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July 2017

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Yesterday i attended a CFA Conference where speaker was Midcap Moghul kenneth Andrade and his investment philosophy is pretty simple “If 80% of a Industry is making losses, buy the 20% companies that are able to make profit, because when the cycle turns, these 20% companies go up 3-4-5x”

Cochin Shipyard fits that criteria where most of its competitors are heavily debt ridden and near bankrupt but this company is holding strong. The government of India is Divesting Stakes in its good profitable assets like HUDCO and now Cochin Shipyard. The best part about the deal is that the government has left a lot on the table for retail investors.

Ipo Details – 

The Grey market is very excited about it and pricing it at a premium of 145/ Share, this is a listing gain of a Whopping  35-40%. Retail Investors will get an additional Discount on IPO price of 5% ie 21 /- per share. The company has cash of 220/per share post the issue and did a ROIC of 47% in FY2017. The Company has a post issue EPS of 23.7 /Share in 2017 and is offered at 18 PE Multiple. If we take out the cash, the IPO is coming at 432 minus 220/cash per share = 212/Share. We Value the company at  15 PE multiple for Operating business at 355 plus 220 cash/share at 575/share. We believe the company can Grow at 10% for the foreseeable future and generate 15-16% ROE.

Lets Understand the business in next 5 mins.

 

Factor #1- About the Business –

Cochin Shipyard commenced operations in 1975 and is one of the largest public sector shipyard in India in terms of dock capacity. The company can be divided into 2 part 1) Ship Repair Business and 2) Ship Building Business.

1.  Ship Repair Business – This segment is 26% of the company’s revenues and has grown 38% in last 2 years and the industry is expected to grow at 10% CAGR going forward till 2021 . Cochin Shipyard has 39% Marketshare in Ship Repair business.  When we met the management in its analyst meet, the management said that the repair business has 5x more profitability compared to Ship Building business. The current capacities allow the company to repair approximately 80-100 vessels per year.

2. Ship Building Business – This is 74% of company’s revenue and the company has order book of 3000 crores in this segment with navy and coast guard being the main client. The strong order book show visibility of revenues for the next 2 years. The government’s make in India project especially for defence vessels will help the company going Forward. The company gets 85% of its total revenue from non cyclical defence companies. This is basically a recession proof business.

 

Factor #2 – Reason of the IPO – The IPO is a Book building Issue as well as Offer for Sale. The company will get 979 crores whereas the government will get 489 crores. The Company has 2000 Crores cash on book and will get another 979 crores from the IPO, which will be used for a expansion of capacity in both Ship repair as well as Ship Building facility. The Total Capex of 2800 Crores will be completed in next 2.5-3 years.

Ship Building Capex – They would be Setting up of a new dry dock within the existing premises of Company (“Dry Dock”) ~1800 Cr .The construction commencement is expected from Jan 2018 and execution time of 30 Months

Ship Repair Capex – Setting up of an international ship repair facility at Cochin Port Trust area (“ISRF”) ~970 Cr The construction commencement is expected from Nov 2017 and execution time of 30 Months. This will Increase Capacity by 60% from currently 80-100 vessels per year.

 

Factor 3 – Peers Bankrupt – All the listed peers of the company are bankrupt and are facing major problems. The company will be the only good surviving company in a struggling industry due to its defence orders and debt free status. Reliance Defence, ABG and Bharati defence had an EPS of -8,-686,-438 respectively against a positive 27.56 EPS of cochin shipyard.

 

Factor 4 – Valuation – Post IPO the company will have a cash balance of 3,000 crores whereas at top range the issue is priced at a market cap of 5800 crores. The Cash Per share is roughly 220 per share. The company generated adjusted operating cash of 350 crores in FY2017 and its expected to remain at 350-450 crores till new capacity comes. The company did a mindblowing ROIC of 47% in FY 2017 and expected to remain at elevated levels for the foreseeable future. We value the Operating business at 15x Trailing PE Multiple at 355/share+ 220 cash on books = 575/Share.

 

Factor 5 – Moat (barrier to Entry) – High capital investments and the requirement of adequate cash flows act as major barriers to entry in this space. The whole industry is struggling except this company, we don’t see any new competition coming in for the foreseeable future. Moreover, critical factors such as expertise and technical know-how are some of the pre-requisites that limit the entry in this industry.

Factor 6 – Financials – 

 

Conclusion – Cochin Shipyard is a superb bet on the Make in India Story and at IPO price its a steal with smart management whose revenues are primarily in defence space which are non cyclical in nature. The ship repair business generates great cashflow and is of great importance tactically for the country. We recommend a Strong Subscribe to it.

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Stallion Asset is popular for catching long term trends but here is one sector where contrarian Investors can look at.

What Doesn’t kill you makes you Stronger.  Real Estate Companies have been in a mess for last many years and things have started to improve especially for the top 3 builders in every city. We at Stallion Asset Strongly believe that there will be massive market share gain for the top 3 builders in every city v/s the unorganized market. Real Estate had problems and over the last 8 years most problems have been Solved atleast for the Top 3 Builders in each City.

1)  Black Money – Black Money has reduced Substantially as more than 75% of new home sales are happening via housing loans . For the Home Buyer it makes no sense to pay in black when he is getting loan at 8.5%. Real Estate Companies have understood that dealing in white makes more sense as they can raise more equity and get debt at cheaper rates.

2) RERA (SureShot Death of Unorganized Players) – RERA has very strong implications for unorganized builders and Stallion Asset’s Internal calculation suggest that inventory will reduce drastically going forward in all major cities especially on the commercial side. RERA will increase consumer confidence which is much needed for Real estate players. Again the larger branded Real Estate Players will take over market share of the Smaller players.

3) Housing Real Estate is unprofitable if not pre-booked – Trust deficit in smaller builders is helping the top 3 players charge in premium. If a builder doesn’t get pre-bookings of atleast 50% of its total inventory, there is no way the ROE of the project to be in double digits. The Entire IRR of the Real Estate project depends on the pre-bookings, and except for the top 3 builder in every city, the other builders are facing serious problems getting pre-bookings. Godrej sold 1,000 crores worth of flats in a week in may 2017 showing that there is demand for reputed Builders.

4) Valuation looks Cheap – The total Market Cap of Real Estate companies is less than the Market of Sun Pharma (Even After a 50% fall in Sun Pharma). Real Estate represents 5% of GDP in India but less than 1% of Market cap of Indian Equity Market.

5) Debt Reducing – None of the top 10 players in Indian Real Estate have debt to Equity of more than 2. The Average Debt to Equity stands at a comfortable 1x, The Pressure on Debt has been reducing as Interest rates fall and builders liquidate some of their asset to cut down more debt. DLF Sold Stake in their commercial real Estate Arm to Blackstone, and many more such deals are happening like purvankara selling some of its land Parel in hyderabad to cut down debt.

6) CNX Realty-  Cnx Realty was in a downtrend from 2008 where it topped out at 1878 till 2016 and it bottomed out at 125 after a 93% fall from the top. Today after about 10 years its still at 280 i.e. 85% Away from the top. In a 10 year period every tom dick and harry who ever held real estate stocks has sold out of it, there is deep value in most of these companies who have huge land banks and won’t need to buy any fresh land for next 10 years.

 

Conclusion – Real Estate is a Contrarian bet, the Industry is influenced by economic cycles but our understanding is that tough times are behind it. Our Understand is that real estate companies will beat the nifty for next 5-10 years.  Real Estate will not have bubble valuations for this bull market but investors who are looking for a stock to hold for a decade, Real Estate fits well. The business environment will become difficult for unorganized player after the implementation of RERA whereas the top 3 builders in every city will do well.  Overall we at Stallion Asset are very convinced that Real Estate Index will beat nifty and a great bet for patient long term Investors.

Disclourse – Amit Jeswani and Family have vested Interest in Real Estate, use this for Education purpose only. Stallion Asset is registered with SEBI (INH000002582) but this is not a recommendation.

We provide independent equity Advisory services Plans Start 8,999

The Market is very excited with New NBFC Aditya Birla Financial Services (New Name – Aditya Birla Capital) coming on the block soon, with PI Opportunities fund (Affiliate of Azim Premji) buying a 2.2% stake valuing the company at post money valuation of 32,000 Crores.

Lets understand the business of Aditya Birla Finance and our Valuation for it.

The business can be divided in 5 major categories

1) Birla Sun Life Insurance – 51% Stake Held

2) Birla Sun Life Asset Management – 51% Stake Held

3) Aditya Birla Finance – 100% Stake

4) Aditya Birla Housing Finance – 100% Stake

5) Other Business – Health Insurance, Online Money Management, Insurance brokerage, etc.

We at Stallion Asset believe an SOTP (Sum of total Parts) Valuation is the right way to value this company. Lets Understand the Business and Valuation of these 5 verticals.

Birla Sun Life Insurance – We at Stallion Asset believe that Insurance Business is set to be disrupted and LIC’s Supply chain moat will be destroyed as people turn toward buying Insurance Policies online. LIC is losing market share and this trend is expected to continue for the foreseeable future. The horse which is leading this trade is HDFC Life and ICICI Prudential Life. Max Life Insurance acquisition deal with HDFC Life happened at 4.3x Embedded value whereas ICICI Prudential trades at 4.10x FY2017 Embedded value. Birla Sun Life Insurance has been an under-performer in the Insurance space and is losing market share, the total premium collected stands at 5700 crores in 2017 v/s 5200 crores in FY2013, whereas Profit before tax has fallen from 540 crores in 2013 to just 120 crores in FY2017. Birla Sun Life has embedded value of 3400 Crores in FY2017, and we value this business at 3x FY2017 Embedded value, a discount of 30% from its peers due to slower growth and small player discount. Aditya Birla Capital has 51% Stake and we value its 51% Stake at 5200 Crores.

 

Aditya Birla Asset Management – Aditya Birla Asset Management has been consistently gaining market share and has reached to 10.7% of the mutual fund market managing AUM of 2.1 Lakh Crores. This Business has grown at broadly 25% CAGR for last 4 years in AUM, Revenue and Profitability; it did a Pretax profit of 337 crores in FY2017. They have grown market share rapidly in Equity Mutual Fund Segment from 5.5% in 2013 to 8.5% in 2017. We believe this growth of 25% is sustainable for next 5 years and value this business at 20 Times Pretax Profit i.e. 6740 Cr There are other ways some analyst value it i.e. use 3-4% of AUM which would get the valuation of 6000-8,000 Crores. Both these valuation techniques get broadly the same results. The 51% held by Aditya Birla Capital as per our estimates is valued at 3450 Crores.

 

Aditya Birla Finance – This is the golden crowned NBFC part of the Business which is 100% owned by Aditya Birla capital, the AUM has grown at a Whopping 44% in last 4 years from 8000 Crores to 34700 Crores. 39% of the Loan book is given to large corporates , 27% to SME, 15% in mid-Corporates,  the rest is given to Promoters, Retail and Ultra-HNI’s. The loan book is diversified and 79% of the loan book is via direct marketing and only 21% via third party agents. The company has consistently maintained its ROE at 15-16% and Gross NPA was 0.47% for FY2017. The company has mind blowing asset quality. The company has a book value of 5000 Crores and did a Pre-tax Profit of 831 crores in 2017. After taking in consideration superior financial parameters and expected growth going forward, We value 100% Stake of Aditya Birla finance at 3.5x P/B or 21 times pre-tax profit at 17,500 Crores.

Aditya Birla Housing Finance – The company forayed into Housing Finance in October 2014 and has grown its loan book swiftly to 4160 crores. The yields stand at 10.2% and average ticket size of the loan is 8-15 Lakhs and focus is on affordable housing segment. There was strong growth of 110% in loan book last year and we expect 40% plus growth to sustain going forward. Aspire, which is a subsidiary of Motilal Oswal has a loan book at end of FY2017 of 4100 crores which is exactly the AUM of Aditya birla finance has; Both are into retail housing finance segment with broadly the same ticket size. Aspire gets an Implied valuation of 6,000 Crores i.e. 150% of AUM, but taking aspire valuation isn’t something which we believe is fair and value the housing finance business at 4,000 Crores. (Caveat – We don’t have adequate information to value this properly and this is just an estimation)

Other Business – The Other Business includes 75% Stake of Aditya Birla Money, Health Insurance business which just started 6 months back with MMI of South Africa with MMI investing 196 crores for a 49% Stake, Aditya Birla My Universe (fintech application) and its Insurance brokerage business. We don’t actually understand or know how to value these small business’ right now and would use them as margin of safety for valuations and give it zero valuations.

Valuation and Conclusion –

The SOTP valuation of the company as per our estimates is 5200 crores for its life Insurance business + 3450 crores for its Asset Management business + 17500 Crores for its amazing NBFC division + 4000 crores for its Housing Finance Division; i.e. the Fair valuation of whole company is 30,000 Crores. We have not considered valuation of other business as margin of safety, and also believe there may be some holding company discount of 10-20%, overall We believe Aditya Birla finance is a great Investment for investors looking for exposure toward the shift from hard Asset to Soft assets at the right price. The company is not listed yet and should be listed in next 2-3 months after it gets demerged from Aditya birla Nuvo (Grasim).

 

Disclourse – Amit Jeswani and Family have no positions in it, use this for Education purpose only. Stallion Asset is registered with SEBI (INH000002582) but this is not a recommendation.

We provide independent equity Advisory services Plans Start 8,999

 

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