financial Snapshot</td></tr>
</tbody></table>
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<ul style="text-align: left;">
<li>The company has given double digit growth in revenues for a good 8 out of 10 years</li>
<li>While the operating profit margin has gone down from 16.12% in FY12 to 13.98% in FY19, the net profit margin has remained in the 8% to 8.5% range because of lower interest rates</li>
<li>The effective tax rate for the company is ~ 33% which will go down after the corporate tax cut, we can expect higher NPM margins in the future</li>
<li>The bright side is that value-added products (OPM > 17%) now contribute ~ 35% of the revenues and the management is stressing on increasing the share of these products.</li>
</ul>
<div>
The company has generated positive operating cash flow every year atleast for the last 10 years. Against Rs 3,021 crores of net profit for the last 10 years the company has generated OCF of Rs 3,823 Crores. The company has regularly paid dividends and has maintained a dividend payout of ~ 35%+</div>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgajhfH8ZijymzLwwR_hh3R43Ixg-M3mVNhC38-P9cCgUrf2YO3Nha7k1t96HGx2gY9NkdQ3GQEdELvB73e7MerosRuoIJL6hpXQeLJNTzdQzWEpjRqkemXCBJdRJrfHBPWyN5SWMJvVm8/s1600/Cash+Flow.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="428" data-original-width="717" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgajhfH8ZijymzLwwR_hh3R43Ixg-M3mVNhC38-P9cCgUrf2YO3Nha7k1t96HGx2gY9NkdQ3GQEdELvB73e7MerosRuoIJL6hpXQeLJNTzdQzWEpjRqkemXCBJdRJrfHBPWyN5SWMJvVm8/s1600/Cash+Flow.PNG" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Utilization of cash flows</td></tr>
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The company has maintained its debtor days at 23-25 which shows that the company is able to collect its receivables on time. The company has maintained a volume growth of ~ 7.7% over the last decade and the realization per KG has also increased from Rs 110/KG to Rs 141/KG.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiwt3fVfuWOViymHAJjM12T6-N6E8w45j8XLYQQWlBrxSkzc6eEOZkfhMQMdBuDcvLZ2dbR9CDMMeJX5f252AMjIGi_2L4j4w3-qop99xpV09LBIjM-vrsLfRJMRfPuD9WcpvfdW_Niew/s1600/Voulme.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="233" data-original-width="1292" height="115" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiwt3fVfuWOViymHAJjM12T6-N6E8w45j8XLYQQWlBrxSkzc6eEOZkfhMQMdBuDcvLZ2dbR9CDMMeJX5f252AMjIGi_2L4j4w3-qop99xpV09LBIjM-vrsLfRJMRfPuD9WcpvfdW_Niew/s640/Voulme.PNG" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Volume analysis</td></tr>
</tbody></table>
The company has maintained high ROE and ROCE ratios over the last 10 years. However, since the company's raw materials are cyclical, the margins and return ratios fluctuate on a yearly basis. We believe it is better to look at the performance over a period of atleast 3 years.<br />
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<div>
The principal raw materials of the company are plastic polymers which are derivatives of crude oil. The raw materials make up ~ 65% of the expenses. Volatility in crude oil prices can hit margins adversely. A fall in crude oil prices may reduce realization and cause inventory losses. An immediate rise in crude oil prices can impact margins as it takes some time to pass on the price hike to the customers.</div>
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<span style="font-size: large;"><b>Valuations</b></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVgOx_x5hmkSsH-LLO-brG4sQTSfaEiU5s0pnwpDYnRmdZuCgbfMlgU9TWSWx9h2V-3-hvw3dc1ZdYv01D-ehi1HX03qM1eWImj2D94pRLfeh-GLCUILrujfY72YbKGVwrQmfOZKKEryg/s1600/Valuation.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="127" data-original-width="248" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVgOx_x5hmkSsH-LLO-brG4sQTSfaEiU5s0pnwpDYnRmdZuCgbfMlgU9TWSWx9h2V-3-hvw3dc1ZdYv01D-ehi1HX03qM1eWImj2D94pRLfeh-GLCUILrujfY72YbKGVwrQmfOZKKEryg/s1600/Valuation.PNG" /></a></div>
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At a market capitalization of Rs 10,150 Crores, the Supreme Industries stock trades at a PE Ratio of 21.41 and a M.Cap to Sales ratio of 1.8x. This is the lowest that the stock has traded in the last 3-4 years. We have been actively tracking the company for long term investment opportunities but the valuations always seemed expensive. Post Covid-19 scenario would not be rosy for the company because of multiple headwinds in the real estate space and low rural spending, but Government measures to boost spending in these areas could push up infra spending.</div>
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<div>
While we would ideally like to buy the stock at a market capitalization of ~ Rs 7,000-7500 Crores, the current levels provide a good entry point. Investors can add a small portion to their portfolio at current price point and on dips of 15%-30%, if any, can further increase allocation. Although the long term prospects are bright, we don't recommend a full allocation at current prices. The ideal PE zone to buy this stock for good returns over the long term is 14-16.</div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-15431898987121094972019-11-07T21:11:00.000+05:302020-03-28T21:31:59.919+05:30Avanti Feeds Stock Analysis<div dir="ltr" style="text-align: left;" trbidi="on">
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Avanti Feeds’ stock price is down ~ 50%, meanwhile the fundamentals are improving. So, we analyze the company from a long term investment perspective. The company began its operations in 1994 with a 20,000 MT unit in Kovvur.</div>
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Industry and Business</h4>
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Shrimps are cultivated in hot weather and barring China, majorly consumed in colder weather countries. India has a climate that suits the shrimp cultivation well. Also, the 8000 km long coastline provides ample access to the brackish waters required for shrimp cultivation. Rising consumption of shrimps means more cultivation of shrimps. This leads to a growing demand for shrimp feeds.</div>
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Indian shrimp exports have grown from Rs 5,700 Crores in FY11 to Rs 30,800 Crores in FY18. The country ranks second in global aquaculture production (China is first) and 80% of the production of shrimps is exported.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-ZtbArJRrxeGWCN6DCHjwn4Ht2RKv3cEcoZ8Ugsni-my0k9opa82-30kH_LmAGnBtv30oZyzWJLFnwA5iFkFUAcw-mom9VW10fEyGn0gYPKta2DEw-ay-UA6oXOPaYYVZ-D3B-dINEMs/s1600/AF_1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="346" data-original-width="403" height="274" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-ZtbArJRrxeGWCN6DCHjwn4Ht2RKv3cEcoZ8Ugsni-my0k9opa82-30kH_LmAGnBtv30oZyzWJLFnwA5iFkFUAcw-mom9VW10fEyGn0gYPKta2DEw-ay-UA6oXOPaYYVZ-D3B-dINEMs/s320/AF_1.jpg" width="320" /></a></div>
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In 2012, the EMS epidemic wiped out many shrimp farms in China and this caused the <em style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">Vannamei</em> shrimp production to drop by 45%. Shrimp farmers in India utilized this opportunity to increase their market share. In 2009, the Government had allowed commercial cultivation of the <em style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">Vannamei</em> shrimp, which is more resistant to disease than the black tiger shrimp. From 10,000 tonnes in 2010 to 4.5 Lakh tonnes in 2017, the <em style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">Vannamei</em> shrimp production boomed. This resulted in <em style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">Vannamei’s</em> production share rose from 2% in FY10 to 76% in FY17.</div>
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The Indian shrimp feed market grew at ~ 18% p.a. between FY10 and FY17. The growth rate is expected to moderate to 12% p.a. between FY18 and FY23.</div>
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The key raw material for shrimp feed manufacturers is Soya. The companies have a very low bargaining power and are not able to pass on raw material price increases with ease.</div>
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USA – A major market</h5>
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In 2014, 31% of India’s shrimps were exported to USA. In 2018, this jumped to 38%. This rise was predominantly because of lower production in Thailand cause by WSS virus. Indian exports to China have picked up pace since 2015 and now constitutes 31% of total exports.</div>
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2018 – A challenging year</h5>
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Imports of Shrimps to USA grew by ~ 7.1% p.a. between 2013 and 2017. However, due to delay in winters and accumulated inventory, the growth rate muted to ~ 4%. As a result, the shrimp feed marker registered a de-growth of ~ 15%.</div>
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Financials</h4>
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Avanti Feeds has two business verticals: Shrimp feed (78%) and Shrimp processing (22%).</div>
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Looking at the past data of Avanti Feeds, we see many positives.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinKCEv9EUIJGZE_oT-Fo3JsVqdT2Ih0TPD-8fdR48if_Lc0VTzfuuPXeSgipyczlEXrLyU05yEj7G80HevEi6wB4uPfccJs8gcAoF2MxfDKXFbJLX8kQ8BOJK4zw-fuAmfeIisBM_0BvM/s1600/AF_2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="256" data-original-width="619" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinKCEv9EUIJGZE_oT-Fo3JsVqdT2Ih0TPD-8fdR48if_Lc0VTzfuuPXeSgipyczlEXrLyU05yEj7G80HevEi6wB4uPfccJs8gcAoF2MxfDKXFbJLX8kQ8BOJK4zw-fuAmfeIisBM_0BvM/s1600/AF_2.jpg" /></a></div>
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<ul style="background-color: white; border: 0px rgb(225, 225, 225); box-sizing: border-box; font-family: HelveticaNeue, "Helvetica Neue", Helvetica, Arial, Verdana, sans-serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; list-style-image: initial; list-style-position: outside; margin: 0px 0px 20px 7px; padding: 0px; vertical-align: baseline;">
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The company has maintained healthy 3 year and 5 year growth numbers</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The company has earned a PAT of ~ Rs 1,339 Crores and generated operating cash flows of Rs 1,035 Crores in the last 10 years</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">Avanti Feeds has incurred a CapEx of ~ Rs 343 Crores and paid a dividend of ~ Rs 232 Crores in the last 10 years</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">In the last 9 out of 10 years, the company has delivered double digit growth rates</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The company has a very low debt equity ratio of 0.01; the company has current investments of ~ Rs 518 Crores which is nearly 8% of the market capitalization</li>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizFzbhZAw4M7fOmGqb5xSv59QR-u8Mi194NuxhYiawiOxcIOQkU9mfkdyYgl0rrBKX6_YVdzvZWlMQxWbKi_qaC1rfGCAtmlRbD8pS3qtiH2H-V7LiUMZ8hFs40m4SyB_DpKzTnil3lX8/s1600/AF_3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="255" data-original-width="702" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizFzbhZAw4M7fOmGqb5xSv59QR-u8Mi194NuxhYiawiOxcIOQkU9mfkdyYgl0rrBKX6_YVdzvZWlMQxWbKi_qaC1rfGCAtmlRbD8pS3qtiH2H-V7LiUMZ8hFs40m4SyB_DpKzTnil3lX8/s1600/AF_3.jpg" /></a></div>
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<ul style="background-color: white; border: 0px rgb(225, 225, 225); box-sizing: border-box; font-family: HelveticaNeue, "Helvetica Neue", Helvetica, Arial, Verdana, sans-serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; list-style-image: initial; list-style-position: outside; margin: 0px 0px 20px 7px; padding: 0px; vertical-align: baseline;">
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The company has delivered a high ROE consistently; in FY19 the ROE tapered off due to low margins and growth</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The company has a very low working capital requirement with debtor days at ~ 5 and inventory days at ~ 40; the working capital to revenue is just 8.1%</li>
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Avanti Feeds Stock Price & Valuations</h4>
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Avanti Feeds Stock trades at:</div>
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<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">PE Ratio (Consolidated TTM): 15</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">M.cap to Sales: 1.29</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">EV to EBITDA: 8.90</li>
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The business is cyclical and there are multiple factors that can cause a slowdown in growth – Tariff war, disease outbreak, fall in shrimp prices, unfavorable Government policies, etc. Under such circumstances, the Avanti Feeds’ stock cannot command valuations that it did in 2017. However, though we do not expect a major expansion in the PE ratio we believe that over the next 3-5 years, the company can deliver a strong growth in earnings. The growth in stock price should be in line with the growth in earnings.</div>
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The EBITDA margins should consolidate in the 10% to 12% range and the growth in revenues over the next 3 years should be ~ 15% to 17%.</div>
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Investment Opportunity</h4>
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Avanti Feeds’ stock is on many investor’s radar now. Not only has the stock price corrected by more than 50% but also the recent improvement in shrimp prices globally has supported the financial performance. The company has a ~ 50% market share in shrimp feeds apart from a strong balance sheet and cash flows.<br />
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Just because the stock is down ~ 50%, doesn’t mean that it will double to reach the previous high. In fact, most stock prices down by such a whopping percentage won’t reclaim previous highs. So, we have be very careful when picking up beaten down stocks.</div>
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Avanti Feeds has established itself as a market leader in shrimp feeds. Moreover, the company has a strong balance sheet to support future growth. Investors looking to add for long term can consider the stock (although with their own research). If the stock closes above Rs 500, a new trend will be established on the charts which can propel the stock price further.</div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-57213608960013737512019-11-02T21:41:00.000+05:302020-03-28T21:42:16.096+05:30Navin Fluorine Stock Analysis<div dir="ltr" style="text-align: left;" trbidi="on">
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Navin Fluorine International Ltd. is a part of the Padmanabh Mafatlal group. The company is one of the largest speciality fluoro-chemical company and has a strong presence in the refrigerant gas segment in India. The business was established in 1967.</div>
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Business & Industry</h4>
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The company’s sources of revenues and their FY 19 revenues are:</div>
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<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">Specialty Chemicals (Rs 300 Crores)</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">Refrigerants (Rs 280 Crores)</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">Inorganic Fluorides (Rs 197 Crores)</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">CRAMS (Rs 178 Crores)</li>
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Navin Fluorine’s client base includes companies operating in the life sciences, crop sciences, air conditioning, stainless steel and petrochemical space. Navin Fluorine’s key raw materials are Fluorspar and Chloroform. China is the leading producer of Fluorspar. Earlier, due fluorine was frowned at because of pollution issues. But now fluorine plays an important role in pharma</div>
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Financials</h4>
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Over the last five years, the revenue has grown at ~ 15.% while the PAT has grown at ~ 17.8%. Till FY13, the company generated significant revenues from the sale of carbon credits. However, post the ban on sale of carbon credits the company stopped generating revenues from this sale. The company entered into the CRAM space almost a decade back and this segment has grown into a major revenue source for the company. Under the Montreal protocol, the company’s main refrigerant product HCFC-22 is under a phasedown since FY15. By FY30, there will be a complete phasedown of HCFC-22.</div>
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<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">Navin Fluorine has earned a PAT of Rs 1,084 Crores over the last 10 years. The OCF during this period has been Rs 919 Crores</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The company has spent Rs 534 Crores on capital expenditure between FY10 and FY19</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">In FY19, fluorspar and chloroform prices increased by 45%, thus impacting the EBITDA margins</li>
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<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The company doesn’t have a heavy working capital requirement; the debtor days have reduced over the last 5 years</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The margins are volatile due to heavy dependence on raw materials; there is a lag in the hike in raw material prices and the hike in selling price; the company has improved margins over the last few years; the management expects to keep the EBITDA margins in the 22% to 26% range</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The company has earned a ROE > 15% in only 5 out of last 10 years; in FY19 the other income was lower due to M2M losses on investments</li>
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Refrigerants</h4>
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The refrigerants segment contributes ~ 30% of the revenues. In 2011, the segment contributed ~ 55% of the revenues. From January 1, 2020 this segment will witness production cuts in the R-22 gas by 25% as per the montreal protocol. The major AC manufacturers are shifting away to other gases. The company expects to recoup some of the loss in revenues by catering the derivatives of R-22 to pharma and crop sciences companies. Also exports to the middle east would make up for some loss in volume. The company is working on new molecules to replace the old generation gases.</div>
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CRAMS</h4>
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The contract research and manufacturing services (CRAMS) segment has witnessed excellent growth over the last 9-10 years. However, the division slowed down in FY19 due deferment of business by clients. The management expects this division to maintain a high growth rate for the foreseeable future.</div>
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Navin Fluorine Investment Opportunity</h4>
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The company has neared the completion of a Rs 115 Crore capital expenditure program. The new plant at Dewas (MP) is expected to contribute to the topline from H2FY20. The company also has a JV with Piramal Enterprises at Dhaej (Gujarat) and this JV has turned profitable by Q4FY19. The CRAMS business is expected to pick up growth in the second half of FY20.</div>
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The stock trades at a PE of 27 which is not cheap for a specialty chemical company. However, Navin Fluorine enjoys a healthy balance sheet and operates in a niche business which isn’t easy to enter. The promoter holding is very low at 31.03% and the promoters have been trimming their stake in the company.</div>
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Navin Fluorine has the potential to deliver good returns in the next 1.5 – 2 years but due to the volatile margins and nature of business, investors should hold the stock with a stoploss and have a low allocation to the stock in their portfolio.</div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-90463215813159230442019-10-01T21:56:00.000+05:302020-03-28T21:58:37.540+05:30Hester Biosciences Stock Analysis<div dir="ltr" style="text-align: left;" trbidi="on">
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Hester Biosciences stock has delivered stellar returns over the last decade. Over the last 5 years, the revenues have grown at a CAGR of 20.8% while PAT has grown at a CAGR of 34.51%. The Bill and Melinda Gates foundation has given the company a soft loan and grant to start manufacturing in Africa.</div>
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Company Overview</h4>
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Hester Biosciences was founded in 1987 by Mr. Rajiv Gandhi (MD & CEO). The company operates in two verticals – Poultry and animal healthcare. The company is one of India’s leading animal healthcare and second largest poultry manufacturer. Hester derives 76% of its revenues from poultry and 21% from animal healthcare. The company derives 92% of its revenues from the domestic market and just 8% from exports. The company has over 50 vaccines and 35 health products. The company’s competitors include Venky’s, Suguna, Virbac, Indian Immunologicals, Zydus, etc.</div>
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<span style="color: #666666; font-size: 18px;">Industry Overview</span></div>
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The global animal healthcare market is estimated at $27 Billion and is expected to grow at a 4% CAGR till 2024. The Indian animal healthcare industry is estimated at ~ Rs 6,000 Crores. Poultry makes up ~ 35% of the industry and is expected to grow at 8% CAGR. India has 31.05% of the world’s total cattle population. Also, India is the second largest producer of eggs, behind China.</div>
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Business</h4>
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Hester Biosciences makes vaccines that treat diseases such as fowl pox, newcastle, etc. for the poultry segment. For the large animal segment, the company makes vaccines for diseases such as goat pox, PPR and Brucellosis. The Government of India has cleared a Rs 13,342 Crore outlay in the first cabinet meeting for treating Brucella and other foot and mouth diseases</div>
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The company’s sales come from tenders and private distribution network. Of the animal healthcare business, ~ 40% of the business is from tenders. The management says that the average EBITDA margins are 35% to 36%.</div>
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Globally, the major companies derive the maximum revenues from animal healthcare and a small portion from poultry vaccines. Hester Biosciences has been growing aggressively on the animal healthcare segment over the last 4 years. The management expects poultry business to grow at ~ 10% p.a. and animal healthcare to grow at ~ 50% p.a. for the coming few years.</div>
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Financials</h4>
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The company has grown revenues at a CAGR of > 20% for the last decade. Coupled with expansion in margins, the bottom line has grown faster than the topline. However, because of the cyclicality in the poultry business, the growth rate has slipped below 12% p.a. multiple times in the past.</div>
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The company has maintained a healthy ROCE and with improving margins, the return on equity (ROE) also started improving from FY15. Moreover, the company has reduced it’s debtor days and inventory days which has reduced its working capital requirements. Hester Biosciences has a healthy interest coverage ratio of ~ 9.57x and a low debt-equity ratio of 0.5.</div>
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The company has issued a corporate guarantee of ~ Rs 27.66 Crores in favour of Bill & Melinda Gates Foundation on behalf of the Tanzanian subsidiary. The company has invested $4 Million in the Africa project while the Bill & Melinda Gates Foundation has given a loan of $10 Million and a grant of $4 Million.</div>
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Hester Biosciences Stock Analysis</h4>
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The company is looking for inorganic growth opportunities and has taken an approval for a QIP of upto Rs 100 Crores. The company had put up a plant in Nepal in FY15 and the company expected to achieve a turnover of Rs 50 Crores from the plant. However due to slow tenders the company has only achieved a turnover of ~ Rs. 9 Crores by the end of FY19, against an expectation of a turnover of Rs 50 Crores. The company expects to commission the Tanzania plan by FY21 and record a turnover of Rs 200 Crores at full capacity. But it will take the company 3-4 years to reach full capacity at the plant.</div>
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The company is targeting a 50% contribution from exports in the coming years. While exports will add to the topline of the company, there is a possibility that the African operations will increase the working capital requirements. Also, the company might have to operate at low margins to gain a foothold in the African market, this can dent the bottomline of the company.</div>
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Valuations and Verdict</h4>
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The Hester Biosciences stock trades at a PE of 35x and a M.Cap to sales of 8.5x. While the valuations seem expensive, the growth rate compensates for the premium valuations.</div>
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The company has 85.06 Lakh shares outstanding of which the promoters hold 54.09%, so there is low float in the market. The company commands a market cap of Rs 1,475 Crores. Over the next 4-5 years, the company can increase the topline to ~ Rs 400 to Rs 500 Crores and see the profits more than double during this period. However, the company has encountered cyclicality in growth. Often, the share price corrects by 40% to 50% and thus investors might have to sit through heavy drawdowns when they hold the stock for long term.</div>
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Investors can put the Hester Biosciences stock on their watch list and buy on dips of 15% to 20%. Also, investors should carefully assess the volatility and other factors before making a high allocation of the stock to their portfolio.</div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-9499740314819706942019-09-17T22:03:00.000+05:302020-03-28T22:04:30.278+05:30CreditAccess Grameen Stock Analysis<div dir="ltr" style="text-align: left;" trbidi="on">
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The CreditAccess stock price is touching 52 week highs. We are getting a lot of requests from our blog readers to do a CreditAccess Grameen stock analysis. A rapid growth in the loan portfolio and profit after tax makes it a potential growth stock.</div>
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About</h4>
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CreditAccess Grameen Ltd., formerly known as Grameen Koota, was founded by Vineetha Reddy in 1996. Today, the company’s promoter is CreditAccess Asia. In 2008, the company moved from being an NGO to being an NBFC. The company is the 2nd largest micro-finance institution in the country.</div>
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Karnataka and Maharashtra contribute ~ 60% of the gross loan portfolio. The top 10 districts make up nearly 32% of the portfolio. Also, Rural contributes 82% (vs 68% in FY15) which makes the portfolio concentrated.</div>
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Industry</h4>
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Nearly 52% of the agricultural households in India are indebted. Nearly 40% of loans came from informal sources (Moneylenders accounted for 26% of overall loans). However, hardly 15% of households with marginal land holding get credit from sources such as Government, cooperatives and banks.</div>
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The NBFC-MFI accounts for ~ 36.8% of the microfinance lending followed by banks at 32.6% and small finance banks at 18.5%. Top 10 MFI’s made up ~ 74% of the gross loan portfolio. Rural India accounts for roughly half of India’s GDP but has access to just 10% of the banking credit.</div>
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Eight MFIs have converted into small finance banks, while Bandhan Bank has transitioned into a universal bank. The largest MFI, Bharat Financial Inclusion has been acquired by IndusInd Bank. As small finance banks diversify into MSME loans, housing loans, etc. their micro-finance loan growth has slowed down to single digits. Small finance banks are also expected to have lower cost of borrowing as they will be eligible to take public deposits. However, small finance banks will have to incur higher operating costs in the initial years which will give NBFC-MFIs to increase market share.</div>
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CreditAccess Grameen Stock Analysis</h4>
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The company is majorly into group lending, which contributes ~ 95% of the loan portfolio. The breakup of the loan portfolio is given below.</div>
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The company has forayed into home improvement loans, family welfare loans and retail finance loans only recently. The group lending model ensures that in case of default by one member, the other members of the group can cover up. However, the group lending model can also cause higher defaults in case of unfavorable circumstances that affect the rural economy.</div>
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The company’s loan book has grown faster than the borrower base. This shows that the company is now having a higher exposure per borrower. Since the company lends to people in the lowest income bracket, a higher exposure to this segment raises the risk of the loan portfolio.</div>
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The company has a positive asset liability mismatch because of shorter tenure of average asset maturity (16 months) vs the average liability maturity (25.3 months).</div>
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Valuations</h4>
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The company commands a market capitalization of ~ Rs 8,600 Crores. The price-to-book ratio of the company is ~ 3.64. IndusInd Bank acquired Bharat Financial Inclusion at a PB ratio of 3.8.</div>
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The dip in ROE in FY17 was caused by higher NPAs. Demonetization hit the industry significantly in FY17 but the industry recovered fast. The NBFC crisis in FY19 didn’t affect the borrowing for CreditAccess Grameen because the company has low exposure to NBFCs and Mutual Funds. The management has ruled out any chance of converting to a small finance bank. Moreover, they have given a guidance of 30% growth in loan book over the next 5 years.</div>
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As per our analysis, CreditAccess Grameen stock trades at premium valuations. Moreover, the business model doesn’t make it a long term portfolio stock. The company has high concentration in a single state (Karnataka). Also, the company’s lending per borrower is also increasing significantly. Any negative news can impact the credit rating, increase the cost of borrowing and also result in high rates of default. If you are looking to add the CreditAccess Grameen stock for short term (3 months to 12 months), then take positions with a strict stop loss.</div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-7526968335816874262019-08-20T22:12:00.000+05:302020-03-28T22:16:43.134+05:30AIA Engineering Stock Analysis<div dir="ltr" style="text-align: left;" trbidi="on">
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AIA Engineering stock has delivered multibagger returns over the last five years. The company has healthy return ratios and has exhibited strong growth despite the slow economic growth globally. AIA Engineering operates in the grinding mill internal market on a global level, serving the Cement, Mining, Thermal Power and Aggregate industries. The mining industry is the major source of revenue for the company. Exports contribute 76% of the company’s revenues.</div>
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Industry & Product</h4>
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AIA Engineering designs, manufactures and markets consumable wear parts (mill internals) which are used in the process of Grinding and Crushing. Due to impact, abrasion and corrosion, there is wear & tear on these parts and they wear away. The company makes these consumables in high chrome metallurgy which offers wear resistance and longer wear life. High chrome is 40% more expensive than forged grind media. AIA Engineering and Magotteaux have a 80% market share of the industry.</div>
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The estimated annual consumption of grinding media for the mining segment is 2.5 million tons. Only 20% of the consumption demand is met from high chrome while the balance consumption is met from the conventional forged components. The company caters to four major metal ore types – Iron, Platinum, Gold and Copper. The company plans to tap it’s existing customer base for it’s new product – Mill Linings. This product has a global demand of 300,000 ton annually. Although the company has a presence in the cement and power industry, it doesn’t expect much growth from sales to these industries in the near future.</div>
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Management</h4>
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The company’s Managing Director Bhadresh Shah has built the company from scratch. Earlier, AIA was in a joint venture with Magotteaux till the early 2000’s.</div>
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The promoters hold a 58.47% stake in the company (vs 61.65% on 31 March 2018). FII holding is 21.81% and DII holding is 14.8%. The stock is held by many funds and the retail holding is just ~ 5%.</div>
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Company Fundamentals</h4>
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The company has a current capacity of 340,000 tons per annum but the management has undertaken a CapEx to increase this capacity to 440,000 tons per annum. However, this CapEx plan has been delayed by three years because of financial issues being faced by an important equipment supplier. The company also plans to invest Rs 100 Crores in wind mills to mitigate the risks associated with power costs.</div>
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Over the last 5 years, the consolidated revenue has grown at a CAGR of 8.11% while the net profit has grown at a CAGR of 9.47%. Volatility in raw material prices make the margins volatile (refer the graph).</div>
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Metal Scarp and Ferro Chrome are the major raw materials of the company. A 1% move in the raw material prices can have a Rs 25 Crore impact on the company’s bottomline. The EBITDA margins spiked between FY15 and FY17, however the management expects the EBITDA margins to sustain in the early 20’s.</div>
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Analysis</h4>
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Molycop is the largest producer of forged grinding balls. The company has a capacity of 1.7 Million tonnes and sales of nearly 1.1 Million tonnes. Molycop was sold for $1.6 Billion in 2016. AIA Engineering with a lower capacity and overall market share has a valuation upwards of $2 Billion.AIA Engineering’s direct competitor, Magotteaux, spends $6 Million on R&D annually, but AIA spends no amount on R&D. Because of lower employee costs and overall cost of production, AIA Engineering enjoys higher margins than it’s peers.</div>
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As it is a replacement product and makes up a small cost for the consumers, high chrome enjoys recurring demand. The company incurred Rs 785 Crores of capital expenditure in the last 5 years and this was met from internal accruals. The company had Rs 1,143 Crores in current investments and Rs 208 Crores in cash and bank balance.This made up roughly 9% of the market cap of the company. Further, the company has a 75% stake in a listed company – Welcast Steel Ltd. The company makes raw material purchases from Welcast.</div>
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Ratio Analysis</h4>
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AIA Engineering has to maintain a quarter worth of inventory for its customers. The inventory days has increased from 68 in FY16 to 93 in FY19. This has resulted in a sharp increase in the working capital requirement.</div>
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The working capital includes the liquid fund investments. Readers should note that the above numbers on working capital look distorted because of these investments.</div>
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AIA Engineering Stock Analysis</h3>
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AIA Engineering’s average realisation per unit is ~ Rs 102,000 per ton (+/- 5%). The management expects incremental volume growth of 50,000 TPA from the mining industry over the next 2 years. FY15 to FY18 was a tough year for the mining industry because of low commodity prices.</div>
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Even if the realisation per ton doesn’t improve, there is room for the company to clock revenues of ~ Rs 3,400 Crores by FY21. At 18% PAT margin, the company would make a profit of ~ Rs 600 Crores. However, if the company is able to push up realisation to ~ Rs 105,000 per ton and maintain PAT margin at ~ 20%, then the profit would be ~ Rs 700 Crores.</div>
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The company is facing a law suit of $60 Million (~ Rs 420 Crores) and has been spending upwards of Rs 10 Crores towards legal expenses every year. If the law suit materializes, then it would cost the company almost a year’s worth of profits. This could hit the AIA Engineering stock price for the short term.</div>
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Long Term Investment</h4>
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AIA Engineering stock trades at a PE of 30x its FY19 earnings. For a company that caters to cyclical industries like Mining and Cement, this valuation is quite rich. From the current market cap of Rs 15,560 Crores the prospective returns over the next 3 years are not much. The AIA Engineering stock has usually traded at fair valuations of above 20 PE, primarily because the company has sustained a high ROCE over time.</div>
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The AIA Engineering stock is part of our watchlist and we would be interested to buy if the stock price corrects to fair valuations. Long term investors can also consider buying on dips.</div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-8460364586416973892019-04-09T22:19:00.000+05:302020-03-28T22:22:25.372+05:30Wabco India Delisting Candidate<div dir="ltr" style="text-align: left;" trbidi="on">
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Wabco India delisting is on cards as ZF Friedrichshafen has acquired the parent company in an all cash deal. Subsequent to this development, as per SEBI regulations on takeovers, ZF Friedrichshafen has made an open offer to the shareholders of Wabco India. The open offer is at Rs 6318 which is nearly 25% lower than it’s 52 week high. While this open offer will not find many takers, ZF Friedrichshafen will eventually look to delist the company.</div>
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Priced at $136.5 per share, it is an all cash deal worth $7 Billion. The deal should be closed by 2020. ZF Friedrichshafen is privately held. The company been moving towards developing technologies and components for self driving cars.</div>
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Wabco India Delisting</h4>
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Wabco India has delivered Multibagger returns to it’s shareholders. Over the last decade, it has been a mega wealth creator. Although we do not expect multibagger returns till it’s delisting we will look for a short term opportunity in the stock. We expect the delisting process to start in mid 2020 and complete by 2021. This is a 2 year long window that we are assigning. Morever, there has to be a 12 months gap between the open offer and delisting.</div>
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How much returns can investors expect in this delisting process? ZF Friedrichshafen paid ~ 18.5x the EPS of Wabco USA. As on date, Wabco India trades at a PE of 39x. The current valuations are already at a premium and ZF Friedrichshafen would not want to pay a higher premium. In terms of price, $136.5 was a 13% premium to Wabco’s market price of shares on the American exchanges. We have done some number crunching to check on what the delisting price could be.</div>
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The valuations of Wabco India are already ~ 25% of what ZF Friedrichshafen paid for the entire acquisition of Wabco USA. However, the contribution of Wabco India’s revenues and profits are just 10% of the group’s total. We do not expect a hefty premium from ZF Friedrichshafen over the current valuation of Wabco India.</div>
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<em style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font-family: inherit; font-size: inherit; font-stretch: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">Note: Technically, ZF Friedrichshafen paid for 75% of Wabco India and it will have to shell out an additional amount for buying out the remaining 25% from the shareholders. Even then, the company has paid a premium.</em></div>
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What if there is no delisting?</h4>
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While there is no intent of delisting shown, we can expect it because of the existing structure of ZF Friedrichshafen. However, in case there is no delisting at all, then investors don’t stand to lose much as Wabco India’s fundamentals are strong and it has posted strong growth numbers consistently.</div>
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But, we believe that the market price of Wabco India’s shares will trade in a range over the coming months and irrespective of the results that the company posts, the market will be looking forward to the news on delisting. Our conclusion is that there is not much on the table from the Wabco India delisting play.</div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-663337764522858952.post-13333989880196954502019-03-18T20:45:00.000+05:302020-03-29T20:48:14.270+05:30Lumax Industries Stock Analysis<div dir="ltr" style="text-align: left;" trbidi="on">
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Lumax Industries is an auto component maker. It is India’s leading manufacturer of front and rear lamps used in motor vehicles. The company’s clients are the manufacturers of two-wheelers, four-wheelers and commercial vehicles. The company’s promoters are the DK Jain family and the Japanese company Stanley Electric. Both hold a 37.5% stake in the company. The company started in 1945 as a trading house and today it has 28 manufacturing units.</div>
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Business Model</h4>
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The company makes ~ 65% of it’s revenues from front lighting systems and ~ 25% from rear lighting systems. Other accessories make up 10% of the revenues. Passenger vehicles contribute 67% of the revenues and 2-wheelers contribute ~ 27% of the revenues. The company’s top customers are Maruti Suzuki (34%) and Hero Moto (15%). Also, other major clients (Honda, M&M and Tata Motors) have a healthy revenue share.</div>
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Raw materials are ~ 60% of the revenue and any fluctuations in the prices of raw materials can have a major impact on margins.</div>
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Industry</h4>
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The fortune of the Auto-ancillary industry is tied to the fortune of the vehicle makers. In developed markets, the auto ancillary market is 100% to 200% the size of the OEMs, but in India it is just 66% to 70% of the OEMs. India has a very low penetration of vehicles as per global standards. There is a good opportunity for the passenger vehicle industry to grow. This would also present growth opportunity for auto ancillary companies. However, the number of components that go into the making of a vehicle will reduce over the next few years. Moreover, the pricing.</div>
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Of the 42 major auto ancillary companies (Market cap > Rs 300 Crores), only 17 have made a ROCE > 15% in atleast 7 out 10 years. OEM’s make up 54% of the demand, exports make up 29% of the demand and the balance 17% demand comes from the replacement market. However, there is a lot of competition from the Chinese and the counterfeit products in the market. There is usually a 3-6 months gap in the negotiation of price with OEMs when the raw material prices go up.</div>
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Financials</h4>
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<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">In the last 10 years, the company has recorded double digit growth in revenues in 6 years. There was no de-growth in this period.</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">While revenues have almost doubled in the last 5 years, the net profit has shot up from Rs 7.7 Crores to Rs 63 Crores.</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The interest cost has reduced amidst a rising margin period.</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The company invests ~ 3% of it’s revenues into R&D.</li>
<li style="border: 0px rgb(225, 225, 225); box-sizing: border-box; font: inherit; margin: 0px 0px 0px 1em; padding: 3px 0px; vertical-align: baseline;">The company paid Rs 58.33 Crores as Royalty, Management support fees and drawing charges to related parties (Stanley Electric). The company pays ~ 2% to 3% every year under these heads to Stanley</li>
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The company enjoys a negative working capital requirement. The improvement in margin has led to an improvement in the return metrics (ROE, ROCE and ROA). However, in the last 10 years the company has made a ROCE of more than 15% in just 4 years (including 3 in the last 3 years). The company’s main raw material is polycarbonate. The company imports 40% of it’s raw materials.</div>
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Outlook</h4>
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The share of LED is at ~ 35% and the management’s forecast is that this proportion will increase to 50% soon. The share of LEDs has already gone up from 8% to 35% in the last 2 years. Bharat Stage VI emission norms will come into force from April 2020 and the industry is gearing up for this transit. LED is becoming the first choice of customers and OEMs. The revenues of Lumax Industries have grown in-line with the growth in passenger vehicles. However, the company has been able to give margins a push. The management says that they have focused on lowering costs by reducing imports.</div>
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The cost of an LED is 3x to 10x more than that of a conventional headlight. This has resulted in the margins improving along with the rise in share of LEDs. There is also a threat of Chinese LEDs which are cheaper in cost and this will hamper the prospects in the replacement market.</div>
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The expected revenue growth over the next 3 years is ~ 8% p.a. However, the margins cannot be predicted here. Although, the last 5 years have been positive for the margins, which have gone up from ~ 4% to ~ 8%. In Q3FY19, the margins rose to 10%.</div>
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Valuations</h4>
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For a business that generated Rs 71 Crores in FY18 and now trades at a market cap of ~ Rs 1,650 Crores, the PE ratio works out to 23. For auto ancillary stocks, we would not recommend investors to invest at such valuations. The margins in the industry are very volatile and a slowdown in the passenger vehicle industry can hit the growth rate. The pricing power is low as it takes time for the company to negotiate pricing. Moreover, the company imports a significant part of it’s raw materials. Thus, any adverse movement in the currency can hit margins.</div>
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The LED migration is a reality but the prices of LED lamps will come down to increase in competition. There is not much scope for margin expansion from the current margins. Though we wouldn’t recommend investing in Lumax Industries Stock at current price, long term investors can put the stock on their watchlist.</div>
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