Yesterday, I heard veteran reputed investor Mark Mobius advice to young investors- “Young Investors should Study, Study & Study. Read and learn as not only much about economics or market but as much about culture, because it would make you creative. At the end of the day the most successful investor would be the one who are most creative”
My takeaway and New Year Wish is – I shall allow my creative side working more this year with writing more blogs about investing.
So I am starting up a Weekly Market Roundup. I would be sharing few important snippets of what has happened in the market .This would simplify, Demystify, Declutter sectoral jargons and myths in multitude of sectors. It will be first released on my channel Sadhan. For staying updated on market and learning investment please subscribe the channel by clicking here.
Week 1 ( 2 – 9 Jan 2021)
WATCH THE VIDEO
Oil & Gas
On Tuesday, Prime Minister Narendra Modi virtually inaugurated the 450-km Kochi-Mangalore natural gas pipeline built at cost of ₹5,750 crore. The event marks an important milestone towards the creation of Modi’s ‘One Nation One Gas Grid’ project.
It has a capacity of 12 mmscmd. Regasified liquefied natural gas (RLNG) has already been flowing from Kochi LNG Terminal of Petronet LNG to Mangaluru (Mangalore Chemicals and Fertilisers Ltd.) .The pipeline will supply environment-friendly and affordable fuel in the form of piped natural gas (PNG) to households and compressed natural gas (CNG) to the transportation sector.
GAIL: It shall aid 1.5 MMTPA volume to the total GAIL transmission volume of 15.5 MMTPA , which makes it a significant event for the co.
Petronet LNG: As petronet owns the Kochi Gas Terminal at a cost of > Rs 4000 cr. But due to low pipeline connectivity the terminal’s utilization was meagre 20% and hence it was dragging the balance sheet.New pipeline to increase utilization to above 30% and t shall increase revenue by Rs. 180 crore per year over 1-2 years as per cos management.
MRPL: The gas started supplying to its Mangalore based plant .Expect Rs. 100-150 crore per year benefit from Kochi- Mangaluru pipeline commissioning
City Gas Distribution cos e.g Indraprastha Gas Ltd, Mahanagar Gas Ltd , Adani Gas & Gujarat Gas Ltd :The government is taking policy initiatives to increase the share of natural gas in India’s energy basket from 6 % to 15 % .The Prime Minister further stated that the government’s focus is to increase the CNG stations to 10,000. Till 2014 there were only 25 lakh PNG connections. Today there are more than 72 lakh PNG connections.
I recommend watching my analysis on CGD players here:
2. Pharma – Lupin
USFDA has issued Observations out for Lupin’s Somerset facility . The 13 observations in Form 483 issued by the USFDA post the inspection over Sep–Nov 2020 largely pertain to cleanliness and equipment maintenance, lack of training given to employees.
4 of Lupin’s facilities at Pithampur Unit-2, Goa, Somerset, and Tarapur have the Official Action Indicated (OAI) status, and the Mandideep plant has a Warning Letter.
With the USFDA unable to conduct overseas inspections, I expect the resolution of regulatory sanctions to be delayed.
3. Finance- IDFC First Bank
The bank is progressing well in its endeavor to become a retail lender and showing strong traction in growing its retail franchise in terms of both loans and deposits .The average CASA ratio for 3QFY21 stood at 44.6% v/s 36.5% in 2QFY21
Also An FPI sold 5.5% stake in the bank which was bought by reputed DIIs such as Abbakkus, Avendus India and FPI Morgan Stanley.
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This blog is going to cover the most intriguing question in the mind of investor leaning to encash huge Gas sector opportunity and that is: Which one is better? Indraprastha Gas Limited or Mahanagar Gas Limited?
Comparative Analysis of City Gas Cos
Watch our 15 min video to understand in depth
Let us start with Industry first:
India is the 3rd largest energy consumer in the world, after US and China. Natural gas has emerged as a reliable alternative for more polluting fossil fuels.The Government of India has set an ambitious target of increasing the share of natural gas in its primary energy basket from 6% to 15% by 2030 following its clean energy agenda.Government has accorded priority in domestic gas allocation to PNG (Domestic) and CNG (Transport) segments.
City Gas Distribution (CGD) market in India is projected to grow at a CAGR of 10% by 2030. The main Growth Driver is increasing natural gas Demand from automotive, industrial, commercial & residentialend-user segments.
In June 2020,Petroleum and Natural Gas Regulatory Board (PNGRB) allowed any eligible entity can set up an LNG station in any geographical area (GA) or anywhere else. This shall mean that the GA license awarded to City gas distribution cos such as IGL, MGL shall be without exclusivity. However it may be noted that CGD being an asset-heavy play the entry barriers remain very high for new players to set up LNG stations in GA owned by these players .
In this industry the market dominance comes through scale, capacity, reach, and infrastructure.
However, natural gas remains an alternative fuel to the consumers as the consumer always compares natural gas fuel such as Piped Natural Gas (PNG) which is used for cooking with Liquid Petroleum Gas (LPG) . Also Compressed Natural Gas( CNG ) which is used as a transport fuel is always compared with petrol & diesel.
One sectoral tailwind supporting this sector is dwindling natural gas prices globally that have led to CGD players reducing the retail prices of all of their products in October last month.
At current prices PNG would be around 15 % economical as compared to LPG on energy equivalent basis. CNG would offer over 62 % savings towards the running cost when compared to Petrol driven vehicles while CNG would offer over 40 % savings towards the running cost when compared to Diesel driven vehicle
Let us dig deeper into what lies in the financials of these 2 cos:
The EBITDA margin difference between MGL & IGL has always been ~9%-10%. What makes MGL so good with operating margins against IGL?
The Answer lies in the cost of Raw material (i.e. Gas). As per GoI mandate,CGD firms serving CNG & Domestic PNG are given first Priority and 110% allocation of domestic gas production.MGL & IGL both receives 110% allocation of gas at Administrative Price Mechanism (APM) prices which is tad lower than prevalent global gas price their for CNG and PNG (domestic) customers. So the company with higher volume mix of Domestic PNG + CNG shall stand on a better ground(cost structure). let us check who makes most of it in the chart below:
The Other factor which impacts the cost is the distance between demand centres and supply centres wrt their Industrial & commercial PNG, as the cost of transporting gas through pipeline is a costly affair and increases the cost for IGL located in far Delhi from the ports as most of balance gas requirement is met through imports.Whereas with proximity to west coast Mumbai based Mahangar Gas is at vantage point.
Reason for the difference in Valuation Multiple
So the bottomline is :
Market pays for Growth. Period.
4 Point Analysis
Growth Investor should prefer IGL as it strives to grow in new territories and keeps the quarter on quarter momentum maintained , however MGL is less risky and available with margin of safety, so investors with value bias shall prefer MGL over IGL.
Disclaimer:The blog is not an investment recommendation but written for educational purpose only.
In my early investment years what puzzled most me was: Quality of Promoters of the stocks I invested in. Management Quality is fairly elusive and some veteran investors like Vijay Kedia had an interesting solution: He ges and visits management in person . There , what he focuses most is on “How management is treating its peon/helping staffs?” His point is simple: If Promoter treats badly/disrespectfully with his employee then his treatment towards minority investor would be worse than that, for sure. A simple but effective hack !
But all minority investor can’t be meeting promoter before investing so here is a investing framework for common investors to solve the puzzle:
Post screening of investible universe common investor should develop a sense of value of the business and then comes the most crucial part: management quality assessment. We have created a 5 point checklist for that:
In this blog we are going to discuss first 2 checks, rest will follow in next blog. We would be analysing Management Quality of Apollo Tyres using 5 point checklist for clarification purpose only.
Check 1:Promoter Background Check
In this step the investor should wear a bad cop hat and conduct a forensic google search of promoter/company with key words such as “Fraud”,”Issues”, “SEBI”, “Court ” etc. The idea is to get to know the promoter’s history to understand whether you should invest in him or not. As Warren Buffett has famously said this:
Look out for any disputes with SEBI or other regulators.
Anything that questions the integrity and character of the promoters should be looked with suspicion. Further study should be done to confirm or dispel doubts about the news or allegations.
Step 2: Board of Directors Check
There are 2 kind of directors:
How Independent are the Independent directors?
One should focus on the Independent directors whether they are independent or not?Have board members been appointed by the company for their decision-making ability and for value add because of their Skill Set (skill) or are they appointed only because they are familiar with the promoter?
Incase of Apollo Tyres, 2 Independent Directors namely Ms Pallavi Shroff and Akshay Chudasama are managing partners of Shardul Amarchand Mangaldas & Co (a law firm). Their law firm have been paid a fee of Rs 1.28 crore during FY 2018 for advice provided by Apollo Tyres. This shadow’s the “Independence” of the Independent Director.
If the ratio of Independent Directors & Executive Directors on board for a company is more than 50:50, indicating their Corporate Governance.
2.Check Committee Compositions
Board works on the shoulders of various committees , so investor should look at the composition of mainly 2 committees, namely:Audit Committee & Remuneration Committee
In Case of Apollo Tyres:Mr. Onkar S. Kanwar (The Promoter i.e. MD) himself is a member of Remuneration Committee which explains high promoter remuneration of Rs 87 cr in FY19.
The conclusion for stocks which fail these 2 acid tests , is pretty clear : Avoid At Any Cost
To know more about this framework watch the video:
Whether it is Cricket or Stock market, winners are made up of their habits. Between Cricket & Investment – Easy thing first. Let me put forth 5 traits/habits of Mr Rahul Dravid which make him ‘Mr Dependable’ of the Cricketing world.
Long Term Thinking
Robust technical skills (The Wall /Moat)
Let us now get under the skin of a Pharma API company which has all these 5 qualities in one form or the another . I am talking about- Solara Active Pharma Sciences (SAPS)
SAPS was formed in the year 2018 by carving out the Active Pharmaceutical Ingredients (API) business of Strides Pharma and Sequent Scientific.It carries a legacy of over three decades with API expertise of Strides Shasun Ltd. and the technical know-how of human API business from Sequent Scientific Ltd
In a nutshell, Solara can be seen like this:
It is a CDMO (Contract Development Manufacturing Organization) which focuses on the manufacturing of Active Pharmaceutical Ingredients (API) for Formulation Companies. What CDMO does can be understand from the below pic where the whole value chain of drug is crisply captured:
Solara is one of the top 3 API manufacturers in the country. The Company boasts of 100+ APIs and 84 active DMF filed with USFDA. Let us check out Solara’s prowess against its peers below:
No of Active DMF
The power of DMFs actually differentiates Solara from its peer API manufacturers:
So let us understand more about DMFs!!
Sadhan Simplify DMF
While not required by law, a Drug Master File (DMF) is submitted to the Food and Drug Administration (FDA) to provide detailed information about facilities, processes and materials used in the manufacturing, processing and packaging of human drugs.
It’s a prerequisite to securing approval and commercialization and ensures confidentiality of proprietary information related to the API
Completing a DMF submission generally takes several months to develop, involving thousands of pages of documentation
High no of DMF vis a vis API indicates that the CDMO is very Transparent and focussed towards Quality, which is the most likable aspect of any Contract Manufacturers (Ask any Big Pharma )
The company makes most of its bucks from selling ibuprofen API , whose prices have been growing since last 2 years.
IOL Chemical & Pharmaceuticals which is the Market Leader with 30% global market share in this API, has been precisely covered here
5 Traits which make it Mr Dependable like Dravid
1.Focus: A Pure Play API Story
We learnt that filing DMFs is not a cake walk and not required by law also, but let us analyse how well placed Solara is in terms of DMFs filling vis a vis its peers:
Transparency Ratio (DMF/API)
with high Transparency Ratio Solara is well placed for long terms contracts
Solara is very well placed to capitalise on the huge opportunity for Indian API companies owing to its strong 30+ year track record, robust customer relationships with a long- term focus, cost-efficiencies, healthy DMF filings as well as a largely unblemished regulatory track record
2. Long term Thinking
Like Dravid , SAPS is placed for long haul as evidenced from the followings:
•Strategic focus: Higher penetration for existing molecules
•Long-term contracts: 50-60% of its contracts are long-term (3-5 years)
•Strong presence in developed markets:2/3 Sales from North America + Europe
•Strong relationship with Big pharma: ~40% of sales to big pharma companies and ~60% are to generic companies
•Stable Culture of compliance: 25 Successful FDA Audits; Except an negative observation due to global issue with Ranitidine as a product
Rahul Dravid is the only Indian batsman to score four consecutive Hundreds/Centuries in Test cricket which signify the importance of consistency in earning a title of Mr Wall.
Likewise when the prices of its key API i.e. Ibuprofen risen from US$11/kg to a peak US$20/kg (currently at US$17/kg) in export markets, many CDMOs have gone upto the hilt with maximising sales by maximising realization, however Solara has refrained from being opportunistic and taking aggressive price hikes and has been supplying Ibuprofen API to its long-term customers at a much lower rate of US$12-14/kg.
Like all good qualities Consistency has a compounding effect , so we can be mindful of that.
4. Adaptability: Positioned with next growth Engine (CRAM)
When Indian team needed a batsman who can keep wickets then only one batsman (Rahul dravid) came out and that made the difference. he came out because he knew that people who can not adapt can not survive.
Similarly, in the ever evolving field of pharma, being open to different ideas/business models makes the difference. Contract Research And manufacturing (CRAM) is a growing & lucrative high margin business ( You may check out Syngene Story here)
Current Contribution of CRAM is 10% of sales which Solara targets to increase to 30% of Sales by FY25.Solara intends to grow in CRAMS both organically and inorganically (recent Rs4.6bn equity infusion by promoters and TPG provides growth capital). They are looking out for acquisition in Europe & USA.
5.Creating High barriers to Entry
Interestingly when cricket fans named him “the Wall” which is not literally very far from “The Moat”. The Wall had the Moat of the craftsmanship in shots due to his hard work and seeking perfection attitude.That makes him is one of the most technically superior batsman our generation has seen.
So for a stock to be called dependable like Dravid have to have few moats. To my mind following are the moats of Solara:
Key Investment Risks
1.Regulatory Risk: Compliance of USFDA Audits
Example:Ranitidine is a “Time- and temperature-sensitive pharmaceutical product (TTSPP)”, which develops a known Carcinogen (Cancer Causing) called N-Nitrosodimethylamine (NDMA) when exposed to heat. So FDA banned it in April 2020. It’s contribution to Solara Top line was 7%
2. Ibuprofen Price Risk
Ibuprofen market is interestingly placed, with key player investing in capex . The risk to watch out is Ibuprofen prices falling after 1-1.5 years due to the ongoing capacity additions by key players like BASF and SI group
3. Approval delay risk at Vizag greenfield plant
Spread across 17 acres, Vizag is Solara’s multi-product, multi-purpose greenfield facility. Having incurred a capex of Rs2.5bn in Phase 1, the Phase 1 of Vizag has gone onstream with additional 3,600 tons of Ibuprofen API capacity.
While the facility is largely aimed at catering to the regulated markets, Solara has just commenced sales to semi-regulated markets (where facility inspection is not required) from the Vizag facility. Solara is guiding for this facility to run at full capacity in the next 12-15 months when all regulatory audits and customer audits are completed.
Currently, the facility is undergoing customary regulatory processes and partner approvals for qualification. The facility inspection by both US FDA as well as the EU regulators is pending. The company is expecting approval from the European authorities earlier than US FDA. However, due to the current travel restrictions, there is a risk of regulatory inspections getting delayed even as the company is trying for a virtual inspection.
4.Promoter Share Pledge risk: 51% of Promoters stakes are pledged with lenders
Huge room in existing market cap of Solara to expand considering its product prowess (Watchout Rs 85k cr market cap of Divi’s) and aiming to strengthen CRAMs like Syngene ( Watchout Rs 22k cr market cap of Syngene)
You can watch the video for detailed analysis:
•A growing business with high barrier to entry and conducive environment e.g. ‘China Plus one’ & Production Linked Incentive by Govt of India
•Great potential : Over the medium term, we expect Solara’s topline growth to accelerate by commissioning of the Vizag facility, formation of the CRAMS business, expansion of APIs to new markets/new customers and ramp-up of new product filings.
•Stock is little undervalued hence shall be watch out and 3-5 %allocation can be done for next 1 year.
For beginners, it may seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. But as Warren Buffett has mused, “Some Promoters can not fill your pockets so they fill your ears” When they buy such story stocks, listening as lullabee then they wake up from their dreams in a jolt only.
If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Coromandel International (CIL). While key details of the stock namely Background, Business Model, Sectoral tailwinds and Fertilizer sectoral dynamics, have already been detailed in my previous blog here, Let us move to discuss the Quantitative part including the valuation of Coromandel International Limited .
Revenue & Margins
Let us know how the company has fared in revenue and margins. The 10 year Sales CAGR have been 6% which is good for a mature industry such as fertilizer.
The operating profit margin have been consistently growing since 2016, indicating that the company is doing things rightly as they have moved towards Nutrient based fertilizers where the farmers preference has increased over few years.
Also the key raw material (Phosphoric Acid) prices has been soft over past 1-2 years leading to good margins. The margin shall remain better as the COmpany has set up a Phosphoric Acid plant at Vizag making its key plant self sufficient.
Fertilizer being a high working capital cycle industry, an investor should look for Receivable + Inventory days
Cash Flow Analysis
Is the profit Real?
Let us check out with CFO/EBITDA ratio, whether it beats the benchmark of 0.8 or not?
Q1 FY21 Performance
Returns to shareholders are detailed below:
How Market have valued CIL ?
Market have appreciated the consistency in profit growth in the counter.
The PE of 17.7 is also less than its historical PE so the valuation are comfortable for a long term investor to enter
CIL is one of the better managed companies in the capital-intensive fertiliser industry. The company has developed a portfolio of products which reduces its dependence on Government subsidy as compared to its peers. The growth in the crop protection segment (relatively low working capital intensive compared to fertiliser) provides further strength to its cash flows. The company therefore forms a very strong play in India’s agriculture and rural sector growth.
A detailed commentary on the Company is available in this video:
We all know how well Motherson Sumi (MSSL) has rewarded it’s long term investors. A magnificent 22X in last 15 years in a cyclical industry like Auto components. Between MSSL & Advanced Enzymes Technologies Limited (AETL), I see stark similarities, which I will detail in the end. Let us start with AETL background first:
The journey began in 1957, when the founder Late L. C. Rathi pioneered the extraction of papain, an enzyme complex derived from papaya fruit and widely used for pharmaceutical and medical purposes. He went on to set up India’s first enzyme manufacturing plant in 1958.
1982 : Started as Advanced Biochemicals Private Limited
2011 : Acquired Cal-India Foods International for direct presence in USA
2012: Acquired AST Enzymes for consolidating USA presence
2016: IPO & listing on the Indian Stock Exchanges
2016:Acquired JC Biotech( a leader in Pharma Enzyme with a fermentation facility at Andhra Pradesh )
2017: Acquired Germany based Evoxx Technologies GmbH
Interestingly papaian was Biocon ltd’s first product which was launched in 1978.
Promoters have cumulative 7 decades of experience in Enzyme
Head of R&D, CFO long associated for 18+ years
Promoters own 58.13% of shareholding with no Share Pledge
World’s leading investment firm dedicated to health care with more than $14 billion assets under management . It owns 11% stake+ Board Seat in AETL
Nalanda invests primarily in those situations where it can be an active partner with the management team . They have recently bought ~ 4% stakes in AETL
As on Q1 FY21
Good Capital allocation Strategy
The company have been a good capital allocator with one of the last 2 acquisition have become profitable unit from loss making unit and JC biotech has started increasing its profitability
Only 2 listed players are there in Enzyme market so comparison with novozyme (the market leader with 48% market size) is as below:
Growth Drivers : AETL
•The Company operating at 50% plant utilization factor
•Without any fixed asset capacity addition it can grow top line till Rs 1200 cr
•The company need to invest into maintenance capex & R&D only, so the company can grow without debt till next 4-5 years
A high margin growing debt free business with high barrier to entry
Stock is relatively undervalued
Stock has great potential so people with conviction in Enzyme growth story should invest
Watch a video explaining this stock in much great depth below:
Similarities with Motherson Sumi
The company resembles in the following areas with Motherson Sumi:
Only time will tell whether the Company can grow like MSSL did in last decade , however one plus with this company is that the company is not a cyclical industry player but a niche player in a growing quasi commodity industry.
Investors always have this dilemma that Should I buy HDFC Bank now? Banks are usually very opaque hence difficult for a retail investor to understand, therefore we have done stepwise fundamental analysis of the whole private banking sector so that we can make out whether a Bank with such a humongous fan following in the Dalal Street is really going to be the ‘Bank for the Buck’. This analysis is done for a long term investment purpose. Here comes our 3 step method of doing Fundamental Analysis of a Bank vis a vis its peers:
Valuation (Return Analysis, PB, Reverse Discounted Cash Flow) You may want to see a guiding video for better clarity of the process here:
Financial Analysis: It includes analysing Operational as well as Financial performance of the banks. Firstly let us analyse HDFC Bank’s Operational parameters vis a vis its peers as below:
Kotak Mahindra Bank
HDFC Score well in 2 out of 3 operational parameters
Secondly let us analyse HDFC Bank’s Financial parameters vis a vis its peers as below:
10 Year Profit CAGR (%)
Kotak Mahindra Bank
HDFC Score well in 3 out of 3 operational parameters
As depicted in the table below,it may be noted that in case of RoA Kotak Mahindra have a better RoA than HDFC but if we see the RoE, HDFC beats KMBL
2. Qualitative Analysis
Let us now look at the quality of the portfolio of all the leading private banks
Real Estate Exposure %
Management Salary (X)
Kotak Mahindra Bank
HDFC Bank scores well with low Gross NPA & Low Real estate Exposure. However HDFC bank Management is drawing higher salary compared to median employee
The Answer to the high ROE of HDFC vs KMB lies in leverage ratio as RoE= (1+D/E)XRoA, In other words due to high leverage of HDFC (5.38) against KMB (2.78) HDFC ROE is higher than KMB. Overall HDFC Bank fare decent on these Quality parameters.
3. Valuation Analysis
(A) Price to Book Value
Price to book value are in line with the 10 year Stock price CAGR with market giving premium to HDFC Bank & KMB for their consistent earning growth leading to healthy price CAGR.
If we look at the historical P/B (average 4.08) of the Bank then at current market price with P/B of 3.25 the Bank seems to offer a margin of safety.
(B) Reverse DCF
Let us look at the valuation using Reverse DCF. Here we have used FCF= PAT-Capex for simplification as for a bank standard CFO does not make any meaning (vis-a-vis PAT).
Conclusion: What Wealthsutra Think about HDFC Bank?
The conclusion reminds me of this :
“The Next HDFC Bank is HDFC Bank”
– Ramdev Aggarwal
Bank being a process driven industry the bank with Right People , Right Processes wins the long term battle. The bank have established super efficient processes and seems to have the people to drive the business further. I would like to add to recent phenomenon adding muscle to HDFC Bank’s strength here:
With progressive weakening in Yes bank & Indusind Bank , the corporate as well retail CASA have shifted to primarily HDFC & ICICI Bank.
2. Recent RBI guideline on opening of Current Account (“Where a bank’s exposure to a borrower is less than 10% of the exposure of the banking system to that borrower, while credits are freely permitted, debits to the CC/OD account can only be for credit to the CC/OD account of that borrower with a bank that has 10% or more of the exposure of the banking system to that borrower”) also strengthen the position of a dominant bank against its peers, which further paves the way for HDFC Bank
Disclaimer: Wealthsutra is NOT a SEBI registered advisor and views present here are personal
Recently Gold has outperformed the greatest stock market Investor Warren Buffett over 20 year period. The below chart depicts the track record of Gold (in violet ) generating 6.2x return against 5.2x return generated by WB’s Berkshire Hathway (BRK-a in orange)over the same period.
Gold as an asset class has been derided by the utilitarian Stock Market Investor for being a commodity with no utility. However, Ray Dalio of BridgeWater Capital have different view on the matter. But to me both the perspective are western and needs an Independent Indian gaze. So this article shall be looking at Gold as an asset class from Indian Investor perspective.
To an Indian Gold is a storehouse of value which we Indians have seen for past 2000-3000 years. Another point is that Gold has definite ornamental value. So even a core Buffett worshiper Indian might not face hard time rejecting WB’s hypothesis.I find 5 reasons why Gold prices have risen, which are detailed below:
1.Too Much Liquidity
Gold has a long standing friend in the form of US Dollar Money Supply (M2). The friendship (Strong Positive Correlation) is hard to miss in the below chart:
To add fuel to fire , US Federal Reserve have announced in March 2020 that it would print 3 Trillion $ for buying government bonds to fight Covid -19. For an Indian 3 Trillion means our annual GDP.
European Central Bank would spend €750 billion ($820 billion) buying government bonds before the end of 2020.On similar lines Bank of Japan would spend $ 1.0 trillion buying government bonds to fight Covid -19. So there would be strong liquidity flow from central banks trying to save their respective economies from Covid which would further strengthen the Yellow Metal’s journey .For an Indian Gold is an hedge against World’s Central Bank gone wild.
2. Too Much Uncertainty
It is a proven fact that Gold prices move higher as economic conditions deteriorates due to uncertainties .In 2020 , there is no dearth of uncertainties. On one side Covid 19 has broken the economy down and world is gaping at an imminent recession while on the other side China US trade war is not going to stop in near time. Also the coming US presidential election in November means that there would be enough supply of news on US China front from Twitter savvy president.
3.Negative Real Interest rate Regime
Gold acts as Hedge against inflation as its prices move higher as real Interest Rate goes down. The Real Interest rate of major Economies such as Japan , Europe (excluding USA) have been in negative territory since 2016. Recently the US Real Interest rate also turned back negative as shown below:
In India if we calculate Real Interest rate then it is nearing zero:
Real Interest Rate= Nominal Interest Rate (5.7%) –Inflation (5.8%) =-0.1%
(10 year G Sec rate =Nominal Interest rate)
As per Jefferies India Real Interest Rate of India has turned negative last week.
4.Depreciation of Rupee
If we compare 10 year Gold prices in USD vs INR then we see that Gold in INR has outperformed Gold in USD by a wide margin of 50%
Overall return =1.5X in Dollar
Overall return = 2.0 x in INR
The obvious reason is Rupee Depreciation against Dollar by 50% (1 USD was Rs 50 in 2010 against present Rs 75). Since Indian Govt is unable to tame Rupee thanks to our CAD the story continues. Rupee Depreciation against Dollar is a Real Risk and Gold being a Global asset class diversity’s this Risk. This is a purely Indian reason to invest in Gold as hedge against Rupee depreciation.
5. Gold as an portfolio hedge
Economist have been long shouting that Gold should form 10 %to 15% of one’s portfolio as it is strongly negative correlated with Equity. If we pit Gold against Equity, the year wise returns suggest that Gold have beaten Sensex 16 out of 40 years in the past:
(Source: Quantum MF)
There are enough evidences to believe that smart hedge fund managers have started taking positions in Gold as evident from the capital flow of Gold ETF globally as well as locally. The Indian Gold (ETF)Rush is depicted below:
(Source: AMFI; PersonalFN Research)
My view is that every investor should have a meaningful allocation towards Gold in the form of either Gold ETF or Gold Saving Funds. As all the above mentioned 5 reasons still hold true and provides a strong basis for Gold to have a long runway to fly. The keypoint to remember here is that Gold could be an effective portfolio diversifier in the case of another stock market correction and renewed risk aversion.
This Stock reminds me the catchy song of Christina Aguilera, which has so meaningful and apt lyrics, which precisely communicates what Route Mobile’s stock has to say to its prospective investors :
“If you wanna be with me Baby, there’s a price to pay I’m a genie in a bottle You gotta rub me the right way”
I hope you get the message but read on to understand the fundamentals of the stock.
Honestly I got bored of the glossy Red Herring Prospectus where every projections/graphs were hitting ceiling, so I thought that it would be good idea to elaborate the business model and segmental analysis of the company. I have presented my findings in a wonderfully made video here which you should not miss >>>
Watch Amitabh’s Stock Show
“Route Mobile Ltd provides cloud-communication platform as a service (“CPaaS”) to enterprises, over-the-top (“OTT”) players and mobile network operators (“MNOs”).”
I bet half of you would not have understood the complete meaning of this jargonised sentence from RHP. To simplify in layman terms
This company is basically acts as a one stop communication consultant who manage various mobile based communication channels on behalf of its client at one place
Elaborating further, If you are a rich man (read client/brand) owning various cars (SMS, Whatsapp, FB messenger on your handset) wants to reach to its customer then you have to have one driver to help you choose (which car to take out today boss?). This driver is Route Mobile for you. Just to add for Mobile network operators road can be the right metaphor in this context.
So like driver, this company has low bargaining power as its client are rich (read few are Fortune 500 cos such as Google etc).
Since Mobile communication is the present and future of communication hence brands need to have reliable drivers, so in spite of small size in comparison to its customer, the company has a leverage due to following 4-5 reasons:
Track record of 15+ years in this not so old sector
Reach in 120 countries which enables them to offer its clients the flexibility of multiple routes, better speed of delivery and an ability to optimize cost of delivery per message
6 data centres giving cutting edge speed and reliability
240 direct relationships with Mobile Network Operators (MNO) :161 in EMEA, 32 in the APAC region, 48 in North America and South America, 6 in India and 1 in Australia.They are able to serve its clients better as a result of its direct relationship with MNOs.
All of this helps them drive 83% of revenue from Enterprise. Let us talk about balance 17% most of which comes from MNOs.
Have you heard of Grey route SMS ? No ? let me explain : it refers to an SMS between two parties or countries which is legal for one party at one end but is illegal for the other party at the other end. It is basically a way of sending SMS where two operators or entities do not have a commercial relationship or agreement. Grey traffic accounts for 1/4th of the total SMS traffic.(A lose-lose game for MNOs).
What Rout Mobile provide are : Analytics based SMS firewall solution which helps MNOs identify grey route traffic terminating on their networks, block grey route traffic, identify the source of such grey route traffic, and monetize such traffic.
One interesting aspect of the business is its negative working capital as shown below in the form of cash conversion cycle:
The reason for the same is : 17% (FY20) of revenue is prepaid and the standard terms of the agreements with its postpaid clients require payments to be made within 30 – 60 days. Whereas typically, Required to pay MNOs within a specified period, usually ranging between 45 and 60 days.
They have not required any capital infusion in the company since Fiscal 2007. They have been consistently profitable since the last decade. Its sustained growth is attributable to its high operating margins and low-cost base.
Sales have been growing at healthy rate of @27% since past 5 years. However, the profit has been largely stagnant.
Leverage is under control and RoE has decreased due to stagnant PAT
Remember the song :“If you wanna be with me Baby, there’s a price to pay“.
With Current TTM PE of 92 the stock does not offer margin of safety. The stock price reflects the optionality of boom in profitability due to scale, market expansion and market penetration. In deed, the business seems to promise operating leverage and the number shall substantiate the valuation in next 6 months, so I am keeping it under my radar for next 6 months as H2 is the major revenue driver from P&L point of view.
It is always interesting to have a relook at the past year market performance as it gives us a good perspective which solidify our understanding of the market. Year 2020 was indeed an abnormally exceptional year due to crest and trough we have seen in past 12 months. While this year has seen NIFTY making the lows (<8000) in March and then making high of 14000 on the last days of the year. Here is the annual chart of NIFTY for CY 2020.
Now let us look at our GDP growth rate chart and it is not a toll surprising due to the pandemic
We have been told many times that India rising GDP is the main driver of the Sensex growth, however this wisdom looks quite misplaced and doesn’t exactly solves/explains the puzzle of stock market rising inspite of India being in a technical Recession (with 2 consecutive de growth). At the face, It looks puzzling and confounding to most of us.
ButWe think that this stock market growth is not a sheer luck but primarily driven by 2 Factors. let us start with the most important driver of this wealth creation journey for Indian investors.
Indian bourses have 3 main participants driving the prices of the stocks:
Let us analyse the FIIs & DIIs flow during the year:
So during the year FII have been buying mostly and DII were selling , so net cash monthly inflow to market looks like this :
November was the month when FII withdrew from most of the emerging markets including South East Asia and invested heavily more than Rs 60000 cr in Indian stocks.
So what drove FIIs to India?
Traditionally FII looks to following factors in any economy before they buys heavily there:
India ticks on all 3 spots hence have received huge inflows from FIIs. Next questions comes to mind is:
Where FII money is coming from?
The Quick answer is the chart depicting the balance sheet of US federal Reserve:
What this chart means is :In 2020 alone US Fed have printed ~4 trillion US dollar which is a bigger amount than India GDP in USD dollars. This huge capital injection has led to abundance of liquidity in the hands of US based FIIs.
Also the role of MSCI cannot be undermined. In the Emerging market Index of the previous year, respective weightage to emerging markets looked like this:
However during November, MSCI Index changed the composition of India weight from 8.1 % to 8.8% (a 10% rise). What this meant to India was Rs 14000 cr of liquidity. Wonderful!!
Now let us explore the second Reason of this stock market euphoria.
2. Consumer Confidence
As per November 2020, RBI Consumer Confidence Indices shown below:
Households remain optimistic about the one year ahead situation, with the future expectations index (FEI) remaining in growth terrain at 115.9. Now this future outlook indicates that Indian investors are sanguine about the next year prospect of Indian GDP growth.
Public polls are underutilised tools, Do you agree? nevertheless I conducted following poll over Youtube :
Over 68 people voted and I got my answer :
The public interest in Abbott India Limited (AIL) is commendable. Here goes my video capturing the fundamentals including Valuation of this stock:
Let us analyse the fundamentals of the stock:
Founded in 1888 by an American physician Dr Wallace Abbott, business reached Indian shores in 1910. in 1944 AIL was incorporated:
In India, Abbott operates through 2 companies:
AIL & Abbott Healthcare Pvt Ltd ,put together Abbott captured 6% market share in Indian Pharmaceuticals Market (IPM) which is second only to Sun Pharma. Brief overview of Abbott in India is here
Business Model of AIL
The traded portion is generated from sale of Anti Diabetic medicines of Novo Nordisk . AIL had entered into a distribution agreement with Novo Nordisk India Pvt Ltd for sale and distribution of their insulin products in India in 2005 and since then this partnership continued till date and shall remain so till 2022 and expected to get renewed going ahead.
In this segment AIL generates 5% EBITDA margin.
Abbott India operates in both acute and lifestyle therapies.Segment wise break up of AIL is below:
Highlights of Key Segments
Gastrointestinal: AIL is one of the largest companies in India’s Gastro therapy, second only to Sun Pharma. Gastro contributes ~25% to sales, and AIL has ~7% share in the Rs 137bn market. In total, it has 57 brands in this category, with 15 brands at the number one position. Key brands include Udiliv, Duphalac, Cremaffin, Cremaffin Plus, and Digene.
Women Health: AIL has 2 key products serving this segments with market leadership position.
Thyronorm is used for treating Hypothyroidism while Duphaston is the remedy for women infertility problems including miscarriage. AIL faces competition in Thyronorm. However, BOOT’s strong branding provides an edge over GSK’s Eltroxin and other smaller brands, retaining 50%+ market share.
CNS/Neuro: It contributes 11% of sales with Vertin a prominent treatment of Vertigo and Prothiaden as a depression cure.
Vaccines:AIL entered the lucrative, high-margin vaccines segment of India in 2014-15. This segment accounts for 4% of total top-line. It has launched Influvac from its parent’s portfolio, which commands 63% market share in influenza vaccines. Additionally, AIL has a licensing agreement with Hyderabad-based Bharat Biotech to market 4 vaccines in the immunology segment.
The Parent Co, Abbott Labs US, acquired Belgium- based Solvay in 2010. The key brands for AIL includes Duphaston, Udiliv, Vertin, Duphalac, Creon.
AIL’s Brands business has outpaced the industry growth driven by the launch of new products and affordable medicines as well as by the company’s direct touch programs.Their key power brands are growing at healthy CAGR of 10-20% during last 5 years.
Let us have a quick look at the top line & bottom line:
The company has been a cash machine with strong generation of Free Cash Flow as shown below:
The Company is virtually debt free.
With nearly 50 PE and Rs 33000 cr market cap the company looks fairly priced. However to arrive at a decisionpoint we use a tool called “Reverse DCF”. Here goes our summary:
The Bottomline is :
Mr market have priced in 22% of annual growth for next 10 years for this stock’s Free Cash Flow. Against which the co has been able to grow its FCF @27%. So the moot point here is:
If you think that AIL can grow its profit/FCF @more than 22% then the stock is available at discount otherwise search elsewhere as there are many other fishes in the pond.
The world love an underdog and Investors love to give an indeliberate large attention to a stock which is underappreciated (undervalued). Interestingly, the investor’s interest increases manyfold if the stock lies under the sweat spot of strong sectoral tailwinds from all sides.
One such stock is Meghmani Organics Limited. A Complete 15 min stock analysis video by Sadhan is here:
Meghmani Organics : Complete Stock Analysis
Watch our complete analysis show below:
Why Meghmani Organics?
Agrochemical Sector is doing pretty well supported by:
(a) low input cost of key raw material i.e. Crude
(b) Healthy demand
(c) No adverse impact of Covid -19 (rather it helped in labour availability in farms)
So , If you narrows the sector’s stock top down with an eye on valuation then you will find yourself somewhere here:
Meghmani with a meagre below 8 PE stands out as a “Undervalued Stock”.
Let us see the Business first:
Meghmani Organics Ltd (MOL) is an established player in Agrochemical & Pigment industry with 4th largest Chloro Alkali & its derivatives complex in India. It has a diversified revenue portfolio with higher export revenue:
The other way to look at the revenue is here:
It is a sticky business with 90% business coming from repeat clients
3. Basic Chemicals
This business is housed under a subsidiary (57% owned by MOL) named Meghmani Finechem Limited (MFL) where the co is planning a capex of Rs 700 cr in next 3 years. The capex is for Forward Integration of Chloro Alkali & Increase value added products via derivatives.
Key Point to note is that MOL is Vertically integrated in most of its business segments
Resulting into high margins in
commodity biz of Soda Ash
Agro Chemicals as they make Intermediates, Technical & Formulation
My experience tells me that Low PE is not always due to investor’s neglect towards value but due to hyperbolic discounting on account of Poor Corporate Governance and bad management quality. So we fathomed and found 3 red flags in management of the co:
Without getting into the financial analysis of the stock, it can be safely said that the with questionable management quality the PE of 8 for a cyclical stock is not unduly placed and the counter can be called as ‘Value Trap’ where the elusive value never converts into return for minority shareholders.
You can watch our 2 part analysis of Chambal Fertilisers& Chemicals Limited here: