Narayana Hrudayalaya Ltd and Max ventures : Result Update

Narayana Hrudayalaya Ltd-Narayana has given great set of numbers…even surpassing all the expectations:

Fig in Cr.
Description	Sep-19	Sep-18	Growth %
Turnover	822	713	13.26%
EBITDA	128	76	68.42%
EBITDA margin	15.57%	10.66%
NP	45	13.5	233.33%

As we can see, against top line growth of 13% the growth in NP is staggering 2.3 times so operating leverage is getting into action now and this will only increase from here on. NH still has 11% of its total bed capacity as new centers and these have negative EBITDA of around 14 cr this quarter and as the same will get matured the performance will be even better. EBITDA margins are at 15.6% vs 10.6% last year. For its Cayman island hospital HCCI- the revenue growth is 26% from USD 12.7 million to USD 16 million (around Rs. 114 cr). At 24% its EBITDA margins are great and this shows the potential when NH will decide to expand HCCI capacity and will open more such centers worldwide near developed countries. But that will happen once NH is free from India and if you ask me that may take some more time as India in itself is yet an under-developed market and scope of expansion is vast. NH has invested big in last 3-4 years and I think it’ll take a little breather now and then the next round of investments will come. But in my view for global expansion they need a partner and it is not the best model where NH is putting all the money as this will run into big money so very soon we’ll see something big in this line also from NH…may be some foreign governments will chose NH as their partner for their country wide healthcare programme.

I still find it hard to believe why our government is slow in recognizing these new pillars of Indian economy. Why our economists still think that our consumption is slowing down and we need to consume more for the growth? If you ask me then this should be the problem of some developed country like America not a growing country like India. We need investments into other segments now. Autos and FMCG are at saturation point as per our current status of income and employment levels so we need to increase our income and employment penetration into real economy. Healthcare is our expertise and we urgently need to build a business model around it to capture export business whether in the form of medical tourism or investments in other countries like Africa. African nations regard India as blessings due to extremely cheap medicines for deadly diseases like AIDS produced by Indian pharma companies like Cipla and Laurus labs (laurus Labs is another name which will become big in the near future. I have invested big chunk of my portfolio in It. This is my second pharma investment after Biocon).

Recently Narayana Health has been recognized as one of the world’s most innovative health care providers by Fortune magazine’s annual “Change The World” list of companies. It is at 33th place out of 52 and it is the only one out of 9 firms with less than a billion dollars in annual revenue. It even toppled the global giants like Alibaba, Hilton, eBay, JPMorgan Chase, and Patagonia. Here, the scale of charity is not the factor to look after but along with the desire to do something good for the humanity/society the firm should have a great sustainable business Idea and that is what set NH apart from the crowd.

I am going to do some more buying of NH in order to celebrate the success of NH. I do not think that we may be able to see this one under 300 may be after tomorrow.

Max Venture: The results are just great. But the most hearting thing is the announcement that they have bought a distressed real estate asset in Noida. I was expecting this and mention the same in my previous post also. I had marked this step as a sign of their strategy that they are going to make the maximum of current state of affairs of real estate sector.

They have entered into an agreement to buy a land parcel at a prime location on Noida Expressway (Sector129) for Rs. 110 cr and development potential of this land is approx. 7 lakh sq ft. Just like the Max Tower they will make a Grade A + leasable Commercial Office space. They have built the max tower on “Workwell” philosophy where employee can also enjoy recreational activities along with office work. Better organizations these days are recognizing the need to offer their employees a stress free and engaging work environment in order to make them perform at their full potential and staying healthy. So recognizing the need of these companies, Max has built this tower and this shows their vision in judging the best opportunity. They have the skills to develop real estate because in Max Healthcare they have developed some of the best hospitals in India and this experience of developing top quality real estate will prove to be a big difference in strong execution skills and they have proved the same by completing the max tower in record time with one of the best in design and quality.

For results, their topline is at 435 vs 268 cr last year and PBT (excluding other income) is at 13.23 cr vs loss of 12 cr last year. With very high growth potential, Net worth at 870 cr, right issue at a valuation of some 950 cr …it is trading at a valuation of 576 cr. Good worthy bet in commercial real estate.

(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. Reach me at oscillationss@yahoo.in).

Narayana Hrudayalaya Ltd: The Axis Mundi of Stock Market

Narayana Hrudayalaya: This is one stock in which I have invested quite a big part of my portfolio and advised everybody to invest big in this one. I am continuously advising this one at this blog- All the way from 250 in 2016 to 200 recently. Its stock price has increased quite a bit after that and now it is at 275. Healthcare is the next big thing going to happen in Indian economy. Healthcare is a stunning option for Indian economy and this is where we have unmatchable technical expertise and we can create an affordable global hub for healthcare services to promote medical tourism. We already are one of the biggest and highest growing medical tourism but we can create a real giant much bigger than IT industry. Unlike other industries, healthcare sector create more jobs as the role of machines are comparatively less.

And when it comes to affordable healthcare then NH is the undisputed leader…in fact no comparison at all. Apart from medical tourism local demand is going to be strong due to rising income levels and life expectancy, health insurance penetration and Government health schemes.

Healthcare sector is going to see the big disruption in the near future and NH is going to be the major disruptor. Due to high pricing healthcare is still unaffordable to the masses. Across the globe, still 90% people can't afford heart surgeries and are dying a death which can be and should be avoided. Healthcare industry due to its own inefficiencies has created a situation where people believe that healthcare indeed is a premium high price thing. But then NH happened and they have brought the assembly line disruption in healthcare and proved to the world that even at much lower prices healthcare business can be profitable. That's why i feel healthcare sector has HUGE scope of scale and NH has everything to capture a big chunk of this opportunity. 

In fact i want our government to take this industry very seriously as this has the capability to do something big for our economy even bigger than IT industry and can be a large foreign exchange earner. I even want our Government to support (financing) the likes of NH to open hospitals across the globe in order to earn precious foreign exchange...our government needs to recognize the points of strength in Indian economy and then doing all it can do to support and grow those. Nothing at present is better than healthcare in fact if you ask me then i can say our technical skills in healthcare are much better than Pharma and IT industry. Our doctors are easily one of the best across the world in their skills and we need to learn to harness this skill of ours.

We started picking NH around 260 2-3 years back and when it touched 350 during peak market in 2017 I was thinking that I would have no other option but to invest more in this at 400-500 levels. But then market fell and NH started falling also and recently it touched 180 levels and I grabbed the opportunity to invest as much as I can at these levels. Now my average is some 230-240. NH has already given stunning improvement in its results in last 2 quarters. The improvement although was inevitable because as the maturity profile of its hospitals increases they generate more profits.

Actually in Healthcare there is high operating leverage as most of the expenses are fixed so when a hospital is new, revenue will be lower but fixed charges like depreciation/lease rentals of building, machinery, staff payments hit hard. Healthcare uses very expensive medical equipment so upfront fixed expenses are high so this gives a false impression of losses. But as most charges are fixed so most of the incremental revenue goes to bottom line and this is precisely what has happened with NH as its topline is growing some 15-20% but bottom line is growing 400-500% for last 2 quarters. Even for this quarter results I expect around 200% growth.

Just to offer a perspective on the impact of operating leverage- if we compare the last 2 quarters results with corresponding period of last year (Mar-18/jun-18 vs Mar19/jun19) then the following picture emerges:

Fig in Cr.
Description	Mar-18/Jun-18	Mar-19/Jun-19	Growth %
Turnover	1300	1542	18.62%
EBITDA	67	191	185.07%
NP	6	67	1016.67%

So as we can see fortopline growth of 19% the corresponding growth in EBITDA and NP is staggering 185% and 1000%. This shows the massive re-rating potential of NH. Due to the mix of mature and new hospitals which impacts the bottom line individualy in opposite direction it is not propoer to value it on the basis of conventional PE ratio. Here EBITDA will give some insights. If we take the recent deals of Fortis and Max Healthcare at around 25 times EBITDA levels as benchmark then at EBITDA (last 12 months) of 340 cr then this value the NH at some 8500 cr. But both Fortis and Max Healthcare has much higher proportion of mature hospitals while NH is quite a young fellow. So its young age,  precision level capabilities and low cost model  are sufficient to value this one much higher- at 30 times EBITDA which makes this one valued at 9000-10000 cr (after deducting debt around 700 cr). Its current market cap is just 5600 cr. Also, we should keep in mind that its EBITDA is growing very fast and it will not be a surprise if we see an EBITDA of 450 cr for this year. So this will make 10000 cr as some 20 times of EBITDA which is quite well within the reach.

HCCI-the jewel in the crown

Further, it has established one of the best hospitals in Cayman Island near USA named HCCI. Earlier NH was having 29% stake in it but now they have acquired 100% stake in it. This is a novel experiment by NH to capture the US/Canada and Caribbean markets with its low cost model. It has received great response and accolades for top notch quality care at affordable rates.

HCCI’s pricing is not as low as the pricing NH charges in India, but services are typically one-half to one-quarter lower than in the US. For example, a Coronary Artery Bypass Graft (CABG) is currently priced at about $32,000, compared to a 2015 US average of $151,785. Hepatitis-C treatments under commercial coverage in the US currently average $75,000 vs. $19,000 at HCCI. The average 2016 US price for hip replacement is $39,299, while HCCI offers bundled pricing of $15,800. Dr. Shetty has set an ambitious goal of reducing all these prices further by 50% in five years. HCCI’s initial 104 bed facility cost $46 million or about $442,000 per bed, compares to more than $1.5 million per bed currently in the US.

HCCI is already getting significant traffic from the Caribbean, Central and Latin America and Canada and traffic is now growing from the US as well. It has shocked USA healthcare industry with this kind of affordable pricing and many USA healthcare analysts/players are lauding NH for this initiative. HCCI is going to touch some 400-500 cr revenues this year and it has very high operating margins of 27-30%. But most important thing is that the success of this initiative will create the blue print for more such ventures and nobody from India has the caliber to take this type of innovation and risk but this is something which has the potential to transform global healthcare industry and Indian economy.

Earlier, American healthcare industry never considered affordable indian healthcare as a threat because nobody will travel to India from USA with all sorts of negativity about Indian hygiene and poverty. But what Dr. Devi Shetty has done has literally shaken the Americans to the core and they are considering NH as a very serious threat. US people are expecting that HCCI will force American healthcare industry to reduce its high prices.

NH-The Axis Mundi

NH is a disruption never seen before and at present I don’t think that analysts’ fraternity has the requisite expertise to measure its margins and topline growth in the future. I adore this man Dr. Devi Shetty and feel there is nobody in India (may be Globe) who can match with him in terms of capability, eye for details, aggression, integrity, passion and most importantly humanity. He has never returned any poor patient for money and there are many stories where poor people adore him like God placing his picture amid other Indian deities. Sometimes back, I thought of writing a detailed post on the strategy and future of NH and Dr.Devi Shetty…I went on writing and writing and so far it has covered some 14-15 pages and I am still not satisfied and I wonder whether I’ll ever be…because I am in awe of this man Dr. Devi Shetty. For this article I have just used some parts of that article. But I will submit the full study very soon…I need to stop at some point in order to enjoy the surroundings.

Today is the result day for NH and I am counting on hefty growth in topline and bottom line. So it is a great fit for every portfolio and a great buy below 300. CMP is 275.

NH has brought down the prices of heart surgeries to such a low that the same looks like a charity.  It offers heart surgeries at $1000 compared to $40000-100000 by western counterparts!!! It is offering these even at 1/3rd of prices in normal Indian hospitals. And these prices have left the globe in awe but even at these prices NH is earning profits. NH has taken the price of heart care to 1990’s levels. Also earlier avatar of NH was more of a philanthropic one where it didn’t care much for the returns. But after IPO NH is focusing on profits also and in order to maintain the affordability it is reconstructing its business completely.

NH is just like the great Kailash parbat- the only un-climbed summit of the world (However as per Tibetan legends, Milarepa the great Tibetan Mystic has climbed the summit in 12th century...and none after him). It is full of mysteries which are just a sign that it is the summit of spirituality and a place just best suited for Gods to rest and watch us.

Some mystics regard Mount kailash as Axis Mundi...means a place where Earth meets the Divine. They say it is the door way to the world of Gods...the Sachkhand...the Shambhala.

NH is the Axis-Mundi of the stock market where charity and compassion meets business and you can't decide whether it is business or charity. And the high PE ratio it deserves is only for the Reverence.

(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. Reach me at oscillationss@yahoo.in).

Max India ltd and Max Financial-Updates

Dear All, Max India has run up quite well after our recent entry at 56 in Aug-19 (click here for previous post on Max group).It is trading around 80 so good 50% growth in last 2 months but if you ask me it is just the start.

Healthcare Business: As shared in the last post on Max India, I am a great admirer of this man Abhay Soi the current chairman of Max Healthcare and I have very high expectations from him. And by looking at this quarter results he has just proved his mettle. They have given stunning set of numbers. Max healthcare revenue grows 13% to 753 cr vs 664 cr. But the star performer is the EBITDA margins which have grown 79% to 116 cr vs 65 cr last year. EBITDA margins are at 15.4% an improvement of 4.36%. Net profit is at 30 cr vs loss of 7 cr last year. So this is a great turnaround and looks like Abhai soi is straight on the task. He is a champion in turnarounds and revivals…a master in cost rationalization and improvement in efficiency.

I do not have the numbers for matured and new hospitals of max healthcare because for Apollo Hospitals the EBITDA margin of matured hospitals is around 22% but for the whole business the same is around 14% so Max healthcare is doing fine although there is still immense scope for growth because current phase is just the start of restructuring post-merger with Radiant life.

Real estate business- As I have shared earlier real estate is going to be the next focus area for the group and I am expecting high activity in this sector from the group. Like for Max Venture, I am eagerly waiting for some news regarding acquisition of some distressed realty project by Max Estates. I think that very soon we’ll see the heightened activity in real estate as distressed real estate developers will run for shelter to much better players like Max group. Banks will start pressing for loan repayments now as they have almost cleaned and provided for the infrastructure NPA’s and next segment is real estate where I think the quantum of distress will be less because at good prices real estate still is capable of generating high demand as compared to distressed assets in the form of Road, power and steel plants.

Max Finanacial Services: Max Fin is also doing good and touched 480 from 400 levels. As I have shared earlier this one is grossly undervalued. Max life is the brainchild of Analjit singh and he has transformed this one into one of the best professionally managed insurance company with very strong ethics. They still have one of the most productive and well trained agency network and this is going to be a critical factor because Max Life is looking to grow their pure protection business (term plan) where bancassurance has very little impact. Bancassurance is best suited for ULIPs where ticket size is higher not for term plans. But term plans are the best for life insurance business as they are simpler and high margin products and Max India is at 2^nd number with 17% share of term plans out of its total premium income. HDFC is at the first…the likes of SBI and ICICI are much behind and they are mainly ULIP players the demand for which is fading away and that’s why I feel in no case SBI life should get so much higher valuations than Max life.

Earlier i made 5-6 times gain in the erstwhile max India which I sold in 2016. But after that it has almost doubled its premium income and but trading at much lower price and the major reason as I have explained earlier is pledged holding of Analjit singh (some 80-90%). But as i have explained in the earlier Post the debt of analjit singh is against real estate assets and he may choose to sell his stake in max Life or some real estate assets although as per the news reports he is looking to sell 10% stake in Max Life and I think with this debt issues will be resolved.

But one thing, Analjit singh has chosen to part away his holding in Life insurance business but have not opted to sell his real estate assets which clearly shows his priorities at present and that’s why I feel that he is going to do something big in real estate.

Coming back to Max Life, apart from stake sale and pledged share issue the next big trigger is investment by Axis bank which is looking to establish its own insurance business. Axis bank holds 2.99% in Max life at present. I think Analjit singh may even sell his 10% stake to Axis bank although as per media reports Munjal family is in the fray.

But still Max Fin is trading very cheap. As I have shared in the previous post, at that time its market value was around 10000 cr which means it was trading at 1.6 times (now around 2) of its Embedded value (EV) which in my view was extremely low for a highly efficient and reputed life insurance player. SBI Life trades at 5 times its EV and HDFC at some 20 times. Last year both SBI Life and Max Fin were trading at 3 times EV so one can see the gross undervaluation. Could not get time to study the results of Max Fin but I am planning to post a detailed study on max Financial soon. 

So I think both Max India and Max Financial are still worthy for investing money but I also feel that this may be the last opportunity to pick both at these levels.

 (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).

MSTC Ltd: In a Parallel world it is trading at 50 PE

Dear All  MSTC Ltd  is my recent entry and I think market may have made a grave mistake in valuing this one as some trading entity with high debtors issue and concluded at worrying levels of working capital but they could not realize that this is the thing of the past and valuation in stock market is derived from the future. MSTC in its new avatar is scaling down its working capital intensive trading business and is focusing on new age businesses- B2B ecommerce and scrapping of old vehicles and both these businesses are stunning.

People run after the likes of Flipkart madly which are incurring huge losses and business model is not that strong because in my view they are yet to add value in the supply chain of a product. They have established themselves so far as discounting entities rather than adding some value to the entire process by bringing the cost of distribution down and then passing on the same in the form of reduced prices to common man which sadly is not the case. Flipkart has sold merchandise valued Rs. 42000 cr on its platform and with astronomical losses.

Compared to this, MSTC on its B2B platform executes transactions of some 1.25 lac cr with revenues of  220 cr and around 150-180 cr as profits (not calculated, just rough idea) and I find it hard to believe that people are dying to buy fancy huge loss making B2C start ups but ignoring B2B businesses available cheap. B2B ecommerce has much bigger transaction value, much larger transaction volumes and very sticky revenue stream and clients. The problem not solved by B2C ecommerce is solved by B2B ecommerce and they provide tremendous value to the businesses wanting to save time and costs, maintain the quality and security in procuring goods. B2B Ecommerce is very matured and adds immense value by providing reliable and secure trading, saves time and ensures fair price discovery.
 
Just imagine the time and effort required by Mahindra and Mahindra to source scrap steel for its auto division- selecting vendors, preparing bids, evaluating bids and then logistics and payment etc. All this requires and consumes resources and time but on B2B platform of MSTC the same can be executed extremely fast and discovered price will be much lower due to large numbers of vendors competing each other. Due to these reasons, B2B ecommerce has high networking effects just like Naukri.com which is always profitable for last 2 decades and nobody could grab the market share from it. This happens because of the first mover advantage where large numbers of sellers and buyers provides huge networking effects.

I am also surprised at the lower valuations demanded by Government while going for the IPO. Let me share something here. Mjunction is another B2B ecommerce player which competes with MSTC. Tata steel and Sail are 50:50 JV partner in it. It executes orders to the tune of 1.5 lac cr and its revenue is around 257 cr and NP is around 45 cr last year (MSTC appears to have much higher profits but that I think may be due to the fact that entire resources are allocated also among other verticals with high turnover…but I am yet to compute the NP but in any case the same is going to be very high in percentages). Tata steel is looking to sell its 50% stake and it is looking at valuation of some 3000 cr at 70-75 PE. So we can also value MSTC ecommerce business around 2000 cr to 2500 cr quite easily while current valuation is just 800 cr trading at PE ratio of around 6-7!!. Further, Flipkart has been valued around 1 lac cr in the last deal by Walmart!!! This gross undervaluation is what they call a Glitch in the Matrix.

Another gem in the crown is the coming old car shredding business which MSTC is doing with Mahindra in equal JV. They have started the first plant in Noida and second plant is coming in Chennai soon. No doubt this is going to see huge growth and going to be the major value creator.

Further, analysts were shouting that MSTC is dependent upon government support to get the revenues from govt and other PSU organizations although they are dying to buy another Govt supported stock IRCTC. Although there is still nothing wrong in government providing the support to businesses because I have always felt that in some sectors it is better if government takes the initiative and put efforts in creating infrastructure and faith in the sector. Chinese state owned organizations have catapulted china into a Giant only on the basis of their efforts to create an environment of confidence and capability. Govt as a client helps these niche businesses to sharpen their skills and mend any loopholes. MSTC has created a highly capable and trustworthy infrastructure for B2B ecommerce by ensuring fair discovery of price and payment settlement eliminating all the third party risks. Due to trust factor, people still do not place orders at another big indian B2B startup Indiamart which is coming with an IPO and this may further establish the valuation benchmarks and rerating of MSTC.

But MSTC is already focusing on partnering  with private sector and recently has entered into deals with Reliance, L&T, Mittal energy for sale of their scrap at its platform and there is no doubt that scrap is just the start and in my view very soon the relationship will be expanded to cover e-procurement also. And due to this alone MSTC deserves big re-rating because it has demonstrated that it can attract Indian private sector giants to trade at its platform which is a big achievement for a PSU which is generally considered lethargic. Here, these private sector are not partnering with MSTC due to some government factor but the fact is for capturing the business from private sector MSTC is competing directly with other private sector B2B ecommerce firms.

MSTC is expanding the coverage of its B2b offerings and off late has covered agricultural produce, coal, govt land, minerals etc on its platform. Just lasy day it has entered into a tie up with Allahabad bank to auction the latter’s NPA on its ecommerce platform. This is indeed a very innovative product and this is going to motivate other banks also to come to its platform to ensure the fair and efficient settlement of NPAs. 

Farmers in our country are not suffering due to production issues but here our main pain point is the very inefficient supply chain where farmers get very low proportion of the final price. But this is not something which can't be solved. Just take the case of Dairy sector where due to supply chain revolution by co-operatives like GCMMF (Amul Milk) farmers get some 70-80% of the final milk price. This is a big revolution and needs to be replicated in agriculture produce also. This high share of farmer is the reason that MNC dairy giants like Danone are struggling to capture Indian market because in India dairy chains do not own large dairy farms keeping hundreds of animals. Here farmer is the producer and the relationship with the farmer in the form of milk sourcing tie up acts as a big entry barrier. It is very costly to run a dairy farm in India due to high land prices etc.

Similar innovation is required in agri produce supply chain also and this is one area about which i have already shared a lot in my earlier posts related to MCX/commodity trading. So in order to achieve the same MSTC has started auction and e-procurement of agri produce on its ecommerce platform (launched E-Rakam) where farmers and retailers/processors can trade and this has ensured good price discovery. At present, MSTC is working on solving the second aspect of this price discovery which is logistics support because someone has to do the role of aggregator and ensure the supply of agri produce to the buyers. MSTC is in touch with some innovative logistics startups and some airlines also. This is an area which is going to be big and why i think so because we have no choice otherwise our farmers will continue to reel under poverty and inefficiency and Government has to put (or waste) scarce and valuable resources to save the farmers. So this is an area where we urgently need to do something. Contract farming is another option to solve this mess and recently Tamil nadu government enacted a law in this regard and contract farming can save the farmers from the weird price moments and the inefficient supply chain.

In Agri produce auction and procurement at MSTC platform, i think various government agencies like NAFED and FCI can take the lead as this will motivate other private players to join and this will also increase the trust in the trading platform.

I have started buying this one from 115 and very soon going to put all my planned investment in this one. CMP is around 123 which is an excellent opportunity to enter and it is buy more at every fall type of stock. I have shared this small study as I feel that it is looking set for re-rating very soon and I will share my detailed study at some other time.

(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.Reach me at oscillationss@yahoo.in).

Clariant Chemicals (India) Ltd: Chemical Bonding

Clariant chemicals- When i entered in it around 600 in 2016 it was in restructuring mode as it had divested many of its units and bought businesses comprising masterbatch and carbon black. It always takes time to fit in new acquisitions to current organizational setup and derive synergy and this may affect the business temporarily. So when a company is getting most of its value from the future business performance then it is always better to do staged buying- buying in small at every significant event whether it is growth in sales or some new product launches.

So when market started falling in 2018 it also fell big time and touched 300. Although its share price was falling but i always had the confidence in the capability of the company to show great performance- It was having global chemical giant as its parent with annual sales of around $ 7 billion, operating in high growth Indian chemicals sector, environment concerns in china further supporting high growth in india, no debt in the books as recent expansions were financed by sale of non core businesses and land, althogh performance wasn't great but it was showing profits and paying dividends regularly. So the fall in stock price was a great opportunity to add more at much lower valuation like it is trading at a valuation of some 600 cr on a turnover of 1000 cr.

So i waited for improvements in results which I found in mar-19 results and started the next phase of investing in it around 270-300 levels. June-19 results were great and so as the today’s Sep-19 quarter results. So far this year for first six months the sales have been increased to Rs. 568 cr from 521 cr last year. The growth in topline is commendable keeping in view the slowness (not recession as is being shouted widely...structural shift in demand is taking place and we need local supply to spur the next phase of growth through new sectors) of the Indian economy. PBT (including like to like other income) is at 40 cr vs 23 cr last year but if we add 8.3 cr paid by Clariant for amnesty scheme of Maharashtra government to settle the outstanding sales tax litigation then the same will become 48 cr which is considerable growth. And as per the trends of last 3 quarters the improvement in performance is stable and this or even better will be the future trend. Generally when a company is in transition phase then one performance in one quarter does not indicate revival of the business so it is better to wait for the performance in at least 3 quarters (Madhya Marg of Lord Buddha) especially when with rise in turnover expenditures (other than raw material) are beginning to fall. Similar trend is visible in the recent performances of Clariant. Raw material impact (positive or negative) is universal for the entire sector (unless the company under consideration is much smaller which will have much adverse impact).

But Clariant chemicals is a company which is always in search of the next big thing and in the run up they are unloading the old baggage quite fast. In fact, this is the trend being followed by other innovative, R&D heavy global chemical giants to sell their commoditized chemical business and focus more on producing high margin innovative specialty chemicals. BASF is another giant who is regularly churning its product portfolio for finding the best fit for their business model which is to invest big for R&D for creating high margin products and when they see that their old products are getting commoditized due to entry of other players from Asia or elsewhere they just exit the business. This ensure two things- First, they get the much needed capital for investing into new novel products and second the sale of commodity business drains the capital from market for new line of products they are targeting.

Clariant started their first round of restructuring in 2013 by selling its textile chemicals, paper specialties and emulsions business to Archroma India Pvt Ltd as a part of the global sale of these businesses by parent. The business like textile chemicals was becoming a commodity after the onslaught of china and developed world was focusing more on environment friendly chemicals. So Clariant started another round of investments by buying fast growing high margin businesses of Masterbatch and carbon black in india in line with the focus of global parent. They acquired the masterbatch business of Gujarat-based Plastichemix Industries for Rs 135 crore ($22 million) and then acquired the black pigment preparations business of Lanxess, located at Nagda in Madhya Pradesh. But the funds were arranged by selling non-core businesses like textiles and the sale of land in india. So no debt was taken for these businesses and this was a master strategy.

So amid all this restructuring, the global parent was going through tough times due to disputes with minority shareholders pursuant to its plan to merge with global chemical giant Huntsman. After the deal fell through, the 25% stake of activist minority shareholders were bought by Saudi Arabia based chemical biggie Saudi Arabia Basic Industries Corp (SABIC) rescuing Clariant from a hostile takeover threat. Then, in another transformational attempt Clariant decided to divest its Masterbatch and Pigments business to focus more on high margin specialty chemicals business by forming a Jv with SABIC. But then falling auto sales (western market) made them to wait as they are developing new age auto chemicals. But their plans are still underway and very soon we may see something big in this regards. Clariant does not see much scope of growth and innovation in Pigments business as most of the pigments were invented this century and there is not much scope for any further technological innovation in these and amid competition from India and china means that margins may fall from here (Still high but not so high for their expected high return due to superior R&D capability).

Further, this SABIC is owned (70%) by none other than Saudi Aramco  which recently entered into a large deal to acquire 20% in Reliance’s petrochemical/refinery business for 15 billion USD. Petrochemicals are the raw material for chemicals/specialty chemicals business of Clariant and even the deal between Aramco and SABIC was cleared by CCI (Competition commission of India). Aramco is betting big on India and there are high chances that we may see some chemical bonding here in India.

Actually if one can see the names we are taking here are not some mavericks we encounter and invest our money with taking all the risks of the world. These names are the Giants like SABIC has turnover of some $ 40 billion, BASF has Euro 65 billion...the size and technical abilities are just beyond our comprehension. Clariant is a giant in itself but SABIC is way bigger than Clariant and i even feel that the day is not far when SABIC will even acquire majority stake in Clariant. The specialty chemicals business plan of both Clariant and SABIC is of such a gigantic scale that to meet out their share of investments Clariant has to divest its Pigments and Masterbatch businesses. Saudi government is looking to expand beyond their bread and butter Oil business and specialty chemicals is one such area where they can become a global giant and i do not rule out aggressive buyouts across the globe including India. So if Clariant decides to carry out the specialty chemicals business in india through listed entity then there is nothing better than this.

Sometimes back, our another MNC gem Linde India came out with delisting offer. We picked the same around 400 and estimated delisting price was around 1000. Although we were getting more than double but i was not happy at all as Linde India has stunning technical prowess and it is poised to capture the biggest share of industrial and medical gases in india along with launching its innovative products. Then,finally Reliance capital played the spoilsport (although blessings for us) by bidding 2000 as the bid price for delisting which was not accepted by the promoters and due to this delisting was cancelled. Due to thism stock price crashed from some 800 to 430 and i used the opportunity to buy more of this. Similarly, i would prefer sticking to Clariant in India rather than making an exit at some 2-3 times.

BASF has also sold its pigments business for euro 1.5 billion to Japanese chemical giant DIC in order to focus on new age specialty chemicals. So as one can see this is the time for consolidation in the dyes/pigments sector which is a sign that margins are falling and size of the business will be the key for future margins. So the players with higher technical abilities like BASF/Clariant who think that they have the better capabilities to create a new growth path for them are exiting the business to focus their resources on their future course of action. BASF is another stock where we have invested and is poised for even faster growth. BASF is world’s biggest chemical company based in Germany with turnover of some 65 billion Euros and annual R&D spending of 2 billion Euros. So no doubt these companies will create great wealth for us in the coming future with their top notch high tech products.

So if we assume that Clariant's Pigments and Masterbatch businesses will be divested soon (it is again in talks with USA based Polyone for $1.5 billion which i think is at significant premium to the price discussed in the media) by the parent then this will leave nothing in the business for listed arm as 93% sales is derived from both. So it means either Clariant will distribute the entire sale price (will be delisted) or will distribute some part of it and the rest will be used for venturing into specialty chemicals business. I think chances of first are quite high but I would like them to start specialty chemical business with the listed entity as they have some of the most innovative products.

But for time being, let’s try to value Clariant. Its EBIDTA is some 50 for first half this year and this is at the verge of margin expansion so we can safely assume full year EBIDTA of some 100-120 cr. Across the globe, recent chemical sector deals have been done at some 15-16 times of EBIDTA and most of the chemical companies in India are also trading at these valuations. But some deals have also happened at 19-20 times also. So let’s take 15 times- the value will anywhere be around 1500 cr to 2000 cr plus they have freehold land in the books costing 25 cr so we can assume significant value for the same also (as the same is rented so we can assume spare land). Against this the current market cap is some 600 cr which implies that the now is the golden opportunity to invest in it.

Clariant is a very liberal dividend player and we can expect handsome payouts even in case the listed Indian entity will continue to carry on the balance and next planned line of business.

Great buy at CMP of 276. Though this may not be available at this price from here on but still even at 300 it is worthy of putting money.

(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.  Reach me at oscillationss@yahoo.in).

MCX Ltd: Best OPTION for the FUTURE

MCX has given great set of numbers for Sep-19 quarter results. Turnover 100 cr vs 71 cr last year (excluding other income), PBT excluding other income is 43 cr vs 19 cr and NP at 72 cr vs 36 cr. QOQ turnover is at 100 cr vs 79 cr and PBT excluding other income is at 43 cr vs 23 cr. There is big jump in daily average volumes traded at 34500 cr vs 25648 cr last year vs 27473 cr in June-19 quarter. The average daily volumes crossed 30000 cr first time since the imposition of CTT in 2013. So this is indeed are an awesome set of numbers and a strong catalyst for huge re-rating of the stock.

MCX has gone through some tough times as far as stock price is concerned (although its business was always doing fine in this period). 

We made first entry around 1000 in Sep-2016 (click here and here for earlier blog posts on MCX) and it touched 1700 shortly after that but then it was on a downward spiral after that and this year I have done some heavy buying at 700 levels to brought down my average to some 850. But I never had the doubts on its great future growth prospectus and have been continuously advising to buy more of this one at every fall to the email group of this blog.

Actually market got fearful after SEBI allowed universal stock exchanges in India paving the way for the likes of BSE/NSE to enter commodity trading and market feared that the likes of BSE/NSE would take the game from MCX by offering predatory pricing initially. So MCX was falling for quite a time.

But I always believed that predatory pricing is not the best strategy and history has proved this time and again. BSE tried hard to get the volume for derivative business from NSE by offering nil charges still it failed. When MCX was facing tough time due to NSEL scam in 2013, NCDEX (NSE Promoted) tried hard to fetch the volume by low charges but it failed miserably!!

Why this happened and why MCX will see strong growth in business:

1) This is due to “Impact cost” which is the cost buyers have to bear due to lack of liquidity in the market and this cost is way higher than the trading charges charged or foregone by the new exchanges. Like if you want to buy 1000 nos. of stock A at 100 but at this price only 500 shares are available. Next sell is at 102 so you have paid 1000 more for balance 500 shares. So taking the ideal price as the base, Impact cost here is 2% which is way higher than the normal trading charges. This is the main reason traders do not leave established exchanges with strong liquidity. This is the experience across the globe and MCX has more than 90% share in all major commodities. That’s why even after the start of commodity trading by BSE/NSE in later stages of 2018 still their impact on the business of MCX is just minimal.

But Impact cost is different from the impact of other factors like some news, any other fundamental factor effecting the business and its future. Here, the impact cost means the impact of low trading volume. Ideally at any given price and time, almost infinite trading volumes should be available for buying at any given price. Like one can buy huge quantity of ITC at NSE at any given price and in fact the constituents of BSE/NSE indexes are chosen based in the impact costs and the same should be almost nil.

So as we can see this “impact cost” is the another version of networking effects and this is one of the strongest entry barriers in nay business as we can see the same happening for long time in Naukri.com which is the undisputed leader in the segment for almost 2 decades and nobody has hit Naukri even after trying hard.

2) Also, if NSE/BSE can attack commodity trading then MCX can attack currency trading. Currency trading is a natural extension of commodity trading. Like, if I am hedging my import of Oil at MCX then I also need to hedge my currency exposure which at present I am doing at two exchanges. So MCX can target this area and chances of win are quite high.

3) Entry of Institutional players: One of the major growth catalysts is and will be the entry of Mutual funds and PMS (portfolio managers) as recently SEBI has allowed the participation of institutional investors such as Mutual Funds and PMS in commodity trading. This is the long awaited reform for Indian commodity market as institutional players can provide the much needed liquidity, research and price discovery to the Indian commodity market which is needed in order to attract the corporate houses (who need commodities for their businesses) to trade or hedge the commodities at Indian commodity exchanges.

Before the entry of these institutional players, the only players in Indian commodity trading was retail investors, small commodity traders (as large corporates trades abroad due to very high impact costs), small numbers of corporate clients and some other small speculators. So as we can see these third world traders can’t do any good for the commodity trading on their own, they need the support of much bigger and able players in the form of MF etc.

Investments into commodity markets will help MF to diversify their assets and risks as when equity markets are down they can invest more in commodities where the prices are more fundamentally derived because of the presence of ultimate users of the commodity in the trading channel which is not the case of stock market and this makes the stock market very volatile. But I think MF’s will first understand the commodity trading and volumes will build slowly over time. I think there must have been some material impact of the participation by the MF’s in the sep-19 results of MCX but the same will be much stronger in the times to come.

Actually the major function of a commodity market is the discovery of fair price; price is best discovered when there is sufficient volume and liquidity and there are INFORMED players in the market not mere speculators. The role of a powerful and able regulator is equally important as it is their responsibility to keep a watch and take necessary steps for the growth of the market.

At present banks are not allowed to trade in commodity exchanges but if allowed then Banks are going to be a major player in both agri and non-agri commodities as banks have huge exposure to commodities as they lend to commodity players like farmers/producers. Here, SEBI is in favour of the same but RBI is not but if allowed then the same is definitely be a great step for Indian commodity trading.

I am yet to analyse the data for Indian corporates doing their trading and hedging in Indian exchanges but I think this will also grow in the future. I’ll check the same and will post the analysis in another post.

4) Then the impact of Option trading. Option trading has been allowed by SEBI and options are cheaper than futures due to lower charges and low impact of taxes like CTT as compared to Futures as transaction value in case of options is very low at just premium paid (Not the strike price like in case of Futures). Also, downside is limited in options to option premium paid while the same is unlimited in Futures. So options are the real hedge products just like term insurance.

Also, hedging by Futures is very costly due to requirements of MTM and margin money which impact cash flow and working capital. So big corporates with tight working capital arrangements find hedging through Futures very costly and capital intensive. So Options are the answer for their needs.

But as options are cheap so in short term it hit the profits of MCX last year but volume growth was always the main catalyst and this is going to happen soon. Right now, i do not think that options volumes are that high and there may be issues related to pricing of options (more on this in the next post).

MCX is mainly focusing on developing options business and launching index options which are major volume growth drivers. Also option business is difficult for new players like NSE/BSE because SEBI has placed daily volume restrictions for exchanges to launch options like for Agri commodities the average daily turnover should be at least Rs 200 cr, for non-agri commodities, it is at Rs 1,000 cr. Building of this much of daily turnover won’t be easy for new players and MCX can build strong position in options by then.

5) Rationalization of Commodity transaction tax (CTT): This is another step which i am expecting from our government sooner or later and the same will happen when the entry of institutional players will have provided the much needed depth to the Indian commodity trading and the role of speculators/cartel will be minimal. Any such rationlization of CTT will be a big booster for the growth of commodity trading in india.

I have more to update on the various factors affecting the business of MCX but I’ll do the same in another post on this shortly with more detailed analysis because I think this is one story which is going to become very big in the near future and MCX can be the stock for next 5 years. NSE is scouting for acquiring a stake in MCX and I think Kotak was also looking to exit and as now it is back to strong growth so Kotak can now demand premium valuations from NSE and the deal may happen at much higher prices (may be at 2000).

At current market price of Rs. 1000 it is trading at PE ratio of just 20 (TTM) and forward PE ratio is just somewhere around 15 when it should command at least 40 keeping in view the fact that it commands more than 90% share of Indian commodity trading market. Its market capitalization is Rs. 5000 cr when NSE (Biggest stock exchange) is going to have a market capitalization of more than Rs. 50000 cr in upcoming IPO. For a perspective, commodity markets are way bigger than equity across the globe like in USA, commodity turnover is about 6 times the equity turnover, in china the figure is 2 times but in India commodity turnover is just 1/10th of the equity market.  This points toward the unexplored scope for high future growth for commodity trading and MCX in India. So I have no doubt that it is a very strong re-rating candidate and a must buy at any price around 1100-1200.

(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. Reach me at oscillationss@yahoo.in).