D-Mart IPO - Invest with what you saved in there...

The company that owns the D-Mart supermarket retail chain, Avenue Supermarts, is coming out with its IPO next week. The IPO opens on 08-Mar and closes on 10-Mar with an issue price range of INR 295 – INR 299 aiming to raise a total of INR 18.70 Billion. This has been most awaited IPO of 2017. The promoter of the company Radhakishan Damani is one of the best stock pickers and a veteran stock market investor. Even the venerable Rakesh Jhunjhunwala considers him a mentor.

This IPO is the second to come out next week. The first being the Radio City IPO, which opens on 06-Mar. Will this cause lesser demand for D-Mart? I don’t think so. The IPO is already trading in the grey market which indicates the interest levels from investors. But is the IPO priced right? Let us review the company and figure out if this is something that one must invest in.

The big positive about this IPO is that there are no Offer For Sale from the existing shareholders. This means that the promoter Radhakishan Damani will continue to own the 100,000 shares in the company. All shares that are being issued are new and the proceeds will be used to partially repay some debt and NCDs (Non Convertible Debentures) while at the same time build some new stores. D-Mart currently has 118 stores across Maharashtra and Gujarat and planning to expand to other states. The focus of D-Mart has been to identify and build a story in a densely populated location and cater to lower middle, middle and aspiring upper middle class audiences. They have built a reputation of a company with tight cost controls and low priced products in the retail space. They have also been aggressively working on their margins and have been improving it year on year. They have improved the margin from 2.70% to 3.70% in 4 years from 2012. Retail is not a margin-intensive industry and runs on real tight margin. Therefore to improve the margin by 100 basis points (which is a 37% increase compared to the 2012 numbers).

Avenue Supermarts’ consolidated financial performance (in INR Millions)
Details	FY2012	FY2013	FY2014	FY2015	FY2016
Total revenue	22,224.0	33,551.0	47,023.0	64,577.0	86,061.0
Total expenses	21,340.0	32,142.0	44,574.0	61,343.0	81,139.0
Profit after tax	604.0	939.0	1,614.0	2,117.0	3,212.0
Profit margin	2.70%	2.80%	3.40%	3.30%	3.70%

The revenues have grown from 22 Billion to 86 billion in 4 years (CAGR of 40.28%) while profits have increased from 0.6 Billion to 3.2 Billion in the same period (CAGR of 51.86%). The EPS for the period ending 31-Mar-2016 stood at INR 5.86. With that EPS, the company is valued at a PE of 52.60 at the price at which it is being offered. It does seem a tad high especially given that the margins are pretty tight. However, when we look at the likely annualized EPS for FY 2017 (INR 9.20), the PE reduces to 32.50. There is only one listed company, Future Retail, which can be looked at for comparing D-Mart’s PE and this company trades at a whopping 393.2 PE (looking at 2016 EPS) but this comes down to a decent but still expensive PE of 37.50 when we consider the expected 2017 annualized EPS. Another thing to consider is that the margins of Future Retail are half of what D-Mart is achieving. All of this makes D-Mart or Avenue Supermarkets an incredible buy. But there is likely to be a lot of demand for this IPO and the chances of being allotted are slim. But still, go for it. You may get lucky. :)

Advanced Enzyme - Will this enzyme accelerate?

When it rains, they say it pours. That is what is happening in the IPO market right now - It is pouring IPOs! It is now the turn of Advanced Enzyme Technologies Ltd, one of the top 15 companies globally in enzyme production.

Advanced Enzyme Technologies Ltd. has opened its IPO today and will close on 22-Jul-2016. The IPO is priced in the range of INR 880-896 per share. The issue will primarily be an Offer of Sale by existing shareholders with the company also looking at raising INR 500 Million. Shares can be applied in lots of 16 shares and its multiples. The retail investors will not be get any discount in this issue while the qualified employees getting a discount of INR 88 per share. The icing on the cake for the retail investors is that they are going to be allotted 35% of the total issue. The company will issue a total of 4.034 Million shares. As mentioned earlier, most of the proceeds will go to the existing shareholders. With the INR 500 Million that the company is raising, it intends to retire some of the debt of its subsidiary in the US.

Advanced Enzyme is India’s biggest enzyme company. It is engaged in the R&D, manufacturing and marketing of over 400 proprietary products developed from 60 indigenous enzymes. In the domestic market, it has the second highest market share behind Novozymes which is the global leader in this business. The company operates in 2 major segments:

1. Healthcare and Nutrition – This business accounts for nearly 88% of the revenues for Advanced Enzyme;
2. Bio Processing – This business accounts for 12% of the revenues for the company.

None of the competitors of Advanced Enzyme are listed in India. We will have to look for its global peers while we review their valuation a little later in this post. 

One of the biggest positives is the financial performance of the company. The revenue has grown at a CAGR of 14% in the 4 years from 2012 to 2016. The margins have also been increasing over the same period. For the year ending March 2016, the EBITDA margin stands at 47% and Net Profit margin stands at 26.6%. The net profit has grown at a CAGR of 24% in the same period and margin has increased by 750 basis points in the 4 years.

Advanced Enzyme’s consolidated financial performance (in INR Millions)
Details	FY2012	FY2013	FY2014	FY2015	FY2016
Total revenue	1748	2241	2405	2243	2946
Total expenses	1272	1479	1587	1505	1721
EBITDA		895	1037	908.6	1382
EBITDA margin (%)		40.60%	43.30%	40.70%	47.10%
Profit after tax	333	492	201	501	784
Net profit margin (%)	19.10%	22.00%	8.40%	22.30%	26.60%

The company has been able to increase their margin levels by consciously reducing their long term debt levels which stood at INR 1.39 Billion. As of 31-Mar-2016, the company’s long term debt stands at INR 387.5 Million (expected to reduce further with the proceeds from this issue). This results in a debt-equity ratio of 0.26. This has resulted in the company’s RONW (Return on Net Worth) doubling in the 2 years from 2014. It now stands at 28% in 2016 compared to 12% in 2014.

The company had a consolidated diluted EPS of Rs. 36.03 per share for the year ending March 2016 giving a PE (Price to Earnings) range of 24.40 and 24.90 at the lower and higher spectrum of the issue price. As mentioned earlier, AETL doesn’t have a listed peer to compare if this valuation is rightly priced or not. We will need look at their global peers like Novozyme and Koninklijke DSM NV. Both these companies are trading at PE of 35.5 and 46 respectively. Considering these ratios, there is an upward premium in the range of 46% and 85%.

Considering that AETL operates in an industry with high entry barriers and the producers enjoy the power to set prices plus the fact that the company has a diverse set of customers including Sanofi India, Cipla, Ipca Labs, Alkem labs with the top 10 customers accounting for 44% of revenues and only 36% of the revenues coming from India, this is a good company to invest in. Whether you want to exit with some listing gains or hold on to it for long term, is your choice. J

Lording over The Lord's

It was anti-climax at the end but then would there have been a better way for it to end? Jadeja bowls to Anderson, who is desperate to get to the other end, takes off for a single that didn’t exist. Jadeja fields and hits the wicket directly while Anderson is still short of the crease. India win! Their first test victory at Lord’s in 28 years. Something that nobody, at least from India, envisaged when they saw the pitch when the test match was to start.

The test match started on the wrong foot with allegations and counter-allegations between the two teams on the spat between Anderson & Jadeja with the latter accusing the former of physically attacking him during the first test. To add on fuel to the fire, the wicket that was prepared for the match was as green as it could be. It was hard to distinguish the ground and the pitch. It got worse for India at the toss with Dhoni losing it and being asked to bat on this wicket.

Cook seems to have stuck gold by sending India to back with 6 wickets down for hardly 125 on the board. It seemed bad when Binny walked back with the score at still less than 150. That is when things started to turn around for India just like in the 1^st Test with the lower order taking the fight to the opposition. The last 3 wickets added another 150 runs before they were all out. One batsman who stood out and held together the innings for India was Rahane and rightfully deserved to have his name on the honors board in the Lord’s board for a fantastic century. The bowlers backed up the batsmen well with Bhuvaneshwar Kumar standing out again with his second 5-for in as many tests. He bowled beautifully in perfect English conditions and made the ball talk. He pitched the ball up. He made the ball move away from the right hander and into the left hander. The batsmen were finding it difficult to handle it all. India were able to restrict England’s lead to only 24 runs. England themselves were able to get over 300 thanks largely to a well crafted century by Ballance and late attack by Plunkett.

The Indian openers started the 2^nd innings well and had the deficit erased before Dhawan lost his wicket cheaply (how many times has he done this in the recent past!). Pujara and Vijay steadied the ship and took the lead to nearly 100 runs before a lapse of concentration cost India Pujara’s wicket which caused a mini-collapse with India losing 3 wickets for 5 runs. More than ever, India needed its captain and monk to stay in the middle for a long time and take it to safety. They did that to some extent by taking India’s lead to over 175 before Dhoni fell and Binny too soon after. Just when Vijay seemed to be headed to his 2^nd century in 2 tests for India, he lost his wicket and India were reeling at 235 with the lead a little over 210. In came Bhuvi and along with Jadeja, turned the game on its head. Their partnership of 99 runs (with both making fifties) not only ensured that the lead was over 300 but also ensured that the bowlers had a lot of time to bowl England out. India were all out for 342 and a lead of 318.

England were set a target of 319 runs on a declining Lord’s wicket. The average 4^th innings score at Lord’s was 157. For England to win this one, they had to score more than double the average 4^th innings score. With their batting wobbling and India’s bowling doing better, it was a foregone conclusion that India were going to win. The question was when and how? As expected, Jadeja got India the first breakthrough with hardly 12 runs on the board for England. Cook and Ballance resisted for a while before the latter was caught behind. Cook continued doggedly and seemed to be getting back in form when against the run of play, he was back in the pavilion. England were reeling at 72 for 4. It all seemed a formality now for India when day 4 ended.

People were betting that India will close them out before lunch on day 5. But the pair in the middle had a completely different idea. They decided to make India earn this win. They defended the good balls, punished the bad balls. Kept the scoreboard ticking. The number of runs required for a win was less than 150 runs. Indians were beginning to worry. Will this be the turnaround that England was waiting for? Is the Indian team lacking the killer instinct to lose from a winning situation, yet again? The last over before lunch when it looked like it was completely England’s session, Ishant Sharma bowled a bouncer from nowhere and Moeen Ali was caught. All the hard work from Ali and Root meant for nothing. The Indians were back. Neither team took the session ended in a draw as the wicket fell at the stroke of lunch. That was the breakthrough that India needed. It was all over an hour after lunch with Ishant taking a seven for. When the last wicket fell, the Indians were all over the place. Nobody expected this team to draw a match, forget winning one. But this young team beat all odds to win and take the lead in this series. With 3 more games to go, I wonder what further twists and turns await us. Test matches are better story tellers than anyone else. Wouldn’t you agree?