Reliance Nippon Life Asset Management company is coming up with an IPO, and the market seems super Excited about Financialization of Savings as a theme.


Stallion Assets View – We Strongly believe that Markets are underestimating the financialization of savings as a theme, the total Profit pool of top 5 Asset management companies (57% Market Share) in India is just 1800 Crores in FY2017. The Profit Pool is so small that one midsized popular hedge fund Pershing Square made more Profit than the Entire Indian Asset Management Industry, We at Stallion Asset have absolutely no doubt that the Profit Pool will grow multi fold in next 5-10 years and there will be massive wealth Created in this space.

These are the 7 Main Factors you need to know about Reliance Nippon Life Asset Management Company.


Factor #1 – Opportunity Size – The Below Chart will Exactly tell you where Indians are Investing their Savings. Indian Savings for last 5 years have Grown at 6%CAGR, Saving in Physical asset (Land & Gold) Grew 1% CAGR,whereas Financial Assets at 14%CAGR.

The Savings in Mutual Fund as a percentage of overall Savings  in India was at 3% in FY2016, this is Exactly the same place where it was in USA in 1980, this moved to 18-19% by 1998 in USA. Since there is consensus that Gold and Real Estate wont move a lot for next 4-5 years, a similar move is expected in India. If this happens in India, it can be the trillion dollar Opportunity in Asset Management Companies.


In 1979 the total AUM with Mutual Funds in America was just 94 Billion $, in the next 20 years by the end of 1999 the Asset under management grew to 6,846 Billion$, i.e. it grew at 24% CAGR. In the Year 1980, only 4.6% USA Citizens  owned mutual fund, which is the similar Rate of that in India today, whereas in the next 20 years in USA this number shot up to 48.6%. This was also the Period where Legends like Peter Lynch, Paul Tudor Jones, George Sorus, Warren Buffet were created, we expect a repeat of the same in the Indian Market.

Factor #2 -Understanding the Mutual Fund BusinessThe Top 5 AMC’s in India have 57% Market shares and top 10 Mutual Funds have 80% Market Share, the competition is fierce among the Top 5 with broadly the same market Share.

Mutual Fund AUM is the worse metric to look at and judge a company because there is huge variation in fees structure across products.. In FY2017, The Fees Reliance AMC got for Equity Funds was 1.35% of AUM, in debt 0.48% of AUM, but just 0.09% in Liquid Fund and 0.95% in Gold. The obvious thing is that more the Equity Portion in the AUM, Higher the fees they Make. HDFC has the highest Revenue as % of AUM at 0.68% as 44.7% of its AUM is Equity Mutual Funds whereas SBI has the lowest Revenue as % of AUM at 0.47% as it has only 31% in Equity Mutual Funds. Reliance AMC has lower AUM in Equity compared to SBI MF at only 28% of its total AUM but still has a good Revenue % of AUM at 0.62% as its fees are higher compared to peers.

Factor #3- Growth – The AUM of Mutual funds has grown from 8.96 Lakh Crores in FY2014 to 18.58 Lakh Crore in FY2017, a growth of 27%, but the Interesting thing is that the high margin Equity AUM has grown from 1.98 Lakh Crore in FY2014 to 6.09 Lakh Crores in FY2017, showing a mindblowing CAGR growth of 45% in last 3 years. As Retail Investors invest in Equity Again since FY2014, Birla Sunlife AMC grew its Equity portfolio the fastest at 63%, whereas Reliance AMC underperformed the market with lowest growth of 34%. It is important to note that within the Top 5 AMC’s of India ICICI AMC has gained the highest share in the recent run and its Equity AUM Grew at 60%. HDFC on the other hand underperformed as well with last 3 year CAGR of only 34% and might lose its position of the largest Equity AMC Company to ICICI AMC in FY2018.

Persistency Ratio – You might be thinking why are we using Persistency ratio in a AMC Company which is commonly used in Insurance companies right? You will be Surprised to know that In FY2017, 43% of Equity Mutual Fund Investors booked out of their fund within a year, 62% Investors sold out within 2 Years. We at Stallion Asset believe that the overall long term trend of the Industry is positive, but there will be huge cyclical Upturns and Downturns in between.  Low Yield of other asset classes like Real Estate, Gold and Fixed Deposit will keep getting new Investors in Equity Market, but as soon as Inflation rises above 7% in India, there will be a shift of Asset class preference.


Return on Equity – When i read the Prospectus of Reliance AMC for the First time, i was hurt to see that this AMC’s is generating just so much less ROE in a Super upcycle. Asset Management is a business which needs very less capital and should have very High ROE. In FY 2017 Reliance AMC had a Return of Equity of just 21%, whereas ICICI AMC Was the Leader in the Pack with 65% ROE. ICICI AMC was the one to grow its Equity AUM the fastest at 60% CAGR in last 3 years, whereas Reliance AMC was the slowest Equity AUM Gainer with 33% CAGR hence the return ratio’s are  poor.  The Largest Equity AUM was with HDFC AMC and it had an ROE of 39% in FY2017.

Valuation –

Reliance AMC IPO is coming at a Market Cap of 15,400 Crore or a  PE Multiple of 38 or 7.3% of FY2017 AUM. Nippon Life had last Increased stake in Reliance AMC in 2015 at a valuation of 8,500 Crores or 5.66% of AUM. In Last 5 years, there has been a lot of consolidation in the Mutual fund space and most foreign players have exited to Indian players getting Valued at 1.5-6% as a % of AUM . We at Stallion Asset have absolutely no Doubt that the Profit Pool in AMC’s will grow 5-10x in next 10 years as financialization of savings theme gains momentum.



Conclusion – The bet here is on the Opportunity size though Reliance Asset management has probably the worse matrix in the top 5 asset management companies. The IPO is a Bull Market IPO and definitely not cheap but there is huge longevity of Growth in AMC companies. We believe Reliance AMC since its the First AMC to be listed will get scarcity premium but as and when more AMC’s get listed the scarcity premium will vanish. Reliance AMC is what it is today due to 2 main Inspirational gentlemen 1) Mr Sunil Singhania 2) Madhu Kela, though both have left the company in last 6 months. We believe ICICI is the best managed AMC whereas Reliance and Birla AMC is the Bottom Pyramid within the top 5. There is no Doubt the business of AMC is great and Huge Operating leverage in it, the wind is blowing in favor of Asset Management companies and Reliance AMC will ride the wave in this bull Market. We Recommend a Subscribe on it but be ready to shift your capital to better AMC’s in the coming Months.

About the IPO – 



Last Week we met the Management of PNB Housing and spend the entire day with the whole top management. We got amazing insights about the housing finance Industry & the road Ahead. These are the 5 main takeaways from the meet.

1)  Opportunity Size – The Run up in Housing Finance Companies has been very strong and we wanted to understand the opportunity as every company is coming out with exciting target’s, for example newly launched Piramal is targeting 15,000 Crores AUM  by FY 2020, Reliance Home has guided to Increase AUM by 57% CAGR from 13000 Crores now to 50,000 Crores by 2020, Kapil Wadhawan of DHFL guided in an Interview last week to more than double AUM from 90,000 Crores to 2,00,000 Crores in 3 years, & Finally Indiabulls Housing finance has guided for 30% CAGR AUM Growth. This is more important as these guidance are coming at a point when the supply to new housing is very weak & most builders are struggling with weak sales.

Sanjaya Gupta, the CEO of PNB Housing and a man who is one of the most passionate 54 year old man i have seen has spent his entire life in the mortgage Industry, told me that there is no doubt that supply is weak in the new retail housing this year due to factors like RERA & Demonetization but a lot of builders have started to line up projects next year, and  FY2018 will be the inflection point for affordable housing in India.  He also added that he will sweat his assets and ensure that they have reasonable growth. The whole Industry is looking towards affordable housing and the same point was repeated by Khushru Jijina on Wednesday on the launch of Piramal Housing finance that FY2018 will be a super Kicker for Housing Finance Companies as affordable housing really starts. We at Stallion Asset always verify the information and we spoke to a few builders in affordable housing & their reply was every top builder in major cities are definitely foraying and betting big on it. The model of Purvankara of having a separate low cost housing subsidiary has been well taken by the market & that’s the model they will work on.


2) Growth – We all know Housing Finance Industry in India has been growing at 18% historically, though the banks have been growing at just 15% and losing market share to Housing finance companies who are growing at 21%, but what about growth ahead. The Question was that if we break up the growth for last 15 Years there was a 10% Growth in Prices of Real Estate & 8% volume Growth, but now that there is no growth in Real Estate Prices, will the Industry be able to grow at 18%? The Answer was affordability for housing has improved as prices have been stagnant for last 5 years and with falling interest rates and subsidies on housing loan, they remain super bullish.

The most Important point i picked up during the Conversation was that only 20% of new registrations for house that happen are new houses (Seller is the builder), and the rest 80% are Consumer to Consumer transfer (Resale).


3) Competition- Since Competition has increased from New HFC’s as well as banks getting aggressive on retail lending, our next concern was will the Spreads sustain? There is pressure on the Salaried Class for spread as government banks are getting aggressive there but self employed remain 50% of Retail book for PNB Housing where competition is limited.


4) Loss Given Default & Credit Risk – We asked that there is a common phenomena and the one that we at Stallion Asset also believe that Profits for an NBFC are Front Ended, Whereas Losses are Back ended.  Sanjaya Gupta Clarified that it all depends on the Credit Quality, and we at Stallion Asset learned from our visit that PNB Housing definitely has the best System in Place for credit Checks. When i asked Jayesh Jain, CFO of PNB Housing about the Loss given default, he told me its about 4% of NPA i.e. if the loan book is 10,000 Crores, assuming NPA is 1% of that i.e. about 100 Crores, in that case only 4 crores is real bad debt, the rest is recovered from selling mortgage.


5) Conclusion – The Growth in Housing Finance going forward is going to be a volume game. Raamdeo  Agarwal of Motilal Oswal who himself runs a Housing finance company (Aspire) gave PNB Housing a thumps up, calling a 1 Lakh Crore ki Kahani. Valuation of most HFC’s are pricing in a pick up in affordable housing, the housing finance story is now depended on affordable housing story, but remember only 20% of housing sold in India is via builders and the rest 80% is by Consumer to Consumer. The conclusion of the meet was that if Affordable housing really picks up the HFC’s would grow at 30%, and if it doesn’t they will grow at 15%.

Stallion Asset is a SEBI Registered Equity Advisory Company and We have delivered 48% CAGR for last 4.5 years. Click here to Subscribe

Today I want to Share a Secret with you. A Secret that will help you successfully Invest in the Market. Lately Markets have been in a strong up move and a lot of people ask me as to what i think about the direction of the market. To be honest, there are only a few people who i know who can predict the market but the best traders React rather than Predict.

At Stallion Asset we Strongly believe in Data, infact we don’t have a television in office. The Reason of this Blog is not to criticize television but to tell you that in the short term and the long term, data suggest that there is only one Independent factor that you should track very Carefully but i guarantee you that you don’t track it yet. Believe me after reading this blog, it will change the way you think.


The Chart Below is a 23 year Chart of MSCI India & MSCI Emerging Market Index from 1992 to 2014

Shocked? Surprised? Impressed? looking at the Similarities.

We used 1992 as base year as that is the year where FII’s were allowed to Invest in Indian Markets. The Indian Markets have exactly the Same Patterns as MSCI Emerging Market Index for last 23 years.  Let me Repeat, this is not a 2-3 Month Chart but a 23 year Chart of MSCI EEM and MSCI India. We in India worry so much about Rainfall, IIP and other things but actually its Global market which matter’s the most.


What is the MSCI Emerging Market Index?

The MSCI Emerging Markets Index captures large and mid-cap companies across 24 Emerging Markets (EM) countries. With 842 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

India & All Emerging Markets move in Tandem, want more proof of it?

The Biggest Event of the Decade in the Indian Economy has been Demonetization right ? The below is a 2 year chart of MSCI India & MSCI Emerging Market that will help you understand that Domestic Factors have only a limited effect on the Index.

If you see the Last 2 year Chart the Patterns of MSCI India & MSCI EEM have remained the Same even after demonetization which was an India only event.

The thing is that Markets are Global & this can be Statically Proven by the Below chart with the Help of Correlations.

Correlation of 83% between MSCI Emerging Market and MSCI India is of extreme significance and is higher than that of HDFC & HDFC Bank clearly showing the strength in the Correlation. The above chart shows that 69% of Movements in Indian Markets can be explained by just one factor i.e. the MSCI EEM.


Sector Performance- We have successful proven that Indian markets are heavily correlated with Foreign markets but domestic news flow in Indian Market helps us understand which sector will outperform or underperform, but overall markets are heavily influenced by Emerging Market Index.


This Time its Different – These are the 4 most dangerous words and a lot of Guys may argue that this time its different & it is domestic money which is driving the market rather than FII Money, but believe me FII’s own 21% Stake in BSE 500 Companies, whereas mutual funds own just 5% and its never different.


Conclusion – In God we trust, but everyone else should get us data. The Information presented helps us give less weight to noise about local & Random factors which explain only 30% of Indian Stock Market movements but give more weight on Emerging Market Index. The Secret has been hidden for many years and hopefully will no more be a secret anymore.

Watch the Video Now for Full Presentation & better Understanding of the Topic.

Last week we Attended the Analyst Meet of ICICI Lombard which will be India’s First listed General Insurance company.

The trade here is similar to the Private banks as Huge Opportunity size exist plus shift in share from public sector companies to private sector companies.

These are the 7 Most Important things you Need to Know About ICICI lombard & the General Insurance Industry.


Factor #1 – Opportunity Size – Industry Growth + Shift from Government companies to Private Companies. – The Total Premiums Collected by Non-Life general Insurance companies was 1.28 Lakh Crores in 2017. The Industry is Poised to Grow at 15-20% for the foreseeable future as penetration of Insurance is very low & Premium Collection for Non-Life Player as a Percentage of GDP in India is 0.77% v/s 2.75% as global average. The Non Life Insurance has grown at 17% for last 15 years, and the trend of 15-20% growth is expected to continue for the foreseeable future. The Market Share of Public Companies has been shrinking every year and this trend is expected to continue. Private Companies got License in 2000-01, and now command almost 50% of Market Share. The Trend of market share shift is expected to gain momentum as Government companies have started to post losses and incapable to invest further.


Factor #2 –  About the Company –  Market Share & Premiums – The Company is a clear cut leader in all Segments of the General Insurance Business. Its Rank 1 across segments like motor Business with 19% Private Market Share,  Health & Accident Insurance with 15.4% Private Market share, Crop Insurance with 22%Private market Share, Fire with 16.6% Market Share. Its is also Ranked 1 in Marine with 26% Market Share.  In Financial Year 2017 it sold a whopping 1.7 Cr policies with about 10% policies online, and commands an Overall Private General Insurance market share of 18%.


Factor #3 – Growth in Premiums – 2017 was a Golden year for the General Insurance Industry as premiums grew 32%, fastest in last 15 years as the share of Crop Insurance Increased from 6% to 16% due to Pradhan Mantri Fasal Bima yogana. Ex Crop Insurance the Growth was 18% for the Industry in FY2017. ICICI Lombard premiums have historically grown 1.2-1.5x faster than Industry as the leader in the Private sector takes market share from Government Insurance companies. We believe that 15-20% growth is sustainable in ICICI Lombard for the foreseeable future.



Factor #4 – Why Customers Love ICICI Lombard – The first thing a customer looks at before buying the Insurance is how fast is the claim settlement if a liability occurs. ICICI has broken all records as far as Fastest Claim settlement goes & its well above Industry Standards. The Claims Settled within 30 days for FY2017 stands at 94.4% for ICICI Lombard, 82.2% for Bajaj Allianze, 83% For HDFC Ergo, 42% For IFFCO Tokyo, 52% for SBI General.  ICICI has created high level of trust among its policy holders, whereas the Industry has lagged clearly suggesting high management efficiency.

The Claim Settlement  is better in Healthcare where ICICI Lombard settles 99.7% claims within 30 days, whereas the Industry is lagging behind at 80-95 days.


Factor #4 Profitability – Combined Ratio – Combined Ratio is the Most Important Ratio for Understanding Profitably of a Insurance Business. Combined Ratio is basically  Expenses Incurred for selling the Policy Plus Loss on claims divided by Revenue.  A ratio below 100% (Greater than 1) indicates that the company is making underwriting profit while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums. Even if the combined ratio is above 100%, a company can potentially still make a profit, because the ratio does not include the income received from investments.
For Example if a Company received Premium of 200, the cost of selling the policy is 30 and the claim which occur are 100, the combined Ratio Would be 65%.

We believe this is the Best Way to measure the success of an Insurance company because it does not include investment income and only includes profit that is earned through efficient management.

ICICI Lombard has a Combined ratio of 104.1% in FY2017, whereas private companies on average have combined ratio of 107.1%, whereas the whole industry including public sector companies had a Combined Ratio of 121.7%. Bajaj Allianz had the best Industry Combined Ratio of 97% in FY2017.


Factor #5 -Solvency Ratio – Risk Management-  A General Insurance business is like selling out of the money options, you make money most of the time, but there will be few large losses. To cover these loses companies need to maintain Minimum Solvency Ratio 150% as  per IRDA norms for General Insurance companies, the higher the Ratio, the better is the risk managed . The Solvency Ratio of ICICI Lombard was at 210%, whereas it was 171% for HDFC, 179% for Tata AIG & 160% with IFFCO-TOKIO. ICICI Lombard has a very comfortable Solvency ratio with 30.6% of its total investment assets in government securities, 43.5% in corporate bonds, 15.7% in equities, and the remaining in other investments.

Factor #6 – Valuation – 

ICICI Lombard IPO is coming at a valuation of 30,000 Crores, i.e. at 7x Price to Book, and 47x Price to Earnings, which may look expensive at first look but this is a consumer type business which will grow at 15-20% for the foreseeable future, generate ROE’s in the range of 15-20%, is the market leader and hence we believe the valuations are justified, though there isn’t much room for listing gains. We at Stallion Asset believe that the PE ratio will keep oscillating in the range of 40-50 for next many years.


Factor #7 Conclusion- We at Stallion Asset are positive on ICICI lombard, and believe that returns be will in the range of 12-18% for next 5-10 years in this stock. This is a great issue for genuine long term investors who are looking for a leader in a sector which has a business model which has been proven globally for decades with longevity of growth.


About the IPO –

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Last week I met the management of Shakti Pump, the stock has moved up 250% in last 6 months and there is a lot of hype as management has guided for sales growth of 70-80% in FY2018, Midcap Moghul kenneth Andrade’s entry at 476/Share via bulk Deal has made it a hot topic around the HNI Circle. The promoter has been aggressively buying from the Open Market for last 6 months.

Here i was meeting a company which had high Growth Expectations, Promoter Buying from the Market, Marqee Investors Getting in and a lot of momentum in the Stock. The Only Question i had is this really a Good business or the Promoter is selling Snake Oil.

These are the 5 key takeaways from the management meet.


1)  Lets First understand the Business & History- Shakti Pumps was mainly into the export market till 2013-14 and had 65-70% of its revenues from exports, this small but aggressive management decided that they want to expand in the Indian Market and Hired Bollywood Super Star Amitabh Bachchan as their Brand Ambassador. Since then the middle east which was their main export market started facing problems in 2014 due to sanctions in Iran, the company struggled for 2 years though the Indian Market was picking up. Today the company’s 75% Sales comes from the Domestic Market whereas only 25% Sales comes from the Export Market.

Shakti Sells Stainless Steel Pumps in the Solar Pump Segment as well as to Industrial Segment.


2) The Opportunity Size and Revenue – I was curious about how would the company achieve 70-80% Sales growth and was the growth Sustainable? The management said they have have 50-60% market share in the Solar Pump Category and that the government gives 85% subsidy on it. The selling price of a Solar Pump is between 4-5 Lakh, whereas the company only makes the Pump, it outsources the other parts like solar panels from other vendors.

The management started by saying that NITI Ayog has planned to install 30 Lac Solar Pumps in next 3 years and tenders for 1.14 Lakh are already tender ready.  In Value Terms it was a 1.2 Lakh Crore opportunity, which sounded insane but wait for it as there is always a catch.

The Company also supplies Stainless steel pumps which is ofcourse its main business where realization is 30,000-40,000/Pump and has marqee clients like Tata’s, Adani, Jain Irrigation. These clients also bid for solar pumps contracts by the government but they source the pumps from Shakti as its the leader in Stainless Steel Pumps


3) A comparison with Peer – I asked them why would they choose Shakti pumps over a global leader like KSB Pumps. Akhilesh Maru, the CFO told me that every company that install’s a Solar Pump has to give a 5 year Guarantee to the farmer. Now the installing company has two options, either to go with Iron Pumps which are not energy efficient as they rust over time or go with Stainless Steel Pumps of Shakti Pumps which don’t rust and are 5 Star rated on energy efficiency. The Pricing difference between Iron Pumps and Stainless Steel is about 20% but cast iron (KSB’s Products) rust over time. He went on to say that even though KSB has 1-2 models of stainless steel pumps, we at Shakti have 2000 SKU’s in Stainless steel pumps, from 250W to 250KW. Shakti Pumps has enjoyed higher operating margins of 15% v/s 11% for KSB Pumps.


4) Promoter Buying Reality or Fake? – Promoter has bought 2.1% Stake from the Market in last 5 months till about 400-450/Share. Interestingly ML Securities a company owned with a person who has the same surname as the promoter i.e. patidar sold 2.5% in the open market. I asked with a smile that how are we related to ML Securities, he smiled and answered that out of 800 employees at Shakti, 150 are patidars, ranging from a clerk to a manager. My Team at Stallion asset had already done some work which showed that there is a high probability of this being a related party and they also acquired warrants in Shakti Pumps at 176/Share.


5) Execution of Solar Pump Projects? – The whole story of Shakti Pumps depends on Solar Pumps order, which is largely a subsidiary based business, and a lot of government interventions. Devendra Fadnavis (Chief Minister of Maharastra) who was the biggest optimist of solar Pumps in 2015 lately said that we rather give subsidiaries on Small Solar Panel generation plants within a village rather than specifically for Solar Pumps for every farmer in a press interview 2 months back. Hence i asked about Execution risks, and they agreed that the business depends on government but they have guided only 500 crores for solar pumps of revenues out of which 250 Crores comes from government backed complete solar systems i.e. assuming 4.5 Lakh Average ticket size, they need to install only 5,500 pumps which is only 5% of the total tender book of 1.14 lakh Pumps. Since they have 50-60% Market Share in Stainless Steel pumps, they will also get orders from other bidders of the Solar Pump which will complete the other 250 Crores guidance.


Conclusion – The management has gone through tough times in 2014-2016 and has emerged strong. Mr Patidar seems to be an optimist and ambitious but we at Stallion Asset know that when it comes to government based orders especially where there are subsidies involved odds are the business will face a lot of turbulence time and again. Markets are pricing in that they will do 700 Crores of Sales and about 50-55 Crores of Profit in FY2018. The longevity of the business depends on the success of Solar Pumps and the business is in its initial stages, will it be a outright failure or a very large trend only time will tell, but we need to track this story carefully.

Disclosure – Amit Jeswani & Family have Vested Interest.

This is not a recommendation and please use this for education purpose only

Yesterday my team at Stallion Asset & I attended the Edelweiss Investor Day meet, and these are the 5 main take away’s from the meet

1)The Larger Trend in Financial Services Space – Financial Services in India are at the same stage as they were in the US in 1980 where it was 2.4 Trillion $ Economy (GDP) and China was at 2.4 Trillion in 2003.

India will be a 5 Trillion Dollar Economy i.e. it will double in the next 8 years. China took 5 years to double, US took 10 years to double from 2.4 to 5 trillion$. It is expected that when India Grows from 2.4 Trillion GDP to 5 Trillion Dollars, financial services will grow 5x in revenues and 6x in Profits.


Rashesh Shah mentioned that PSU Banks are growing at 3-4% which is about 70-75% of India’s Credit, whereas Private Banks are growing 18-20% and NBFC’s are growing at 22-25%. He sounded Optimistic that this trend will continue for the foreseeable future though he did believe that NBFC’s are scalable to 1,00,000 Crores AUM and post that it’s smarter to be a bank. Edelweiss has a Loan book of 42,000 Crores and being a NBFC for next 3-4 years is prudent for them.


2) Democratization of Credit in India – OMG FACT – The Top 45 Business houses in India are 50% of Nation’s banking debt even after nationalization of banks. The Top 20% of India is well banked and Opportunities are now on the lower ticket size retail lending (80% of Population). With Upsurge of MFI, SME Lending, consumer finance is the next big trend which are small ticket size loans with higher NIM spreads. Rashesh Sounded very positive on Retail Finance and he has walked the talk with retail Credit growing 46% in last 3 years. There are market rumours that Edelweiss may acquire Manappuram as Nandakumar’s 2nd Generation isn’t Interested in running the business. We believe this could be a marriage made in heaven as Manappuram would be immediately re-rated to 3.5-4x Book, and moats are very strong in gold finance business. Every NBFC and a few banks at some point have tried getting into gold finance but failed miserably.


3) My Chat with Siby Anthony (CEO of Edelweiss ARC) – He is also called the Mogul of turnarounds in India and very smart guy, obviously knows the distressed debt game really well. He is the person who has made edelweiss get 40-50% Market share in ARC in India. Rashesh Sounded very positive in India and Said about 20,000 Crores of fresh investments will be needed every year in Distress debt and the opportunity size is massive.

I knew ARC will be a big business, but why did Rashesh sell 20% of it so cheap at a valuation of just 2,500 crores to Canadian Pension is what i asked Siby Anthony? – He said we need the tap of money to be always open, Canadian pension has a lot of money, and we need a lot of investments, it made sense to us.

I wanted to understand the ARC business, and i asked a few questions on it and the ROE of the business, where he jokingly told me that unless he screw’s up very badly, he will make a ROE of 13% on it. If he works mediocre they are good to make 20-25% ROE in it, but if they get it right, they could make a killing.

I Asked him that if there are stock & sectors he could buy now, what would those be? Well the Answer of this Question was superb but lets say i cant disclose it here and keeping it for Clients of Stallion Asset.


4) Loss Given Default not NPA – Rashesh Shah gave a heads up of what he exactly thinks about the NPA Situations especially about banks. He Said i would rather have a 4% NPA in a Housing Finance Business rather than a 2% NPA in a Project finance Business.  He Said, GNPA is not really the true assessment of the health of a bank and the strength of its balance sheet going forward. To truly estimate the potential financial hit the bank will take, Loss Given Default (LGD) is a more comprehensive and appropriate measure. LGD is the share of a loan that is lost when a borrower defaults. This will, of course, vary  depending on the kind of loan and the extent of collateralisation.

He gave out Industry Numbers which got my eyes glittered as this is a new way of thinking about defaults.





This meant that if Some one Defaults 1000 crores in a Housing Finance book, the real loss would be just 150 crores and the rest would be recovered as there is collateral whereas on a project finance book if someone defaults worth 1000 crores, the loss would be 600 crores. We at Stallion Asset have decided to now go deeper in NPA profile of banks, probably there might be some bank which has high NPA but its actually due to its home finance or SME book which can get recovered but the markets are mispricing it.

5) Diversified NBFC will survive – Rashesh Shah has understood that the key for a sustainable NBFC is right capital allocation and risk management which can be done very smartly by diversification. Lets take an example of a only microfinance business like Ujjivan which had to lend even after demonetization, but if they had only 7% of their assets in Microfinance, they would have obviously stopped lending for some period like Arman Finance did. Mahindra & Mahindra finance was aggressively lending to the farm sector in 2012-2015 even though the farmers were defaulting because thats the only business they were in. Someday Interest Spreads in housing finance business will get squeezed as more and more Housing finance companies enter the market, but One product housing finance companies will have to continue to lend, just to survive. Edelweiss wants to create a 1,00,000 Crore loan book divided in 10 verticals so they can stop lending as risk increases, or increase lending in a vertical as opportunity increases. We believe a diversified NBFC is atleast 5x more safer than a concentrated one segment NBFC and deserves a higher valuation.


Conclusion – India is in a long term secular trend and Financials are expected to grow 5-6x faster than the country’s GDP Growth. We remain bullish on financials where there is a passionate management team, who is ready to go a extra mile for its stakeholders.

The above was written by Amit Jeswani, CFA, CMT (Founder of

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Disclosure – Amit Jeswani & Family may or may not hold the stocks discussed. Please use this education purpose only and Stallion Asset won’t be responsible for data.

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.

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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.

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The Sector in play for this bull market is undoubtedly the NBFC space and AU’s IPO at mind blowing valuations is just an confirmation of the trend.

AU was valued at 1200 crores in Feb 2013 when Chrys bought Stake, it was valued at whopping 5,000 Crores in June 2016, just a year later in June 2017 at IPO its valued at 10,200 Crores.

The Grey Market Premium for AU is 100/Share i.e. it will list at a market cap of 13,000 Crores. We at Stallion  Asset Believe that AU is a Sell on listing gains as EPS will drop from 12 in FY2017 to 7-8 in FY2018 due to conversion from NBFC to Small Finance Bank. There is very limited upside for next 2 years after listing gains. Our Calculation Suggest an optimistic fair value of 350/Share.

Below are the 10 Must know Things about AU Small Finance before you Subscribe for the IPO

Factor #1 About the Management & Business – I had gone to Attend AU Small Finance Bank analyst meet a week ago and met Sanjay Agarwal personally to understand the business, let me tell you with some conviction that Sanjay is very passionate and the company works like a Start up. He understands the business really well and understands the credit culture for SME’s really well.

AU was launched in 1996 as a retail-focused NBFC based in Jaipur.  In December 2016 the company became the first asset-led NBFC to get a small finance banking license from RBI to kickstart their operations.

The Business is pretty Simple, they borrow at 9.6% and lend at 16.5%, there are two important cost 1) Credit Cost (NPA) and 2) Operation Cost.

AU was primarily in Vehicle Loans i.e Cars and  Commercial vehicles loans from 1996 and expanded in MSME in 2007.

#Factor2 – Loan Book –  50% of the Total Loan book is toward Vehicle Finance and the rest toward SME and MSME. The Growth in SME & MSME is faster than vehicle segment. When i asked Sanjay (the Founder) about expected growth he said he can’t give out the numbers in public due to SEBI Guidlines but we expect 40%+ Growth in SME/MSME Segment.

The Company has growth its AUM at 30% CAGR for the last 5 years and we believe this is sustainable going forward as well. We expect that the Vehicle finance would grow at 20% and SME Segment at 40%.

Factor 3 – Secure Lender –  The 3 rules of Credit are Character, Capacity and Collateral . Both Microfinance and SME finance grew at 40%+ for last 5 years but with SME finance the book is secured and MFI violates one of the most important rule of credit i.e. collateral. 99% of AU’s lending book is secured and AU SFB lends only for mostly productive assets.

Factor 4 – Complexity of  Business – AU has displayed good understanding of its client’s business, on why the customer needs money and how he will repay. Evaluation is very difficult because data is not available and AU uses its own 120 points checklist that has helped them get an edge over competitors.

Factor 5 – Low Leverage – AU is leveraged 5x whereas leaders in both SME and Vehicle space are leverage 7-8.5x. AU has a mix of Vehicle Loans and SME. We believe AU can leverage itself 50% more from current level and AU will not dilute its equity for next 2 years as it can Increase its leverage and ROE further.

Factor 6 – ROE – AU has the highest ROE among its peers of 21.7%, v/s 12% for Capital First and 11.6% for Shriram Transport even without taking on a lot of leverage, suggest better management effectiveness compared to peers.

Factor 7 – NPA – Au Small Finance has an NPA of 1.6% v/s 8.16 for Shiram Transport (Vehicle) and 0.95% for Capital First (SME). The most important things about AU is the credit discipline that they have maintained, Mr Sanjay says that he personally focuses a lot on Credit Quality. The Management seemed confident that net Credit cost will be 1% in the long term which is reasonable.


Factor 8- Financials & Valuations – The company has doubled its revenue in last 2 years and the Profits have Increased 234% in the same time to 326 crores. The networth has Increased Sharply from 1000 to 2000 crores in one year as it sold 90% of its housing finance business for 828 crores. The Selling of Housing Finance business was required as RBI had given them a conditional Small Finance Bank license and the most important condition was selling controlling stake of housing Finance business. AU Continues to Hold 10% stake in the housing finance business.

The IPO is priced to perfection leaving no room for sustainable upside. At IPO price, the Company is valued at 30x FY2017 PE and 5.11x P/B for 2017. The Issue is very expensive and we are very confident that Capital First will beat the returns of AU SFB for next 3 years after listing.

Factor 9 – SFB Conversion – This is the biggest risk to the company as they will now have to invest in low yielding government securities and spend money on opening branches. Currently the Company in FY2017 has opex of 350 crores and the company has guided that the opex will increase to 700-800 crores in FY2018. We believe that this will hit the EPS from 12 in FY2017 to 7 in FY2018, but it will get back to 11-12 in FY2019.

Factor 10 – Conclusion – If Grey Markets are Right and the company list at 100/Share premium, the stock would trade at 6.5x FY2018 P/B and 60x FY2018 PE. We believe it would be a Great Sell at 460 and Assign Fair value of the Stock at no more than 350/Share.

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CDSL is coming with an IPO and the Grey market is very excited about it and pricing it at a premium of 100-105/ Share, this is a listing gain of a Whopping 65-70%. The Company did an EPS of 8.21/Share in 2017 is offered at 18 PE Multiple. We believe the company will grow at 10-15% for the Foreseeable future whereas maintain an ROE of 15% and we at Stallion Asset believe that the Fair Value is 200-220/Share.

Depositories have played a tremendous role in helping shareholders move away from physical share certificates to holding shares in the electronic form. The story of CDSL is pretty easy, it a duopoly business (2 player market), it’s a perfect proxy for playing the emergence of equity & mutual Fund as an asset class story.  Depositories are just like a bank. While a bank holds your cash and fixed deposits, depositories hold shares, debentures, bonds etc., for all shareholders in the electronic form.

8 Things You need to know about CDSL

Factor #1 – Forced Public Issue – According to existing rules, stock exchanges cannot hold more than 24% stake in depositories. BSE, which owns 50.05 percent in CDSL, is looking to divest 26 % stake.

Factor #2 – About the Business – Established in 1999 CDSL is the 2nd largest depository in the Country with Market Share of 43%. Below are the services offered by CDSL.

1) Depository Participants : CDSL offers dematerialization for a wide range of securities including equity shares, preference shares, mutual fund units, debt instruments, government securities.

2) Corporates: CDSL offers facilities to issuers to credit securities to a shareholder’s or applicant’s demat accounts to give effect to a range of non-cash corporate actions such as bonus issue, subdivision of holdings and conversion of securities in a merger, amalgamation or in an IPO.

3) New OpportunitiesCDSL has entered the new age depository as well where Mutual Funds, Insurance Policy, Commodity Receipt will all be securely stored digitally. They have also Invested in E-KYC which has huge potential where client data is pulled in via Unique Identification Authority of India (Aadhar).

Factor #3 – CDSL V/S NSDL Number of Accounts – The Total Beneficiary owner accounts are 27.88 Mln. accounts (CDSL & NSDL) combined as of FY17. The depository industry in India is worth  Rs2400 Mn as of FY16, with a CAGR of 12% from FY14 to FY16 . CDSL’s  volume of accounts has grown at 10% CAGR in last 4 years Vs 5 % of NSDL

Factor #4 – CDSL V/S NSDL Revenue Growth-The revenue of NSDL has grown at a CAGR of 12% Vs CDSL’s 11%.


Factor #5 – Incremental Market Share –  CDSL has gained in market share with respect to incremental demat accounts from 46% in Fiscal 2012 to 60% in Fiscal 2017 . CDSL added 1.51 Million Accounts compared to its peer NSDL who added just 1.01 Million. CDSL Has been Gaining Market Share consistently.

Factor #6 – No Pricing Power – Since the Pricing is controlled by SEBI there is no Pricing power in this company. Financial Inclusion is an important agency for the government and they wouldn’t allow these companies to make a lot of economic profit. Even though they can increase pricing by 100%, and revenue is highly inelastic, they cannot due to control by the Government.

Factor #6 – ROE– CDSL has an ROE of 15% whereas its Peer NSDL has an ROE of 10-15%. The ROE is expected to be sustain at current levels for the foreseeable future as operating cost is fixed and even if it’s a Duopoly business the pricing is controlled by SEBI. SEBI will never allow them to have an ROE above 20%.

Factor #7 – Financials – The Revenue has Grown over the Last 4 years at  10% CAGR to 146 Crores whereas Profit has grown 11% CAGR.

Factor #8 – Valuation & Conclusion – The Company is a high Quality Franchise and has longevity of 10-12% growth for next 1-2 decades. The company throws a lot of FreeCash Flow which doesn’t need to be reinvested as the business is self sustainable. We believe the company will trade at 25-30 PE Multiple due to longevity premium. The Pricing power is limited and SEBI will make sure that the ROE of more than 20% doesn’t happen.

If the Grey Market is Right and the Stock Indeed gets listed at 250, i.e. 30x FY2017 we will happily exit as expected returns are then probably equal to the growth rate of 10-12% which are satisfactory for an institutional Investor but not for Retail investors. We recommend a Subscribe for Listing Gains.

There is no doubt that financial Services and NBFC’s have been the leader of this Bull Market. IDFC is one of the newest bank and has recently completed its 1st Full year of Banking operations has done pretty well.

Let’s understand the larger trend that has emerged in the Private Banking space.

There have been different  strategy era’s in the private banking space in the  last 15 years which has resulted into wealth creation for Investors.

2003-2009 was about branch expansion and cross selling on services like credit card and auto loans which made the Emergence of HDFC Bank and ICICI Bank.

2009-2016 was about Kotak Bank, IndusInd Bank and Yes bank, where they emerged as the Fastest growing banks due to their focus on Niche Services and Digtal Foray.

2016 – 2020 the trend is clear i.e. its Digital Plus Rural. Till now banks have concentrated on 20% of population who has 60% of the countries net worth, however going forward the focus will be on the 80% population which doesn’t have access to credit facilities. With Digitalization, financial inclusion has become a possibility and the leaders in this pack could be IDFC Bank and RBL Bank.

10 Important Factors you need to know about IDFC Bank.

Factor #1 – About The Management Management – At Stallion Asset when we buy a Bank, We look at the Banker rather than bank only. Dr Rajiv lal is a veteran economist for last 30 years and has worked in various RBI Committees along with ex Governor Raghuram Raju, he has been a partner of popular private equity firm Warburg Pincus, head economist at Morgan Stanley clearly suggesting that he is a seasoned player who understands the game really well.

Factor #2 About the Bank – IDFC became a bank from an NBFC in October 2015, It offers wide variety of corporate and retail banking products and services to ~1.38 million customers. The Bank enjoys a presence of 74 Core Branches ; 47 ATM’s ; 8,600 points of presence covering 20 states, 150 districts, 19 major cities and almost 33,000 villages.

The bank is Divided into 3 Parts
1) Bharat Banking –  (Rural Side of the Bank) –This is the Microfinance unit of the company which started after it acquired Grama Vidiyal Micro Finance and has a unique outreach model to cater to local consumers. It has its branches built in difficult geographies and it has a unique outreach servicing model focused on financial inclusion. IDFC has acquired 12 Lakh customers in a small timeframe of 1 year.

2) Bharat Plus(Digital urban focused side of the Bank) It primarily caters to the needs of  mass affluent (Salaried class)  & affluent segment (self employed) business banking segment. The Bank has acquired 1.4 Lakh Customers since inception, out of which 20,000 are digitally acquired.

3) Wholesale – This is the legacy exposure of Infrastructure loans the Company had before it became a bank. The Percentage of Infrastructure loans have come down from 75% to 51% in FY2017 after 1.5 years of commencement of bank.

Factor #3 -Branch Light and Asset Light Business Model. –

IDFC bank is the bank of the future is focusing  more on technology and partnership and rely less on branches. Currently it has 74 Branches under its network likely to go up to 200 Branches by 2020 and corporate Business Correspondents will go up from 350 currently to 1000 by 2020. Further aggressive use of  micro ATM’s to 100,000 touch points from 8600 Currently & is expected to make en-roads in making banking simple and accessible, anytime and from anywhere along with Bank focus on serving the rural underserved communities & self employed. The average break-even of new branches is 4-6 months, the lowest in the industry.

Factor #4 – Impressive first Full Year of Operations –  There are only a few banks that become profitable in the first year of their operations since a lot of the cost are front loaded. Since IDFC Bank had a ready made loan book of Infrastructure loans, this helped it to be profitable in the first year Itself. The Bank recorded a net profit of Rs. 1,020 crore for FY17, delivering a 25% growth in net profit. Net interest income improved 20%, while the cost-to-income ratio was steady at 54%. Fee income has continued to increase at a healthy pace of 26%. The Balance Sheet grew y-o-y by 35% to 112160 Cr in Mar 2017.

Factor #5 -Growth Without Equity Dilution – Capital Adequacy Ratio stood strong at 18.9% with Tier I capital ratio at 18.5%. The bank does not plan to raise Tier I capital atleast for the next 2 years. The comfortable capital position provides healthy support for expanding loan book at a strong pace. The bank had a CASA of only 4% in FY2017 which the company has guided to Increase to 15%, which will decrease cost of funds.

Factor #6 – Selling out Legacy Loans – The bank sold its legacy infrastructure loans of Rs 2000 Cr net of provisions  in Q4FY17 to ARCs by way of security receipts. As a result of this sale, the Gross NPA levels reduced to Rs 1540 Cr (3%) in Q4FY17 from Rs 3590 Cr (7%) in Q3FY17. The net NPA levels stood at Rs 580 Cr (1.1%) in Q4FY17 as against Rs 1250 Cr (2.6%) in Q3FY17. Profitability wont be impacted in near future since management has provided adequate provisions for the stressed assets.

Factor #7 – Vision 2020 – The management has given aggressive guidance and is on the mission to transform the bank.

Factor#8 – Risks – The company is investing a lot of money in Microfinance segment and we at Stallion have been bearish on that part. We Believe that Loan Waiver is a New Normal and will continue happening for next two years until 2019 Elections Atleast.

The Company needs to show its best in digital platforms, a place where RBL is clearly winning in all fronts. Kotak has come out with 811, and has guided to acquire 1.5 crore customers.
IDFC doesn’t have the brand name yet, but with Mr Rajiv Lal at the forefront you can Expect the Unexpected. They have guided for atleast one acquisition which is very risky as valuations of banks ain’t cheap and the options available are South Indian Bank and Karnataka bank for them.

Factor #9 – Valuations- IDFC has a book value of 43/Share and Adjusted Book value of 41/Share i.e. it trades at 1.3x P/B . IDFC has a Market cap of 20,000 crore and did Earnings of 1020 crores i.e. trading at PE of 20 times. The valuations are reasonable but only if they can reach their 2020 target without screwing up in the acquisition, microfinance portfolio, they will get higher valuation. CASA growth is also very important which stands at 4% currently (Guided 15% in 2020) as cost of capital decreases with increase in CASA.

Factor #10 – Stallions View and Conclusion – At Stallion Asset We do understand that Rural plus Digital is wealth where wealth will be created. IDFC is reasonable at 1.3x Book especially after most legacy loan issues are now cleared but the story is not very clear as the bank is only 1 year old. We need to understand that there are many Small Finance banks (Rural Space) coming in as well as competition from payment banks (Digital Space). IDFC Bank are targeting 1 crore customers by 2020 which is a tall task but have an amazing management team. Most loans given out in microfinance division are subprime loans and are risky.

IDFC Bank is definitely not a 1 year story but a 5 year story and if it plays out, you can expect a 3-4-5x returns, and worse case you can lose 30% from these levels. We at Stallion like more clarity before investing especially because IDFC will be acquiring a bank, and expected volatility in microfinance division;things are not very clear now, probably we will have to pay a higher price for clarity, but we are comfortable to pay up a little more for certainty.

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Disclosure – Amit Jeswani and Family have no Positions in it. This is not a advise, please use this for education purpose only.

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