Investment Arguments

1. Lowpenetration of equity gives a long runway for growth – A typical Indian household has 80% of their wealth in physical assets like land, house or gold. Of the remaining 20% which is in financial assets, 85% in into traditional products like fixed deposits, NSC, KVP offered by India Post, PPF, LIC, etc. That leaves a minuscule 3% towards equities, which is one of the lowest in the world. Now that real estate & gold have started losing its sheen, huge shift is happening in the savings pattern of India. Also, basic financial literacy has enabled young Indians to view equities without the baggage of past. These tailwinds will enable trusted brands like HDFC to post double digit growth for many years to come.

2. Most profitable AMC – Ever wondered how your mutual fund company makes money? They deduct 1.5% to 2.5% of your NAV directly from your portfolio. This money is used by them to pay their distributors / agents who get them the customers and hire fund managers to manage your money. Thanks to the strong brand and distribution network, HDFC Mutual Fund has become India’s most profitable mutual fund.

3. Attractive Valuation – At the upper end of the price band, HDFC AMC is valued at 32x on last year’s earnings. While this may not look optically cheap, the strong growth expected in coming years will ensure good returns for its shareholders. HDFC MF grows if it acquires new customers, if the same customer puts in more money and if there is an increase in the value of the stocks owned. Hence, there is ample room to grow the earnings.

Issue Details
 

Trivia

We are happy that many of you have started your equity journey in a small way. Stocks have created huge wealth over the past twenty years, but unfortunately a large part of the benefit has accrued to foreign investors. HDFC group has created US$150bn of wealth over the past thirty years but ~65% of it belongs to foreign investors! An external observer may surmise that foreign investors have more faith in the Indian economy and India companies than Indians themselves. 

After a long break, it’s again a month of good IPOs. Before you get excited, let us put a disclaimer – these companies are great companies in their respective sectors, but will not give you returns on day 1 of listing. Unlike in the past, you will have to stay invested for a slightly longer period. Since the euphoria in the IPO market has subsided, there is a good probability of allotment in all these IPOs.

Bandhan Bank

Apart from being the largest microfinance company in India, it is also India’s most profitable bank. Its presence in relatively under-banked regions of India (East & North East), its low cost operating model and strong liability franchise will ensure strong growth in coming years as well as the ability to generate similar levels of profits. Surely, such a bank will never be available at cheap valuations. At 4.2x P/B on post money basis, it is asking for valuations that are commanded by the likes of HDFC Bank and AU Finance. While we do not expect major listing gains, this stock can be a good 15% to 20% compounding story over medium to long term.

Bharat Dynamics

It is one of India’s leading defence PSUs, engaged in manufacturing Surface to Air Missiles (SAM) and Anti-Tank Guided Missiles (ATGM). It is the sole supplier of these missiles to the Indian armed forces and is also engaged in the refurbishment and life extension of missiles manufactured. The company boasts of a strong order book, debt-free balance sheet and negative working capital management. Valuations at 17x on trailing earnings look attractive.

Bharat Dynamics Issue Details

Hindustan Aeronautics Ltd (HAL)

It is India’s leading defense company involved in design, development, manufacture, repair and upgrade a wide range of products including aircrafts, helicopters, avionics, etc. Indian defense services contribute to 93% of its total revenues. The company boasts of a strong order book of Rs680bn, which is three times its annual revenue. Valuations at 17x on trailing earnings do not look expensive.

HAL Issue Details

There have been a host of IPOs which have been hitting the markets since the past few months. We have refrained from writing on IPOs where – either the valuations are excessive or the business model is flimsy or our understanding about the business is modicum. IPO is a good way to enter into equity markets but serious investing happens in the secondary market. After a long time, the markets have corrected. This is your chance to make your debut or increase you allocations to stocks.

We may be blissfully unaware that we could be using this little known company’s products to seek respite from the sweltering heat.Amber Enterprises India Ltd is a Punjab based contract manufacturer of room air-conditioners and its components for most of the Indian AC brands. Below are the investment arguments.

Investment Arguments

1. Leadership position in Room AC (RAC) to further strengthen

Amber commands a lion’s share of ~55% in the outsourced AC industry in India & 19% share in total RAC market. The company caters to 8 of the top 10 customers with marquee names like Voltas, LG, Hitachi, Blue Star, Panasonic, Whirlpool, Godrej, Carrier, Daikin which together constitute 75% market share in India.

While 51% brands are still manufacturing in-house, the trend is expected to shift in favour of OEM/ODM so that brands can focus on their core of marketing and distribution. The company is trying to move up the value chain by transitioning from being an outsourced manufacturer for OEMs to an Original Design Manufacturer (ODM).

2. Industry tailwind & geographic expansion provide decent growth visibility

In India, AC penetration is sub 5%, amongst the lowest in the world and is expected to rise on the back of bourgeoning urbanization, disposable income, shorter replacement cycles& easy consumer financing options. The room industry has grown at a CAGR of 9.6% in FY12-17 but is expected to grow at ~16% CAGR in FY17-22E courtesy of the above macro drivers.

Amber is currently exporting to 9 countries but has aims to ramp up its exports share which would also aid the company in improving its capacity utilizations as peak summer season in export markets may coincide with non-peak season in India. The company is already working with the leading global brands in Indian market and needs to leverage its relationship with them to get a share of their export markets too.

Valuation & GreenEdge View

At the upper price band of Rs. 859 per share, the company will trade at 49x based on annualized earnings of H1FY18. Though valuations are not cheap, we recommend investors to subscribe to the issue given the growth opportunity in the AC segment & its leadership position.

Issue Details

There are three more IPOs hitting the markets this week. Two of them (MAS and IEX) are relatively small sized IPOs and there is only a 15% chance of getting an allotment. However, the third one i.e. GIC is slightly more exciting. It’s a mega IPO and chances of getting an allotment are close to 100%.

MAS Financial – Made for Masses

With the intent to serve the under-served segments of the society, MAS Financial (MAS) has built its presence in 2-wheeler, Commercial Vehicle, SME and MSME finance through a combination of wholesale and retail businesses.

Given its small size, scope to expand in states outside Gujarat & Maharashtra and capable management, MAS has the potential to grow at 25% for next few years. At the upper price band of Rs. 459 per share, MAS will trade at 3.0x on FY19E book, which appears reasonable.

Issue Details

India Energy Exchange (IEX) – Powering India’s Energy Market

India Energy Exchange is India’s largest and the only exchange that is involved in trading of electricity products. It boasts of more than 3,500 active participants (mainly corporates) who buy or sell power on this exchange.

Power trading is relatively new concept in India. With the huge amount of reforms in the power sector (Electricity for all, National Grid, Renewable Energy), trading volumes could witness an exponential increase and IEX is the obvious beneficiary of this trend.

At the upper price band of Rs. 1,650 the stock will trade at P/E ratio of 41x. While there are no direct comparisons, MCX trades at similar valuations while BSE trades at much lower valuations. We don’t expect immediate gains here, but like this company as a concept.

Issue Details

GIC Reinsurance – India’s only Re-insurer

While most of you would be familiar about the concept of insurance, re-insurance is a relatively esoteric concept. A few lines won’t do justice to the complexities involved in the reinsurance business but here is a simple analogy – you hedge your risks by buying insurance policies; similarly, the insurance companies hedge their risks by buying a re-insurance cover.

GIC is India’s only re-insurance company and under-writes 60% of India’s re-insurance business. In fact it is the world’s 12^th largest reinsurance company. Given that the under-lying markets (motor insurance, health insurance, fire insurance, crop insurance, etc) are growing at 12% to 15% per annum, we expect similar growth rates for GIC’s business.

At the upper end of Rs. 912 the stock will trade at P/E ratio of 23x. While there are no direct comparables in India, global re-insurance giants trade at 10x to 15x. GIC is growing at a much faster rate than its foreign peers, so some premium is definitely warranted. Also, it is a one of its kind business in India and should deliver good returns over long term (thought there may not be immediate listing gains).

Issue Details

Team GreenEdge wishes you all a very Happy& Prosperous Diwali in advance. Don’t get swayed by all the rosy predictions that people make about the stock markets, especially during Diwali. Have a disciplined approach and a systematic plan to create wealth from equities.

Godrej Agrovet is one of the leading players in agri-business with operations across five business verticals – Animal Feed, Crop Protection, Oil Palm, Dairy and Poultry & Processed Foods.

Investment Arguments : 

1. Presence in Attractive Businesses

   Animal Feed, Crop Protection and Dairy are among high potential sectors in India, where demand is high but supply of quality products is low. Given the government’s ambition of providing food security to 1.2 billion citizens, each of these businesses have the potential to grow at 15% for the next five years.

2. Superior Research Capabilities

   Intense focus on R&D has helped Godrej Agrovet to consistently improve the yields of its existing products and develop newer products. As an illustration, this is the only company in India to offer cattle feed across the entire life cycle of the cattle. As of Jun’17, the company has 190 registered trademarks, 13 patents and 2 copyrights.

3. Pan India Manufacturing & Supply Chain

   Godrej Agrovet sells its products under more than 42 different brands, including Jersey and Real Good Chicken. Each of the five businesses has multiple manufacturing locations and a pan-India supply chain. As an illustration, its animal feed business has 35 manufacturing facilities and a network of 4,000 distributors across India to sell these products

Valuation &GreenEdge View

At the upper price band of Rs. 460 per share, the company will trade at 30x current year’s earnings. Given the huge opportunity in each of the businesses and the well established position of Godrej Agrovet, valuations are bound to remain elevated. This can be a great compounding story over the long term. We recommend investors to subscribe to this IPO.

Issue Details

Cochin Shipyard Ltd. is India’s largest public sector shipyard providing shipbuilding and repair services in defence and commercial sectors since over last four decades.

Investment Arguments

1. A Solid Player in India’s Defence Sector with High Entry Barriers – 

   Cochin Shipyard is a well-run and well-managed company evident from the fact that it’s the most profitable player amongst its peers – Competitors are heavily debt ridden & quite a few peers like Reliance Defence, Bharti Defence& ABG Shipyard are loss making. Defence (navy & Coast Guard) & Commercial segments contributed to 85% & 15% of revenues respectively in FY17. The company can become a huge beneficiary of the Make in India theme by bagging more Defence orders. The company naturally enjoys formidable entry barriers – Setting up a dockyard entails large capex while catering to the defence sector entails competencies that cannot be developed so easily.

2. Market Leader in Lucrative Ship-repair segment – 

   The company enjoys over 33% market share in the ship-repair market in India while the #2 player commands a distant ~20% market share. Ship repair is a small part of company’s business (comprising just 26% revenues in FY17) but is much more profitable than the ship-building segment (comprising 74% revenues in FY17). It is noteworthy to mention that Cochin Shipyard has been growing the ship-repair business north of 35% since the last 2 years. A larger share of ship-repair business could aid in improving the company’s margin profile.

3. Robust Financials – 

   The 10 year revenue and profits CAGR has been recorded at 11% & 19% respectively. An order book of Rs. 3,000 crores provides reasonably good revenue visibility. Margins have expanded from 8% in FY07 to 18.4% in FY17. It commands a strong balance sheet position – negligible debt of Rs. 228 crores and strong cash balance of Rs. 2,000 crores as on FY17. The dividend payout has averaged at an attractive 29% since last 4 years.

Valuation & GreenEdge View

At the higher band of Rs. 432, the stock is valued at Rs. 18x FY17 earnings. Retail investors are entitled to an additional 5% discount too. Considering the revenue visibility, leadership position, strong financials and entry barriers enjoyed by the company, we recommend investors to subscribe to this issue.

Issue Details 

And the IPO bonanza continues with 3 IPOs being launched in June!

Eris Lifesciences

Think of lifestyle disorders and the two most common things that affect Indians are – diabetes and heart related ailments. Here is an Ahmedabad based company which is capitalizing on this trend by making medicines for people affected with these ailments. Below are some investment arguments:

• Given the young demographics and increasing lifestyle disorders, the target market for Eris is growing a fast rate.

• Eris has a strong presence in the chronic segment, where treatment lasts for several years. This gives a huge visibility of repeat sales.

• Given the above factors, Eris has posted 17% revenue CAGR, 43% earnings CAGR and RoEs of 45% over FY13-17 and can continue its strong growth trajectory.

Valuation & GreenEdge View

The IPO is priced at 34x trailing earnings and probably 19x FY19 earnings. While the valuations are surely not cheap, long term investors can expect decent returns. Please note that stock markets are quiet buoyant and IPOs are being priced to perfection. So expecting magic on listing day isn’t a good expectation to start with.

Issue Details

CDSL

Just like a bank account which is used to store and transact with money, a demat account is a digital warehouse that can be used to store your stocks and bonds. CDSL is one of the only two companies in India, which is permitted to offer demat account facility and is coming out with an IPO. It’s a very interesting story and is available at a reasonable valuation too. Below are the investment arguments:

• The failure of real estate, gold and fixed deposits to generate decent returns have pushed a lot of people to investing in equities. Demat account opening pace has picked up since 2014. CDSL owns has 43% of demat accounts in India and has an incremental market share of 67%.

• The business model involves high fixed costs – employees and technology costs are the largest cost components. Now that the investments in these things are done, any incremental revenue will flow to its bottom line!

• Going ahead, the utility of demat accounts will increase – you can store your digital documents, your academic marksheets, mutual funds, property deeds, etc in your demat accounts. CDSL’s revenue and profitability will significantly improve with time.

Valuation & GreenEdge View

The IPO is priced at 21x trailing earnings. Given the steady growth potential and the asset light model, these valuations are very attractive. Investors can expect some listing day magic and more in the years to come.

Issue Details

AU Financiers

AU Finance is one of the 10 small finance bank license winners (Equitas and Ujjivan have already got listed last year) and the only one which who doesn’t have a microfinance business. Over the last twelve years, AU has built a strong lending book in the vehicle & SME space, which is secured in nature. Below are some pointers:

• Over the  last 12 years, AU has transformed from being HDFC Bank’s channel partner to a diversified NBFC to a small finance bank. Its growth and profitability profile has improved with each of these transformations, indicating the presence of a capable management

• Given the strong profitability profile, the migration to small bank will be least disruptive for AU Finance. While peers like Equitas and Ujjivan are battling with single digit RoEs, AU Finance will report 15%+ RoEs even during the transition years

• After establishing its base in Rajasthan, it ventured out only into familiar geographies like Gujarat, Maharashtra and Madhya Pradesh. As a result, its asset quality is better than the best of the players like Cholamandalam or Shriram Transport.

Valuation & GreenEdge View

AU Finance is priced at 4.5x trailing book. Such a premium business can command premium valuations and this can be a good story for the long term.

Issue Details

While buying a house, most of us end up taking a loan from a bank or a housing finance company. But have you ever wondered where would your state government or municipality borrow from when it has to construct mass housing or drainage system or water recycling? HUDCO is one such company that has an expertise in lending towards social housing and urban infrastructure projects. Below are the investment arguments:

Investment Arguments

1. Access to Low Cost Funds Allows HUDCO to Lend at Competitive Rates

Being a central government owned entity, HUDCO is rated AAA by rating agencies like CARE, CRISIL and IRRPL. In addition to this, HUDCO has been allowed to issue tax free bonds in the past, which are the lowest cost debt instruments in the country. This has enabled HUDCO to earn 2% spreads in the past despite lending to the state governments and agencies at competitive rates.

2. Thrust on Affordable Housing, Strong Relationship with State Governments to Aid Growth

The governmental thrust on affordable housing should ensure significant pick-up in construction activity and this could aid HUDCO in growing its housing portfolio (currently 31% of loans). It can leverage the strong relationships that it has built with various state government and its agencies for growth (due to appraisal & monitoring role played in central schemes like DAY- NULM, JNNURM and PMAY).

3. Prudent Lending Practices to ensure Lower Credit Costs

While providing the loans to state government, HUDCO assess the state’s repayment capabilities through analyzing allocation in the state budgets, alternate source of revenues, etc. In addition to this, 67% of loans to state sector are backed with state government guarantees. These measures have ensured that GNPA in this segment is merely 0.75%. We note that HUDCO had a bad experience in the private sector (61% GNPAs) and has stopped lending to them since 2013.

GreenEdge Wealth Services’ View

At the upper price band of Rs. 60 per share, the stock trades at 1.0x FY19E book. While comparison with HFCs is absolutely unwarranted due to the fact that HUDCO doesn’t lend directly to the home buyer, IPO valuations leave reasonable upside for investors lucky enough to get an allotment; we recommend investors to subscribe to the IPO.

Issue Details – HUDCO

After the stellar IPOs of BSE, D Mart & Shankar BuildPro, the unabated launch of IPOs still continues! The latest IPO on the block is S Chand.

S Chand IPO – Invest in this Education Content Company

The company is India’s leading educational content developer and provider for K-12, higher education and early learning segments. Company is involved in publishing, printing, sale, purchase, export, and import of various books and other literary work.

The company has recorded a 47% topline CAGR over FY12-16 in its largest K-12 segment with EBITDA margins in the range of 22-24%.

GreenEdge Wealth Services View

At the upper price band of Rs. 670 per share, it will trade at ~39x on FY16 earnings. Though not cheap, we recommend to subscribe to the IPO as the educational sector provides huge growth opportunities, company is a leader in CBSE curriculum (17% market share) and enjoys a good brand recall. You can subscribe to the IPO for around 15% listing gains. However, given the huge demand for the IPO, there is a small probability of you getting an allotment.

Issue Details – S Chand

The torrential IPO showers in March continue!

Shankara Building Products IPO

The company is India’s one of the leading organised retailers of home improvement and building products. Under retail operations, it offers a comprehensive range of products at its stores, including structural steel, cement, TMT bars, hollow blocks, pipes and tubes, roofing solutions, welding accessories, primers, solar heaters, plumbing, tiles, sanitary ware, water tanks, plywood, kitchen sinks, lighting and other allied products.

GreenEdge Wealth Services View

Though not cheap, we recommend to subscribe to the IPO listing gains. However, given the huge demand for the IPO, there is a small probability of you getting an allotment.

Issue Details – Shankara Building Products

CDSL IPO – Your demat account  

Central Depository Services (India) Limited (CDSL), a subsidiary of BSE Limited operates as a securities depository in India. They offer various services, such as account opening, dematerialization, processing delivery and receipt instructions, account statement, re-materialization, pledging, nomination, transmission of securities, change in address, bank account details and SMS services for depository participants.

GreenEdge Wealth Services View

We recommend to subscribe to the IPO for 30% to 40% listing gains. However, given the huge demand for the IPO, there is a small probability of you getting an allotment.

Issue Details – CDSL IPO (The below details are tentative)