To Quess or Not to Quess - An IPO Analysis

Yet another week, yet another IPO; Quess Corp, the integrated business services provider arm of Thomas Cook India, is coming out with its IPO next week. The company is issuing shares worth Rs. 4000 Million in the price band of Rs. 310 to Rs. 317. The IPO will be open from 29-Jun-2016 to 01-Jul-2016. Shares can be applied in lots of 45 shares and the retail investors will be allotted 10% of the total issue. The company has not provided the number of shares it is going to issue rather have informed that they are expecting to raise a minimum of Rupees 4000 Million. Considering this, they are going to issue at least 12, 618, 297 shares and utmost 12, 903, 226 shares. 

The company intends to do the following with the proceeds of the IPO:

•  Repayment of Debt – Rs. 500 Million;
• Capital Expenditure – Rs. 717 Million;
• Incremental Working Capital Requirement – Rs. 1,599 Million;
• Acquisitions & Strategic Initiatives – Rs. 800 Million.
  

The company operates in 4 major segments:

1. Global Technology Solutions – IT Services, IT Product solutions contributing to 26.77% of the revenue;
2. People & Services – Staffing services and solutions including general staffing, recruitment and executive search, payroll, compliance and background verification services contributing 56.64% of the revenue;
3. Integrated Facility Management – Facility management services to corporate, hospitals and schools contributing 10.82% of the revenue;
4. Industrial asset Management – Industrial operations and maintenance services to industries generating 5.61% of the revenue.

There aren’t many listed competitors of Quess available. The closest competitor is Teamlease India Limited. Like Teamlease, Quess also operates all over India providing all of these services.

The revenue of the company has had a 52% CAGR for 4 years from 2012 to 2016 which is phenomenal.

Quess Corp’s consolidated financial performance (in INR Million)
Details	FY12	FY13	FY14 (Apr 13 – Dec 13)	FY15 (Jan 14 – Mar 15)	FY16
Total revenue	6,394.00	10,043.00	10,081.00	25,727.00	34,424.00
Total expenses	6,263.00	9,800.00	9,792.00	24,685.00	33,176.00
Net Profit	62.00	120.00	178.00	672.00	885.00
Net Profit Margin	1.00%	1.20%	1.80%	2.60%	2.60%

However, their profit margin is quite low at 2.60% for the year ending March 2016. This is definitely a cause of concern. This may be completely wiped out if the costs increase in the future. However, since the company is headed by Ajit Isaac, who is an industry veteran, who has been managing the company professionally and consistently increasing the margin from 1.00% in 2012 to 2.60%. He has also ensured that the company, even though he owns nearly 40% of the company, adheres to high standards of corporate governance. His compensation is also at not too high at Rs. 14.50 Million for the year ended March 2016. 

Another good thing is that the company has a long term debt of only Rupees 354.80 Million. However, they have a high short term borrowings in the form of Cash Credit, Overdraft and Working Capital loans from bank for their business requirements to the tune of Rupees 3390 Million. With part of the proceeds being used to repay these, short term borrowings are expected to reduce to more manageable levels at around Rupees 1800 Million.

The company had a diluted EPS of Rs. 7.67 per share for the year ending March 2016 giving a PE (Price to Earnings) range of 40.40 and 41.30 at the lower and higher spectrum of the issue price. This compares to a PE ratio of about 60 for Teamlease. There is a huge upside expected when the company lists compared to the issue price of the company. The company also has a very high RONW (Return on Net Worth) of 25.60% compared to 8.00% of Team Lease.

Considering that Quess operates in the highly fragmented HR outsourcing market with a high growth prospects and is relatively better placed than its competitors, the offer price looks competitive. This is another IPO that I am going to subscribe to with a long term view in mind.

The NPA Saga - What to Expect??

One of the actions that Raghuram Rajan took, as the RBI governor, was to ensure that the banks did a serious clean up of their loan portfolio. This resulted in the banks reviewing their portfolio and reclassifying their NPAs. In this post, I try to look into the numbers and analyze if the worst is over or yet to come.

Non-Performing Assets (or NPAs) are those assets where there is a delay in interest or principal for 3 months or more. These are also referred to as Gross NPAs. Net NPAs refer to the NPAs after reducing the provisions set aside by the banks.

At the end of March 2016, the Gross NPAs of all the 41 listed banks reached a record high of INR 5.79 Trillion. It has increased by 92% when compared to March 2015 and by 32% when compared to December 2015. Public Sector Banks accounted for 91% of the GNPAs (they are 61.54% of the total number of banks) registering a 95.67% increase compared to March 2015. However, the private banks accounted only for 9% and registered a 60.34% increase in GNPAs. The below chart shows a systemic rise in the Gross NPAs of all banks over the last 1 year:

                     

So, should we really worry about the increase in the absolute amount of Gross NPAs? Or should we really look at another metric that will tell us if the problem is bigger than imagined? The best metric that can help us clear things is to look at the ratio of Gross NPAs to Advances. This indicates what proportion of advances are NPAs. Advances refer to the total amount given away as loans by the bank. If you see the chart below:

                     

7.71% of the total advances have been identified as Gross NPAs by the banks as of March 2016, up from 4.32% a year ago. Once again, public sector banks lead the way by declaring 9.36% as Gross NPAs (4.96% in March 2015). What this means is that 1 out of every 10 rupees is deemed to be doubtful to be recovered by the bank. The comparable ratio for private banks stands at 2.76%. The reason the ratio has grown so high in this period is because the growth in advances has reduced compared to the growth in bad loans.

Public Sector Banks:

The Gross NPA ratio of the public sector banks stands at almost 10%. Does it mean that all public sector banks are leaking and have NPA issues? Or are there some banks that are in a worse situation than the others? The chart below helps us understand that better.

There are 3 banks that have the worst offenders in their books. They are Indian Overseas Bank, UCO Bank and Union Bank of India. IOB is the worst of the lot with nearly 1 in every 5 rupees declared a NPA. Associate banks of SBI like State Bank of Bikaner and State Bank of Travancore have the best NPA ratios with both being less than 5%.

Even though Indian Overseas bank has the highest NPA Ratio, do they also account for the highest amount of NPAs? Or is there any other bank that holds the dubious distinction?

Even though IOB has the highest Gross NPA ratio, it is the State Bank of India that has the most NPAs at 981.73 Billion rupees. Punjab National Bank is the second highest with 558.18 Billion. IOB is fifth in the pecking order with 300.49 Billion which is only 30% of the total NPAs of State Bank of India. The primary reason for the high NPAs seem to be the exposure of the banks in the Iron & Steel, Energy and Textiles sectors.

Private Banks:

The Gross NPA ratio of the private banks, on the other hand, is way lower at 2.76%. This helps the private banks operate at a higher level of profitability.

Jammu and Kashmir Bank has the worst NPAs among the private sector banks at over 8% followed by Dhanalakshmi Bank and ICICI Bank. Dhanalakshmi Bank saw its NPAs come down by over 330 basis points compared to the previous quarter where as most of the banks have reported an increase. ICICI Bank, however, saw a 54% jump in their NPAs compared to last year. However, Yes Bank, Indusind Bank and HDFC Bank have NPAs of less than 1%.

It is not surprising to see ICICI Bank top the list of private banks with most NPAs at 211.50 Billion rupees with Axis Bank as the 2^nd highest with 57 billion (nearly 1/4^th of ICICI Bank). Dhanalakshmi Bank ranks 10^th with just close to 7 Billion rupees as NPAs.

The Reserve Bank of India has asked the banks to recognize the really bad loans by end of Financial Year 2017. This can mean only one thing. There are going to be more provisions set aside by the banks in the quarters to come. Also, the banks have been asked by the RBI to provide for 15% of all the loans that are part of the Strategic Debt Restructuring scheme. This is way higher than the earlier rate.

The NPA saga is far from over. Like Shah Rukh Khan says in one of his super hit movies, ‘Picture abhi baaki hai mere dost’…

Mahanagar Gas IPO - My thoughts

It has been more than a month since the last IPO and finally, there is another IPO on the cards. Mahanagar Gas Limited’s IPO is open for subscription from Jun 21-23 2016 with a price band of Rs. 380/- to Rs. 421/-. At this price band, the size of the issue stands in the range of Rs. 9.38 Billion to Rs. 10.39 Billion. This IPO is an offer of sale from the existing shareholders of the company. Post the IPO, GAIL and British Gas Ltd will continue to hold 32.5% shares each in the company. 35% of the issue is for retail customers.

The company primarily operates in and around Mumbai including Thane and Raigad district. It enjoys a monopoly to distribute gas in Mumbai until 2020, its adjoining areas until 2030 and in the Raigad district until 2040. There is also a possibility to increase this monopoly by a block of 10 years should the government decide to do so. The cost of natural gas for the company was USD 3.06/MMBTU much lower than the cost of imported natural gas which stands at USD 5/MMBTU despite the crash in the gas prices. There is supply equal to 110% of the company’s CNG and domestic PNG demand at this price. The company, however, pays for the raw material for industrial CNG at closer to market rates making the cost rather high. 85% of revenue for Mahanagar Gas comes from domestic CNG/PNG while only 15% of the revenue comes from Industrial CNG and commercial PNG sector.  

Mahanagar Gas Limited – Financial Performance (in Millions)
Details	FY2012	FY2013	FY2014	FY2015	FY2016
Total revenue	13,090.30	15,143.8	18,851.5	20,949.3	20,789.3
Total expenses	8,744.3	11,038.8	14,778.6	16,863.4	16,529.8
Profit/(loss) after tax	3,077.4	2,985.1	2,972.5	3,010.0	3,086.9
Net margin	23.5	19.7	15.8	14.4	14.8

The revenue of the company has grown at a CAGR of 12.26% from 2012 to 2016. Though there was a slight dip in the revenue in 2016 that can be attributed to the fall in the gas price in the previous financial year. There was a 2.1% growth in the volume for the same period. There was also a decline in the cost which has resulted in a growth in profits, though not by a big margin. The margins have declined drastically though since 2012 but has remained consistent in the last 2 years.

With the demand for CNG vehicles set to increase in the next few years especially given the fact that NGT (National Green Tribunal) has banned diesel vehicles with an engine capacity of 2.0 and above in a few cities in Delhi and Kerala, the demand for CNG is also set to increase. Also, the urbanisation in Mumbai and it surrounding areas will help in the growth. What is also going to work for Mahanagar is the assured supply of natural gas at low price. This will ensure that the profitability margins are largely unaffected for the foreseeable future.

The diluted EPS of Rs. 31.36 for FY2016 gives us a PE ratio range of 12.11 and 13.42 for Mahanagar. Its direct competitor, Indraprastha Gas Limited, has a PE of 20.80. Gujarat Gas Ltd (though it mostly caters to industrial sector) has a PE ratio of 21. This is further proof that the valuations are very attractive for Mahanagar. The company also has the highest Rate on Net Worth in the industry at 20.20% for FY 2016.

Overall, Mahanagar Gas Limited’s IPO appears to be excessively discounted considering their sound financials and strong balance sheet. I expect this gap to be addressed when the company lists in the stock exchanges. I am definitely going to apply for this IPO for all the reasons mentioned above. 

For those who plan to apply, applications need to be made for 35 shares or its multiples.