Max India,Max ventures and Analjit singh:Money,Velocity and Salvation

I see people analyzing a company…they try to extract the gold from financial data, numbers…investing all their efforts on the financial data as if the figures of turnover, profits are generated in auto mode by some business entity. But no such entity exists…behind all these superlative businesses, giant economies is just one factor-Human factor. The figures we try to use to judge the worthiness of a business are nothing but a quantification of human efforts….and bad news is that even this quantification can’t capture the force behind human efforts-wisdom. It counts the money but leaves the velocity....human spirit, creativity and bravery is the Velocity. Total money in an economy is a function of base money multiplied by velocity of money.

Any central bank can increase the base money but still it does not ensure that this will increase the liquidity in any economy. The best example for the same is the massive quantitative easing by the US Fed where it raised the money base from some $ 900 billion in 2008 to $ 4 trillion in 2014 but still it could not impact anything-neither inflation rate as was feared but nor the consumption (and GDP)  as was expected because if money base was increased 4 times velocity of money came down to 4 from 17 (factor of 4). That’s why it is so difficult to channelize any economy in the desired direction. Due to uncontrolled factors like this we still do not have any universal growth formula just like E=MC².

Economists still can’t foresee how the velocity of money will change. There is no trend analysis possible because past experiences do not provide any such trends relative to supply of base money.  Money is a powerful tool in directing any economy but only when money velocity is stable. So the most important tool in the hands of central bank is hampered by the inability to measure the velocity factor and same thing is true for stock analysis. We try to use the best possible fundamental analysis tools to judge the validity and value of a stock…but still these tools are ineffective in valuing the force behind all performance indicators which is the-Human factor.

Also, sometimes I feel that economists can’t measure or judge this Velocity (V) because in the money equation (M*V=P*T or GDP) except V all other factors are independent of each other-Money base is an individual independent entity, so is Price level and volume of transactions. But here V is just an expression expressing the use of money (in fact, decision to use money) by general public...means V does not direct or establish anything because it is not an independent entity. Velocity does not direct the prices of goods but individual choices of demand and supply. More on this some other time. But in driving the performance of a company the velocity of the human factor is indeed independent of all other variables and that’s why this is so important.

So in most of the cases, I have found that we can focus on human being alone and we can find the gems. I have found some of my best picks by just valuing the human factor behind the company-Kiran Mazumdar shaw (Biocon), Vikas Oberoi (Oberoi Realty), Ajay Piramal (Piramal Enterprises), Analjit singh (Max Group), PRS Oberoi (EIH Hotel) and from current big bets Dr. Devi shetty (Narayana Hrudayalaya).

Today I am focusing again on Mr. Analjit singh who in my view has fantastic eye for gauging the next big thing in the business. He was one of the first to enter mobile telephony in India through his joint venture with Hutchison and made 561 cr by selling his stake to enter Life Insurance and created very strong brand image of Max New York life insurance among the big names in insurance sector backed by giant business houses like ICICI and HDFC and Reliance. Max New York life insurance is one of the most ethical having lowest agent turnover and highest agent productivity. Then he selected healthcare as the next focus area and started Max Healthcare which established itself quite fast. He singlehandedly created an empire of Rs. 15000 cr. But this eye for opportunity is not the real worthiness of Analjit singh.

A) Analjit singh means trust, ethics and wisdom

 He is one of the few in Indian business who has maintained and followed very high corporate governance and ethical standards. World renowned management Guru Ram Charan is his close friend. With his guidance, Analjit  singh transferred all his holding in Max group into Trusts. He wants Max to be a professionally managed company not promoter governed. He has kept management separate from ownership. His children had to work from scratch in Max to earn their place. He is so much obsessed with ethical management that if 4 out of 5 trustees vote against him then even he can’t move ahead with his action.

Max has one of India’s strongest Board and best independent directors. The Board has immense powers and no investor dares to challenge or force them to be yes men. I have never seen such a strong and high caliber board in any group as each board member is an institution in itself with highest regard for ethics and transparency. Some people find it hard to understand Analjit Singh’s obsession with governance and ethical standards and his decision to stay away from day-to-day management. But he has seen and bore the brunt of mismanagement in his family. Analjit singh is the son of Late Bhai Mohan singh the founder of Ranbaxy. In the family settlement of assets-His elder brother Parvinder singh who was close to Bhai Mohan singh got the  prized possession of Ranbaxy, Real estate went to brother Bhai Manjeet singh and Analjit singh got a small troubled textile factory at Okhla.

Analjit singh with Ram Charan

(Source: Forbes India)

Ram charan regards Analjit singh as one of his best students with great eye for details. Ram charan is a world renowned Management Guru, best-selling author. He advises to who’s who of global giants like GE, BOA, Dupont, Tata. He works alone and shaped a number of global CEO’s like current CEO of GE. GE is working with him for last 45 years. They say that nobody knows Corporate America better than Ram Charan. Ram Charan is the common link between the promoter, board and the senior management of Max India. He attends board meeting of Max once a year and give his guidance. Ram charan guides three children of Analjit singh in their individual businesses. Analjit singh regards Ram Charan central to strategy, people and ethics at Max group. Presence of person like Ram Charan is the best indication of Corp governance standards of the group.

Also, now is the time when cases of fraud, mismanagement, money leakage are coming out daily and it is shocking to see big names in the list. So here, a group like max with very strong ethical management and board has immense value. A company never commits a fraud...it is always the human factor that's why human is the most important factor in judging and evaluating a company.

I am a great fan of this man Analjit singh and learned quite a bit by following him. However, there are some people who think that he is a mercenary as he starts a business with great devotion but then when he gets a fair value he sells the same without any emotion whether it was Hutch, Life insurance (tried to merge with HDFC), Healthcare, health insurance. But I think all these transactions were prudent business decisions taken with a focus on protecting and growing shareholders. And decision to quit these businesses was primarily motivated by a new much better business opportunity in his eyes. His prime motive is earning profit and maintaining business viability not to create and maintain a legacy business. So whenever he sees that dynamics of their line of business are changing due to rising competition and requirement of high capital he understands that now is the time to change track. On the contrary, it is very challenging, difficult and discomforting to start a new business with great dedication again and again and i think this alone proves the risk taking ability and mettle of Analjit singh to succeed in tough environment.

But this change of track is never abrupt…new track is always laid beforehand. It is not that they start laying a fresh track only after taking the decision to change the track. Like when his life insurance business was generating profits he started healthcare business. But apart from business angle, I think there may be another reason that we see Analjit singh selling these businesses time and again-he does not feel belonged or related to these businesses. His inner being wants to demonstrate creativity, innovation on some other canvas.

Then, few years back, one day I read something about his new investment. He went to Africa to watch football world cup in 2010 and he just fell in love with the place-the Franschhoek winelands of Cape Town, the world-renowned wine-producing town.  He felt a sense of connection with that place and then started his string of investments in the real estate of Africa.

And I knew at once that Analjit singh has found his path to salvation-Real estate. And I am buying Max venture since then along with Max India. Earlier I earned 7 time return in erstwhile Max India (Before Demerger).

B) Real estate-Next big thing for Analjit singh

I think the moment he understood that he yearns for this business…that he wanted to use his creativity in this business he must have made his mind to exit his complex set of businesses of healthcare and insurance. People say that he wanted to quit as both especially healthcare needs high capital investment amid tight regulatory framework but I think he does not love the healthcare just like our Dr. Devi shetty who feels healthcare like his breath…like our PRS Oberoi who loves creating masterpieces through his hotels. Analjit singh was a close confidant of PRS Oberoi and was about to acquire a significant stake in EIH hotels to thwart the hostile takeover threat of ITC which holds a 15% stake in EIH hotels but his investment in EIH was strongly objected by Vikram oberoi and Arjun oberoi,  son and nephew of PRS oberoi.

Later on Reliance picked 15% stake in EIH (along with buying Analjit singh’s stake…some 5%). Although ITC always maintained that it’ll never go for hostile take-over of EIH…quite contrary of what L&T has just done to Mindtree. I think the recent hostile takeover of MIndtree by L&T is a black day for Indian corporate world. Mindtree was a stunning company and one of the most ethical, employee and shareholder friendly. Its promoters are one of the most passionate and visionary. On the contrary L&T is anything but ethical with accusations of forgery (by world bank), bribing and money laundering. When I was searching one name in Indian IT which can do big in Artificial Intelligence then Mindtree was the name I finalized and was planning for investing in it but takeover by L&T was a big blow for my plans also and I have dropped any plans of investing in it as of now.

Coming back to Analjit singh’s love for Africa-ever since he has felt the connection with the picturesque village of south Africa, he has invested some 300-400 cr in his personal capacity in south African real estate. Singh purchased 68 hectares of farmland with vineyards, olive trees, plum trees and pomegranate fields in Franschhoek valley in South Africa. Singh has 17 land holdings and substantial hectarage under wine cultivation.

He set up Leeu Collection, an international collection of four boutique hotels, restaurants, a spa, a microbrewery, and home to Mullineux & Leeu Family Wines.

Singh told Forbes Africa “Business is one part of my life but the person is more permanent and more holistic in a manner of speaking. So when I think of myself as a person and my likes and dislikes, and I don’t have many dislikes, what I like most are all the things this life embodies. This place gives me greenery, nature, mountains, fog, and science and technology, as wine-making is all about technology [with regard to] the maturation process, and the way the fruit is extracted. These are the things I like. I don’t like sitting in front of a computer screen trying to trade off the New York Stock Exchange. It’s not my cup of tea. I have therefore really begun to think of this lifestyle, even though my days are busy when I come here. But whilst you may call it work, for me, it’s the most pleasurable thing to do… I am in the moment when I am here. It’s the most restful state for the mind. I feed off natural energy.”

Local village people treat him like one of them now and he is a very famous person especially because people see in him the prospectus of job growth. In Franschhoek valley, he has one special figure as his neighbour- Sir Richard Branson founder of Virgin group is investing big in the valley due to superior wine making capability of the valley. The great mountains, pure and clean air and vast tourism potential has made the valley one of the biggest investment destination. Not a surprise that Analjit singh has seen the opportunity much earlier. These days he spends three months every year in his African properties.

He has also bought properties in Italy and London (Linthwaite House, a boutique luxury hotel at Windermere) and has around 68 key properties around the world including India. Recently, he has acquired a bungalow owned by his nephews Malvinder and Shivinder Singh for Rs 185 crore in Lutyens’ Delhi which is the most expensive real estate zone in Delhi. In acquiring all this, he has invested significant money of its own apart from incurring debt of some Rs. 2000 cr. Recently he is in talks with KKR to raise 2000 cr for reducing debt. The deal with KKR is going to have equity portion also.

Earlier in 2014, Analjit singh tried to buy a stake in Nashik based Nashik Vintners, the makers of Sula wines only to be pipped by Anil Ambani. I do not know the status of investment of Anil ambani.

As per latest estimates the property prices in the Franschhoek valley has increased by some 150% in last 5 years and so are the prices of properties of Analjit singh.

So I see that this is going to be one of his biggest and passionate venture and something which has the capability to engage him permanently. And this is where Analjit singh is seeking his salvation after wandering and covering the distance.

But as it has happened all the time, I think market has failed itself in understanding and valuing Analjit singh. However in difficult times, one would always prefer man of wisdom like Analjit singh. I do not know what is going in the mind of Mr. Market as I am trying to guess the next step of Analjit singh and in the process regularly buying the stocks of Max India and Max Ventures.

Healthcare business of Max India is another factor apart from real estate business which has great growth prospectus and something which is my favorite as I see healthcare to achieve the status of IT industry for india in few years’ time.

C) Why Real Estate for Analjit singh

Real estate is not just like any other business…it has some unique features which require specific approach to understand the dynamics of real estate.

1. Quite opposite to what most people think real estate is very regional. There is nothing like pan India market for real estate. Every market is unique with its own set of supply demand dynamics. It is just like when people say that the world temperature is rising at the earth when the matter of the fact is there is no such thing as world temperature. Every place on this earth has different temperature which goes on changing everyday all the time. So what they do is to calculate the average of all these worldwide temperature to conclude that temperature is rising. But I have serious doubts whether we can take this average as a representative of global temperature to conclude and prove things.

Similarly there is no such thing as Indian real estate. If I want/need to buy a property in Chandigarh but then I won’t be buying a property in Surat if same is available cheaper. If I need to buy in Chandigarh then I’ll go for chandigarh only. And due to this demand supply dynamics of Chandigarh are more important because every place has specific factors which affect the elasticity of supply of real estate.

Like, I am always of the view that Mumbai market may not follow the trend of fall in the prices of real estate in NCR, Bangalore etc. One of the main reason for this is Mumbai has relatively inelastic market as far as supply is concerned and the reason is-Mumbai is land locked from 3 sides by sea so we can expand the city only by that much. But there is no such limitation for the city like Bangalore which can expand in all the directions. Also Mumbai municipality is on the verge of raising the Floor space index (FSI) in the city which will further increase the supply of space for more real estate development from sane piece of land. Due to this, I have been investing in Oberoi Realty for last 3-4 years from 200 levels but invested quite a bit last year when it fell to 350 levels. Apart from these Mumbai factors, Oberoi realty is one of the most ethical and premium builder in Mumbai with one of the strongest balance sheet. In my real estate stock portfolio, Oberoi Realty is the biggest investment followed by Mahindra Life space.

Most of the manufacturing and business activity of the country is restricted to some 10-15 large cities like Delhi, Mumbai, Bangalore, Hyderabad, Chennai or pune. That’s why regional factors become more and more important. Normal Tier 2 or Tier 3 cities do not have any real demand for real estate.

2. Then there is commercial real estate which has its own set of impact factors which are quite different from residential real estate. Demand for commercial real estate is more stable than residential. As more and more global companies and manufacturing is entering in India the need for Tier 1 office space is growing fast. And I have a feeling that as compared to residential, commercial real estate is fairly priced and less chance of a bubble. The reason is- rental yield. Rental yield on residential real estate is just 2%-3% in India while the same for commercial real estate is in the range of 8%-12% which looks authentic. This much higher yield is the proof that demand for commercial real estate is real and based on the natural economics of demand and supply rather than speculative demand for residential real estate where the customers are not much aware of the steep prices. People invest in residential property out of baseless speculative instincts and then they keep it forever in the hope of getting 100%-200% gain and due to higher prices and low demand the rentals are low in the vicinity of 2%.

Due to this higher and much real yield, foreign investors are investing big time in Indian commercial real estate. The likes of GIC, Blackstone Group, Canada Pension Plan Investment Board and Brookfield Asset Management etc. have invested big in Indian commercial real estate. GDP growth is still good in India and this will create the demand for more commercial real estate. Another factor which I think behind the higher demand for commercial space is due to much higher investments in residential segment in the last decade or so and this has sort of created a supply constraint in the commercial space and all of a sudden people have realized the much higher yield of commercial assets.

In 2018 around 50 million sq. ft. of commercial space was leased out which is the highest in last 8 years with major contributions from NCR and Bangalore. Few days back some of my friends opined in favor of a friend who bought a flat at expensive price (in my view, some 70-80 lacs for 1100-1200 Sq feet) and they submitted that this is better than stock market investment. But I told them that the rental value of the flat is Rs.15000 pm (1.8 lac a year) which is around 2% yield and this is the yield (dividend) I am currently getting from my investments in stocks and this is going to grow much faster as most of the recent investments made at very low prices in high dividend stocks are yet to accrue dividends. On the contrary, he bought the flat at the peak prices and chance of further growth in residential flat prices is very remote. So by paying Rs. 30 lac upfront and taking a loan of Rs. 40-50 lac for next 20-25 years my friend is just saving 2% rental yield which he could have earned by keeping his 30 lac in bank.

In my view most of the just concluded bull run in residential property market was created by investors (black money) buying real estate for further selling (or renting?) not by end users. I do not think that normal end users in India have so much money to buy such expensive but ordinary houses. Low rental yield of 2% dwarfed by bank interest of 8-9% on loans discourages investment in residential property for earning rent. So focus was always on capital appreciation which did happen but money circulated in a narrow loop and no real demand was created.

Now as our economy needs new sectors to push the GDP growth, I think time has come to have a revisit of real estate sector and in order to promote authentic and real investment we need low interest rates and most importantly government should reduce the tax rates on long term and short term capital gain. Also, there is urgent need to cut stamp duty and registration charges as these are very high (6%-10%). Stamp duty charges in china are .05%, in Brazil and USA around 2%. Cutting stamp duty will not lower the revenue of the state as people will declare real deal price (now 50% of deal price) and there will be volume growth and curbing of black money.

Growth in commercial real estate also results in creating demand for residential properties as employees move to new business places and require homes.

Apart from Max, in commercial real estate i have so far invested in Mahindra Lifespace and Prozone Intu which have high share of lease rentals in their overall revenue. Mahindra Lifespace was the first one to introduce integrated cities in India and created gigantic integrated cities in Chennai world city and Jaipur world city spanning 1500 acre and 2900 acre respectively. Prozone earns some 100 cr a year as lease rent but its market cap is just 300 cr with fully paid land bank of around 2000 cr with almost nil debt. Oberoi Realty's commercial real estate business is smaller as compared to residential portfolio but he has invested big for this business and from its present commercial portfolio of some 1.6 million sq feet it is going to touch 4.2 msf in the near future.

3. Supporting Infrastructure: Recently, there is high growth in much needed supporting infrastructure in metro cities like Metro rail, Airports etc. This has resulted in growth in demand for commercial properties. Metro rail network has created the biggest impact and corporates are moving to these cities. Here, NCR region has the most robust and vast metro rail network which is way bigger than any other cities. It is the twelfth largest metro network in the world and it goes beyond connecting intra city and connects nearby cities like Noida, Gurugram, Faridabad and Ghaziabad. Most importantly, Max ventures has developed and is developing its commercial properties in NCR market.

4. RERA Impact and debt problems of the sector: strong regulation of RERA and tight liquidity position of the most of the small developers is forcing them to re-consider their approach and they are making deals with large corporates for completion and sale of the project. This is going to create great opportunities for strong corporate developers like Oberoi Realty, Godrej and Mahindra. Max group is also going to jump in as they have all the resources and strong brand image. In fact, their first completed commercial project Max Tower in Delhi 1 has been acquired from original developer 3C which ran into financial troubles.

NCR market has huge unsold inventory and Analjit singh himself has invested quite a bit in NCR market so I am sure with having the pulse of this market they are definitely going to pick such deals. Residential developers have some 4 lac cr debt as on date and they are required to pay around 1.2 lac cr every year including interest payments to the lenders. However their EBIDTA is around 60000 cr so they are in no case in a situation to pay back the money to lender with current situation. So I am sure we are going to see big stressed sale in the near future.

In fact, Max estates (Subsidiary of Max Ventures) is already in discussions to acquire land parcels in NCR for office projects in partnership with Apollo management Singapore ltd.

D) So where does Max groups stand now

1) Max ventures: Let me first come to Max ventures as it has just completed one of the marquee commercial project in NCR market.

a)Earlier it was mainly a packaging product player with investments in hospitality and E-commerce startups. Then as they planned for real estate foray and expansion of packaging business, they raised the capital for the same by stake sale of packaging business, right issue and investment by New York life.

So in all they collected Rs. 770 cr-200 cr from stake sale of 49% in packaging business to Japanese major Toppan, 450 cr through right issue (at Rs. 61 per share) and also earlier partner of Max in life insurance business New york Life picked 22.5% stake in max venture for Rs 121 cr (Rs 78 per share). Right issue was primarily for real estate business. After the right issue, promoter holding in the company has gone to 47% from 38%.

b) The repeated investments by the marquee global business houses and investors in Max are a testimony for the faith in managerial capability of the max group by these global giants. New york life acquired 26% stake in Max Life in 2001 which it sold to Mutsui Sumitomo in 2012. Earlier, KKR picked 10% stake in the life insurance business and now KKR is putting big money in acquiring majority stake in Max Healthcare. KKR has also supported the personal real estate business of Analjit singh by providing some 2000 cr credit line.

c) Apart from the above, they have also made partial exits from their investment made in e-commerce venture Nykaa. Max ventures invested 17.5 cr in 2016 for 2% stake. It sold 1% stake (around 17 cr) at 100% profit in FY-2018 and sold .5% in June-19 quarter for 25 cr. Max ventures holds 18.87% stake in Azure hospitality with investments of Rs. 70.5 cr. Azure is the owner of some of the fastest growing restaurant brands in india like Mamagoto and Rollmaal. Azure is backed by Goldman sachs which holds around 35% stake in it. Azure is debt free and profitable with topline of some 180 cr with 45 restaurants and 2300 employees. So this is not some generic restaurant business selling run of the mill chinese food, butter chicken and Dal makhani which opens and closes daily. Max has selected one of the best and successful names in Indian food space.

Max has earned 42 cr from 11-12 cr invested in Nykaa so far. For Azure, I do not have any valuation figure right now but the minimum valuation of Max’s stake should be around 100 cr. So we’ll see Max exiting these investments in due course of time in order to grow real estate business.

d) So far Max ventures has completed its first commercial development project Max tower in record 24 months in Delhi 1 which is located on the DND flyway between Delhi and Noida. After its original developer 3C ran into financial troubles, it was being executed by the private real estate arm of Analjit singh Piveta Estates Pvt. Ltd. But later on the same was transferred to Wise Zone Builders Pvt Ltd (Subsidiary of Max estates which is a subsidiary of Max Ventures for Real estate business). It is probably the only stressed real estate asset in North India to have witnessed such a speedy revival and completion.

Max tower is 22 story building with top 3 floors are for amenities like Auditorium, food courts, green areas, an air purifying system, Gym, swimming pool and spa etc. It is the only office building in Delhi NCR to have these facilities. No doubt, with this Max has changed the concept of office life from nothing else than boring all day tireless sitting to involving and refreshing work well philosophy. It has total leasable area of 5 lac sq feet.

e) Max tower is an “A” grade LEED certified commercial property built at a total cost of 600 cr out of which Rs. 150 cr is debt and 450 cr is own contribution. There is shortage of “A” grade office space in NCR and due to amenities being offered, Max tower is getting monthly lease rental of Rs 100 sq feet which are 40% higher than the neighborhood rents. So the rental yield is coming around 12% which speaks volume about the capability and eye for business opportunity of the management. Most players and foreign investors are happy at 8% yield so in this background this indeed is a commanding performance and I am expecting Max group with their fantastic eye for details and trends to establish strong brand image in Indian real estate market.

Global co-working giant IWG has taken on lease 50000 sq feet for its space brand. 20% of the leasable area has been taken on lease by Max group firms. French Bakery player L’Opera, well-known for bringing authentic French bakery products to India has opened its biggest outlet in Max Tower which was inaugurated by French Ambassador to India in June-2019.

Actually, they are not a novice in this sector as building of large hospitals require tireless planning for most efficient use of the premium space and providing and meeting the expectations of patients. So they already have the ground work for this business.

f) As shared earlier, due to financial troubles faced by developers strong hands like Max has the opportunity to grab land parcels, projects cheaply and for Delhi 1 projects most of the projects are facing insolvency proceedings and Max has already submitted bids for these projects.

g) Apart from Max Towers they are also developing a commercial project “Max House” in Okhla Delhi with leasable area of 1 lac sq feet in the first phase. Earlier they were having 50% interest in this project and the balance belongs to Max India ltd as Max India is the holding 85.17% stake in Pharmax corporation in which phase 1 of the Okhla project was housed. But in June-19 Pharmax corporation has sold its 85.17% stake to Max estates for 87 cr including preference share capital. With this I think now as Max Estate is holding 85.17% in the Pharmax corporation so their interest is also 85.17% of Phase 1 and further expansions. Pharmax is already earning lease rent income from the building.

A residential project at Rajpur Dehradun comprising 22 super luxury villas with a price tag of Rs 4-5 cr each has been completed and so far they have sold 11 units for 44 cr.

h) For their manufacturing business, they have almost doubled the capacity with recent expansion of around 250 cr. Last year was the difficult period for indian packaging firms due to over supply but this is normalized now and June-19 results were great for packaging business and I expect this business to result in good profits and cash flows.

i) I think of a situation in the future where Max needs cash to buy stressed real estate assets cheaply  then they may sell their 51% stake in packaging business. Although before that they would sell their investments in Azure. Also from now on they will get steady lease income from Max Tower which they can use for expansions.

j) So no doubt, Max ventures is going to create serious wealth in future and things have set up nicely for that. But its share price was falling along with market and after Mar-19 results I have started my second phase of investment in this one from Jun-19 onward. I started 2^nd round from 42 and goes on picking this one all the way to 38 just before jun-19 results. I was having strong feeling that its june results would be great which they were and after stellar June-19 results it has already shot up from 35 to 45. My earlier avg was around 62 but picked up good quantity in the current fall and the average now is 46.  

k) Let’s try to find out its minimum value. Last time they sold 49% stake in packaging unit for 200 cr so after the recent expansion (with debt) and growth in business they should get minimum 250 cr for their 51% stake at present. They have invested 450 cr in Max Tower project. They were having 120 cr in Mar-19 balance sheet out of which they have agreed to pay 87 cr for Pharmax acquisition but let’s take this 120 cr. Take the value of their Nykaa and Azure investments at 125 cr. The sale price of balance 11 flats in Rajpur at 4 cr per flat is 44 cr. So all this make the minimum valuation at 989 cr or 1000 cr when its current market capitalization is just 650 cr. Please keep in mind that we have only taken the minimum value of its various verticals. So this makes current market price of 45 a good entry point.

l) They have also setup Max Asset Services to take care of the servicing needs of their commercial assets. But it is not like our traditional facilities management entity to take care of tap and toilet. Its focus is on creating community in the building and creating events, sports and all that which will lead to a better customer experience. This is a novel idea which may create niche business opportunity in the future.

2) Max India: Market has literally thrown this one into garbage bin. Max India houses the heathcare (Max Healthcare), Heath insurance (Max Bupa) and senior living business (Antara senior living). Recently they have sold out their 51% stake in health insurance business for 515 cr and then sold out their stake in Pharmax corporation to max estates for 87 cr. So these two deals mean that they have 600 cr cash in the books.

a) In Antara senior living they have created one of the most premium senior living project with excellency in design and facilities named ‘Antara Purukul’ which is spread over 14 acres of lush greenery in Dehradun.. Senior living as a concept is growing fast in India and it is coming out of the negativity attached due to old age home thinking but this one is a premium hospitality project where old age residents live in best in class luxury homes which are designed around the safety, wellness and lifestyle requirements of seniors.

Senior living communities is popular in USA from 1980’s and we are trying to catch up now with the potential. Senior living is a $ 300 billion industry in USA. Other developers have opted to outsource the management of the community but Antara has decided to manage the entire community with an in-house staff trained by the company. And their top notch community service is winning accolades from around the world. I have seen disputes emerging in other senior living communities over frequent increase in dining charges etc. but residents of Antara are living and enjoying a great life. Residents are provided with dining facilities, daily housekeeping, laundry services, concierge services, Yoga, healthcare, Bar, sports activities and life time maintenance of everything in the house be it the flooring, plumbing, lighting or electrical appliances.

Images source: Antara senior living

But Antara is not our normal real estate project. Antara has been carefully crafted by internationally renowned architects Perkins Eastman from New York and Esteva & Esteva from Spain, with design execution support from Arcop Architecture Inc. and Studio Lotus. With construction partners such as Shapoorjii Pallonji, Suri & Suri Constructions (civil works), Vadhera Builders (finishing works), Sterling Wilson (plumbing and firefighting) and Jakson (electrical). While designing the homes, focus was on the fact that these are to be used by senior citizens where premium-ness should be supported by safety.

Antara was having the inventory of 192 apartments with price ranging from 2 cr to 6 cr. So far they have sold 111 apartments and 73 residents have moved in. They have collected around Rs.300 cr so far.

Antara is the brain child of Tara Singh Vachani, the youngest of Analjit Singh’s three children. Her husband, sahil Vachani, is having the charge of max ventures.  In order to understand the senior living model and finer details she has visited numerous senior living projects across countries and she has come out with a project which is at par with world’s best so far.

Now, Antara is focusing on growing its business via asset light, low risk business model where it will partner with developers for operating or joint development model. It is looking to leverage its strong brand name and execution skills. Antara’s responsibility will be to provide design, quality assurance, sales and marketing support, and program management during the project and sales phase and independently run the community operations after handing over the apartments to the residents. It has so far identified two such opportunities in Chandigarh and Noida. For Chandigarh project comprising 650 units with price range of 75 lac to 1.5 cr, developer will arrange land and debt whereas Antara will invest some 20cr and will get 17%of collections as fee. For Noida project comprising 550 units with price range of 75 lac to 1.5 cr, it will put 51 cr apart from guarantees for debt of 130 cr whereas developer will arrange land. Here it will get 10% of collections as fee and 62.5% of net realization.

So I think, this fee based co-development model will provide vast business opportunities and as the contribution of Antara will mostly be designing and marketing at development stage so the same will ensure execution of more projects at a given point of time resulting in more revenues for given amount of capital. Max India has invested around 283 cr in Antara so let’s take this as minimum valuation of Antara.

b) Max Healthcare: Max India has 49.7% stake in Max healthcare. South Africa based Life healthcare is also having 49.7% stake and they are selling the same to Radiant life care for Rs. 2136 cr (Rs. 80 per share) thus valuing the Max Healthcare at 4298 cr. Radiant is owned by Abhay Soi and backed by KKR. After that Radiant’s healthcare assets will be demerged into Max Healthcare which will result in KKR and Radiant promoter Abhay Soi together acquiring a majority stake in Max Healthcare and Max Healthcare will be listed separately. Max India shareholders holding 100 shares will get 99 shares of demerged Max healthcare and this means that current 1 share of Max india will get 1 share of Max healthcare valued at Rs. 80 at a valuation of 2136 cr. Combined valuation of Max Healthcare and Radiant life care will be around 7300 cr.

Max healthcare has revenues of some 2800 cr. Last 2 years were very difficult for the healthcare industry in India due to regulatory overhang where it was perceived that Hospitals are looting people with exorbitant pricing. However this is not true as hospitals are very capital intensive business and require large capital due to high real estate cost of setting up hospitals in prime locations and high cost of imported machinery. Contrary to the general public opinion, Hospitals have low return on equity of some 8%. So industry suffered in last two years due to control over pricing. Hospitals do not mention the charge for machinery, building etc. in their bills so it appears that they are charging way too much for drugs and consumables. But then they corrected their billing composition and to counter the price control over drugs they raised the procedure prices.

Now the industry is back to the growth in bottom line and the likes of Apollo and Narayana Healthcare have given stellar performances. Max Healthcare has also shown a Net profit of 20 cr in Mar-19 quarter. Healthcare industry is going to witness high growth from hereon. India is leading the world in low cost quality healthcare and this is going to be once in a life time opportunity for India to improve its infrastructure and support to encourage the growth of medical tourism which I think has the potential to achieve the scale achieved by our IT industry. Healthcare is still a luxury and around 90% global population can’t afford this. But India is now leading the way in changing the notion that healthcare is costly. The likes of Narayana are providing heart surgeries at the cost of Rs. 2-3 lac when the same is costing around 70-80 lacs in USA. Healthcare is the top priority of Modi Government also so in my view healthcare stocks are stunning high growth but defensive bet for any portfolio.

I have invested most of my money this year into healthcare stocks and the likes of Narayana Healthcare, HCG and Max India are my top investments and I feel NH is going to be the stock of this year.

After the demerger of Max Healthcare (merging Radiant life care), Abhay soi is going to lead the company. In the resultant MHIL, KKR will be the majority shareholder with 51.9% stake, Abhay Soi will hold 23.2%, Analjit singh will hold 7% and public will hold 17.8%. Radiant life care has the management contract for running BLK hospital, Delhi (650 beds) and Nanavati hospitals Mumbai (350 beds). Before Abhay Soi took the operations of both these hospitals, both were having stagnant topline and losses. But after Abhay Soi, BLK revenues has grown at CAGR of 43% from FY10 - FY18 and 27% in Nanavati from FY15 - FY18. During the period EBIDTA growth in BLK is 48% while in Nanavati EBIDTA margins in FY 2018 are 2.7% against losses in FY 2015 when Abhay soi took the control.

This Abhay soi is a very dangerous man and he is the reason I am very excited about the growth of Max healthcare in the future. This is also due to the fact that after the merger, there will be the positive impact of synergy as both these chains have major business from Delhi market and so they will witness savings in costs like HR, IT, Finance function, common and bulk sourcing of drugs, machinery and consumables. So I think even these changes alone will bring significant positive impact on the bottom line. And most of the impact will come from the superior management skill of Abhay Soi and financial clout of KKR.

So I think investment in Max India now is a fantastic chance to be a part of high caliber business lead by the likes of Abhay Soi and KKR and due to market imperfection the same is not available even at par value but at throw away price.

Before starting Radiant life care, the first firm in India in the hospital management business, Abhay Soi worked as turnaround specialist and was the head of corporate restructuring at KPMG and EY. The learning of turning around businesses has made sure that he had the wisdom and eye for turning around hospital business of BLk and Nanavati even when he was not having any experience of healthcare business. He was backed by KKR and Radiant invested its own money (350 cr) in re-developing BLK and making it a force to reckon in Delhi circle. Radiant life is one of the top player in medical tourism in India especially because Delhi is the main market for the same and Radiant has BLK in Delhi. Max also has strong presence in Delhi-NCR market. Out of the total combined bed capacity of 3200 beds after merger, both will have some 2400 beds in Delhi-NCR market alone.

I will cover the detailed analysis of healthcare sector in india in another post dedicated to it and will be posting the same within few days. i am leaving it here due to the length of this post.

So after adding the cash of 600 cr and 283 cr investment in Antara and valuation of stake in MHIL at 2136 cr, we are getting the valuation of Max India at 3000 cr and this will prove that stock markets are weird as current market value of Max India is just 1500 cr. My average used to be around Rs. 125 for Max India but in last two months I have picked good quantity in the range of 56-65 and now the average is down to 78 which is a fantastic price to have it. I do not  know what market is seeing here which i am not being able to see because the valuation gap looks too good to be true that too of a top notch group like Max. Fantastic buy at CMP of 56.

Apart from the baove, Max India has another high growth business in max Skill first which is into providing professional skilling solutions. It has been acknowledged as the 5th Best Place to Work for, in a survey among 50 companies in the SME Biz category across major industry sectors in India, by the 'Great Place to Work Institute(GPTW). Earlier it was having Max group companies as its client but now it has expanded the clientele to cover the likes of HDFC, Karur Vysya Bank, Ujjivan and Rattan India. In FY 2019, it imparted over 3.9 Lakh hours of training to more than 1 Lakh learners through 90,000+ sessions to both Max Group and other accounts.  It has grown its revenues very fast to touch 52 cr last year and I think this is going to be one of the future value creater for Max India.

Further, Max Financial services Ltd which holds the life insurance business of group is also trading at very cheap valuations. At CMP of 400 its market value is around 10000 cr which means it is trading at 1.6 times of its Embedded value (EV) which in my view is extremely low for a highly efficient and reputed life insurance player. For a perspective, 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. Looks like market is worried about pledged shares (some 80%) but Analjit singh is having high value real estates for backing his debt so he may decide to either sell stake in max Fin or his real estate holdings but there will be no default. So i think Max Fin is also a stunning buy at present and i am buying this one regularly.

Path to salvation for Analjit singh

Max India, Max venture and Analjit singh have one common link and that’s real estate business. Max India will be having 600 cr cash in its books which can be utilized for the expansion of group real estate business. Analjit singh has some of the marquee real estate and hospitality properties across the world but he has high debt to focus on. Max ventures has settled commercial real estate business and the cash flows from the same can be utilized for the further expansion.

But if one can see, the real value will emerge if we can combine the real estate businesses of these three entities and I think this will be the best solution. KKR is already backing Analjit singh and there is high chance for a place for KKR also. Analjit singh has also expressed in so many interviews that they are not afraid of listed companies and they like it because they even run their private businesses just like listed companies. I feel Analjit singh can opt to merge full or some part of his real estate holdings with Max India/Max venture and for this he may further opt to pay off his real estate debt before the merger.

Analjit singh was in development phase of his personal real estate venture and now he has settled most of these and will witness strong growth in revenues like his winery is setting its eye on exports market of Europe, America, Uk and Asia. General public opinion is that Analjit singh has sold healthcare due to tough regulatory environment and high capital requirement but I think this can’t be the case with someone who has crafted and handled those businesses throughout his life time which require large capital amid tough regulations. It is just that he had to choose between Real estate and Healthcare and he chose the former because it is where he wants to manifests his creativity and purpose.

I have seen people living (wasting) whole their life thinking that uniform is the religion and taking care of this uniform is the karma and the purpose. But the real karma is what puts us on the path to salvation all else is just dusting. And path implies effort, dedication and yearning to cross over…uniform is cheap but salvation is dear.

When we use financial analysis we are just taking care of the uniform...Analjit singh is the salvation.

(Update Sep-2020: Max healthcare is listed around 120 in Aug-2020 after demerger from Max India. Max India listed and trading around 60 (12 Rs. for 2 Rs. face value of erstwhile Max India). So total value of both is 120+12=132 which is around 2.5 times of our investment at 56...so it is doing great and still there is a lot of value unlocking is due and both are great long term bets.)

(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).

Nelco Ltd: Sky is coming Down-Result update

Last year when we picked Nelco Ltd (click here for earlier detailed post on Nelco ltd) it was still in transition mode and much action was pending for execution but we had the faith in Nelco keeping in view its strong technical capabilities, the scale of opportunity in Indian VSAT industry and its Tata parentage which ensured strong brand image and easy availability of capital/funds. And after 1 year the sky is getting clear. We picked it around 110-120 last time and it is now at 300 after one year and this is one of the best performer of my portfolio in difficult last one year of stock market.

Lets’ first of all focus on its financial performance this year. Nelco has shown stupendous performance both in topline and in bottom line in FY-2018-19. Its topline this year has grown 27% from 150 cr to 191 cr and the same has touched 51 cr in Mar-19 quarter from 39 cr in Mar-18. At this juncture I am more inclined towards growth in the topline than bottom line because there is still vast scope of scale in VSAT industry in India. So capturing the major chunk of the future scale will be the major growth catalyst and this is exactly what Nelco is doing right now.

It has invested quite a bit last year in expansions as its gross assets/capital work in progress has touched 100 cr from 50 cr last year. I am sure that these investments are made for maritime and aerospace connectivity because in Sep-18 its gross assets base including capital WIP was 70 cr and it has crossed 100 cr now only after the approval of maritime and aerospace connectivity by Indian government in Dec-18 (for which I was waiting for long time). This expanded assets base is one of the reason which has impacted its already good bottom line figures due to depreciation and interest charges as it has taken debt to the tune of 34 cr to fund its expansions. Still it has managed to grow the figure of PBT at 20 cr from 15 cr last year. However I think the maximum benefit of the expansions done this year will accrue in the next year and we’ll see high growth in top line but bottom line growth will be even faster.

But the most important move is the declaration of dividend by the company. They have declared Rs. 1.5 dividend which is a significant move and it shows the confidence of the company in the stability of the future growth and profits. Its dividend history was erratic due to subdued performance in last 2 decades and last time it gave dividend was way back in 2013 (50 paise). So this dividend is very important indicator of the future growth. It has given great all round performance this year and I think this will take its stock price to new orbits. Its current PE is around 30 which for a company growing like Nelco is not expensive and we should see this touching 40 and the same will get re-rated after the June-19 quarter results and any other favorable regulatory and policy action.

Its transformation phase started in 2016-17 after it sold its loss making automation business and shifted focused on profitable VSAT business. But due to the dynamics of VSAT industry in India where much action was needed at regulatory and policy front not much was in the hands of Nelco even if it wanted to grow its business. Nelco needed to wait for some important actions in external environment to settle some of the most pertinent issues restricting the growth of satcom industry in India like Satellite capacity/bandwidth was not available to Satcom industry in India even if they wanted to grow their business, Internet connectivity in some high growth sectors like marine and aerospace was not allowed. So for me, more than the action in the topline and bottom line it was the action in the regulatory and satellite capacity fronts which was more important.

GSAT satellites: Game changers by ISRO for India

As I have noted in the last blog post on Nelco that affordable supply (New satellites) and corresponding high demand (Marine/Aerospace/Remote areas) is the most significant factor for a new technology/product to achieve widespread acceptability and growth. So this year, as Government created the new supply avenues by launching new satellites it has also created the scope for demand growth by allowing internet connectivity in marine and aerospace sector and this has really opened the doors of huge growth for Nelco.

This year, ISRO has done some serious work in creating the satellite communication capacity for India. ISRO has launched GSAT-19 in June 2017, GSAT-29 in Nov 2018, GSAT-11 india’s heaviest satellite launched in dec-2018 and GSAT-20 another heavyweight was launched in Jan-2019.  So by mid-2019, these satellites will cover the entire nation and together they have the capacity for 100 Gbps internet capacity but this will provide more benefit to rural and remote areas of India. As I have shared in the last post, the main motive behind these satellites is creating fast reliable internet capacity in rural india. This massive capacity will also support commercial and industrial applications like ATM, Marine and aerospace connectivity, Oil and gas sector, mining, education sector etc. India has huge ambitions for smart cities and without satellite internet connectivity in smart cities is not possible especially keeping in view the mission criticality of satellite internet. Similarly, IOT also needs reliable satellite internet.

So the supply of this massive bandwidth will create the demand for VSAT in remote areas and other industrial application like marine and aerospace. So many of Government’s public welfare and e-governance initiatives like e-banking, e-health, e-governance aimed to grow rural India was on hold due to lack of cheap and reliable internet connectivity in remote and rural areas.

As I have explained in the old post, in remote and tough terrains building of terrestrial communications is very costly and not suitable for mass scale application. Satellite internet is the best choice here as one satellite is enough to cover large area cost effectively. Like, take the case of Indonesia, which has string of 13677 islands so instead of creating terrestrial infrastructure for telephony it has launched dedicated satellite for telephonic communication in the country and this has proved very cheap as compared to creating time consuming and costly physical infrastructure.

Satellite Internet can fight on cost

So we will see satellite internet creating its own space and there may be a situation where it can give tough fight to terrestrial internet on low cost. The biggest factor affecting the cost of satellite bandwidth is not the cost of satellite but it is the high costs of satellite launch. Like, for example, cost of satellite launch by Arianespace's rocket is around $100 million after subsidies. SpaceX due to its backward integration offers the same at around $62 million and India’s ISRO is at $60 million and it is looking to reduce the cost even further and ISRO will launch all of its future heavy satellite on its own.

So due to heavy launch costs, the focus was always on to create long life satellites in order to get the maximum out of the launch costs and it was not possible to use new age technologies in space communication instantly as the same is being used in terrestrial communications like 3G/4G/5G. Further, the focus is always on reducing the weight of the satellite as every KG costs big to launch. So it has resulted in light weight space hardware and machinery which often creates problems in launching and sometimes entire satellites is destroyed.

So this risk of failure and high launch costs discouraged the satellite use for mass scale applications like personal internet. The high cost of a space program has traditionally put it beyond the reach of most countries. For example, Intelsat, the firm which currently operates more communications satellites than any other, has been around for 54 years and has launched just 94.

But space launch costs are declining fast and trend is expected to continue and costs will be reduced even faster which will pave the way for massive growth in space technologies for the benefit of army, industries and general public as a whole.

Along with ISRO, Elon musk owned SpaceX is doing great work in reducing the cost of launch rockets. Its Falcon 9 has reduced the cost of space travel to ISS (International space station) by almost 20 times at $2,720 per kilogram as compared to $54,500 per kilogram earlier. And with current focus, it is expected that space launch costs will go even lower due to focus on reuse of launch vehicle, more demand resulting in further cost reduction due to economies of scale, advanced engineering and technical advances. Reduced launch cost will result in heavier, strong, reliable, and better performing spacecraft to be developed at lower cost and this will revolutionize every sphere of connectivity. At present , due to weight issues more reliable and strong models are not being used but low launch costs will result in better design and materials which will further reduce the cost of space shuttle as the same can be designed keeping in view the performance rather than low weight.

So much work is under way in space technologies and as per our past experience commercial aspect can really transform anything and result in advance technologies and cost reductions. Earlier avatar of satellite internet was mainly for defense and national security where cost was never a constraint but now as people in remote areas has money for connectivity and industries are finding novel applications for satellite internet like IOT the satellite connectivity sector is going to witness radical innovations and investments to create the economies of scale.

Marine and Aerospace connectivity: Big growth factors in the near future

Indian Government in Dec-2018 has allowed internet connectivity for maritime and aerospace sector and this is one big event which will create the demand for satellite internet and attract more investments in the sector.

At present, I think maritime connectivity has high growth prospectus than aerospace because worldwide this industry is one of the few which has embraced satellite internet quite early. Just for a perspective, maritime connectivity in Europe is growing some 20% yearly and generates revenues of some $1 billion. Actually shipping sector due to its dynamics is more suitable for satellite internet. First of all, still sea route accounts for more than 90%of world trade and this is really big!! We think that now is the age of aviation but shipping is still the cheapest when it is about global trade.

VSAT provides these giant ships fast and reliable internet connectivity which is vital for their operation and safety in the vast sea. Further, internet connectivity is a major factor for employees while choosing shipping lines for jobs because they are away from their families for long long time so connectivity is a big factor for them. Same is true for passengers on cruise ships where internet connectivity is a major differentiating factor as they need fast and reliable internet for their entertainment, connectivity and business needs while at sea.

Also, fishing sector was one of the fastest in recent times in using VSAT on their vessels due to crew safety and welfare, weather mapping, regulations and vessel safety. India also has vast fishing lines and I think this is going to be one of the first to embrace satellite internet.

Across globe, maritime VSAT is set to grow fast and the same thing is true for indian shipping lines also. Global satellite leasing revenues for maritime applications alone are going to touch $1 billion by 2026 from the current levels of $500 millions.

For offering maritime connectivity to Indian and foreign vessels sailing into Indian waters, Nelco has already entered into partnership with global satellite communication giant Speedcast International Ltd. As per the deal customers/vessels of the both the companies will be able to connect to the network of both the companies while moving in or out of Indian waters. This is one of the first such partnership for Indian maritime connectivity.

Although there will be competition but i expect Nelco to capture significant share of maritime connectivity just like it did in Oil & Gas and ATM industry in the recent times where it has emerged as one of the fastest growing player. I am expecting Nelco to be very aggressive in its expansions.

Similarly, airlines are going to adopt VSAT technology at fast pace in the near future as just like maritime aerospace connectivity is proving to be the decisive factor in choosing the airlines by passengers. Further, the demand will be created by business class passengers for applications such as emails with large attachments, and video conferencing. 

There are some concerns over the rules by Indian authorities that satellite bandwidth can be taken only through ISRO and this will render satellite bandwidth very costly as even at present satellite bandwidth charges in India are some 6-7 times higher compared to other parts of the world. Due to capacity constraint in the satellite communication the charges are highest in India whereas for broadband the charges are lowest in India. But I think this was when ISRO was not having bandwidth capacity for leasing for commercial purposes but now after the launch of 4 giant GSAT satellites last year there will be no dearth of bandwidth capacity.

So Nelco is still in transition phase and this year will be even more significant as the focus is on maritime and aerospace connectivity and big investments will be done.

Continue to hold for further re-rating.

One last thing I would like to add is that I got so many queries from worried investors about the fall in the price of a stock which they have bought at higher price. Some gets desperate for non performance of their stock over long time. Like, take for example, Narayana Hrudayalaya and HCG which are one of my favorites in healthcare sector and I am investing in these stocks regularly for last 2 years but both these have fallen (although almost all the stocks have fallen some 40-50%) in last one year. But both have invested quite a lot in building capacities and it’ll take time for these capacities to reflect in the top and bottom line so for me current fall is a fantastic opportunity. Same is true for the likes of MCX, Laurus labs, Mahindra lifespace etc. which are fantastic stocks.

I see people getting worried when their stock is not valued, not tracked, not followed by the market and it lies low and down. I see them talking about PE ratio assigned, traded quantity and coverage by analysts and when these are missing from their stock they shiver with fear. But let me tell you one thing-Divine is not divine because of offerings. Offerings do not transform something into divinity..they can't even differentiate between a real or fake because mortal beings offer these as per their expectations. And divine is still divine even if not recognized by mortal beings and if we can see the wisdom level in our mortal world chances are much higher that a real divinity is missed by mortals as they always value bunch of offerings. But a true seeker always yearns for a Lord Buddha sitting alone under a tree…eyes closed...unnoticed…radiating divine…

(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).

Hercules Hoists Ltd: Warehousing Automation

Stock investing is all about value investing i.e. picking a stock at a price which is much lower than its intrinsic value (real worth). And most people think that this real worth is basically a handiwork of financial analysis which calculates Real worth of a stock based on earning growth, balance sheet strength etc. But this is just post mortem. The most important factor in the value investing formula given by Sir Benjamin Graham was not the evaluation of these financial parameters but it was the mysterious “g” in his formula which was the most important factor in the valuation matrix. This “g” denotes the future growth rate and this is where investing starts and ends. This growth rate is not a financial entity it is just represented as a financial figure.

To understand the growth prospects of a company requires thinking like a businessman. One has to understand the whole nitty-gritty of a particular industry-raw material, substitutes, strength of entry barriers, user industry, global competition, future threat or opportunities…and the list is endless but this concludes why stock analysis is so complex because it looks like dealing in finite numbers but it is most affected by infinite business/economic variables. This effectively means looking into the future demand supply trends and this is where creativity, intuition, wisdom and knowledge enlarge the vision to sniff the future much ahead of others and this is the most decisive factor in business and in stock investing.

Sometimes I feel that stock picking is getting increasingly difficult. In old times, there was information scarcity and only the privileged ones had the timely access to relevant financial and economic data affecting companies in stock market and so they could pick valuable gems cheaply and much early. But today most of the data is available freely and quantum of privileged data is very less (although that is still important). But this democracy in data availability means one has to expand his vision further to look far deeper into the future and gasp the coming economic trends.

We are also in our journey to understand what changes GST will bring into the business land scape of India. Logistics is no doubt one sector which is going to see revolutionary changes because in its earlier avatar it was most effected by fragmented structure of Indian taxation system where each state has its own set of taxes and businesses were taking investment decisions not from the point of view of operational and business sense but to save multiple state level taxes.

GST is a massive financial engineering and it is bound to change the way we were doing businesses. In an ideal economy, business decisions should be based on sound operational economics and efficiency rather than an exercise to fit the business operations into the tax or accounts regime. Tax/revenue authorities should keep the business economics in mind while framing tax laws rather than businesses designing their businesses to tax laws because taxes do not generate business profits rather businesses generate the resources for taxes.

Earlier, we have picked Hercules Hoist Ltd (Click here for earlier study) as one of the beneficiary of impact of GST on logistics. In the past one year after we picked Hercules Hoist things are looking in much better shape.

GST to revolutionize the warehousing in India

Supply chain and logistics is the most important function in the entire chain of production to final consumption and it requires huge resources. And warehousing is the most important part of the entire logistic function because excellency in warehousing implies low cost of warehousing, low inventory levels, low pilferage but earlier due to state level taxes like CST companies planned their warehousing just to avoid high taxes. Earlier, every state was a foreign territory as far as movement of the goods was concerned and each state levied a number of taxes on goods coming into their state from outside state. But amid this complex tax structure, some relaxations in taxes were given like when goods were moved inter state not out of sale but stock transfers no CST/Entry tax was charged. So companies, in order to avoid multiple level taxes, just operated small inefficient warehouses in each state and this along with other factors has resulted in higher logistics costs which are twice (14% of GDP) the cost in developed countries (7% of GDP).

So warehousing in India only meant “godowns” which were just a structure with no automation and did not provide any value added services. So companies operated small shabby warehouses in each state they operated which resulted in operational inefficiencies and huge resources were blocked in the form of high inventories, maintenance of large number of inefficient warehouses.

But all this has been going to change after the implementation of GST. After GST there are no state level markets and India is a one big market and no matter from where you operate the taxation is same. so now companies can plan their supply chain and logistics keeping in view the operational efficiencies rather than tax savings.

Earlier, the focus on tax saving resulted in small low tech warehouses and the average size was some 10000 sq feet and almost 90% of the warehousing space is controlled by small unorganized players. At this small scale it was not possible to invest in mechanization and automation. So there was no economy of scale, no control and overall inefficiency. But after GST, the average size of a warehouse has touched 1 lac sq feet and companies are investing big in mechanization and automation and so now the true worth and value of a good warehousing system will be realized. Warehouses of the size of 4 lac-5 lac sq feet are underway.

As one can see, it is impossible to manage these large scale warehouses without being equipped with smart mechanization and automation.

So these smart fully equipped warehouses present huge opportunity for Hercules Hoists which is one of the largest suppliers of material handling solutions in India.

Warehousing industry is undergoing great consolidation and increasing merger and acquisitions will take place and the sizes of warehouses will increase significantly to make possible the automation. This greater scale will also positively impact the IT cost of deploying Warehouse management system (WMS) and ERP systems which was not possible earlier and due to these technical advancements in warehousing entire supply chain will reap the benefits.

Apart from GST, there are other reasons which are creating the demand for large scale automated warehouses:

1) The growth in manufacturing due to “Make in India” initiative. High end large and smart Warehousing and logistics systems are required to support this scale of growth in manufacturing.

2) The warehousing and logistics sector has been granted the infrastructure status which means they can get funds cheaply with payment stretched much longer time.

3) The huge demand for high tech large scale warehousing from E-commerce sector. E-commerce is all about reaping the benefit of scale so large fully automated warehouses are the first thing they need to create value for themselves.

Hence, no doubt these large smart warehouses are going to save the costs of logistics of companies.

The most important factor is reduced inventory costs. Inventory consumes huge resources in the form of cost of production, storage costs, theft, damage, obsolescence etc. So optimal inventory levels are the ultimate aim of any supply chain as the same will maintain the overall efficiency of entire supply chain. Earlier, companies were always facing either the situation of excess inventory or low inventory leading to loss of business.

Infact, the efficiency of a supply chain system is gauged from the levels of inventory-how much capital is lying idle due to inventory carrying costs which can otherwise be used for other productive uses. So optimal inventory level is the prime aim of any supply chain manager.

Due to the use of hub and spoke model for inventory control across the entire supply chain, faster movement of goods due to fewer/no state border checks, lower number of warehouses, higher efficiency of warehouses due to automation etc. means companies can maintain pre-GST supply chain service levels with much lower levels of inventory as they can move the goods fast. So no surprise that inventory costs are coming down. As per recent studies, inventory levels have come down by some 30%-40% which are increasing the profitability.

Consumer durable industry is going to see almost 50% fall in warehousing costs while FMCG sector will see 25% fall. This is due to the fact that lead time for consumer durables are around 2 days so consumer durable players can easily supply the existing markets from fewer but larger warehouses like from Haryana warehouses they can cater to Punjab, Uttarakhand, UP and Himachal Pradesh easily which are major consumption centers in the country.

The stock turnaround time for FMCG is much lower (24 hours) due to reasons like small scale of distributors/retailers, availability of substitutes in the form of other brands so they are required to maintain more warehouses as compared to consumer durables but still due to operational efficiencies their cost will fall some 25%.

So as we can see the investments in smart warehousing will be more than offset by the savings in the cost of carrying inventories.

Also, small and low key warehousing further takes away the scope of movement of cargo by rail due to short distances as railway frieght is cheaper by some 30-40% in long distance cargo. I feel, with the coming of dedicated freight corridor warehousing and logistics will be further benefited.

Further, there will not be much consolidation in clod chain logistics as they are very capital intensive to build and so it is not easy for companies to leave some capacity just like that which they can do for low key warehousing where their investments are low.

The warehousing sector is witnessing big activity

Earlier, due to small size and small opportunity, large organized players and PE investors have avoided warehousing sector. But now this is one of the most sought out sector. In the last 4 years, investors have put around $3 billion in warehousing and this accounted for around 26% of the total private equity funding in the real estate sector during this period.

Demand for Grade A warehouses (Large automated) is growing and going to cross about 300 million sq feet by 2022 from approx. 140 million sq feet in 2018. So as we can see, this requires massive investment in capacity in the coming 3-4 years.in the next 2 years, investments of around Rs. 45000 cr are going to be made in grade A/B warehouses and some 100 Million Sq feet of warehousing space will be created.

Grand opportunity for Hercules Hoists Ltd

So, this gigantic scale investments and activity in large format warehousing is going to create high demand for material handling equipment for warehousing and this is where Hercules Hoists ltd comes into picture.

Hercules Hoists has established itself as most trusted brand in Indian material handling market and cater to almost all of the manufacturing industries including logistics and counts leading manufacturers as its customers. It operates under “Indef” and Hercules “Hoists brands”.

The scope of its products for material handling systems in warehouses is enormous. Like, its electric wire/chain hoists can be used for overhead material handling in the warehouses. Overhead material handling in the warehouses increases productivity, enhance safety, improve ergonomics and maximize available floor space. It has many other innovative products like iCranes and iStacker which are created for logistics sector. I do not see any reason why Hercules should not be able to benefit from high demand for warehouse mechanization and automation.

Although, Hercules Hoists provides material handling solutions to a number of manufacturing industries but I think its high growth phase is coming now due to growth in warehousing and further due to the revival of investment cycle in other industries. Indian industries were slow on capital expansions due to high debt levels in the past, high interest costs, bank NPA’s resulting in banks not providing loan to industries. But now after a long period of consolidation the investment cycle is going to pick up.

Recent financial performance points towards revival

Its operational performance in the recent 2 quarters points towards revival in its fortunes. In sep-18 quarter results, its turnover increased to 30 cr from 17 cr in sep-17 while its PBT excluding other income was at 3 cr vs 20 lac. Similarly, in Dec-18 quarter results, its turnover increased to 25 cr from 17 cr in Dec-17 while its PBT excluding other income was at 2 cr vs 70 lac.

I think, companies were waiting for more clarity on GST laws/rules before going ahead with their investment plans in warehousing etc. So it was not that they started investing in warehousing right after GST in July-17 instead they waited for the clarity and common sense. I think 2018 was the year of action and from now on the pace is only going to increase so it is possible that we may see high growth in the topline of companies related to this space like Hercules Hoists.

I am waiting for mar-19 quarter result for Hercules and I think it should see some 80%-100% growth in the topline. Further, Hercules does not need any capital investment so soon as I think it can sustain the topline levels of 300-400 cr without any capacity expansions so it implies we are going to see the major impact of this growth in the scale of operations for Hercules in the bottom line as it is also nil debt company. Further, as a nil debt and Bajaj group company there will be no shortage of funds in case it needs investments in capacity expansion in the future.

At present, i care more about the growth in top line than bottom line because there is huge scope of growth in scale of operations. And at current low scale of operations bottom line anyway is not relevant. But still even at such a low scale of operations, at CMP of 115 it trades at PE of 28 (If we take into account the recent performances then the same will around 20-23) which is good because at this juncture i could not have cared even if it was in losses. But this better financial performance is due to conservative and superior use of capital.

I am buying this one regularly and picked good quantity when it fell below 100. Few days back, picked at 115. CMP is 115. This one is good high quality Tier 3 stock (Risky) and I think this may turn out to be another Nelco for us.

But this being Bajaj group stock, nil debt and investments in its books provides high margin of safety and even I put it as Tier 3 but this riskiness is not due to its books/balance sheet weakness but due to the fact that most of its valuation will come from future growth only.

Further as explained in the earlier post that  it is having stocks of various Bajaj group companies like Bajaj Finserv, Bajaj Auto, Bajaj Holdings and Bajaj Electricals and MF valuing some 250 cr, has 2 acre vacant land in Mulund in Mumbai (I think it should get around 70-80 cr). So out of 400 cr market cap, some 320-330 cr (80%) belongs to Investments and land. So we are getting the rest of the company with one of India’s best material handling brand for just 20% (80 cr). It earns around 10-12 cr as dividends from these investments which provides the stability to the bottom line.

Apart from Hercules Hoists, I think Redington, which is my another favorite stock, is going to be benefitted from GST due to low cost of inventory for its distribution business and its focus on third party logistics business. Other large scale Logistics players like Mahindra logistics and Future supply chain will also be the key beneficiaries. 

Also, these giant scale warehouses need Pre-fabricated steel/material and Pennar Engineered building solutions and Everest Industries can be the beneficiaries as these two are one of the biggest but I have not studied these two in detail so not in a position to offer any further view.

In the end, I am going to touch something about the high standards of Bajaj group and this is why I think even after being a small company Hercules is still a safe bet for us.

Something about Bajaj group

Let me share something of my opinion about Bajaj group. Bajaj group is one of the best professionally managed group. Their family members start the job right from the shop level and they have to prove their mettle. Nothing is based on the family ownership quite unlike other promoter owned companies. Very few people know the strong family roots of Bajaj brothers. They are incredibly smart and choose the best person to run the business keeping apart their egos and family ownership.

Rahul bajaj is the current patriarch of the family/businesses and he is an institution in himself. He came to the small town Akurdi in 1965 (Bajaj Auto) and he still stays in this small town in factory colony. I have great respect for Rahul Bajaj and I think he was and is way ahead of the likes of Munjals, Ambanis. There was a time in 1970’s when there was a 10 year waiting for Bajaj scooter but still Rahul never tried to profiteering (as people were dying to offer much more than the market price) but still Rahul offered the best scooter and authentic price.

Bajajs are very down to earth people. The founder Jamnalal Bajaj had two sons- Kamalnayan and Ramkrishna Bajaj. Both were ardent followers of Gandhi and Jamnalal donated everything to Gandhi. Both sons were the real force behind the growth of the empire.

Now let me come to the bigger story-The current leader Rahul is the son of Kamalnayan and Shishir was his brother and a sister Suman. Ramkrishna has three sons- Shekhar, Niraj and Madhur. But for the entire world they were five brothers…there was nothing like cousin brother between them and the most able of them was running the best companies…in fact Bajaj Auto was created by Rahul so he was the leader. But still entire family shared everything…they have pocket money, leaves etc. in equality. However in 2000’s there was a fight between brothers and Rahul was shocked when one of 5 brothers wanted separate business. He along with other 4 tried hard to persuade him to stop demanding. You’ll be surprised to know that it was Rahul’s real brother Shishir who was fighting and other 4 were together and Rahul was leading them. Shishir’s son Kushagra was over ambitious albeit with great abilities but he wanted to build something on his own.

So brothers parted (Only one) and Shishir got Bajaj Hindustan and Bajaj Corp (I think they own some big power plants also). But rest of the 4 brothers are still together and running the other giant group companies. Rahul’s sons Rajiv and Sanjiv are running Bajaj Auto because they have proved their ability. Even Rahul had many differences of opinion with son Rajiv (like stopping scooter production which Rahul did not want) but still he never interfered and Rajiv has his own style. But Rahul has always praised him for his toughness and leadership.

Shekhar Bajaj runs the other Bajaj house biggie-Bajaj electrical. Many times Rahul has told that his younger brother Shekhar has never doubted and wanted a place in Bajaj Auto as he knows that Rahul is running the best show and Shekhar is doing the best in Bajaj electricals. Bajaj electricals is one of the best electrical goods company enjoying great brand strength (one of my investments, Study posted at this blog also). So as you can see there is nothing like bad managing in Bajaj group…the best of them will lead the show. I think the other brothers Niraj and Madhur are associated with Bajaj Auto. So it is still a close knit family…true Indian joint family…sharing everything among them.

This is why I have so much faith in Bajaj group.

(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).