Prabhat Dairy IPO: Looks expensive

About the company
Prabhat Dairy, incorporated in 1998, is a firm which sells dairy products to both institutional and retail customers of India. The firm is in three verticals namely: integrated business, consumer business and co-manufacturing. Some of the products in their portfolio include fresh, dry, frozen, cultured and fermented dairy products, including pasteurized milk,  flavoured milk, sweetened condensed milk, ultra-pasteurised or ultra-high temperature (UHT) milk, yoghurt,  dairy whitener, clarified butter (ghee), milk powder, ingredients for baby foods, lassi and chaas. As of June 30, 2015, the firm had an aggregate milk processing  capacity of 1.5 million litres per day.

Issue proceeds will be used for

• Increasing their manufacturing capacity

• Developing their logistics chain

Risks

• Margins are very low around 2% level.

• Sales to institutional clients are more (around 75%) and top five clients contribute around 36%.

Industry
Currently, about 42% of the total milk produced in India is purchased by consumers directly from milk farmers  in a raw form. The remaining 58% goes for processing and is sold as processed milk and milk products like  curd, yogurt, buttermilk, lassi, butter, ghee, ice cream, frozen desserts, cheese, paneer, khoa and milk powder  (including skimmed and whole). The processed dairy industry in India was estimated to be around ₹3,650-3,700 billion. The processed milk and milk products segment is expected to record about 12-13% CAGR between Fiscal 2014  and Fiscal 2017. Growth will be driven by several factors such as changing lifestyle of consumers, growth in the  food services industry, increasing urbanisation.

Financial
The firm's total revenue increased at a CAGR of 36.71% from Rs 2,868.21 million in Fiscal 2011 to Rs 10,017.38  million in Fiscal 2015, while their profit after tax increased at a CAGR of 22.06% from Rs 94.81 million in Fiscal  2011 to Rs 210.45 million in Fiscal 2015. In the same period, the firm's EBITDA increased at a CAGR of 48.00% from  Rs 213.75 million in Fiscal 2011 to Rs 1,025.50 million in Fiscal 2015.

Valuation
At the price band of Rs 140 – Rs 147, the firm is valued at an 43.8x to 46.4x which looks expensive. Therefore, the firm may not be a good bet for listing gains. The dairy industry is a very competitive one, so the firm may face difficulty in gaining market share.

Buy Kaveri Seeds for long term

About the company

Kaveri seeds, incorporated in 1986, is one of the high growth company in India dealing in the field crops and vegetables space. The company has also received the "Best under a Billion" award from Forbes this year. The company has a strong network of around 15,000 dealer across the country. Their seeds portfolio includes corn, paddy, cotton, sunflower, mustard, sorghum, pulses, bajra, wheat and their vegetable portfolio includes tomato, brinjal, okra, gourd, watermelon, chillies. The company is backed with strong management who are specialized in this agri domain of the business.

Industry

Over half the population of the world lives in rural part and their main occupation is agriculture. Majority of the Indian population relies on agriculture for employment and livelihood. In India, agriculture accounts for 14% of the GDP. In value India is estimated at 12154 Cr. and 6th in rank after USA, China, France, Brazil and Canada. Indian seed industry is undergoing metamorphosis with increased role of private seed companies, entry of MNCs, joint ventures of Indian companies with multinational companies and a wave of consolidations. Cotton, Maize and paddy are expected to be the main growth drivers.

Financial Performance                                   Source: Company

Strengths

·      Significant investment in R&D in the last five years.

·      Developed proprietary germplasm and hybrids.

·      Multi-location breeding and trial stations.

Financials

The company has faced a slowdown due to weak markets in Karnataka and some other southern parts of India. This slow down occurred due to weak rainfall. The company has improved both its operating and net profit margin even in this slowing market.

Valuation

The firm is currently trading at 11x compared to industry average of 10x. Considering weak monsoons in FY16, we expect the firm to generate less volumes of sales but improving margins maybe able to offset this decline a bit. The stock can move to reach Rs 600 by the end of FY16.

Kaveri Seeds vs NIFTY                                                          Source: Reuters

Nitesh Estate: A multibagger in process

Company

Nitesh Estates  is an integrated property development company  headquartered  in Bangalore, India. Founded in 2004, has  grown into a company renowned for its above average developments in Office Buildings, Residential, Hotels and Shopping Malls. Within few years of its inception, the firm has brought more than 20 million sq ft of space under development as premium living, working, lifestyle and leisure space. The company has expanded its services to Goa, Chennai, and Kochi.

Recent Development

• Goldman Sachs and Nistesh Estates announced an agreement to jointly invest in income producing commercial real estate assets in India for upto $250 million. This partnership will bring produce fruitful results in the next 3-5 years.
• Nitesh Estates has a very strong portfolio of 20 ongoing projects with a total revenue potential of Rs 46 billion of which Rs 35 billion is still to be booked and recognized. In line with our strategy of diversifying revenue streams, they recently acquired a shopping mall in one of the prime locations in Pune. This will provide the firm with a recurring income stream of Rs 450 million.

Financial Performance

The firm ended FY15 with a revenue of Rs 2,906mn. The company reported EBITDDA of Rs 687 million, up by 13% (y-o-y). The margins recorded 13.0% which is an increase of 344bps (y-o-y). The net profit recorded Rs 309 million which is a substantial 31% increase over previous year. The PAT margins stood a

t 10.6%.

Industry

The Indian real estate market size is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country's gross domestic product (GDP). Also, in the period FY08-20, the market size of this sector is expected to increase at a compound annual growth rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needs.

Valuation

Nitesh estate vs Nifty50

Nitesh estates is currently trading at a PE of 12x (industry PE: 24x). Hence, we suggest a BUY for a target of Rs 25 for the next six months period. The stock has multibagger attributes, hence we also suggest to keep holding the stock for the next three years.

Source for information in the post: Company, IBEF.

Sygene IPO: Subscribe with a 18 months time horizon

COMPANY

The Bangalore based firm, incorporated in the year 1993, now became one of the well known and leading CRO (Contract research organization) in India. They are a subsidiary of Biocon Limited (“Biocon”), a global biopharmaceutical enterprise focused on delivering affordable formulations and compounds. The company offers service in discovery and development of small molecules, large molecules, antibody-drug conjugates (“ADC”) and oligonucleotides. The company offers a suite of integrated, end-to-end discovery and development services for novel molecular entities (“NMEs”) across industrial sectors including pharmaceutical, biotechnology, agrochemicals, consumer health, animal health, cosmetic and nutrition companies.

Source: Company                                                                     

As of March 31, 2015, their tangible fixed assets (gross block) were Rs 9,311 million. Their laboratory and manufacturing facilities are spread over more than 900,000 sq. ft. and located in Bengaluru, India. As of May 31, 2015, the firm had 2,122 scientists, including 258 Ph.Ds. and 1,665 scientists with a Master’s degree.

During fiscal 2015, the firm has serviced 221 clients, ranging from multinational corporations to start-ups, including eight of the top 10 global pharmaceutical companies by sales for 2014. Syngene also have longstanding, extensive relationships with multinational clients such as BMS, Baxter, and Merck & Co.

INDUSTRY

Frost & Sullivan estimates that global R&D expenditure for the pharmaceutical industry in 2014 was approximately US$139 billion, of which US$105 billion could have potentially been outsourced.  Outsourcing penetration for the CRO market for development services as of 2014 was estimated to be 27.3% of the potential outsourcing market for development services, but poised to grow to 38.7% in 2019, reflecting a CAGR of 12.5%. 

• The global CRO market for discovery services was estimated to be US$14.7 billion in 2014 and is expected to reach US$22.7 billion in 2018, reflecting a CAGR of 11.5% (2014-2018). 
• The global CRO market for development services was estimated to be US$28.8 billion in 2014 and is expected to reach US$44.6 billion in 2018, reflecting a CAGR (2014–2018) of 11.6.

FINANCIAL PERFORMANCE

Historical Performance of Syngene

For the fiscal year ended March 31, 2015, the firm generated total revenue of Rs 8,716 million, restated profit of Rs 1,750 million and EBITDA of Rs 2,928 million. For the fiscal year ended March 31, 2014, we generated total revenue of Rs 7,077 million, restated profit of Rs 1,348 million and EBITDA of Rs 2,226 million. For the three fiscal years ended March 31, 2015, their total revenue, restated profit and EBITDA grew at a CAGR of 27.7%, 35.1% and 28.3%, respectively.

VALUATION

The price band is between Rs 240 to Rs 250. The valuations are slightly expensive. The company is available at a P/E of 27.4x to 28.6x based on the EPS for FY15 i.e. Rs 8.80. The valuations are justified by the strong growth prospects of the company. Hence, we suggest SUBSCRIBE with a time horizon of atleast 18 months.

Buy Kitex Garments for a target of Rs 1500 for a period of 9 months

Kitex Garments, a part of the Anna – Kitex group of companies with easy access to sea and airports. The company was established in 1992 and today it has become to be one of the largest exporters of infants garments in India. Not only that, Kitex has also become world’s 3^rd largest manufacturer of infant wear. The company has a strong international presence especially in US and Europe.

Source: Company                                                                                                                 

The company’s product line includes body suits, sleepwear, rompers, burps, bibs, training pants. The company is also one of the largest employer in the private sector employing over 7000 people. The current manufacturing facility produces 250,000 units of garments per day.

India has a share of 25 per cent in the global spinning capacity. India produces 20 per cent of global cotton supply both for domestic use and for export. The country ranks No.2 in global textile and apparel exports with nine per cent growth since 1995. About 27 per cent of the foreign exchange earnings are on account of export of textiles and clothing alone. Indian textile and apparel exports to the US rose nearly 6.5 per cent. As per the DGCSI – India statistics the garments segment witnessed a growth of 16% during Apri-December (FY15) as against the same period in (FY14). The overall textile and garment exports, is expected to reach $41 billion in 2014-15, compared with $39.3 billion in the previous year. Children’s wear market in which infant wear is a segment, is one of the most profitable segments in the global apparel industry and is estimated to hit a value of 173.6 billion dollars by 2017. In developed economies, although birth rates are generally in a downtrend, parents are spending more on their children, offering a wealth of opportunities for babies’ and children’s products. The industry also has great potential in the BRIC countries, given the sheer size of the population of babies and children and the burgeoning middle class. At this point, Europe and the U.S are the major consumers of the global children wear market.

The company has posted extra-ordinary superb returns in the past fiscal. In the FY15, the PAT margin has increased by more than 600 bps to reach 19% margin. The revenue has increased by more than Rs 700 cr to touch revenue of Rs 5,247 cr in FY15. From Rs 1,109 cr, the operating profit increased at an extra ordinary pace to touch Rs 1,841 cr. The company has delivered great returns to the shareholder by posting an increasing trend in the ROE’s. The company has posted an ROE of 27%, 39%, 45% for FY13, FY14, FY15 respectively.

The company has good prospects in the future as the global economy is expected to improve. The developed economies are stable and as the financial stability improves, the consumers will spend for their infants well care. The company also has plans to start operations in US to establish a strong market. In future, the firm also plans to start manufacturing under their own brand name. The stock may look expensive but one should consider buying the stock on dips. We suggest a buy with a target price of Rs 1500 in the next nine months.

Source: Bloomberg                                                                                                     Kitex vs NIFTY

Research on DCB Bank: Buy with a target of Rs 170

DCB Bank is one of the new emerging banks of India. The bank has been in existence since 1930’s and is the only co-operative bank to get converted into private bank in 1995. There are about 154 branches in 94 locations, 328 ATM’s across the nation. The bank has strong presence in Gujarat, Maharashtra, Telengana and in the current fiscal year, the bank will expand to Chhattisgarh, Madhya Pradesh, Odisha, Punjab & Rajasthan.

The bank has various financial products in the following areas:  Micro SME, SME, Retail Mortgages, Commercial Vehicle, Gold Loans, mid-Corporate and Agri / Inclusive Banking. Mortgages contribute about 45% of the loan portfolio of the bank followed by corporate banking 23%, SME/MSME 13%. The bank has a CASA of 23.40% and CRAR of 14.95% under BASEL III. The bank is focusing on the retail segment for building deposits. The bank has also increased its fee income by cross selling insurance, mutual funds, and trade and cash management. The promoter’s hold 16.33% stake, and there is an increase in the FII and DII holdings indicating strong growth prospects of the bank.

Although the stock market sentiment has improved, the economic conditions continued to be difficult. The banking industry continues to be under pressure due to rising NPAs and restructured loans. The MSME / SME sector plays a very important role in the growth of the Indian economy. It is estimated that MSME / SME contribute 17% to GDP and employs over 70 mn people in about 30 mn units. According to IBEF, total Indian banking sector assets reached US$ 1.8 trillion in FY14 from US$ 1.3 trillion in FY10, with 70 per cent of it being accounted by the public sector. Total lending and deposits increased at a compound annual growth rate (CAGR) of 20.7 per cent and 19.7 per cent, respectively, during FY07-14 and are further poised for growth, backed by demand for housing and personal finance. In the past fiscal year, private sector have outperformed the state and government run banks.

The bank has grown by 61% (y-o-y) for the quarter ending March’15 in terms of net profit. This growth is largely due to the growth in assets that led to immense increase in net interest income of the bank. The operating cost to operating income ratio has come down significantly for the past four years i.e. from 74.45% in FY12 to 58.83% in FY15. The Net NPA is almost stable for the past four quarters at 1%. The net profit margin for the bank is around 28% for the FY15 which is the highest in the banking industry.

The bank is currently trading at Rs 147 with a P/E of 21.7x (industry P/E 21.5x). The bank’s ROE has been growing at a robust 31% CAGR over the past three years. The credit policy of the bank is well maintained to restrict the NPA to 1% whereas the industry average NPA is 2.5%. Considering the bank’s expansion plans and increasing asset in the balance sheet, we recommend a BUY with a target price of Rs 170.

DCB Bank vs Bank Nifty                                              Source: Google finance