AIF Green Fund Letter
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1 Private and Confidential – Circulation to Unit Holders only UNIFI AIF 2 – The Green Fund February 2020 UNIFI AIF 2 – The Green Fund The Green fund targets capital appreciation by investing in the next generation of winners arising from India’s evolution towards a more sustainable economy. The investment universe would comprise of well managed businesses offering best in class solutions to address challenges in the areas of Energy, Emissions, Waste and Water. Quarterly Review FUND DETAILS The third quarter of FY-2020 has been good, with most of the fund’s investee companies delivering along expected lines. In Q3 of FY-20, the weighted average PBT growth for green Launch Date: portfolio was 16% YoY (this excludes contribution from Gravita India where PBT grew from 31 July 2017 Rs.1cr., to Rs.21cr YoY). During the quarter, turnaround in financial performance was visible in companies like Gravita India and Srikalahasti Pipes. We continue to rebalance Scheme AUM: Green portfolio towards investments with higher conviction of near-term earnings. INR 1.03 bn Towards this objective, the new additions in portfolio during the quarter gone by include – Petronet LNG, Symphony Ltd, Tube Investments and Hindustan Oil Exploration Company. Theme AUM1: While consumption trends in the economy continue to be soft, FY21 is expected to be INR 2.74 bn moderately better due to base effect (BS-6 transition, weak rural incomes in FY20, and disruptions due to the general elections). However, challenges to all the major drivers of Firm AUM: GDP remain given low household income growth, weak government consumption (high INR 45 bn fiscal deficit) and cautious corporate balance sheets. These factors are unlikely to change quickly. While the Central government and RBI have taken various measures to boost No. of Investors: domestic economy, there is no firm indicator of a wide-ranging economic recovery. 71 However, most of our investee companies continue to consolidate on their business proposition and deliver earnings growth through cost efficiencies, market share expansion Investment Manager: and product diversification. Unifi Capital Pvt Ltd. Sector Exposure Tenure: 5 Years or 200% absolute return whichever is earlier Custodian Alternative Cash, 7% BNP Paribas Energy, 10% Recycling, 21% Reporting: Quarterly Review Water Infrastructure, 13% Hurdle Rate: 12% Per annum compounded Energy Efficiency, 27% Fees: Safe Chemicals, 1% per annum of AUM payable 22% monthly and 20% of profits earned above the hurdle rate. The management fee would be offset from our share of Profits. 1AUM under Green Fund in PMS as well as AIF. 2 Private and Confidential – Circulation to Unit Holders only UNIFI AIF 2 – The Green Fund February 2020 I Recycling: Recycling constitutes about 21% of the fund’s decline was lower 3% YoY due to taxation benefits. The exposure and the various sub-segments within this include: company has scheduled to replace the refractory lining in lead, glass, plastic and refractory recycling. this furnace in early FY21 which should improve the performance and also increase capacity marginally. Their JV a) Lead Recycling: The fund is invested in Exide Industries and with Heinz glass for manufacturing glass bottles for perfume Gravita India. industry reported a loss of Rs. 1.5 cr due to delay in certain shipments. While we continue to monitor the business Gravita India’s profitability has been improving steadily in all performance of this JV, the overall business environment the three quarters of FY20. Led by ramping up of newer continues to be good for container glass manufacturers and capacities in Ghana and Tanzania and implementation of we continue to remain invested. hedging policy in the lead division, earnings for Q3-20 showed marked improvement in profitability. Recycled lead Risks: Increase in raw material costs and decline in demand volume grew by 23% YoY and 8% QoQ. The lead plant in with end user (Alcohol industry). Ghana with capacity of 12,000 tons is operating at 90% utilization and the one in Tanzania is operating at 100%. The c) Refractory Recycling: Refractories are a consumable in the important point to mention here is the company’s hedging manufacturing process of iron, steel, aluminium and cement. policy in the lead recycling division was visible. During the The fund is invested in India’s largest manufacturer of quarter, LME lead price declined by 7%, but this did not refractories: Orient Refractories. The company reported impact the profitability of lead division. The aluminium and weak performance in Q3-FY20. Top line declined by 16% on plastics divisions’ performance was weak during the quarter. a high base of last year. Sequentially it declined by 7% driven While the aluminium division was hit from the slowdown in by 5% realization drop. Overall gross margin was steady at the domestic auto sector, the plastics division was impacted 40%. However due to operating deleverage, company due to the fall in realization in the American markets. The reported low EBIDTA margin of 16.6%, down 20 bps YoY. The company is now looking to debottleneck existing capacities parent company – RHI Magnesita, is in final stage to to increase sales volume without much capital expenditure. consolidate its Indian businesses by merging its unlisted companies in India with the listed entity - Orient Key risks would arise from continued loss from plastics Refractories. This is waiting for the final approval from NCLT. division, lower off take of lead volume and any geo-political This is a powerful step in right direction and helps in disruptions. synergizing for better scale and growth. The Fund’s other investment in lead recycling, Exide Risks: Slowdown in metal sector demand and decline in raw Industries, manufactures batteries by sourcing close to 40% material availability from China. of its lead and lead alloy requirements through recycled lead. In Q3-FY20, Exide’s revenue declined by 3% YoY due to sharp d) Plastic Recycling: Ganesha Ecosphere reported steady drop in auto battery sales to OEM. However better growth in performance in Q3-FY20. While the volume sold declined by the replacement market for auto battery and UPS absorbed 4% YoY, realization dropped by 18% YoY (on a very high base most of this decline. EBIDTA grew by 2% YoY as RM costs of last year). Overall, operating profit declined by 16% YoY were lower by 110 bps YoY driven by lower lead metal price. and profitability declined by 19% YoY. To get benefit of lower On the back of this and lower tax rates, earnings were up tax rates, company has set up a wholly owned subsidiary - 40% YoY. Exide’s lithium ion battery assembly unit is “Ganesha Ecospet Private Limited” where the upcoming expected to commission by end of FY20. While 70% of Exide’s capacity expansion in Warangal (Telangana) is likely to revenue come from aftermarket segment, there would happen. Ganesha’s business model of giving waste a useful definitely be an impact from the slowdown in auto OE sales second innings, is well-poised for growth, on the back of: (1) in the near term and increased competition. a widespread channel network for procurement of raw material (PET bottles) and (2) planned greenfield expansion Key risks include further decline in auto sales, increased in south India. competition, faster adoption of electric vehicle and sharp increase in lead price. Key risks would arise of softer crude prices, disruption in procurement of waste PET scrap, and delay in b) Glass Recycling: The fund is invested in a Gujarat based commencement of new capex activities. container glass manufacturing company, Haldyn Glass which II Energy Efficiency & Emission Savings: The fund has an reported stable performance in Q3-FY20. While the company reported its highest ever quarterly revenue in Q3- exposure of 27% to this segment with investments in (a) FY20 (growth of 4% YoY), gross margin was lower due to India’s largest industrial steam turbine manufacturer - higher consumption of raw material in one of their furnaces Triveni Turbine, (b) India’s largest coastal shipping services as a result of which EBITDA declined by 12% YoY and PAT provider – Shreyas Shipping & Logistics Ltd, (c) Himadri Speciality Chemicals, (d) KPIT Technologies – provider of 3 Private and Confidential – Circulation to Unit Holders only UNIFI AIF 2 – The Green Fund February 2020 auto engineering solutions for electric and hybrid vehicles, e) current excess capacity. While the performance is weak, at Hyderabad Industries – a manufacturer of green building the current FY20e P/B of 0.5 and a P/E of 8.5, it trades at products, (f) Tube Investments – a leading manufacturer of multiyear low valuation. With renewed efforts by food & cycles and auto & industrial products and (g) Symphony Ltd fertilizer ministries to increase the use of coastal shipping, it – India’s largest air-cooler manufacturer. has the potential to generate significant volumes for the Industry & Shreyas, which can lead to a sharp turnaround. Triveni Turbine’s Q3-FY20 results are broadly in line with expectations as revenues fell 4% YoY while EBITDA margin Key risks include failure to pass on bunker fuel prices while improved by 3.3%. Fall in raw materials was the key driver of domestic and global slowdown can lead to lower volumes. EBITDA margin improvement. As a capital goods player, order book is the key determinant of well-being, and at Himadri Speciality Chemical delivered a soft quarter for Q3- Rs.694cr, their order book increased just 1.1% sequentially, FY20, on account of multiple business headwinds across while being down 8% YoY. In 9MFY20, there was some different segments. Their CTP volumes (roughly 60% of total business lost in export market, which impacted growth and volumes) have been largely flattish with a negative bias. as well as orderbook.