Quick Heal Technologies IPO: A Quick take

We always wonder that in spite of so much noise about our IT industry’s clout in placing india as global hub for IT solutions, none of our IT behemoths like Infosys, TCS or Wipro have ever developed a product like Windows, IOS, Oracle. These companies operates on cheap Labour to win business; term cheap labour because that is what most of our IT professionals are doing in the labs of these behemoths…they just type the codes of a program developed somewhere in USA which is as lengthy as millions of lines.

So I am never a big investor in indian IT companies as their model can be challenged any time by other emerging alternatives like china and in fact these companies have realized it some time back and now focusing for new growth avenues. Their margins are falling continuously. 

Part of the reason for not focusing on developing an innovative IT product can be indian business structure where very little equity money is available for investments in new innovative but risky products as compared to developed markets. But this can further be due to the perception about the ability of Indians to produce something unique. Some may say that now millions of dollars are being invested in ecommerce startups in india like Flipkart but there is nothing new on fact and that is why almost 99% will vanish. Most of these startups have stolen their ideas from advanced USA markets and they think that their success in USA means success in india too although we are a very different country.

Like delivery startups like Foodpanda and Localbanya; they are trying to sell us the convenience factor in delivery at home but we Indians have never cared about convenience. We are always about value for money. We are ordering on Foodpanda because it is now value for money as we are getting delivered free. So no wonder Foodpanda and Localbanya are now at the verge of closing.

But Quick heal is the answer for lack of product based companies in indian IT sector. KPIT is another one which I like. Quick Heal chose the difficult path of investing in developing a product rather than offering generic services and so now they are a brand in direct competition to MNC behemoths like AVG, Mcafee, Norton, Kaspersky and in fact they are giving these a run for their money because Quick Heal commands around 30% share of retail anti virus market in india.

As they were short of funds initially so they invested lesser in branding but in developing distribution channels across india by offering them high margins, so now they have one of the biggest distribution strength in india with around 12000 channel partners. 

Quick Heal is a 300 cr turnover company but it invests around 50 cr in R&D which is never seen in india. It is also spending around 30 cr in advertising these days. As it invests big in R&D now so its margins are falling for past few years and its NP is around 60 cr in 2015. It has grown from 170 cr to 300 cr in last 5 years which is not so fast and that is where I feel the chances of growth and reason for going for IPO is emerging.

I never invest in IPO’s as I always find them expensive. Quick heal is also expensive at a pe ratio of 40. Another thing that I look for in an IPO’s is the reason for the IPO, if  IPO proceeds are going to promoters as they are selling their stake, I take this as a big negative. But if promoters are not getting any money and in fact company is issuing new shares and the funds collected will be used for the growth of company, that is a very healthy sign of the inherent strength and growth prospects in the company.

In this IPO promoters are not getting anything only their equity investor sequoia is selling  part of their share and company will get around 250 cr for future growth. They have plan for using 111 cr for branding and 40 cr for R&D which are a big positive. Their work force is around 1500 out of which 550 is dedicated for R&D which is just great.

Quick Heal is very dominant in Home and small user segment of security but they are now focusing big on SME (small and medium enterprises) and large enterprises segment and also launched their solution “Seqrite” which can be a big surprise in the future so as their focus on cloud, Internet of things sector.

I am a bit late in posting on this as I have spent only a few hours on this. But I feel at 40 pe ratio this one is worth taking a risk as this is different from any other IT company we have seen so far and so should not be compared with them. They are offering this at 40 pe ratio may be because of no so fast growth in the recent years. Also for product based companies, PE is not the only metric to value them, turnover based valuation along with PE is the best as product based companies can quickly earn bigger percentage of their revenue as profits after they cross a critical scale. Quick Heal is investing big (around 20% of turnover) in R&D, the full benefits of which are yet to achieved; may be mainly due to lack of sales promotion and branding which it plans to invest in now. After it reaches a scale of 500-600 cr (of current products, not of any future products) we can see a big turnaround in profits.

Even if it falls after listing I would be willing to invest more into this.  I am a great believer in the strength of intellect and creativity of we Indians and have faith that we have all the muscles to compete at global scale in branded products. Digital india and growth of IT gadget are a big opportunity for security system business in india.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)

Vacuum Fillers: Dredging corporation of India Ltd and Snowman Logistics Ltd

Vacuum Fillers: Presently I am studying some companies which have the strength or can achieve the scale to fill up the huge demand supply gap in the near future for some much needed products or services which have in them to make our production very competitive.  Study is under progress but I am sharing the snapshots just in case somebody likes it and have it right at the moment. Incidentally these are related to indian logistic sector which is so far a drag to the economy as logistics cost in india are 14% of GDP as compared to 6-7% of developed world. Any Improvement in this can bring huge gains.

Dredging corporation of India: Dredging is making the depth of ports at a certain level so that Ships can navigate easily as they need depth from 10 m to 15 m. With the use, sediments accumulate deep down the port Bed which are then removed with the help of Dredgers. Some of the big ships need around 20 m to 24 m. as usual we Indians are way behind in this also with depth of around 12 m to 14 m in most of the ports here which render us unable to reap the benefits of economies of scale by transporting the cargo by bigger ships. A much larger ship like one with 14000 TEU (twenty feet equivalent units) capacity , the cost is almost 60% of a ship with capacity of 6000 TEU.  It becomes a double edge sword when big ships unload their cargo at bigger ports like Dubai and Colombo; from where cargo is shipped to india via smaller ships. 

No indian company is having a deep anchor in this sector with PSU Dredging corporation of india being the largest but with much of its dredging fleet being older dated back to 1970-80. 

Another big opportunity is Inland waterways projects of Indian Government which will make it possible for us to fully reap the benefits of large rivers like Ganga. We can pollute our Mother Ganga with all possible garbage but can’t use it for the best. India has just 14500 KM of inland waterways even these are not used for transportation of goods which can be very cheap as compared to road and rail. And our Non-religious Neighbor China has waterways of 100000 km and it transports around 47% of its cargo via water, we are at 3-4%. Even  EU is at 44%, Bangladesh at 35% !!

Number of inland vessels in india are just 1000, in china there are 200000 and 11000 of EU.

But now india is waking up and just recently they planned a waterway from Varanasi to Haldia of 1620 KM. Dredging is constantly required to keep these waterways navigable.

So we will see huge demand for dredging. DCI is the biggest indian Dredging service provider but garners just around 700 cr of turnover. But it has acquired 3-4 new vessels in last 2-3 years and plans are for better planning of its finance.

I am buying it regularly around 360-370. CMP is 370.

Snowman Logistics: We do not want to waste our life in tiny worldly matters. We see life as Maya but when we move in a Temple, all we seek is; Girl next door named Maya. We are a country of contrasts. We proudly regards agriculture as our identity but every year we waste fruits and vegetables equivalent to the UK’s yearly consumption!! No contrast here…UK do not consume smaller amounts of fruits and vegetables; it is we who waste big…around 40% of annual production. It is worth 50000 cr.

A quantity of wheat equivalent to one tonne per person for the entire population of Australia is wasted by India every year. India is the second largest producer of fruits and vegetables (about 200 million metric tonnes) but it has a very limited integrated cold-chain infrastructure, with only 5,400 stand-alone cold storage having a total capacity of 23.6 million metric tonnes. Most of this (around 80%) is for Potatoes and Onions. No wonder we only process just 5-6% of our agri produce against 80-90% of the western world. This is one of the main reason of wide swings in the prices of these; either we are long or most of the times short but never in balance for much of the time. Traders call the shots in indian agriculture produce.

So again here too, possible scale is huge but Snowman Logistics, the largest in indian cold chain scores just 250 cr as annual turnover. This is nothing and I hear some says it is overvalued!!! PE ratio of 30-40 is irrelevant at this time as it is investing big regularly in capacity expansions, the benefits of which will accrue in the near time.

Gateway distriparks ltd is the promoter of it, with negligible debt (70 cr) it is poised to show stellar performance in the future. Our eating habits are changing. Our new friends like Pizza, Burger king, KFC’s etc all rely on cold chain infrastructure to constantly provide us the same taste.

CMP is 82. Just Freeze it.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)

Tube Investments of India Ltd: Michael on Cycle

For earlier study Click here

Greeks worshiped the geometry like God. They were of the view that these intelligent designs were a proof of the some super Creator. They were very near to the truth. There lies a system, a thought, intelligent design behind our universe…and if we have open minds we can see that even pattern of petals of flowers are following a system, our DNA is following some pattern, so as tree branches, Galaxies etc…it is called Golden Mean; the Fibonacci series where every successive number is a sum total of preceding two numbers (1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 . . .). Remarkably whole nature is built on the basis of this series. Its nature’s way of perfect design. Anything built on the basis of this ratio look perfect…Gize pyramids are also based on this ratio, Leonardo Da Vinci used this ratio extensively in his artwork; he conducted an entire exploration of the human body and the ratios of the lengths of various body parts.

So it is also called Divine Proportion. It is the division of a given unit of length into two parts such that the ratio of the shorter to the longer equals the ratio of the longer part to the whole or, when a line is divided such that the ratio of the longer part of the line to the whole is exactly the same ratio as the shorter part of the line is to the longer part. This ratio is golden mean or phi, which is approximately 1.61803. The higher you go in the Fibonacci sequence, the more closely the ratio between two successive numbers in the sequence approximates phi.

Shapes proportioned according to the golden ratio have long been considered aesthetically pleasing throughout many cultures, and is still used frequently in art and design, suggesting a natural balance between symmetry and asymmetry.

The master creator has left his watermark everywhere. He might have used this ratio for some purpose which we don’t understand but we KNOW HE has used it. This golden mean is a bit complex but once we understand it, it opens a new world to us. Same is theory of relativity, multi universe, time travel etc.

If we sit among the Gurus discussing it, we may find our head twisting as these are most difficult things for human mind. But when we Understand or Follow it, our Vision changes and we begin to see and comprehend a Life which was always HIDDEN from us.

We feel alike when we sit among another set of Gurus like CA’s, Finance professionals, Taxation experts etc. They use very complex phrases like “Excise duty is payable on manufacturing, but payment event is triggered on removal of goods from the factory gate. CST input can’t be set off against VAT liability but against CST liability.” Common man shivers on the name of Tax laws. Big words, tough ones. These are too complex. Our tax laws have become much complex and lengthy but I do not feel that tax administers have done it. Actually they are forced to insert/remove new tax rules due to some smart people exploiting the weakness of their rules. So they change their rules accordingly but all of it has rendered our tax laws into a big tree with thousands of interconnected branches and we are supposed to read one rule with reference to 10-20 other rules.

Being a CA myself, I have been the privilege of being in many so discussions. We think by understanding complex tax law we are doing something but at the end these taxes are just a mean to collect the money from the earners to distribute them to laggards to fulfill the political wishlists. You can go on feeding a poor man with free food for eternity but he will remain depend upon you. You are not doing any good. This is what our government is doing all the time. Very less money is really invested for growth. No denying to the fact that govt needs money for security and justice. So these tax laws are complex so that no one can evade it. There is no big deal in absorbing this mess.

And what our administers say about this mess? They say that tax income is needed for the security/growth of the country, helping the poor etc. but is it so? Whether they are successful in fulfilling the PURPOSE? A big NO! Poor pay the same amount of tax on Tea as is paid by a rich man. Our Government is still unable to devise a system to keep poor out of the sales tax. They say that they use the tax income to help the poor, but everybody knows the efficiency of distribution system of government where 50-60 rupees out of 100 are wasted or stolen. But yet so many talks, use of big words like “GST will end the cascading effect of taxes” when they are a failure in serving the purpose of collecting high amount of taxes.

Taxes on Indian liquor are around 100% which makes liquor very costly for a poor man. And so poor man buys substandard low quality liquor and many times he dies because of this. State says our constitution asks them to prohibit the use of liquor. But what about our Army? Army gets the liquor without taxes and at even lower prices. Why? They say they work in difficult conditions and also need to fight the depression of tough life. But whether our poor laborer lives an easy life? No, they live even harder life devoid of basic facilities. But on the contrary, every state earns around 20% of their tax income from liquor!!

Government talks about lowering oil imports, pollution. The way we are living, there are high chances pollution will kill everything. In order to promote consumption to bring growth, everybody focused on cheaper loans for cars etc. And then new roads, steel etc for these cars, trucks all of which contribute their share in pollution.

But in another feat of splendor, they kept their eyes off from the easiest remedy; instead they levied high taxes on it. I am talking about poor Bicycle which is taxed anywhere around 15-20%. It should have got subsidies but it is taxed!! So ridiculous. I mean what our planners really understand. Government should never enter any business; especially in competition with private sector. Just look at Air India, HMT, BSNL. These crowns were crushed by private elephants. But at least they can act rationally while levying taxes.

They should have promoted Cycle sharing systems, separate bicycle lanes, reward schemes for using bicycles, subsidies on bicycles with no tax. Bicycle are a panacea to reduce the dependence on costly oil, accidents, pollution, provides health benefits. But still india is way behind in using bicycles. Our share in global exports and production is also very low. China leads the way in it with 67% against 10% of india. India produce around 15 million bicycles but it exports just 5-6% out of it.

India exports bicycles mainly to Africa and other less developed nations. Their exports to western countries are negligible as we can’t meet their demand for high end products. Exports are growing at 10% but imports of high end bikes from countries like china are growing at 25%!! Although now we are waking up to it and companies like Hero and Tube are investing big into R&D. India mainly use steel for their cycles but global demand is for alloy, carbon or titanium based components which are not produced in india. India also lacks the technology to manufacture high technical cycle products like gears, disc brakes etc. which are currently imported. Here again, our great government planner play their innovative part by  imposing import duties of around 20% which further raise the final prices and hit the export competitiveness. We are urgently required to sort out these issues just like we did in pharma and auto parts.

Copenhagen, the capital of Denmark, is regarded as bike city of the world. Maximum people use bicycles for their household and office work. Most of the people owns a bicycle but not a car. Around 70% of their parliament members use bicycles. No wonder, Denmark is world’s cleanest and most peaceful country.

As a counter measure to deal with rising emission levels and congestion on roads, presently, 800 cities in 56 countries have well established public bicycle sharing systems. The system consists of bike hubs situation in an area from where anyone can rent a bike for short distance commuting. The cycle can be picked up from one hub and left at another on reaching the destination. The cycles are made available at cheap rents. Advanced electronic assisted tools help preventing theft or misuse.

It cuts traffic trouble and struggle for parking space. A space required to park a car can accommodate 15-20 cycles. Neighboring China is the world's largest shared-bike market with a fleet of 858,000. France started Velib’ in 2007, now the world’s second-largest operation.

But we are way behind the globe in using bicycles in spite of the fact that we are a poor country and bicycle suits us the most. Like just 50% of rural households have a bicycle in india as compared to 100% of china. Cheapest bicycle cost around 15% of annual per capita income as compared to 2.5% of china (our planner please open your eyes). So our planners needs to seriously eliminate the taxes on bicycles costing less than 5000 to help the poor along with providing direct subsidy to consumers on every purchase of bicycle.

So no doubt we need to do much in this direction. And I think that this is just on the anvil. Although the demand for high end sports bikes are growing fast in india for last few years but this is nowhere near the potential. Just as New Delhi Govt has imposed even-odd rule for vehicles on the roads on alternate days, I think measures for bicycle will be announced soon. It will take time to build separate cycle lanes in the city, but at least cycles can be made compulsory in colleges and universities. Government employees should be encouraged to use bicycles.

Efforts should be made to make people aware about the benefits of cycles and change in the image of bicycles as poor man’s gadget.

Although Hero cycles is the largest in india with around 40% shares but Tube with brands BSA and Hercules is second at around 25-30% share.

Tube got around 1300 cr from cycle business in 2014-15 with around 60 cr as operating profit before interest and taxes which is good keeping in view the competition with low demand, setting up of retail points (around 940), new models…the benefits of these will be realized in the future. As against this much older Atlas cycle with around 600 cr is grappled with losses for past many years. So Tube’s performance is encouraging relatively as sector is yet to see its good time. It is best placed along with Hero to reap the benefits of most probable surge in demand of bicycles in india. I have been to many cycle stores with some selling only high end costly bikes starting from 20000 and they are getting good respond. The only thing which I see lacking is proper brand promotion.

Cycle manufacturers need to link bikes with fitness and machismo; they need to endorse someone like Salman khan or John Abrahm and create a new product line. Tube and Hero has the financial muscle to do this.

Tube’s metal and engineering products divisions are fairly big in size with turnover of around 2700 cr. I will write more on these two on some other time.

Its most prized assets are cholamandalam investment and finance company ltd (CIFC, listed) and Cholamandalam MS general insurance company ltd (not listed). It is having 50.4% holding of CIFC. Current market value of CIFC is around 10000 cr, so its 50% share is valued at 5000 cr which with 30% holding company discount is valued at 3500 cr. Its insurance business is not listed but it earned around 150 cr net profit last year, I am giving it 30 PE ratio which is not high as compared to the current deal in the sector as growth prospects are very high in general insurance in india. So its value will be 4500 cr. Its share is 74% which valued it around 3200 cr. Since it is not listed I am not discounting it. These two are valued at 6700 cr itself. Current market value of Tube is 7800 cr which makes its standalone business with turnover of 4000 cr valued at just 1000 cr.

It also holds 70% in listed shanti gears whose market value is at 900 cr. It is also having a 50:50 JV with Tsubamex of japan for making dies and tools for which india depends on imports. It has invested around 20 cr in the JV which may bring good revenues in the future.

I want to devote some more time on detailing its other businesses but only for time and length of the article. I will post another post on it. Its cmp is 420 but do not make big of it as it is a Murugappa group company; Eid parry and Coromandal international. Good buy at CMP and at every fall.

Let’s wait for our respected PM to say “Michael on cycle” and this cycle will turn into a rocket.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares of Tube Investments of India ltd)