Opportunities for Organised Retail Sector & Avenue Supermarts

Introduction

Avenue Supermarts primarily engaged in the business of organized retail and operates supermarkets under the brand name of D-Mart. D-Mart seeks to be a one-stop shopping destination for the entire family, meeting all their daily household needs. Let us also explore the future opportunities organised retail sector is possessing.

Avenue Supermarts Ltd – Stock Analysis

Retail Sector Overview

• Indian Retail sector has emerged as one of the most dynamic and fast-growing sectors due to entry of several new players in the recent times along with rising income levels, growing aspirations, favourable demographics and easy credit availability.
• Globally, India is fourth-largest global destination in the retail space after US, China and Japan.
• Current Valuation of Indian Retail sector is close to $1 Trillion ie. Rs.70 Lakh Crore in FY2019-20. And as per the estimations provide by Ministry of Commerce, retail sector would be around $1.1 Trillion by 2021.

Indian Retail Sector – Market Share

1. Unorganised Retail : Currently, the Indian retail market continues to be dominated by the unorganised retail (traditional kirana stores) accounting for about 88% of the total retail market.
2. Organised Retail : On the other hand, organised retail like Big Bazaar, D’Mart, Walmart, Malls, Showrooms etc, is contributing only about 9% of the total retail market.
3. Online Retail : Online retail players like Flipkart, Amazon, Big Basket etc, accounts for only 3% of the total retail market in India.

Future Growth for Organised Retail

• As per the the growth projections done by Ministry of Commerce, Organised retail market share is expected to rise to 18% in coming 2 years ie. by 2021.
• Private consumption expenditure is expected to grow at the rate of 10-11% YoY till 2021. So, the size of the Indian retail sector would be $1.1 Trillion by 2021. And out of this $1.1 Trillion, 18% market share would be contributed from organised retail.
• It means, 18% of $1.1 Trillion = $198 Billion corresponds to the total organised retail players. And here Avenue Supermarts is a big player in the organised retail segment.

Avenue Supermarts Ltd – Q2 FY2019-20 Results Update

D-Mart’s Store Count

D-Mart has shored up its store addition by adding 13 stores (8 in Q1 FY20 + 5 in Q2 FY20) of (0.6 mn sq.ft. addition) in first half of FY2019-20 (vs. 5 stores in H1:FY19 and 21 stores in FY19). Thus, the total store count is 189 stores spread across 6.5 mn sq.ft.

Future Earnings Visibility Outlook

• The Trailing 12 months revenue from these 189 stores is around $3 Billion.
• As per current numbers, size of total retail sector is $1 Trillion and 9% share is of organised retail. Means 9% of $1 Trillion= $90 Billion. And out of this $90 Billion, just $3 Billion is currently contributed by Avenue Supermarts. It indicates the how big opportunity is present for the company’s future growth.
• The market share projections of organised retail market is :
  • 2021 : 18%
  • 2025 : 30%
  • 2030 : 40%
• The entire retail sector is expected to grow close to $2.2 Trillion in next 10 years. And out this $2.2 Trillion valuation, 40% will go to the organised retail share. It means Organised retail market would be 40% of $2.2 Trillion = $880 Billion.
• Avenue Supermarts is expected to grow with a very high CAGR from current market contribution of $3 Billion to contribute in this $880 Billion market size by 2030. This also shows how big is the opportunity present for Avenue Supermarts and the other organised retail players in the coming 10 years to grow.
• Currently, Avenue Supermarts is tackling only the Tier-1 and Tier-2 cities. And according to its market study, the company may enter in the online retail business also in near future.
• Also, with the help of efficient supply chain management strategies employing, Avenue Supermarts is planning to open Mini D-Mart stores like small kirana stores to improve their presence and penetrate the unrealised market also.

We can get a clear idea of the earnings visibility of the company from the above projections and calculations.

Advantage of Need-based Consumption Business Model to Sustain Growth Trajectory

• Retail sector is basically a need-based sector. If any business is dependent on the need-based consumption, then the economic slowdown won’t affect much to the earnings growth of that business. So, in this case such business won’t find it much difficult to achieve a steady growth graph (economic growth + inflation growth).
• And due to this kind of strong earnings visibility, these stocks like Avenue Supermarts, Reliance Industries (due to Reliance Jio + reliance Retail) are trading at a premium valuation.
• These stocks are having a great advantage of need-based consumption business model to sustain growth trajectory.

Avenue Supermarts – Q2 FY2019-20 Results

• D-Mart reported strong revenue growth of 22% YoY to Rs.5,949, driven by healthy store addition pace in Q2 FY20. While the net profit increased by 47.34% YoY to Rs.333 Cr. Lower tax rates (22% vs 36%) boosted the PAT growth in spite of lower PBT in Q2 FY20.
• As per the management, revenue growth was slightly below its expectations. But, owing to a favourable product mix, gross margins improved.
• Higher operating expenses restricted profitability, due to which operating profit margin % has reduced to 8.7% in Q2 FY20 from 10% in last quarter Q1 FY20.
• The stock price has appreciated around 13% since the announcement of the recent corporate tax rate cut as the benefit of higher free cash flows probably can be passed on through price cuts to consumers
  to boost revenue growth.

Conclusion

• With the expansion in the market share of organised retail, Indian Retail sector will achieve the estimated projections in next 2-3 years.
• Improving economy, changing demographic profile, increasing disposable incomes in hands of the middle class, brand awareness and growing urbanization along with rising discretionary spends are the main growth drivers in the organized retail market in India.

IRCTC Listing – What Should Investors Do?

Introduction

In this article, we are going to see the IRCTC Ltd (Indian Railway Catering & Tourism Corporation) bumper listing gains on its listing debut on BSE and NSE on 14th October. Shares of IRCTC rose as much as 132% to Rs.743, as compared to issue price of Rs.320. What should investors do after such grand debut?

IRCTC Ltd Bumper Listing Gains

IRCTC IPO was subscribed 112 times

• Shares of IRCTC Ltd made a grand debut on Monday, 14th October, after they got listed on BSE and NSE with a 101.25 premium over issue price of Rs.320. Its initial public offering (IPO) received the highest ever subscription among PSUs.
• The IPO of IRCTC was subscribed a massive 112 times. It received Rs.72,000 Cr worth of bids. The retail category was subscribed nearly 15 times while qualified institutional buyers (QIBs) segment got subscribed 109 times and non-institutional investors (NIIs) category 355 times.
• This IPO was open for subscription between 30th September and 3rd October. The issue comprised an offer-for-sale of 2.01 Cr shares of face value of Rs.10 each.
• The issue price was fixed at Rs.320 per share, which is the higher end of the IPO price band. Retail investors and employees of the company received shares at a discount of Rs.10 per share. Hence the final IPO price for them is Rs.310 per share.

Company Overview

• The stellar response for IRCTC IPO may help in supporting the government’s drive to raise funds of Rs.1.1 Trillion by selling stake in PSU firms in FY2019-20. However, not all share sales will evoke such a massive response. IRCTC is an exception because of the quality of businesses it offers.
• Diversified Business :
  • IRCTC was conferred the Mini–Ratna status in May 2008.
  • IRCTC is the only entity authorised by Indian Railways to provide catering services to railways, online railway tickets and packaged drinking water at railway stations and trains in India.
  • It also provides non-railway services including budget hotels, e-catering and executive lounges to create a one-stop solution for customers.
  • The company is in steady business model, which is likely to grow at 12-15%. The revenue of company is expected to boost in the next 1-2 years due to :
    1. Restoration of convenience charges for e-ticket from September 2019 is likely to generate additional annual revenue of Rs.450 Cr.
    2. The company would get additional benefit from the recent corporate tax rate cut regime where effective tax is reduced to 25%.
• The company has healthy balance sheet with over Rs 1,100 crore cash to support capital expenditure.
• It has good dividend pay-out track record, as it paid around 50% average payout in the last 3 years.

Government Holding in IRCTC Ltd

• The Government is executing the divestment programme of PSU stake in state run firms. This move is in accordance with the governments” divestment target of Rs.1.1 Trillion for FY2019-20.
• Thus, government holding in IRCTC is reduced from 100% to 87.4% after issue, by selling the stake of almost 12.6% through public issue.
• As per SEBI’s Regulations and guidelines, any public listed company is entitled to maintain the promoter holding maximum up to 75%. Thus, IRCTC Ltd is further required to reduce its government stake from 87.4% to 75% in near future.

IRCTC Ltd Valuation Analysis

• Here, we have calculated the Profit After Tax (PAT) projections of IRCTC for FY2019-20, assuming the Profit before tax growth of 20%. Thus, after updated reduced corporate tax rates from earlier 36.5% to 25.17%, Profit After Tax comes out to be Rs.386 Cr for FY2019-20. And by considering the PE ratio to be 20, we have made the projections for the market capitalization of IRCTC to be Rs.7,700 Cr for FY2019-20.
• Now, after today’s massive debut if IRCTC listing the stock was trading at PE of around 40, deriving its market cap to be around Rs.11,580 Cr. The over-subscription of IPO by 112 times played a key role in a overwhelming debut of the stock.
• So, we believe that IRCTC stock is currently overvalued and will get corrected by 30% in a course of time.

What Should Investors Do?

There are 3 options which retail investors can opt for :

1. Book Partial Profit : By getting the principal amount invested in IPO and retaining the additional profit, one can opt for partial profit booking. Profits earned can be invested for long-term due to higher earnings visibility of the company.
2. Hold and Stay Invested : One can also hold the entire amount (principal + profit earned) invested and hold the stock in the long-term investment. Because, IRCTC is a good long-term investment bet given its unique business model and monopoly in the business it operates. Hence. one stay invested.
3. Sell Entire Allotment : The most practical option in current scenario is one should get over the listing euphoria. The bumper listing was expected owing to phenomenal over-subscription of the offer. Thus, retail investors, who got allotment in the IPO, should utilise this opportunity to exit. Because the stock which is currently trading at almost 40 PE is possessing a very attractive and overvaluation. So, one can sell the entire allotment in this golden phase because the stock might get corrected to PE of 20-22 in a course of time.

Conclusion

• IRCTC’s overwhelming debut is a bright spot in India’s IPO market. IRCTC’s IPO is the biggest and the most successful among the four companies from the Indian Railways stable that have gone public.
• The company is likely to benefit from monopolistic nature of business, significant growth over FY19-21, an asset-light business model with healthy dividend payouts and strong parentage.
• Retail investors can opt for one of the following 3 options after such a incredible listing of IRCTC :
  • Book Partial Profit
  • Hold as a long-term investment
  • Sell Entire Allotment

Inclusion of Bandhan Bank in MSCI Index – Merger Effect

Introduction

Bandhan Bank & Gruh Finance Merger is approved by NCLT’s (National Company Law Tribunal) Kolkata and Ahmedabad benches. 17th October 2019 is fixed as the record date for the effective merger.

Bandhan Bank & Gruh Finance Merger Approved (To Merge on 17th October 2019)

Merger Overview

• Objectives of Merger
  1. Lower Bank’s Promoter Holding :
     • The merger will reduce the promoter stake in Bandhan Bank to 61%, from 82.26% as a first step towards finally reducing to 40% as directed by Reserve Bank of India (RBI) based on norms for holding of promoters in private sector bank.
     • Thus, after getting approval from NCLT’s (National Company Law Tribunal) Kolkata and Ahmedabad benches, then Bandhan bank’s promoter holding will go down from 82.26% to 61% holding in the merged entity effective from 17th October 2019.
  2. Expand Housing Finance Portfolio :
     • This merger is going to give Bandhan Bank a ready-made home finance company, Gruh Finance to diversify business.
• Share Swap Ratio
  • The share swap ratio is 568 shares of Bandhan Bank for every 1,000 shares of Gruh Finance.
  • The share swap ratio is in line with six-month weighted average stock price of the two companies.

Inclusion of Bandhan Bank in MSCI Index – Merger Effect

• Bandhan Bank will be added in the MSCI (Morgan Stanley Capital International) Index of India with effect from 16 October. This inclusion in MSCI index is due to Gruh Finance’s merger with Bandhan Bank.
• The move is likely to result in $180 million (Rs.1,300 Cr) worth of inflows.

Shareholding Pattern of Bandhan Bank

Who Is Going to Gain from This Merger & What?

For Promoters of Bandhan Bank

• The merger enables Promoters of Bandhan Bank to dilute their stake without actually selling any shares and get strong housing finance portfolio though at premium.  Though they still need to dilute stake further but may be when they dilute now can get better price for their sale.
• Also, They will be able to scale up the business both in east and west by cross selling the products. They get HDFC as a very strong partner or promoter.
• The merger may look at premium price for Bandhan Bank in the short term. But if scale-up of business continues to remain profitable then it can provide benefits in the long run to all stakeholders.

Great Business Synergy for Bandhan Bank as well as Gruh Finance

• The merger will help Bandhan Bank diversify its product basket and de-risk portfolio by addition of secured loan products.
• For Bandhan Bank, merger is getting ready made business. Also in the process walk towards the compliance by getting reputed Company like HDFC as its shareholders. 
• In terms of manufacturing business,
  1. Geographical expansion
  2. Product diversification
  3. Getting strong infrastructure and client base
  4. Big opportunity for cross selling the products
• Also raising funds for deposits and improving gross and net interest margin. It is possible for the bank to increase its CASA deposit post-merger. Since existing clients of Gruh Finance may be attracted to shift its normal banking operations to Bandhan Bank.
• The biggest advantage of the merger for Bandhan Bank will be a sharp increase in the secured loans. Post-merger, the share of unsecured loan book of Bandhan Bank will decline to 57% from 86%.
• Also, expertise of Gruh Finance can be utilized to cross-sell products. The merger will enable Bandhan Bank to reduce risk arising out of geographical concentration, diversify its product portfolio, and still target the under penetrated market.
• Bandhan Bank is well positioned to deliver a 23% CAGR in micro-finance loan book over next 4-5 years, driven by :
  1. Continued growth in credit demand from existing customers
  2. Increasing penetration and expansion into new geographies and
  3. Further market share gains from micro-finance lending
• Bandhan bank’s strategy to diversify the geographic and lending mix will be helpful and its ability to collect deposits from its borrowers would also give it more information about the borrowers, thereby reducing the risk.

For HDFC Ltd.

• One of the biggest winner of the merger is HDFC Ltd. HDFC is able to get an exit from its subsidiary at good premium and is able to participate in the growth of the merged entity though as minority shareholder. 
• HDFC has been able to monetize its investments in Gruh Finance at a very attractive valuation which is 13.3 times the trailing book value.
• The merger helps HDFC Ltd avoid a potential conflict of interest as both the parent and Gruh Finance are in mortgage financing. Now, HDFC is having a great opportunity to organically expand into the affordable housing segment. There has been an overlap in business of both Gruh Finance and HDFC Ltd, especially in the western region.
• The RBI’s rule does not allow a promoter of one bank to hold more than 10% stake in another bank. As HDFC will hold 15% stake in Bandhan Bank, it will have to reduce its stake in the future. 

Conclusion

• Bandhan Bank achieves geographical expansion, product diversification, regulatory compliance stake dilution and getting HDFC as stakeholder in this merger.
• Whether it will deliver superior value to public shareholders or not will depended how product and cost of funds synergies are captured post-merger.

Divestment Options of BPCL

Introduction

In this article, we are going to do BPCL stock analysis including company overview, key financials and divestment options of BPCL. BPCL is a leading name in the government’s divestment programme to maximize the revenue.

BPCL Stock Analysis

Company Overview

• Bharat Petroleum Corporation Limited (BPCL) is a government-owned company with 53.29% stake of government.
• In 2017, BPCL has received Maharatna status, putting it in the category of PSU entities in India with the largest market capitalization and consistently high profits.
• It is India’s 6th largest company in terms of revenue, with a revenue of Rs.3.376 Lakh Crore for FY2019. Also, it is 2nd largest oil marketing company (OMC) after Indian Oil Corporation Ltd. (IOCL).
• Domestic market share of BPCL by value is around 21% in FY2019, whereas that of IOCL is around 40-45%.

Business Verticals of BPCL

• Bharat Petroleum Corporation Ltd. (BPCL) is mainly engaged in the business of refining of crude oil and marketing of petroleum products. BPCL is having a diversified product offering and presence across value chain.
• The company’s business is divided in seven key Strategic Business Units like Refinery, Retail, LPG, Industrial/Commercial, Aviation, Lubricants and Gas.

Key Financials of BPCL Stock

• With a heavy capital investments in refinery, pipeline infrastructure and oil terminals, retail outlets, stock is giving a return-on-capital-employed (ROCE) of 18.92, which is very positive. ROCE number of BPCL is greater than its peers, showing the comparatively higher return per unit of capital employed. ROE is 19.86, which is also very positive.
• D/E ratio is 0.78, while interest coverage ratio is 6.72. Both the numbers are very good. It shows the ability of the company to repay its interest payments regularly with generation of a positive net cash flow.
• Also, the Stock is providing a good dividend yield of 3.34%.
• Current PE ratio of BPCL is 18.9 as compared with its historical average PE ratios around 10-13. It shows BPCL is currently trading at almost 40% premium valuation when compared with its historical PE ratio.

Divestment of BPCL

Government is looking to divest its 53.29% stake in BPCL either to IOCL or even private players. This divestment will help maximize revenue for the government.

Divestment Option 1 : Merger of BPCL with IOCL

• Merger of BPCL with IOCL will create an energy giant with disproportionate share in the Indian energy market across refining, fuel retailing and City Gas Distribution players.
• This will be an easiest way out for the government to raise money to meet part of their divestment target of Rs.1 Trillion.
• Synergy in refining and product sourcing : In terms of synergy, there is lot of overlap in fuel retailing business and major savings can be achieved by way of coordinated marketing plans.
• Funding the acquisition not a concern : Funding the BPCL stake by IOCL will not be a major concern, as IOCL’s net debt to equity stands comfortable at 0.55x.
• In addition, BPCL has a much better earnings profile with ROEs of >20% vis-a-vis 15% for IOCL.

Divestment Option 2 : BPCL Stake Sale to Private/ Foreign Players

• BPCL stake sale to private/foreign players will help unlock the real value of the company and help realize government strategy to bring competition in fuel retailing and break the dominance of the OMCs, which has over 90% market share.
• Post sale, share of private/foreign players in fuel retailing will increase to around 33% from current 10%.
• BPCL’s well-laid pipeline infrastructure and oil terminals across India can be used by the entrant to significantly scale up operations in a competitive landscape.

Conclusion

• Divestment to IOCL will create a big monopoly of combined entity (IOCL+BPCL). Although it is unlikely to alter market dynamics in the near term.
• The divestment to IOCL is the easy way out, but the real price discovery of BPCL stock will happen with stake sale to foreign/private players and unlock the real value.

Are Your Deposits Safe in Co-operative Banks?

Introduction

In this article, we are going to discuss the issue in PMC bank (Punjab & Maharashtra Co-operative Bank), which is one of the top 10 co-operative banks in India. After the PMC bank crisis, are your deposits safe in a co-operative banks?

PMC Bank Issue | Is Your Money Safe in Co-operative Banks?

Commercial Bank v/s Co-operative Bank

• Commercial Banks :
  • They are regulated under the RBI’s Banking Regulation Act, 1949 and their business model is designed to make profit.
  • Their primary function is to accept deposits and grant loans to the general public, corporate and government.
• Co-operative banks :
  • They are registered under the Cooperative Societies Act, 1912 and they are run by an elected managing committee. Their objective is to provide service on no-profit no-loss basis.
  • Basically, it is a financial entity engaged in the business of collecting deposits and lending – like any other commercial bank.
  • But they function on the principle of cooperation and sharing profits with members. They offer services essentially to members who are shareholders of the bank.
  • They mainly serve Agriculture-based activities, entrepreneurs, small businesses and self-employment mainly in rural areas.

PMC Bank Details

• Punjab & Maharashtra Co-operative Bank (PMC bank) is a Mumbai-based co-operative bank established in 1984. It is one of the top 10 co-operative banks in India.
• The name of PMC bank came into the limelight when the RBI recently ordered freezing of operations and imposed limits on withdrawals of funds by depositors.
• The bank is having a total loan book of Rs.8,383 Cr as on March 2019. PMC’s annual report shows it to be a profitable lender with a capital adequacy ratio higher than the 12% minimum requirement and a bad-loan ratio of under 4%. This is almost respectable by the current standards of India’s banking industry.
• According the Financials for 2018-19, PMC bank shown NPA of just 2.19% which around Rs.160 Cr.

Then how can the bank have bad loans of Rs.6,500 Cr?

• As much as 73% of PMC bank’s loan book was tied to just one borrower group – Housing Development and Infrastructure Ltd. (HDIL). HDIL is a Mumbai-based real estate developer that’s facing bankruptcy proceedings at NCLT. Thus, the bank’s exposure to bankrupt HDIL has been pegged at Rs.6,500 Cr, which is 73% of the bank’s total assets.
• At least 21,049 dummy accounts were used by the Punjab and Maharashtra Co-operative Bank to hide accumulated non-performing assets of realty firm Housing Development and Infrastructure Limited (HDIL).
• The size of the reported advance is far in excess of the bank’s capital. This goes beyond a failure of oversight, and would require top-level complicity.
• As the outstandings (loans) were huge and if these were classified as NPA, it would have affected the bank’s profitability and the bank would have faced regulatory action from RBI.

Are Your Deposits Safe in Co-operative Banks?

• The nature of regulation is different for co-operative banks. Although RBI regulates co-operative banks from the financial aspects, the management supervision is done by state and central governments.
• In other words, RBI can prescribe the best practices to run a bank but cannot make any changes in the bank management, barring an emergency. As a result, these banks have been subject to a high level of political interference.
• Many small cooperative banks and cooperative societies keep their deposits in large urban cooperative banks. The urban cooperative banks (UCBs) often offer slightly higher interest rates than state-run banks and aggressively seek deposits from housing societies.
• Deposits with a co-operative bank are eligible to get protection of up to Rs.1 lakh per deposit if
  • The bank is covered under the Deposit Insurance and Credit Guarantee Scheme
  • Provided the bank has subscribed to the protection cover
• Only a fraction of a depositor’s money can get insurance cover. If a commercial bank is in trouble, there are legal provisions to protect the depositors’ interest by merging the troubled bank with another. But the same is not true in case of a cooperative bank.