IDENTIFYING THE EST ‘ALL WEATHER’mailers.sparkcapital.in/uploads/strategy/Spark India...
Transcript of IDENTIFYING THE EST ‘ALL WEATHER’mailers.sparkcapital.in/uploads/strategy/Spark India...
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IDENTIFYING THE BEST ‘ALL WEATHER’ MANAGEMENTS
December 11, 2017
VIJAYARAGHAVAN SWAMINATHAN [email protected] +91 44 43440022
GAUTAM SINGH [email protected] +91 22 6176 6804
ARJUN N [email protected] +91 44 4344 0081
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SPARK STRATEGY
find SPARK RESEARCH on (SPAK <go>)
BSE Sensex 33,250
NSE Nifty 10,265
Performance (%)
1m 3m 12m
Sensex -0.2% 4.3% 24.3%
BSE200 0.2% 3.5% 27.3%
Identifying The Best ‘All Weather’ Managements
We put our coverage universe of 190 stocks to some of the most stringent qualitative and quantitative criteria to identify the 25 best ‘All Weather’ Managements. In our assessment, most managements tend to be ’Fair Weather’ friends, who do well in upcycles with the help of macro tailwinds. Very few companies have a time tested track record, underlying robust business model and a solid governance structure to deliver consistent performance irrespective of cycles and headwinds. In this note, we separate the two and pick the best managements to have as the core portfolio stocks. We have consciously kept valuations, earnings estimates and TPs from distracting the argument.
15 POINT QUALITATIVE FRAMEWORK
#1. Management Quality
Demonstrated performance track record across cycles and against external headwinds? Is the management ahead of competition both in terms of capturing the future opportunities and cognizant of challenges? Has the management been tested by competition and come out unscathed? Is the management prepared for disruptions in the industry? How well has the management corrected its past mistakes?
#2. Business Model Strength
How long is the runway for the company’s growth? Sustainability of competitive advantages? Ability to protect and gain market/ wallet share? Predictability, consistency, volatility and resilience to vagaries across cycles? Are they vulnerable to concentration and regulatory risks?
#3. Governance Structure
Management continuity? Capital allocation track record? Material related party transactions? Alignment of interests of promoters & management with minority share holders? Frequency of changes to Board of Directors, CFO, auditors and accounting policies?
10 POINT QUANTITATIVE FRAMEWORK
Consistency in revenue growth, Volatility in profit margins, Operating Cash flow generation, Quality of capital expenditure, Free cashflow generation consistency, Cash return on Cash invested (CROCI), Quality of retained earnings, Future growth expectations, Operating cashflows yield v/s earnings yield and Sustainable Growth Rate.
WHO PASSED THE MUSTER?
Large Caps – Maruti Suzuki, Hindustan Unilever, Asian Paints, HDFC Bank, Kotak Mahindra Bank and TCS.
Large Midcaps – Emami, Page industries, Berger Paints, Sundaram Finance, Shree Cement, Ramco Cements, AIA Engineering, Info Edge, Cadilla Healthcare and Torrent Pharmaceuticals.
Midcaps – Sundram Fasteners, Relaxo Footwear, La Opala, City Union Bank, PI Industries, V-Guard, Astral Poly Technik, KNR Construction and Cyient.
The ‘work-in-progress’ companies whose managements are working on strategies which should reduce their past cyclicality and vulnerabilities are Bharat Forge, Ashok Leyland, Voltas, Blue Star, Thermax and Federal Bank.
On the other hand the managements who might fit the criteria currently but are ‘likely to get tested’ going forward are HDFC, Eicher, Whirlpool, Kajaria, Havell’s and IndusInd Bank for a variety of reasons.
STRATEGY 11 December 2017
VIJAYARAGHAVAN SWAMINATHAN
+91 44 4344 0022
GAUTAM SINGH
+91 22 6176 6804
ARJUN N
+91 44 4344 0081
RESEARCH ANALYSTS
-15%
-5%
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15%
25%
35%
No
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Mar
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May
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Jul-
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Sensex BSE 200
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Stability of earnings
Ability to find avenues to grow consistently
Working capital trends with consistency
Quantitative Framework
Out of Spark coverage universe of 190 stocks, companies in non-BFSI sector were alone taken and tested for the following 10 parameters
Parameter Why it is relevant? Methodology used
Operating Cash flow generation
Consistency in revenue growth
Earnings Predictability Highest Inline results in the last 30 quarters (+/-5% PAT deviation from the Bloomberg
consensus estimates)
Sales growth more than 10% each year from FY12 - FY17
Highest Pre-tax OCF conversion (Pre tax OCF/ EBITDA) during FY12-FY17
Notes: *OCF – Operating Cash Flow
Companies which are efficient in generating cash with its capital invested
Quality of capex Growth in OCF during FY12-FY17 is higher than growth in invested capital
Consistent track-record of FCF generation; funding future capex with internal accruals
Free cashflow generation consistency
Highest FCF generation. Cumulative FCF from FY12 to FY17 divided by cumulative OCF for the same period
For every 1 rupee retained how much rupee of market value creation
Growth on all parameters Future growth expectations
Quality of retained earnings Market cap difference divided by difference in retained earnings between FY12-17
Sales/EBITDA/PAT CAGR > 15% between FY17-FY20E
Cashflow return on invested capital
How much can the company grow using only internal accruals
Sustainable Growth Rate (SGR)
Cash return on Cash invested (CROCI)
Highest average CROCI during FY12-FY17. CROCI= Post tax post interest OCF/ Invested Capital (Capital employed - CWIP - cash)
Cos. with highest SGR in FY17. (SGR = Incremental OCF/OCF) Note: Incremental OCF= Redeployment of OCF *(OCF/Sales)
Redeployment of OCF = Total asset turn*OCF Total asset turns = Net sales/Total assets (ex-cash)
To assess fluctuations in the EBITDA margin profile; Prefer least volatile companies
Volatility in profit margins Least variance in EBITDA margin range during FY12 - FY17
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Quantitative Framework – Which companies pass the filter?
No. of occurrences Satisfies both qualitative and quantitative criteria
Companies Total no. of
screens qualified
Consistency Earnings
Predictability Margin
Volatility
Cashflows vs. EBITDA
Quality of Capex
FCF generation consistency
CROCI Quality of retained earnings
Future growth rate
SGR
1 2 3 4 5 6 7 8 9 10
Hindustan Unilever Ltd 7
Page Industries Ltd 7
Emami Ltd 6
Infosys Ltd 6
Eicher Motors Ltd 6
ITC Ltd 5
Bajaj Corp Ltd 5
Tata Consultancy Services 5
Britannia Industries Ltd 5
Sun TV 4
Maruti Suzuki India Ltd 4
Whirlpool 4
Bajaj Auto Ltd 4
Eclerx Services Ltd 4
Hero MotoCorp Ltd 4
Just Dial Ltd 4
Info Edge (India) Ltd 4
Titan Company Limited 4
Wonderla Holidays Ltd 4
Shree Cement Ltd 4
Astral Poly Technik Ltd 4
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Qualitative Framework
Key Qualitative criteria
Management continuity
Capital allocation track record
Material related party transactions
Alignment of interests of promoters & management with minority share holders
Frequency of changes to Board of Directors, CFO, auditors and accounting policies
How long is the runway for the company’s growth?
Sustainability of competitive advantages
Ability to protect and gain market/ wallet share?
Predictability, consistency, volatility and resilience to vagaries across cycles.
Are they vulnerable to concentration and regulatory risks?
Demonstrated track record of the management across cycles and against external headwinds.
Is the management ahead of competition both in terms of capturing the future opportunities and cognizant of challenges?
Has the management been tested by competition and come out unscathed?
Is the management prepared for disruptions in the industry?
How well has the management corrected its past mistakes?
#1. Management
Quality
#3. Governance
structure
#2. Business Model
Strength
Out of Spark coverage universe of 190 stocks, companies with three years of listing history coupled with the relevant analyst experience of knowing those companies for over three years were only taken up for the purpose of this analysis.
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The Best Managements on Qualitative Framework
Maruti Suzuki
AUTOMOBILES
Sector Large Caps
Sundram Fasteners
CONSUMER
FINANCIALS
INDUSTRIALS
IT SERVICES
PHARMACEUTICALS
Large Mid Caps Mid Caps
Hindustan Unilever
Asian Paints
Emami
Page Industries
Berger Paints
Relaxo Footwear
La Opala
HDFC Bank
Kotak Mahindra Bank Sundaram Finance City Union Bank
Shree Cement
Ramco Cements
AIA Engineering
PI Industries V-Guard Astral Poly Technik KNR Constructions
Tata Consultancy Services Info Edge Cyient
Cadilla Healthcare
Torrent Pharmaceuticals
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Maruti Suzuki (MSIL)
Timely new product launches in the compact UV and premium hatch segment driving growth. Separate sales/service network for products in the premium segment. Currently investing significantly on sales infrastructure and on lithium ion batteries for EVs.
Introduced new products, targeted marketing such as government employees, expanded reach and network to benefit from non-urban growth.
In a highly competitive market place, the management has kept its market share & leadership status intact. Last 5 year company CAGR of 10%. Vs. industry CAGR of 5%. New technologies (mild hybrids) and move towards premium products have helped.
New product launches, network expansion and lower margin risks have resulted in consistent and predictable earnings. Good capital allocation track record with the parent investing on newer capacities leaves more capital available for sales & marketing.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
A negative and further strengthening WC cycle and a EBITDA to OCF conversion improving further from 100% to 125% reflect the balance sheet strength.
FY07-11 and FY11-14 revenue CAGR was volatile at 25% and 6% respectively. However, FY14-FY20 CAGR likely to be more consistent at ~15%.
EBITDA margins averaged 12.8% and 9.5% during FY07-11 and FY11-14 phases respectively, which is also likely to average a more predictable 15% during FY14-FY20 period.
A strong 50% average CROCI over the past 10 years is likely to further improve to 150% over the next 5 years.
Localization of raw material input requirements at ~92% currently vs. lower than 90% in FY12 improves margin/ FX vulnerability.
Growing exports proportion of sales billed in JPY at 5% of sales now vis-à-vis an immaterial proportion earlier provides a natural hedge reducing FX uncertainties.
Its biggest, non-replicable moat is its distribution and service network; Hyundai the second largest OEM in India by volumes, lags MSIL’s reach by a distance.
More rural reach, premiumization and exports offer enough legroom for growth.
Balance sheet strength
Margin stability
Cash generation & CROCI
Reduced vulnerabilities
Predictability & Consistency
Natural FX hedge
Distribution reach strengths
Growth runway
Mr. R C Bhargava, Chairman joined Maruti in 1981. Mr. Kenichi Ayukawa, MD & CEO, joined the parent in 1980 and held multiple global roles. Mr. R.S Kalsi, ED (Marketing and Sales), has more than three decades of experience in the automobile industry.
Management Team & Governance Grid
MSIL by way of regional mix (rural, urban & exports), product mix (economy and premium), largest sales/service network, success rate of products, low total cost of ownership has created a competitive edge over others. Volatility in margins have come down as the company has made efforts to naturally hedge the JPY exposure by way of exports (in
JPY), incremental royalty agreements in INR and by increasing localization.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Immaterial Deloitte w.e.f. FY17; prior to
that, PWC were the auditors for more than 5 years
Management continuity Alignment of interest
Professionally run organisation Well aligned
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Sundram Fasteners (SF)
FY11-FY15 growth in exports (17% CAGR) helped the company manage the domestic downturn (2% CAGR). Successfully increased exposure to PVs – historically had high exposure to CVs. Preparing for opportunity in EVs and the new opportunities / disruptions, already suppliers to Tesla for small components.
Sold German operations as change in government policies impacted business.
Among the most credible and capable management groups in India. The management has significantly diversified away from fasteners into more value added products such as hubs & shafts, pump assembles & engine components, which now contribute 63% of revenues. This has a material positive impact on the riskiness and provides pricing power/ higher margins.
Geographic expansion – China & UK are profitable, significant scale expansion drives more predictability.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Long-standing relations with major domestic and global OEMs. While ensuring stickiness, the same also inhibits customers from moving to competitors for minor variations in prices.
Reducing the domestic CV bias and increasing the global PV proportion has a material positive impact on the cyclicality of the business.
Higher proportion of the value added products at 63% of sales currently increases the company’s pricing power and margin profile.
Margins have not been volatile, in fact it been consistently moving up (up 500bps in last 4 years).
10 year average CROCI has been muted at 12% though it has improved to 13% for FY17. With the disposal of the German subsidiaries, CROCI to improve to 27% through FY18-FY20E
WC days expected to improve from 101 days (FY13-FY17) to ~70 days through FY18-FY20E (disposal of the German investments) Expect EBITDA to OCF conversion to improve to 95%.
RoCE has improved to 25% in FY17 from 13% in FY14; prefer to outsource a number of activities vs. in-house set up as capital requirement would be significantly higher.
SF’s technical competence, quality and TAT has ensured continued improvement in wallet shares (through existing products and new products/programmes) with major customers
Strong OE relations
Pricing Power & Low Volatility
Margin stability and cash generation
Cash return metrics
Predictability & Consistency
Balance sheet strength
Capital Efficiencies
Growth runway
Mr. Suresh Krishna, Founder & CMD, has experience of over five decades in the automotive industry. Ms. Arathi Krishna, JMD, served as ED from 2006 till 2010 when she was elevated to the position of JMD. Ms. Arundathi Krishna, DMD, joined SF in 1997.
Management Team & Governance Grid
Low cost of product development given huge library of in-house tooling, focus on value addition beyond forging, among the lowest TAT, wide basket of products to be a one-stop-shop to most global OEMs. The company has significantly diversified its geographic and end-market mix in order to relatively outperform. Agreements include
pass-through clause for both raw material and FX
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Negligible Sundaram & Srinivasan have
been auditors since FY04, atleast
Management continuity Alignment of interest
Succession plan in place Well aligned
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Hindustan Unilever (HUVR)
It has managed to grow even in the highly penetrated categories such as soaps and laundry through sub segmentations such as face washes and fabric conditioners.
To highlight the depth of the management quality, HUVR was one of the few companies in the FMCG space that successfully managed the last ~12 months of high intensity disruptions - Demonetisation (unplanned) and GST (planned).
HUVR’s management is one of those rare global MNC managements in India, which enjoys unquestionable confidence of its parent to decide and execute strategies as per local needs (e.g. Pureit water purifier, Ayurveda portfolio, etc.)
The management has been at the forefront of changes in the FMCG industry, even in cases where they had missed a trend such as in Ayurveda/Natural, they have been quick to reformulate an effective strategy to capture the trend.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
HUVR’s CROCI is ~121% on an average over the past 8 years, which is ~3x the next best FMCG company in our coverage.
Categories contributing ~65% of HUVR’s revenues currently have low penetration at ~40% (avg.) and huge premiumisation opportunities offering long runway for future growth.
Over the last 10 years, the highest fall in gross margins is ~250bps yoy, reflecting strong pricing power.
It has managed to improve operating margins ~450bps in 8 years due to which earnings CAGR has been 7%, though revenue and volume growth CAGR has been muted at 6%.
It has been able to groom competent top management teams consistently by leveraging the human resource pools available across its global network.
HUVR on an average has paid ~88% of its profits as dividends over the past 8 years, highest among our coverage universe.
In their recent acquisition of Indulekha, they had devised a staged payment outgo strategy on the back of the erstwhile team achieving targets set for each year.
Even in highly penetrated categories such as detergents and personal wash, HUVR delivers growth exhibiting its ability to create behavior changes and gain market share.
High cash generation; Low cash utilization
Pricing Power
Low earnings volatility
Managing talent
Runway for growth
High dividend payout
Capital allocation discipline
Ability to create growth opportunities
CEO – Mr. Sanjiv Mehta (57 years), the CEO since October 2013 has been with Unilever for ~25 years. COO – Mr. Pradeep Banerjee (57 years) has been with Unilever for 37 years and has been ED–Supply Chain since March 2010. CFO – Mr. Srinivas Pathak (45 years old) has been with Unilever for ~18 years and has been the CFO since 2017.
Management Team & Governance Grid
Market leadership, pricing power of its strong brands helps HUVR weather exposure to a wide commodity basket, and limit significant gross & operating margin vagaries despite a consistent high A&P outlay.
HUVR’s CROCI returns are ~121% on an average over the past 8 years, which is ~3x the next best FMCG company in our coverage. Sustained high operating cash flow with limited additional CAPEX outlay makes HUVR CROCI as the highest among peers.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Minimal. Royalty at ~3% of sales None
Management continuity Alignment of interest
Our key comfort is that the core philosophy and culture of the firm is institutionalized and personality
neutral.
Parent’s entire India biz under HUVR’s umbrella.
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Asian Paints (APNT)
Set a tone for the industry in venturing ‘ahead of time’ into premium emulsion paint and later into wall papers. It is launching AP homes – a one stop shop for all home needs, again well ahead of the industry.
The company has also been a pioneer in increasing B2C interaction launching experience retail stores, (Colour world), colour consultancy @ home and home painting services significantly trying to enhance its strong brand equity.
Phenomenal demonstrated ability by the management to consistently gain market share for decades even while remaining a dominant market leader in a market having global leaders.
Its capital allocation track record has been at par with the best. While protecting and expanding the current moat, APNT hasn’t hesitated from investing in future growth drivers.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Operating margins and cash generation (as a % of sales) with a 5 year average of ~17% and ~11% respectively.
The company has demonstrated a consistent growth profile with volume, topline and earnings CAGR at ~8%,~10% & ~14% respectively over the past 5 years.
Gross and operating margins have been stable at ~43%-44% and high teens respectively with low volatility reflecting pricing power.
The company invests significantly in branding as reflected in last five year average A&P outlay of ~4.6% of total revenues.
CROCI has in high teens over the last few years; Capital efficiencies remained healthy as reflected in mid 20s RoEs but has been slightly volatile owing to capex for new facilities.
The company’s dividend policy has been consistent paying out almost 50% of its earnings while also investing back the remaining to keep the growth trajectory.
it has acquired two companies viz. Ess Ess Bathroom fittings & Sleek Kitchenware in the recent past. Capital deployed in these segments are minimal, but symbolises its strategy.
Reach, repeat usage and premiumization remain the company’s time tested growth formula, which is unlikely to change over the ensuing period.
Margin stability and cash generation
Pricing Power& Low Volatility
Healthy A&P spend
Robust cash return metrics
Predictability & Consistency
Dividend payout
Capital allocation discipline
Long Runway for Growth
Asian Paints is owned by the Choksi, Vakil & Dani families. Majority of the BoD constitute members from all the three families. Mr. K.B.S Anand has been the MD & CEO of Asian Paints since April 2012. He has over three decades of experience in the company. Mr. Jayesh Merchant is the current CFO.
Management Team & Governance Grid
During FY11-14, when crude oil prices doubled, APNT effected ~15 price hikes cumulating to 40%, thereby protecting margins. Despite effecting this price hike, the company’s volume growth remained in healthy double digits, reflecting its pricing power.
In the oligoplisitc Indian paints market, the company’s total outlay on A&P is healthy in mid-single digits given that even today paints needs B2B marketing with limited consumer decision making which though is increasing.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Nothing Material None
Management continuity Alignment of interest
Our key comfort is that the core philosophy and culture of the firm is institutionalized and personality
neutral.
Rightfully aligned
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Emami (HMN)
HMN’s management was pro-active during the raw material tail wind climate over the past 3 years as they engaged in investing gross margin gains behind extending core brands into complementing categories, launching new brands and pursuing inorganic growth.
HMN despite taking over Zandu in a hostile manner, arguably at steep valuations, has managed to transform the brand to resonate with younger audience and post a significant turnaround of the brand.
Potent mix of entrepreneurial risk taking spirit and professional touch in execution. Driven by the promoter families, HMN has never shied away from taking ‘visibly’ aggressive bets and then turning the same in their favor with the relentless focus on execution.
Through both organic and inorganic measures, they have managed to outpace the industry growth in the past 5 years. New product innovations like ‘HE’ brand, F&H facewash and acquisition like Kesh King have provided additional levers of growth.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
HMN spends ~20% of its revenues on A&P, the highest among our coverage universe companies. Mass audience target with celebrity endorsement.
Categories contributing to ~70% of HMN’s revenues currently have low penetration at <50%, offering a long runway for future growth.
The management has demonstrated its ability to create and protect market leadership in a categories like CHO (~61%) and F&H (~60.3%) reflecting remarkable execution.
HMN has taken conscious initiatives to diversify the seasonality risk. Season neutral products now contribute ~48% of revenues vs 38% 5 years ago.
Despite its policy of investing most of its gross margin benefits into brand investments, has managed to increase its operating margins by ~640bps over 8 years.
HMN’s 13 day working capital cycle coupled with high margins have ensured that Cash returns on Capital Invested is ~40% on an average over the past 8 years
Dividend pay out is about half of its profits, except in years of high M&A activity, the company has maintained consistent dividend payout policy.
Last 5 year volume and revenue growth has been ~8% and 12% (including KK acquisition) respectively. Acquired brands have grown ~13% value CAGR.
Heavy branding efforts
Ability to gain market leadership
Low Volatility
Ability to juggle growth & profitability
Runway for growth
Capital efficiencies
Healthy payout
Scalability
Promoter Director – Mr. Mohan Goenka – With ~20 years experience, he leads the FMCG business. Promoter Director – Mr. Harsha V Agarwal – He heads the M&A, HR, IT & Media functions. CFO – Mr. Naresh Bhansali – With 2 decades of experience, he manages strategy and business development along with budgeting.
Management Team & Governance Grid
Market leadership in its core categories as Cooling Hair Oil, Pain Balm, Men’s fairness creams and Antiseptic creams enables them to command a strong pricing power in these segments, inspite of competitive intensity from MNCs. HMN, on an average, has delivered ~33% RoCE over the past 8 years, stable profit margins in excess of ~20% despite a heightened
CAPEX outlay reflecting its ability to optimally juggle growth, margins and capital efficiencies.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Not material None
Management continuity Alignment of interest
Not a concern No visible conflict
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Page Industries (PAGE)
While brand ‘Jockey’ has found growth challenging across other markets, we believe it is the management’s strategy which aided ‘Jockey’ to grow into a Rs.~15bn brand in India.
In a highly fragmented and unorganised sector, PAGE’s revenues and earnings have grown at a robust CAGR of ~35% and ~47% respectively over the last ten years across cycles significantly outpacing the industry growth rate of ~13%.
PAGE has cracked the complex equation of remaining affordable yet aspirational, unmatched by its competition. The management’s classic strategy of creating heightened brand aspiration and following it up with numerous brand extensions has done wonders.
The management is extending the brand loyalty seamlessly into the adjacencies like leisure wear, which we believe is an excellent strategy.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Operating margins and cash generation (as a % of sales) with a 5 year average of ~20% and ~11% respectively.
The company has demonstrated a consistent growth profile with volume, topline and earnings CAGR at ~15%,~26% and ~24% respectively over the past 5 years.
Gross and operating margins have been stable at 60% and 20% respectively with low volatility reflecting pricing power.
The company invests significantly in branding as reflected in last five year average A&P outlay of ~4% of total revenues.
CROCI has been volatile in the past on account of heightened inventory in select years leading to poor operating cash flows, the same has normalized in the past few years.
the management has been professional enough to share fruits of its success with minority shareholders too, with an average dividend pay-out of ~53% over last ten years)
Robust RoE. Average dividend pay-out of ~53% over last ten years
Reach, repeatable, aspirational and affordable – This cannot go wrong for a long time.
Margin stability and cash generation
Pricing Power& Low Volatility
Healthy A&P spend
Robust cash return metrics
Predictability & Consistency
Dividend Policy
Capital Efficiencies
Long Runway for Growth
Page Industries is promoted and managed by the Genomal family with Mr. Sunder Genomal at the forefront of operations. Mr. Vedji Ticku, is the current CEO and in the past served
as the Chief Operating Officer of Page Industries Limited.
Management Team & Governance Grid
Its healthy and sustained capital efficiency, owing to an asset light model of distribution with the wholesale channel contributing to more than 85% of total revenues. The company’s capital allocation history has been robust. Unlike its peers in the sector, PAGE does not employ any brand ambassadors. It instead invests significantly on A&P across media
building a ‘moat’ of being an aspirational brand though at affordable price points.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Nothing of a concern None
Management continuity Alignment of interest
Though professionally managed, we believe the strategy and
heightened motivation still stems from the promoters
Rightfully aligned
Page 13
Berger Paints (Berger)
In addition to high A&P outlay (company’s total spend on branding as a % of total revenues is the highest in the sector) and multiple initiatives like Express painting etc the company has managed to create a robust brand equity in a segment which by the day is transitioning to a B2C from a B2B model.
Though being the No.2 player in the Indian paints sector, the market leader commands more than thrice the market share of BRGR reflecting the ‘moat’ the market leader has created in the marketplace. Despite this, Berger’s management through aggressive network expansion (grows its dealer network by ~10% annually), highest penetration of tinting machines in dealer network and via differentiated/premium product profile has been garnering market share to grow its revenues in-line/above the market leader.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Operating margins and cash generation (as a % of sales) with a 5 year average of ~13% and ~9% respectively.
The company has demonstrated a consistent growth profile with volume, topline and earnings CAGR at ~9%,~9% & ~20% respectively over the past 5 years.
Gross and operating margins have been largely stable at ~41% to ~43% and ~15% respectively with low volatility on the downside reflecting pricing power.
The company invests significantly in branding as reflected in last five year average A&P outlay of ~5.6% of total revenues.
CROCI has in high teens to low 20’s over the last few years; Capital efficiencies on the uptrend given significant improvement in profitability over the last few years.
The company’s dividend policy has been fairly consistent paying out almost 35% to 40% of its earnings while also investing back the remaining to keep the growth trajectory intact.
Though the company has signed multiple MOU’s/acquired ‘niche’ business in the recent past, it follows a largely robust capital allocation strategy not ‘moving’ away from its core segments where it is among the top.
Reach, repeat usage and premiumization remain the company’s time tested growth formula, which is unlikely to change over the ensuing period.
Margin stability and cash generation
Pricing Power& Low Volatility
Healthy A&P spend
Robust cash return metrics
Predictability & Consistency
Dividend payout
Capital allocation discipline
Long Runway for Growth
CEO & MD – Mr. Abhijit Roy – has been at the helm of affairs since 2012 (has been with the company for more than two decades). CFO/Director, Finance - Mr. Srijit Dasgupta – has been the CFO since 2011 – total experience of close to three decades
Management Team & Governance Grid
Inherent strengths which the company enjoys being part of the oligopolistic Indian paints sector. As witnessed multiple times, during deflationary cycles the company doesn’t pass on (or limited benefit passed on) decreased raw material prices benefit to consumers while in an inflationary cycle fully passes on any price increases to the consumer. Despite this prevailing scenario, we note that demand remains inelastic reflecting the superior pricing power of the company.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Nothing Material None
Management continuity Alignment of interest
Fine mix of promoter and professional personnel lead the
company. Culture has been largely institutionalized.
Rightfully aligned
Page 14
Relaxo Footwear (Relaxo)
Relaxo’s revenues which for at least 10 years grew consistently, witnessed a standstill in FY17. While a general slowdown was a factor, we admire the management for their stance of ‘not chasing growth at the cost of compromising on cash flows’ as competitors extended favorable trade terms to distributors/retailers compromising on the credit quality.
Also, the management took the wise decision of not creating a capital intense retail footprint.
The management identified a vacuum in the market for a branded footwear player in the ‘value for money’ segment, designed new brands and fulfilled the requirement with the help of celebrity endorsements.
The management’s three pronged strategy of branding, premiumization and penetration has been successful with its revenues growing at a robust CAGR of ~22% in the last decade.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Operating margins and cash generation (as a % of sales) with a 5 year average of ~13% and ~9% respectively.
The company has demonstrated a consistent growth profile with topline and earnings growth CAGR at ~15% & ~25% respectively over the past 5 years.
Gross and operating margins have been stable at ~55%-~58% and 14% respectively with low volatility reflecting pricing power.
The company invests significantly in branding as reflected in last five year average A&P outlay of ~4% of total revenues.
CROCI has in high teens over the last few years; Capital efficiencies remained healthy as reflected in mid 20s RoEs but has been slightly volatile owing to capex for new facilities.
The earlier structure of some brands owned by other group entities and related party transactions have been addressed.
The company has no stated dividend policy, however based on the past track record the average dividend payout has been in the range of high single digits to low double digits.
The long growth runway is obvious given the highly fragmented and unorganised nature of the market with limited brands in the ‘value for money’ segment.
Margin stability and cash generation
Pricing Power& Low Volatility
Healthy A&P spend
Robust cash return metrics
Predictability & Consistency
Governance concerns addressed
Dividend Policy
Long Runway for Growth
Mr. Ramesh Kumar Dua, the promoter & MD and Mr. Mukand Lal Dua, the promoter & Director, manage the day to day affairs of the company. Both of them have 4+ decades experience in the footwear industry. Mr. Nikhil Dua has an experience of more than 15 years in the footwear sector.
Management Team & Governance Grid
Pricing power in a highly fragmented and competitive space is reflected in the company’s per unit realization growing at a CAGR of ~12% over the last ten years beating the inflation rate significantly led by premiumization and consistent annual price hikes. The company’s strategy to be a wholesale led model realizing the capital intensity of a retail model is possibly its biggest strength.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Earlier concerns addressed completely.
None
Management continuity Alignment of interest
Well planned. Earlier concerns on brands
owned by group entities addressed
Page 15
La Opala RG (LOG)
The management was ahead of MNC competition in sensing the opportunity in the space to create a niche.
Though initially aided by Anti-Dumping Duty (FY11-16), LOG did a phenomenal job to graduate from a product to a strong brand. Focusing on the right pillars – Brand, Distribution and Systems, LOG created an enviable position in the Indian opalware market.
Pioneer in the emerging organized opalware space in the country, having single handedly grown the category to ~$100mn. First mover advantage is a strength in taking on competition from MNCs & regional unorganised players to be the market leader.
LOG embarked upon a capex of Rs. ~400mn in FY07-08 when their reported PAT was just Rs.~44mn, this speaks volume about their confidence on the category’s growth potential, brand’s strength and company’s execution capability.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Operating margins, cash generation (as a % of sales) and CROCI are among the most robust in the consumer space with a 5 year average of ~30%, 23% and ~22% respectively.
The company has demonstrated a consistent growth profile with topline and earnings growth CAGR at ~18% & ~34% respectively over the past 5 years.
Selling price per kg of output is Rs.~139 whereas the raw material per kg of input is Rs.~42 indicative of the huge value creation and pricing power and huge gross margins of 70%.
The company spends low to mid teens % of revenues for both advertising and promotions making it one of the highest such spends in the consumer space.
Reinvestment in the business has reduced dividend payout to~20% of its profits though the company used to distribute more generously years back.
Trailing five years average ROE at ~30% and ROCE at ~26%.
La Opala’s core net working capital days have improved from 124 days in FY12 to 87 days in FY17 primarily led by lower inventory holding.
The space is nascent with little competition in the organised space, rising aspiration/ life style spend, increasing use of microwave ovens and falling stainless steel usage.
Stellar profitability and return metrics
Value creation
Brand awareness
Reinvestment
Earnings Consistency
Healthy Capital efficiency
Consistent improvement in working capital
Long Runway for Growth
The company is managed by the father-son duo of Mr. Sushil Jhunjhunwala and Mr. Ajit Jhunjunwala. The former was the founder and has 40 years experience in the space. The latter runs the business operations as the JMD.
Management Team & Governance Grid
The dual strategy of premiumization and low operating costs ensured that the company’s operating margins doubled over the last 7-8 years. We note that the company commands the highest margins in the sector. The company has been consistent in its strategy focusing on its core brands and not investing too much on product/brand extensions.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Nothing material Negligible
Management continuity Alignment of interest
Though professionally managed at various levels, expect centralization
of power with founding family. No visible conflict
Page 16
HDFC Bank (HDFCB)
Despite being the market leader across multiple segments, the bank has not faced any major asset quality challenges. This is evident from the FY08 - 09 unsecured retail loans blowout, when the bank came out unscathed; also visible in the current corporate asset quality cycle where the bank has held on to its lofty asset quality standards despite being present in the same operating environment.
They grabbing market share when the incumbents exited the retail lending space was an example of conviction led growth strategy.
The management has found the right mix of aggression, caution and risk pricing within the bank and prizes itself on being proactive, rather than reactive to market conditions. Consistently the de-facto industry benchmark.
Ahead of the curve preparedness for an opportunity or minefields has been exemplary. Willing to let go unviable opportunities and treading a path vacated by competition has been its hallmark.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Despite having ~1/4th SBI’s branch reach, HDFCB is the market leader in new age channels – Mobile banking, RTGS, NEFT and credit cards.
Steady high margins in a narrow band across interest rate cycles & changing regulatory requirements, led by optimal asset mix, no liability-asset mismatch and low cost deposits.
Over 10 years, the loan book and earnings have grown at a CAGR of 27% and 28% resp. It has been adding 70-80bps every year market share among banks to reach 7.1% now.
Except FY09, NPA additions have been less than 2% of assets. Retail delinquencies remain best in class, while low concentration of wholesale borrowers prevents chunky NPAs.
10 year average CASA is 48% with retail liabilities constituting 75% of total liabilities.
10 year average RoRWA at 2.3% and Risk adjusted margins at 2.9% are the highest among banks
High capital efficiency aided by best in class return metrics and low capital consumption. HDFCB is expected to maintain an RoA of ~1.9% & RoE of ~19% over FY17-21E
The Bank has got the optimal growth-profitability-asset quality-capital efficiency equation for 2 decades, which has created shareholder value of >25% CAGR returns since IPO.
Delivery channels
High growth
Healthy Asset Quality
Stable Liability Franchise
Earnings consistency
Risk pricing
Capital Efficiencies
Demonstrated track record
Mr. Aditya Puri has been the MD & CEO since inception. Mr. Paresh Sukthankar, Depy MD, Mr. Kaizad Bharucha, ED – Wholesale banking and Mr. Sashidhar Jagdishan, CFO have been in the bank for 2+ decades.
Multiple exits at the senior management level over the years has not caused disruption.
Management Team & Governance Grid
The Bank’s strength emanates from its CASA franchise, which leads to low cost of funds and as a result, a high quality asset book.
HDFCB’s market leadership in retail credit, counter cyclical approach to large corporate loans, leadership in non-branch transaction channels, deep entrenchment in systemic CA & SA verticals, productivity uptick, granular fee income streams, proactive accounting (in view of IND-AS implementation) place the bank in an exalted orbit.
Business Model Strengths
Related Party Transactions Frequency of changes in
accounting policy & auditors
The bank distributes home loans for HDFC Ltd. in return for a fee and
can buy back 70% of such loans.
in line with regulatory requirements.
Management Continuity Alignment of interest
The bank will see a CEO change for the first time in CY20. Succession
planning should see the replacement by Sep/Oct-19.
A well incentivized ESOP scheme ensures alignment of interests of
Promoters, management, employees & shareholders
Page 17
Kotak Mahindra Bank (KMB)
Ability to pull back when risk-reward does not make sense, irrespective of competition. For instance, the bank, sensing issues with the corporate loans back in FY14 ran down the corporate book by 14% in a single quarter, resulting in sub-par loan growth of 9% in that year.
On the other hand, currently, sensing opportunity, we are seeing the bank aggressive in the debt resolution space.
Strong credit culture & management’s single minded focus on asset quality ensures earnings sustainability - while the bank could go through phases of low growth, earnings/ RoA volatility should be limited. A genuine ’sleep well’ bank for investors.
Stability and longevity of the high quality leadership team for 2+ decades - something even HDFC Bank has not had. Ability to integrate ING Vysya Bank - a complex bank with an ‘oil-water mix’ of old generation-MNC bank employee base.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Carefully scoped and integrated acquisition opportunities acquired at the right price – a rarity in today’s market also sets the management apart.
Over 10 years, demonstrated predictable and consistent growth profile. The loan book and earnings have grown at a CAGR of 27% and 31% resp.
Improving margins across rate cycles, led by shift to higher yielding loan mix, with low volatility, led by high fixed rate vehicle finance book.
Healthy asset quality, 10 year average slippage of 2.1%, negligible assets under various dispensations and high provision coverage.
Average CASA has improved sharply to 48% with retail liabilities constituting 65% of total liabilities.
10 year average RoRWA at 2.2% and Risk adjusted margins at 2.85% are among the best in class – close second only to HDFC Bank.
Though RoAs have been healthy and improving post the ING Vysya Bank merger to close to 1.7%, RoE has been subdued to low leverage, which should get addressed over the years.
Strong track record of healthy return ratios & clean governance history has created substantial shareholder value of >30% CAGR returns since inception.
Integrate acquisitions
Low Volatility
Healthy Asset Quality
Stable Liability Franchise
Earnings Consistency
Risk Pricing
Capital Efficiencies
Demonstrated track record
Mr. Uday Kotak is the Executive VC & MD. Mr. Dipak Gupta, JMD is in charge of group treasury, wealth management & the ARC businesses, with supervision on the alternative investments business. Executive board comprising different business heads drives
group strategy and the overall operations.
Management Team & Governance Grid
Consistency in strategies – has remained true to its target segments of HNIs, capital markets & vehicle finance since inception without fiddling with the core business model. Has come out relatively successful in the worst of asset quality cycles.
Presence of banking, securities, capital markets, insurance & asset management subsidiaries provide an entire gamut of services to the customer making it a sticky and repeatedly engaging relationship.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Negligible in line with regulatory
requirements.
Management continuity Alignment of interest
MD is currently 58 years of age and can possibly continue for a decade
more.
Mr. Uday Kotak owning 30% stake in the bank and a well incentivized ESOP scheme
ensures alignment of interest.
Page 18
Sundaram Finance (SUF)
Demonstrated outperformance across cycles over decades; In our professional engagement, we have seen SUF emerge unscathed from the down cycles seen in late 90s, 2008-09 and 2012-13, when their competition had multiple casualties.
We have seen the management prepare for challenges a year ahead. Willingness to say no during periods of mispricing & over zealousness by competition is a trait few possess.
Overwhelming emphasis on asset quality over growth at all times. Despite conservatism in growing the book, the growth rate for the company has been on par with the industry growth rate.
Knowledge of the market place is unmatched led by the group’s positioning as an automobile manufacturer, OEM supplier across industry segments and as a financier. A seasoned management team which has seen multiple cycles.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Consistent earnings profile as demonstrated by >2% RoA since FY10, despite being present in a cyclical industry.
Client repeatability at 60% is the best in class vs. peers’ 10%-30% reducing origination costs. New customer acquisition is reference-led by existing customers with implicit guarantees.
A 10 year average of 2.5% operating costs + credit costs as a % of assets is ~100bps lower than the nearest competitor.
Although SUF’s NIMs appear lower than peers, risk adjusted NIM at 6% is best in class.
Transition to 90 days of NPA recognition in FY16, two years ahead of competition, inspite of which GNPA came in at 2% .
At 7.9%, SUF commands one of the lowest cost of funds among peers. 85% rollover rates in retail deposits – one of the highest in the industry.
Prudent capital allocation. Investments have paid back the capital invested in them in the form of healthy dividends; Listing of SFIL is expected to further unlock shareholder value
Scale in passenger vehicle financing, home finance, insurance, asset management and business services serve as counter cyclical shock absorbers for growth and profitability.
Earnings consistency
Low business costs
Superior risk adjusted NIMs
Preparedness for challenges
Enviable repeat customers
AAA rating; Funding cost advantage
Capital Efficiencies
Counter-cyclical engines
Uniquely in the financials domain, SUF has a track record of not having raised any capital in the last four decades consistently growing through internal accruals and creating shareholder value through the creation of multiple new businesses. Repeat customers is SUF’s secret sauce leading to low operating and credit costs, which helps SUF source liabilities at AAA pricing and
attract/ retain the best customers, creating a virtuous loop.
Business Model Strengths
Mr. TT Srinivasaraghavan has been the Managing Director of the company since 2004. Mr. Harsha Viji is the Depy MD. Mr. M Ramaswamy, the current CFO of the company has been in this position since FY12. Mr. AN Raju is the Director (Operations). Governance track record is blemishless.
Management Team & Governance Grid
Related Party Transaction Frequency of changes in
accounting policy & auditors
Negligible Brahmayya & Co. have been auditors of SUF for 25+ years
Management continuity Alignment of interest
3 out of the 12 directors on the Board and most members of top 2
tiers of the management team have 20+ years experience in SUF
Though reclusive, the promoters’ & managements’ skin in the
business and ownership is clear
Page 19
City Union Bank (CUB)
Unlike peers who ventured into consortium based large corporate lending during FY07-12, CUBK’s management stayed away from that segment sensing the potential risks, at the cost of a lower growth trajectory compared to peers. That strategy ensured that when the asset quality issues came to the fore for the peer banks, CUBK remained unscathed throughout.
Firm No to ‘Pan India aspirations’, micro finance opportunities and unsecured retail loans insulated the bank from others’ mistakes.
Strategies built around core competence and awareness of its limitations irrespective of competitors’ strategies and market’s temporary preferences.
Clarity of thought, consistency of communication and understanding of long term investors’ mind-set brings comfort.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Well distributed asset book with average SME client exposure (67% of loan book) at ~Rs. 3mn and corporate book (7% of loan book) at Rs. 35mn.
Demonstrated predictable and consistent earnings growth of >20% CAGR over the past ten years, highest among relevant peers.
One of the least volatile RoA profiles in the industry. Last 10 year highest and lowest RoA at 1.7% and 1.45% respectively.
10 year peak slippage at <3% and average slippage at 2.0%, negligible restructured assets of 0.1% currently (lowest in the peer group).
Sticky retail term deposit customer base with 95% renewal, low dependence on wholesale deposits at just ~5% of liabilities and negligible asset-liability mismatch.
Robust and sustainable >3.7% NIMs given adequate pricing power with its loyal SME customer base and stable retail liabilities.
High 18%+ sustainable RoEs. Highest RoRWA of 2.3%, highest in the industry.
CUB’s market share in TN state (63% of loan book) is still 2.3% offering huge growth opportunity in its own backyard, apart from growth opportunities in contiguous states.
Granular Loan Book
Low Volatility
Healthy Asset Quality
Stable Liability Franchise
Earnings Consistency
Pricing Power
Capital Efficiencies
Long Runway for Growth
Dr. N Kamakodi, the current MD & CEO, first joined the bank as DGM in 2003, and rose through the ranks to eventually take charge of the bank in May, 2011. Six years back, the bank had identified third tier
management team who are graduating to second tier adding depth.
Management Team & Governance Grid
Collateralized lending opportunity to small & medium sized businesses is structurally sound, relationships are sticky over a long term and relatively lower competition offers adequate pricing power especially with PSU banks vacating the space. Being sole banker for most customers an added advantage, in terms of determining customer behaviour, early detection of cash flow
constraints and first right on collateral in stress situations.
Business Model Strengths
Related Party Transactions Frequency of changes in
accounting policy & auditors
Negligible in line with regulatory
requirements..
Management Continuity Alignment of interest
CEO is 44 years old with a long likely tenor. His father, Mr,
Narayanan was MD of the bank from 1981-2004.
Board managed. No promoters. Management has no other
related or unrelated businesses.
Page 20
Shree Cement (Shree)
Calibrated and prudent expansion plans over the years de-risk from its single region dependency in North in FY13 to East where volumes were at 20% in FY17 which has further potential to increase post the current round of expansion
Unchanging core principles on targeting higher than industry growth; cashflow precedence approach over margin leading to 13% volume CAGR in FY12-17 v/s 6-7% industry growth
Ahead of the curve preparedness has been laudable with long term track record of delivering better than industry growth led by gradual and steady low cost organic expansions. Willing to let go unviable high cost inorganic opportunities.
Consistent focus on cost leadership and pioneering the cost saving initiatives like adoption of pet coke, split grinding units and waste heat recovery plants.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Open wagon transportation, usage of synthetic gypsum, automated fuel management system, kiln productivity improvement, wet pet-coke usage keep cost under check
Less volatile with average post tax OCF margins at 27%/25% over the last 10/5 year time frame respectively Pre-tax OCF/EBITDA conversion at ~99% between FY08-17 indicates credible working capital management practices
10 year average CROCI at ~65% in FY17 is distantly better than its peer group
Consistent FCF generation each year in the last 10 years irrespective of capex plans
Cost leadership invariably pips out competition; Focus on top 3 positioning in volumes with strong regional barriers offers adequate pricing advantages
Average RoEs of 26% between FY08-17; Average RoCE at 20% both in 5/10 year timeframe despite adverse cyclicality in the last five years
Consistency in clocking double digit volume growth each year in 9 out of the last 10 years
Granular approach = cost efficiency
Cash conversion
CROCI
FCF generation
Cash generation volatility
Pricing Power
Capital Efficiencies
Growth Consistency
Currently managed by Promoters Mr. H.M Bangur (Managing director) and his son Mr. Prashant Bangur (Joint Managing director)
Stable middle management professionals who have been with the company since 2000
Management Team & Governance Grid
Shree’s strength manifests from its low cost gross block per tonne which leads to low cost of operations and as a result, a high quality earnings profile
Well-entrenched relationship to optimize trade: non-trade mix in a relentless manner
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Negligible transactions with related parties
No change of auditors since 2011
Management continuity Alignment of interest
Prashant, JMD is 36 years old with a long likely tenor. Already gathered
12 years of experience in Shree
65% promoter holding. No related /unrelated businesses
ensures alignment of shareholder interest
Page 21
Ramco Cements (Ramco)
With profit-sensitive cement prices being an uncontrollable aspect, Ramco’s de-risk strategies from South centric operations by expanding aggressively in the Eastern markets has paid-off in the last five years.
Ramco bucked the trend with ~20-25% of current volumes contributed by East despite fickle demand scenario in South since FY11 Notably, profitability has not been compromised in the process of expanding reach.
Riding more on micro variables than macro sets the management apart from its peers. Ability to act dynamic across all critical business parameters (product/distribution/geography/costing). Seasoned leadership team has seen multiple business cycles.
Consistent focus on profitable growth is rigorously followed which is a benchmark to its peers. Clinical capacity expansions via organic route with leverage followed by de-leveraging out of cash accruals. Willing to let go unviable high cost M&A opportunities.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Real time tracking from tracking limestone mining to dispatches, Kiln productivity, ability to switch between captive and renew-power, usage of multi-modal logistics
Track record of 5/10 year average EBITDA/t of over Rs. 1000/t is commendable considering cyclical nature of business Pre-tax OCF/EBITDA conversion at ~100% between FY08-17 indicates strong working capital management practices 10 year average CROCI at ~20% when majority of the time has been impacted by weak market demand
Capacity utilisations at ~55% provides enough head-room to grow with strong operating leverage; Cost optimising split grinding investments enhances market presence
Cost leadership with top 3 positioning in markets it operates with strong regional barriers offers adequate pricing advantages over its peers
Average RoEs of 26% between FY08-17; Average RoCE at 20% both in 5/10 year timeframe despite adverse cyclicality in the last five years
Medium consistency in growth parameters; 7 out of the past 10 years volumes grew with four years of strong double high-digit volume growth
Granular approach to business = cost efficiency
Cashflow conversion
CROCI
Strong headroom to growth
Lesser volatility in earnings
Pricing Power
Capital Efficiencies
Growth Consistency
Currently managed by a professional CEO Mr. A.V.Dharmakrishnan who has over three decades of experience with the company
Already identified strong second tier management team with over two decades of experience who are graduating and adding depth to the team
Management Team & Governance Grid
Ramco’s strength stems from its continuous investments in augmenting the plant infrastructure (critical to manage both fuel & freight costs) which in-turn leads to competitive cost advantage and as a result, a superior and consistent earnings profile
Strong relationship to optimize trade: non-trade mix; Vertical approach with strong brand recall & distribution strength by being relevant in a market than a sheer presence
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors Negligible. Management has
reversed the RP transactions in the past to protect shareholders
interest
Same auditors for many years
Management continuity Alignment of interest
Post recent demise of Mr. P. R. Ramasubrahmaneya Rajha in FY17,
Mr. P.R.Venketrama Raja was appointed as the MD. No issue in
management continuity
43% promoter holding; the promoters’ & managements’ skin in the business and ownership is
clear; Group’s largest market capitalisation and asset–base
Page 22
AIA Engineering (AIA)
Even during weaker commodity cycle between FY13-FY15, focus was to increase their market share in the mining segment where the presence was meager. This helped them buck the trend with average revenue growth of ~15% in an otherwise flat market growth
Despite presenting a larger opportunity in an oligopolistic market, capacity additions were in a calibrated manner in the past decade to match with volume visibility
Persistence and vision to offer total cost of ownership solutions model than selling products in a highly competitive export market is commendable where very few Indian engineering companies have demonstrated consistent success vis-a-vis global competition
Steady and disciplined strategy of single manufacturing location v/s capacity near to the customer approach of its competition. Sticking to organic growth approach irrespective of commodity cycle shows prudent capital allocation decision
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Low cost advantages with strong balance sheet provides strong headroom to growth given that current mining volumes are still at <5% of the overall 3mn MT grinding media market
Demonstrated consistent earnings CAGR >14%/20% over the past ten/five years respectively Average ten/five year operating margins were stable in the range of 24-25%; Operating margins have shown signs of volatility in the past. High/low range of 29%/18%
Pre-tax OCF/EBITDA conversion at ~84% between FY08-17 indicates strong working capital management practices
Consistent FCF generation in the last 7 out of 10 years; 65% conversion from total OCF generation between FY13-17
Offering solution than products, manufacturing facility at low cost region (Gujarat) and sticky relationship with customers helps pricing the products better
Average RoEs of 20% and pre-tax RoCE of 26% between FY08-17 is superior among its peers
Recent order-win from Barrick, world’s largest gold miner indicates that established companies are entrusting AIA’s capabilities; Capacity utilisation at 55% provides visibility
Low cost advantage
Earnings Volatility
Superior cash conversion
FCF consistency
Earnings Consistency
Pricing Power
Capital Efficiencies
Strong pipeline with low capacity utilisation
Mr. Bhadresh Shah, Promoter & MD along with his team possesses more than four decades of experience in the manufacturing and design of various kinds of value added, impact, abrasion and corrosion resistant high chrome castings.
Management Team & Governance Grid
Core competency of knowledge of end application, metallurgy and design are its key strengths. This combination forms the bedrock which helps customers reduce wear and tear and operational costs. Team of engineers and metallurgists are best-in-craft.
Significant cost advantages over Magotteaux while the product and service quality is at par with Magotteaux, should likely to benefit both market share gains and an overall increase in opportunity size
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Negligible transactions with related parties
No auditor change since 2011
Management continuity Alignment of interest
Mr. Kunal Shah, ED is 40 years old with a long likely tenor. His uncle,
Mr. Bhadresh Shah is the Managing Director
62% promoter holding. No related/unrelated businesses.
Page 23
PI Industries (PI)
Senior management not resting on laurels from the successful CRAMs business is further scaling up its R&D capabilities -doubled its R&D investments (~13% of workforce; currently 8% of gross block) to tap growing opportunities in both CRAMS and domestic market
In domestic segment, while pricing did materially decline in the past two years due to end of marketing exclusivity in some of its key products – Management’s efforts to aggressively reduce sourcing costs helped it to remain largely margin neutral
Credible track record of building a unique business model with >50% of revenues from niche CRAMS business (very few such entities globally) and has considerably de-risked from relying solely on volatile domestic agrochemical industry
Critically in both these businesses (CRAMS and domestic Agchem) PI’s management has/and is building its forte in patented and high efficacy molecules vs generic oriented approach of its competitors;
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Capex in the past 5 years have largely been on the CRAMS (exports) and R&D (2x size expansion). Most of the CRAMS investments are backed by order book giving predictability.
Gross margins have improved from ~42% during FY12-15 to 47-49% during FY16/17 (+600bps); while EBITDA margins have improved 400bps during the same period to >20% Pre-tax OCF/EBITDA conversion at >90% between FY12-17 indicates strong working capital management practices
10 year average CROCI at ~24% indicates prudent capital allocation
CRAMS revenues could double in 3-4 years and high potential launches in domestic segment could lead to 10-15% CAGR growth over the medium term (though back ended)
CRAMS command superior margin profile (20-25% ROCE); Domestic segment lifecycle product margins are relatively better vs peers due to high efficacy molecules and branding
Average RoEs of 30% between FY12-17; Average RoCE at 26% over the same time frame
High consistency in both revenue & EBITDA growth; Double digit revenue growth consistently in the past 5 years while EBITDA grew >25% in the past 5 years
Measured aggression
Cashflow conversion
CROCI
Strong headroom to growth
Volatility in earnings
Pricing Power
Capital Efficiencies
Growth Consistency
Mr. Mayank Singhal, MD & CEO since 2009 has >20 years of experience in the field of chemicals and intermediates and has transformed PI into a science-led company with focus on technical brilliance in all initiatives.
Experienced senior/middle management team in place with decades of relevant sector knowledge
Management Team & Governance Grid
Relatively better predictable business model vs peers due to its integrated business approach of R&D led CRAMS (export) and domestic agrochemical market (majorly in-licensed Patented products). CRAMS business offsets the volatility in domestic agrochemical segment and newer R&D efforts improve potential for new product launches
Best in class R& D skills - a trait visible in new launches as affirmed by competitors.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Negligible Same auditors for more than 7
years
Management continuity Alignment of interest
CEO is in mid-forties with a long likely tenor. His father, Mr. Salil Singhal was MD until 2009. No management continuity issues
Promoter group has no related/unrelated businesses.
Full alignment to the interest of shareholders
Page 24
V-Guard (VGRD)
Reduced the business seasonality by continuous launch of new products over the last 7 years which caters to both summer and winter seasons; VGRD clocked >25% CAGR even during weaker macro periods of FY11-FY14. due to aggressive product launches with considerable market share gains was visible in stabilizers, water heaters and fans.
Focus on geographical diversification with revenues from South currently at 65% v/s 91% in FY09
Leveraging its market leadership in voltage stabilizers, management has metamorphosed the company from a single product/single geography company to a multi product emerging pan-India player in Consumer Electrical segment
Clarity with measured growth strategies, focus of being relevant in both products/geography (top 3), consistency and transparency in communication brings comfort
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Resolve to be number one, two or a strong number three; Vacate segments where they do not occupy these positions, protecting the capital. Product level RoCE is being measured
Demonstrated consistent earnings CAGR >30%/25% over the past ten/five years respectively, highest among relevant peers
Less volatile. Average ten year operating margins of 9.5%; High/low range at 10.1%/7.6%
CROCI at ~22% in FY17 in line with its five year average implying superior and stable earnings quality and attractive cash conversion
Consistent FCF generation in the last 5 years; 72% conversion from total OCF (FY12-17)
Focus on top 3 positioning, transparency in pricing and dealer friendly initiatives provides adequate pricing power
Average RoEs of 22% between FY08-17 which is further on an improving trajectory
Higher double digit growth in 9 out of the last 10 years
Granular approach
Earnings Volatility
CROCI
FCF generation
Earnings Consistency
Pricing Power
Capital Efficiencies
Growth Consistency
Mr. Kochouseph Chittilappilly is the Chairman and Mr. Mithun Chittilappilly is the MD. Mr. Ramachandran, Professional Director & COO with loads of experience in FMCG sector is well supported by a bunch of professionals with varied background
Management Team & Governance Grid
Products catering to discretionary consumption, electrification and real estate construction amplifies diversified growth possibilities
More focus on manufacturing v/s outsourcing which can expand gross margins and safeguard against higher commodity prices
Well-entrenched distribution network with products which can funnel through modern retail, electrical and kitchen channel
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
No material transactions with related parties
No change of auditors since 2011
Management continuity Alignment of interest
Mithun, MD is 36 years old with a long likely tenor. His father, Mr.
Kochouseph is the Chairman
65% promoter holding. No subsidiaries or any related
businesses ensures alignment of shareholder interest
Page 25
Astral Poly Technik (Astral)
Ability to buck the trend with an aggressive foray into adhesives/construction chemicals segment which offsets the falling growth rates in pipes business during unsupportive macro. Overall revenues at 19% CAGR v/s pipes division at 11% CAGR between FY14-17
Demonstrated strong revenue growth trajectory despite the real estate slowdown with new product launches and consistent brand building; Continuous focus to reduce the proportion of sales from institutional clients from 70% to 50% in the last five years.
Proactive strategies and incessant focus of the management on the look out for new products especially in PVC pipes and fittings through technology absorptions/tie-ups with reputed international players
Credible and experienced senior management team with strong domain knowledge; Promoter is often attributed for introducing and spread-heading usage of CPVC pipes in India by collaborating with Lubrizol
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Capacity expansions both in pipes and adhesive business. Further sales mix change towards retail, market share gain possible due to captive compounding and foray into agri pipes
Track record of 5/10 year average EBITDA margins of 13.5% is commendable. 300bps is the range between best/worst margins Pre-tax OCF/EBITDA conversion at ~83% between FY08-17 indicates strong working capital management practices
10 year average CROCI at ~22% indicates efficient capital allocation
14% sustainable growth indicates strong self funding of future capex without leverage
Leadership in CPVC market backed by regular product launches + consistent branding + cross selling opportunities should lead to pricing power
Average RoCEs of ~20% between FY08-17
Consistent double digit revenue growth every year in the last 10 years. 30% revenue CAGR between FY08-17
Multiple growth levers
Cashflow conversion
Strong CROCI
Sustainable growth
Lesser volatility in earnings
Pricing Power
Stable capital efficiencies
Growth Consistency
Currently managed by Mr. Sandeep Engineer, MD first generation promoter with strong domain knowledge
Second generation have joined the business with clear cut responsibilities. Kairav looks after pipes and Saumya has recently started to look after adhesives segment
Management Team & Governance Grid
First mover advantage in fast-growing CPVC pipes with increased manufacturing and distribution reach. Captive CPVC compounding facilities offers both margin expansion and working capital cushion
Launching new products at regular intervals, increasing share of fittings, and efficient logistics are inherent strength. Strong brand recall (ad-spends at 3% of sales) trickling pull demand coupled with brand leveraging to strengthen its adhesives business.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
No material RP transactions Same auditors for many years
Management continuity Alignment of interest
Management continuity in place with responsibilities identified for
the second generation
58% promoter holding; the promoter family is fully involved
with no related/unrelated businesses
Page 26
KNR Constructions (KNR)
Track record of down-sizing the orderbook during adverse macro (FY12-14) in the past sets KNR apart from its peers. Orderbook declined by 60% in FY14 v/s FY12; Track record of no fund raise in an otherwise capital guzzling sector
Consistent infusion of capital to repay the debt at asset owning entities (BOT assets) to avoid default situation. Demonstrated track record to maintain/improve credit rating at all times
Strategies built around core competence and awareness of its limitations irrespective of macro economic variable changes
Geographical focus, consistent bidding strategy (cash contracts over BOT) with pricing discipline and focused execution with direct intervention from the promoters at every stage
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
South dominant geographical mix, concentrated large sized orders and focus on keeping the lead distance lower between projects
16% average operating margins over the last 10 years with 300bps of variance
Cumulative Pre-tax OCF/EBITDA at 100% between FY08-17
CROCI has improved to 32% in FY17 vs 13% (highest among the peers) over FY10-FY15 implying superior earnings quality, low investments in assets and attractive cash conversion
FCF generation in 6 out of 9 years between FY09-17 is commendable in a sector with weak business characteristics
Demonstrated better pricing discipline during bidding process across cycles
Industry leading average RoEs of 16.5% between FY08-17
Consistent execution track record during strong orderbook phase
Orderbook Quality
Strong Cash Conversion
CROCI
FCF generation consistency
Earnings Volatility
Pricing Power
Capital Efficiencies
Growth Consistency
Clear succession plan in place with Mr. Jalandhar Reddy, aged 45 years with 18 years of experience is expected to take over from his father as MD in future
Sticky core bidding and project execution team with over decades of experience gathered in KNR
Management Team & Governance Grid
Commitment and consistency in strategy, prefer to remain as a main contractor along with strong balance-sheet are key strengths.
Good relationship and reputation of strong execution have enabled them to be more aware of project risks ahead (evident from negligible % of slow-moving orders and consistent EBITDA margins and the resultant cashflow conversion)
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
No material transactions which could have potential conflict with
the company's interest
No change in auditors for more than 7 years.
Management continuity Alignment of interest
ED is 45 years old with a long likely tenor. His father, Mr. Narasimha Reddy is the MD since inception
No conflict; 56% promoter holding. Promoter group has no
other related or unrelated businesses.
Page 27
Tata Consultancy Services (TCS)
Despite its growing size, TCS used the high growth phase of FY10-14 to make the organisation more nimble and this helped it open newer markets like Japan and Scandinavian countries to outpace peers.
During the period of weak macro, TCS readjusts its pricing policies to gain market share and grow faster than the industry. The strong focus on sales and lower cost of delivery helps TCS grow faster than Indian peers.
Senior management continuity and longevity is the key reason TCS has managed the transitions of the past two decades better than most others in the industry. The company has had only 3 CEOs over the past 25 years.
TCS has largely been consistent in delivering its strategy of growing faster than the industry due to its scale and pushing high value services wherever possible.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
TCS bridged the 5% differential in EBITDA margins to Infosys in FY10 with higher revenue growth and then utilized its size and scale to reduce the total cost of ownership for clients
Barring FY15 and FY16, when the industry realigned itself to the lower growth and it Insurance (Deligenta) and retail offering, TCS performance has largely been predictable
TCS’ EBITDA margins of 27% has remained stable over the last 10 years despite employee growth being faster than revenue growth due to lower costs and low attrition.
The largest spender on IT is the BFSI sector and the fastest growing amongst services is IMS. TCS has the largest practice in BFSI and now has overtaken HCLT in IMS segment as well
The average cash return on the capital invested during the last 10 years is a robust 37%. TCS continues to convert almost 100% of its EBITDA into pre tax operating cash flow.
TCS has increased its dividend payout from 26% in FY07 to 35% in FY17. A buyback in FY18 and if followed on a consistent basis can improve ROCE over the next five years
TCS generates 75% of the profitability of Tata Group which is then used by the group to fund its investments in other sectors, providing alignment of interest.
The addressable IT offshore services opportunity for TCS is ~US$1 trillion, and the market share of TCS (India IT export revenues) 15.2% in FY17, indicative of further room for growth.
Beneficiary of scale
Margin stability and cash generation
Clear focus on high growth vertical and horizontal
Cash return metrics
Predictability & Consistency
Dividend payout
Capital Efficiencies
Growth runway
Mr. N. Chandrasekaran, Chairman of the Board of Tata Sons was the CEO of TCS from FY07-17. Mr. Rajesh Gopinathan, is the CEO. He has been with TCS for close to two decades now. Mr. Ganapathy Subramaniam is the COO and Mr. V Ramakrishnan is the CFO. All 3 took their respective roles from February 2017.
Management Team & Governance Grid
TCS has the largest digital practice amongst the Indian vendors and its decision to reskill 25-30% of its workforce should enable it to compete with larger MNC vendors going forward. Although there is no pricing power in the business due to commoditized service offerings, the adoption of outsourcing increases in a
downturn and TCS given its scale and accommodative pricing policies grows faster than the industry.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Negligible Consistent
Management continuity Alignment of interest
Clear now Well aligned
Page 28
Info Edge
Demonstrated track record to drive earnings during weak macro between FY08-10 & FY12-14 by realignment of A&P spend
Vigorous investments in search algorithms to weather the competition
Maintaining leadership positioning in 99acres despite momentarily stiff competition from Housing.com and Commonfloor in 2014/15
`
Deep domain knowledge of the management team with consistent innovation in the product profile within its core business, Recruitment Services has bolstered to garner ~75% traffic market share
Proactive and measured capital allocation decisions in now profitable Zomato and Policy Bazaar
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Info Edge commands 75% traffic market share in recruitment portal and 55% in real estate portal and has leadership position in food ordering and in growing insurance aggregation
Consistent improvement in operating margins of core business in last 10 years from 36% to 55%. YoY contraction in margins has been contained at under 2% over last 10 years Pre-tax OCF/EBITDA conversion at ~106% between FY08-17 indicates strong working capital management practices
10 year average CROCI at ~20% indicates prudent capital allocation
The offline to online shift is a structural change in customer behaviour.
Over the last 10 years the pricing growth has contributed to 40% of the overall revenue growth. Its revenues has grown by 19% CAGR over last 10 years but the price per unique customer has increased at 85% CAGR.
Average RoEs of 17% between FY08-17 despite investments in Zomato, 99acres, Policy Bazaar and Jeevansathi
High consistency in growth parameters; 7 out of the past 10 years reported strong growth
Unique positioning
Cashflow conversion
CROCI
Growth drivers
Lesser volatility in earnings
Pricing Power
Capital Efficiencies
Growth Consistency
Mr. Sanjeev Bikhchandani, Founder Promoter & Executive Vice Chairman is currently leading the company.
Core management team has been with the company for more than 15 years.
Strong middle management team in place with extensive experience.
Management Team & Governance Grid
Revenue growth from its core recruitment business is the factor of GDP growth thus bringing in predictability in revenues and cash flows. Strong operating leverage in the business with any incremental growth over 15% in recruitment services is a complete flow through to the operating margins.
99acres, Zomato and Policy Bazaar are leaders in their respective segment with challengers lagging far behind
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Negligible Same auditors for more than 7
years
Management continuity Alignment of interest
Founder promoter is 54 years old with a long likely tenor. No challenges in management
continuity
Founding management team owns 42%; No related/unrelated
businesses
Page 29
Cyient
The core change in Cyient came in after Krishna Bodanapu was elevated to the position of CEO and MD in April 2014 and with that came in management’s focus on receivables management, FCF generation and profitability improvement as a part of the senior leadership’s KRAs. This resulted in consistency and predictability in performance vis-à-vis peers.
Another area where Cyient clearly scores over its peers is the longevity of its middle management.
Cyient has managed to outpace the Engineering services industry over the past 3-4 years due to measures taken by the management in focusing on top 50 accounts, putting in place a list of 600 “must have” accounts that spend heavily on R&D and incentivizing sales force by offering 3x commission in converting such names.
Clear focus on the niche engineering services opportunity; exited a small IT services company in 2016.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Transportation practice of $250m; telecom and hitech practice of $150m and industrial product practice of $150m drive client referencibility
Growth in its top 10 and top 20 accounts since FY14 has been 16% and 15% respectively, and the company has converted ~4-5% of the 600 high focus target accounts.
Over the last 10 years, Cyient’s revenues has grown by 16% CAGR while the headcount has grown by 10% CAGR indicating strong improvement in employee productivity.
In last 5 years, EBITDA margins have declined by 2.5% vs. ~7% decline for peers, DSOs decreased by 12 days and pre-tax OCF/EBITDA improved from 72% in FY13 to 107% in FY17.
The average cash return on the capital invested during the last 5 years stood at 39%, and has moved from 34% in FY13 to 41% in FY17
Cyient’s stated dividend policy is to pay upto 40% of consolidated profits as dividend and it currently pays 30% of its profits as dividend which has risen from 5% 10 years back.
Its ROE has doubled from 9.5% in FY07 to 18.5% in FY17 due to improvement in asset turnover.
The addressable E,R&D offshore services opportunity for Cyient is US$ 22bn, out of which Cyient’s market share is 2.4%, reflecting its long runway available for growth.
Referencibility and Productivity
Improving employee productivity
Margin stability and cash generation
Cash return metrics
Predictability & Consistency
Growing dividends
Capital Efficiencies
Growth runway
Mr. Krishna Bodanapu was elevated to the position of CEO and MD in April 2014. Mr. Ajay Aggarwal joined Cyient as the CFO in March 2011. Before joining Cyient, he was Chief Corporate Controller with Tata Chemicals. Mr. Anand Parameshwaran heads the Aerospace and Defense business unit, Cyient’s largest vertical.
Management Team & Governance Grid
In order to tap a higher proportion of clients R&D spending, Cyient has successfully broaden its offerings from services to solutions to manufacturing. With engineering services, Cyient was tapping only 10-15% of the client spending which was in upfront design. But with Solutions and Design Led Manufacturing, it is now able to tap incremental 40-50% of the client spending. Engineering services have higher entry and exit barriers given the longer sales cycles and the complex nature of services.
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Negligible Consistent
Management continuity Alignment of interest
Visibility for next 10 years Well aligned
Page 30
Cadila Healthcare (Cadilla)
Direct intervention by the promoters helping relatively (vs. peers) better navigation of an extremely challenging phase in the US. While peers go through a phase of erosion in their US sales and profitability, Cadila bucking the trend on the back of compliant facilities and strong approvals
After a weak approval phase, management prioritized addressing deficiencies in ANDA filings, which has led to the current phase of complex generic approvals. These approvals include highly complex products such as gLialda, gAsacol HD and gTamiflu suspension
Investments in areas such as transdermals, vaccines, biosimilars, NCEs, animal health and Wellness several years back were clearly out-of-the-box capital allocation decisions. While the upsides from some of these investments are yet to play out, these investments should add significant diversity and resilience to revenues in the next 5 years
Following multiple compliance issues in FY12-FY15, management focused on improving the quality culture at the company, leading to the current clean compliance status at all facilities
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
In a unique position to reap benefits from high R&D investments in complex generic segments such as injectables, derma, modified-release orals and transdermals
Improvement in margins – currently at 20-22% vs. ~17% in FY13/FY14. Margin volatility in the past due to inherent lumpy nature of high-value product opportunities in the US Pre-tax OCF/EBITDA conversion at ~80% between FY09-17 indicates strong working capital management practices
10 year average CROCI at ~17% indicates prudent capital allocation
Strong growth from its investments such as transdermals, vaccines, biosimilars and NCEs should add significant diversity and resilience to Cadila’s business in the next 5 years
Optimal mix between branded (B2C) and unbranded (B2B) generics. While pricing power is limited in unbranded generics, reasonable pricing power in branded generic markets such as India (including Zydus Wellness business) and other emerging markets
Average RoEs of 31% between FY08-17; Average RoCE at ~18%/~21% in 5/10 year timeframe
Volatility in growth in the past partly due to compliance issues and weak pipeline execution. Both issues now behind and more consistency in growth expected going forward
Unique positioning
Cashflow conversion
CROCI
Growth levers
Lesser volatility in earnings
Pricing Power
Capital Efficiencies
Growth Consistency
Mr. Pankaj Patel is the Chairman. Mr. Sharvil Patel, the MD, joined the company a decade back. He had spearheaded several key projects before his recent elevation
The promoter leadership is supported by an experienced senior and middle management team
Management Team & Governance Grid
Optimal mix between branded and unbranded generic markets. In unbranded generics (mainly US), Cadila has attempted to reduce volatility in performance through investments in complex generic segments such as injectables, derma, modified-release orals and transdermals. The gross margin profile (~65%) over the years validates the margin stability provided by optimal geographic and business mix
Invested heavily in capacities in recent years (annual capex of ~Rs. 10bn including acquisitions) to augment its positioning. Cadila’s strong FCF profile has helped maintain a strong balance sheet (FY18E net debt/equity of 0.4), despite the heavy investment phase
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Negligible Same auditors for more than 5
years
Management continuity Alignment of interest
Sharvil Patel, MD who is aged 38 years is in for long likely tenor. His
father Pankaj Patel mentors the company in his role as chairman
Promoter ownership at 74%; No related businesses.
Page 31
Torrent Pharmaceuticals (Torrent)
Transformational M&A and capex decisions. Acquisitions of Heumann in 2005, Elder in 2014, Unichem in 2017 and the huge capacity addition at Dahej are examples. Strong execution on integration and deleveraging of balance sheet have always followed large transformational acquisitions.
Rs. 36bn acquisition of Unichem’s domestic business - given Torrent’s limitations in R&D and challenges in the US generic market, we believe Torrent’s decision to allocate more resources to its domestic business is a prudent one.
Over the years, Torrent management has offset the company’s limitations in R&D through 1) strong execution on product opportunities 2) transformational M&As 3) disciplined selection of therapies and markets
Willingness to say NO to high cost M&As. Torrent was actively pursuing M&A opportunities in the US in FY14-FY17, to compensate for its weak pipeline. However, unlike its peers, Torrent walked away from many transactions citing unreasonable valuations, now totally vindicated.
Why we like the
Management?
Where were they ahead of
competition in managing an
adverse environment?
Higher exposure to branded generic markets such as India and Brazil makes it more diversified and less volatile vs. other Indian pharma peers
Consistent improvement in EBITDA margin – ~500bps in the past 5 years (excluding FY16 at ~40% EBITDA margin, which benefited from limited competition opportunity, gAbilify, in the US) Pre-tax OCF/EBITDA conversion at ~91% between FY09-17 indicates strong working capital management practices
10 year average CROCI at ~49% indicates prudent capital allocation
M&A led growth in domestic market and scaling up of US business (is currently sub-scale compared to peers) by stepping up R&D spending
Optimal mix between branded (B2C) and unbranded (B2B) generics. While pricing power is limited in unbranded generics (US and Germany), reasonable pricing power in branded generic markets such as India and Brazil
Average RoEs of ~40% between FY08-17; Average RoCE at ~27%/~27% both in 5/10 year timeframe
High consistency in revenue and earnings growth rates; reported strong revenue growth (>15%) in 8 out of the past 10 years
Unique positioning
Cashflow conversion
CROCI
Growth levers
Lesser volatility in earnings
Pricing Power
Capital Efficiencies
Growth Consistency
Promoters - Mr. Sudhir Mehta and Mr. Samir Mehta provide strategic directions, day-to-day operations are managed by its senior leadership team comprising of Mr. Ashok Modi (ED & CFO), Mr. Sanjay Gupta (ED – International Business) and Mr. Dhruv Gulati (ED – India & RoW)
Experienced middle management team is in place
Management Team & Governance Grid
Higher exposure to branded generic markets such as India and Brazil makes it more diversified and less volatile vs. other Indian pharma peers. Traditionally, the company has stayed away from low-margin, high working capital segments and markets
Strong franchises and market positions in key chronic therapy segments such as cardiac and CNS in India
Business Model Strengths
Related Party Transaction Frequency of changes in
accounting policy & auditors
Negligible Same auditors for more than 5
years
Management continuity Alignment of interest
Sudhir Mehta aged 63 & Samir Mehta aged 56 are currently
holding chairmanship position. Induction of key senior leadership
positions in recent years
High promoter holding at ~71% Enough skin for the promoter group. No related businesses while the power business is
managed separately
Page 32
Appendix – List of companies which satisfy the parameters
Consistency in revenue growth Earnings predictability Volatility in profit margins Operating Cash flow generation Quality of capex
HealthCare Global Enterprises Ltd Tata Consultancy Services Ltd Astral Poly Technik Ltd Fortis Healthcare Ltd Eicher Motors Ltd
TeamLease Services Ltd Wipro Ltd Asian Paints Ltd Just Dial Ltd Just Dial Ltd
Info Edge (India) Ltd Reliance Industries Ltd V Guard Coal India Ltd Britannia Industries Ltd
Alkem Laboratories Ltd Infosys Ltd ITC Ltd Mahindra & Mahindra Ltd Sadbhav Engineering Ltd
Cyient Limited ITC Ltd Wipro Ltd Ashok Leyland Ltd Eclerx Services Ltd
UPLL IN equity Britannia Industries Ltd Havells India Ltd Maruti Suzuki India Ltd Astral Poly Technik Ltd
Persistent Systems Ltd Marico Ltd Tata Consultancy Services Ltd Gujarat Pipavav Port Ltd Info Edge (India) Ltd
Page Industries Ltd Bajaj Auto Ltd Hindustan Unilever Ltd DFM Foods Ltd Emami Ltd
Minda Industries Page Industries Ltd Page Industries Ltd ACC Wonderla Holidays Ltd
Sun TV Sun TV Network Ltd Exide Industries Ltd JK Lakshmi Cement Ltd Shree Cement Ltd
Page 33
Appendix – List of companies which satisfy the parameters
Free cashflow generation consistency Cash return on Cash invested (CROCI) Quality of retained earnings Future growth expectations Sustainable Growth Rate (SGR)
Bajaj Corp Ltd Eicher Motors Ltd Hindustan Unilever Ltd Wonderla Holidays Ltd Hindustan Unilever Ltd
Bajaj Auto Ltd Hindustan Unilever Ltd Bajaj Corp Ltd Ashok Leyland Ltd Dish TV
Zydus Wellness Ltd Bajaj Auto Ltd Page Industries Ltd Granules Titan Company Limited
Tata Consultancy Services Ltd Emami Ltd DFM Foods Ltd Astral Poly Technik Ltd Hero Motocorp Ltd
Info Edge (India) Ltd Zydus Wellness Ltd TVS Motor Company Ltd Maruti Suzuki India Ltd Bajaj Corp Ltd
Eclerx Services Ltd Whirlpool V.I.P.Industries Ltd Page Industries Ltd Page Industries Ltd
Hindustan Unilever Ltd Dish TV Infosys Ltd Cadila Healthcare Shree Cement Ltd
HCL Technologies Ltd Maruti Suzuki India Ltd Eicher Motors Ltd Cera Sanitaryware Ltd Emami Ltd
V.I.P.Industries Ltd Eclerx Services Ltd Britannia Industries Ltd Eicher Motors Ltd Tata Consultancy Services Ltd
Wipro Ltd Shree Cement Ltd V Guard Titan Company Limited Eclerx Services Ltd
Page 34
Valuation Summary
Company Name CMP (Rs.) Mkt Cap (Rs. bn)
Net Sales (Rs. bn) EBITDA (Rs. bn) Net Profit (Rs. bn)
FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E
Agro Chemicals
PI Industries Ltd 959 132 22.8 25.0 28.8 33.5 5.5 5.9 6.8 8.1 4.6 4.5 5.1 6.1
Auto
Maruti Suzuki India Ltd 9,118 2,754 680.3 793.2 945.2 1,040.9 102.5 123.7 154.4 174.8 72.3 85.9 108.6 124.4
Sundram Fasteners Ltd 508 107 29.3 32.5 37.2 42.6 5.5 6.1 7.2 8.3 3.2 3.8 4.5 5.3
Capital Goods & Engineering
AIA Engineering Ltd 1,502 142 22.5 24.5 28.0 31.5 6.3 5.7 7.3 8.9 4.6 4.1 5.1 6.1
V-Guard Industries Ltd 236 100 21.5 24.0 27.1 30.9 2.2 2.4 2.8 3.2 1.5 1.8 2.1 2.5
Cement / Materials
Shree Cement Ltd 17,179 598 84.3 96.3 119.5 144.5 23.7 23.7 32.2 41.2 13.4 10.9 16.4 22.7
The Ramco Cements Ltd 699 166 39.4 42.0 46.8 54.1 11.6 11.3 12.9 15.1 6.5 6.2 7.3 9.4
IT Services
Cyient Ltd 591 67 36.0 38.8 43.5 47.8 4.8 5.4 6.4 7.3 3.7 4.1 4.8 5.5
Info Edge (India) Ltd 1,225 149 8.0 9.3 10.8 12.5 2.3 2.8 3.3 3.8 2.1 2.6 3.0 3.5
Tata Consultancy Services Ltd 2,616 5,008 1,179.7 1,219.8 1,309.4 1,402.1 323.1 320.0 338.3 361.8 262.9 252.7 264.8 284.9
Building Material
Astral Polytechnik Ltd 826 99 18.9 21.3 26.5 32.1 2.6 3.0 3.9 4.9 1.5 1.7 2.4 3.2
Consumptions
Asian Paint Ltd 1,133 1,086 152.9 172.2 198.7 228.9 30.2 32.0 37.0 43.0 19.4 20.6 23.5 27.1
Berger Paint India Ltd 253 246 45.5 52.1 60.4 69.0 7.2 8.0 9.6 11.0 4.4 4.7 5.6 6.4
Emami Ltd 1,266 287 25.3 26.7 31.2 36.5 7.6 8.0 9.5 11.5 5.5 5.8 7.3 8.3
Hindustan Unilever Ltd 1,320 2,858 331.6 356.2 395.4 438.2 63.4 74.9 84.8 95.1 43.1 51.7 58.5 65.9
La Opala RG Ltd 663 37 2.6 2.8 3.3 3.9 0.9 1.1 1.3 1.5 0.5 0.7 0.9 1.1
Page Industries Ltd 22,555 252 21.3 25.6 31.1 38.1 4.1 5.1 6.5 8.2 2.7 3.3 4.3 5.4
Relaxo Footwears Ltd 644 78 17.4 20.3 23.5 26.9 2.4 3.0 3.7 4.3 1.2 1.6 2.0 2.4
Pharma
Cadila Healthcare 422 432 94.3 121.0 137.1 153.3 19.0 27.3 33.2 38.1 14.7 17.3 22.3 25.8
Torrent Pharmaceuticals 1,336 226 58.6 61.0 78.5 88.9 13.8 13.9 18.8 22.5 9.3 7.7 8.8 11.6
Infra & Power
KNR Constructions Ltd 281 40 16.8 21.1 23.8 27.5 2.6 4.3 4.3 5.0 1.0 1.8 1.5 1.7
Page 35
Valuation Summary
Company Name P/E EV/EBITDA (x) ROE (%) Target
Price Rating
FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E
Agro Chemicals
PI Industries Ltd 28.9 29.7 25.9 21.6 24.1 22.6 19.3 16.3 33.1 24.8 23.3 23.2 925 Buy
Auto
Maruti Suzuki India Ltd 38.1 32.1 25.4 22.1 24.2 19.8 15.5 13.4 21.9 22.0 23.9 23.5 9,350 Buy
Sundram Fasteners Ltd 39.1 33.0 28.1 23.5 20.1 17.8 15.2 13.1 27.5 27.1 27.9 27.4 585 Buy
Capital Goods & Engineering
AIA Engineering Ltd 31.0 34.5 27.5 23.3 21.0 23.2 18.0 14.7 18.1 14.4 16.4 17.3 1,666 Buy
V-Guard Industries Ltd 66.0 60.4 47.9 40.8 45.4 39.9 34.4 29.5 27.4 24.8 24.9 24.2 164 Sell
Cement / Materials
Shree Cement Ltd 44.7 54.7 36.5 26.4 23.5 23.2 17.3 13.2 18.4 13.6 18.2 21.7 19,500 Buy
The Ramco Cements Ltd 25.6 26.4 22.4 17.6 15.5 15.7 13.6 11.2 19.0 15.9 16.6 18.2 780 Buy
IT Services
Cyient Ltd 18.0 16.1 13.8 12.0 10.2 8.9 7.2 6.1 18.4 19.0 20.5 21.5 650 Buy
Info Edge (India) Ltd 71.0 56.8 49.2 41.8 55.8 44.6 37.0 30.9 11.1 12.5 13.0 13.9 1,300 Buy
Tata Consultancy Services Ltd 19.6 19.9 18.9 17.6 13.7 14.1 13.0 11.8 32.6 30.0 30.7 29.0 2,300 Reduce
Building Material
Astral Polytechnik Ltd 66.7 58.2 40.4 31.2 37.0 31.8 24.3 19.4 19.1 18.3 21.8 22.9 820 Add
Consumptions
Asian Paint Ltd 56.0 52.6 46.3 40.1 38.1 36.2 31.3 26.7 27.5 25.6 25.8 26.5 1,111 Reduce
Berger Paint India Ltd 51.9 52.3 44.2 38.3 34.4 30.6 25.5 22.1 25.6 23.2 24.4 24.7 232 Reduce
Emami Ltd 52.2 49.4 39.5 34.5 36.5 34.4 28.4 23.2 32.7 31.7 35.5 35.8 1,261 Add
Hindustan Unilever Ltd 63.8 55.3 48.8 43.4 40.9 38.9 35.1 30.3 64.7 74.7 78.3 77.7 1,339 Add
La Opala RG Ltd 67.0 51 42.2 35 28.9 24.8 20.8 17.4 21.7 23.9 24.0 23.9 563 Add
Page Industries Ltd 94.5 75.4 58.6 46.4 61.7 49.9 39.1 31.1 44.5 44.6 45.8 46.1 16,040 Reduce
Relaxo Footwears Ltd 62.9 48 37.8 32.3 40.6 32.8 26.4 22.6 22.7 23.7 24.1 22.7 528 Reduce
Pharma
Cadila Healthcare 29.4 24.9 19.4 16.7 25.2 17.2 13.9 11.8 23.2 22.5 23.8 22.9 505 Buy
Torrent Pharmaceuticals 24.2 29.3 25.6 19.4 18.0 19.7 14.3 11.6 23.8 16.8 17.2 19.9 1,374 Add
Infra & Power
KNR Constructions Ltd 40.0 22.1 26.8 23.7 17.4 10.8 10.7 9.2 12.1 18.2 13.1 13.0 235 Reduce
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Valuation Summary - Financials
Company Name CMP Mkt Cap (Rs. bn)
Net Interest Income (Rs. Bn) Operating Profits (Rs. Bn) PAT (Rs. Bn)
FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E
Financials
City Union Bank 182 120 12.0 14.3 16.2 18.7 9.9 12.3 13.6 15.6 5.0 6.1 7.1 9.1
HDFC Bank 1,845 4,775 331.4 407.7 508.2 613.8 257.3 325.2 410.2 499.6 145.5 176.7 232.2 286.3
Kotak Mahindra Bank 1,006 1,916 81.3 94.5 112.9 135.9 59.8 71.2 87.5 107.3 34.1 41.0 51.2 63.2
Sundaram Finance 1,888 210 11.9 13.7 15.7 17.8 7.8 9.3 10.5 11.9 5.0 5.5 6.3 7.2
Company Name ABV/share Rs. P/ABV RoE (%)
Target Price
Rating FY17 FY18E FY19E FY20E FY18E FY19E FY20E FY17 FY18E FY19E FY20E
Financials
City Union Bank 49.9 57.8 67.8 80.1 2.9 2.4 2.1 15.2 15.9 15.8 17.4 201 Buy
HDFC Bank 344.3 386.8 460.2 551.3 4.8 4.0 3.4 17.9 18.5 20.9 21.6 2,115 Buy
Kotak Mahindra Bank 143.8 188.7 213.8 245.1 4.0 3.4 2.9 13.2 12.6 12.9 14.0 1,233 Buy
Sundaram Finance 332.0 349.9 390.6 438.6 5.3 4.3 4.3 14.0 14.3 15.0 15.3 1,841 Buy
Page 37
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Page 38
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