Report for the Month of August-September ‘18
15th
September ‘18
The Investment
Board
REPORT FOR THE MONTH OF AUGUST-SEPTEMBER ‘18
REPORT FOR THE MONTH AUGUST - SEPTEMBER 2018
To, Dr Adya Sharma Director- SCMS Pune
Respected Ma’am,
The Investment Board was announced with the other clubs in the end of July and we got started with our work immediately. The 22 members of the board were divided into 4 teams, and were asked to analyse various sectors and companies in those sectors. Each of the sub-teams presented their ideas and analysis to the entire board in the first week of August, where the board unanimously picked two companies to analyse further - Havells and Ashok Leyland.
The board performed a fundamental analysis on the companies selected and a report on the same was soon generated. On the 6th of August, the board decided to test the accuracy of its fundamental analysis with a buy recommendation on the aforementioned stocks.
The market has been volatile over this period of over a month, with various factors influencing it. Some of the major factors which have been responsible for this volatility are the weakening Rupee against the Dollar, the US-China trade war, the rising price of crude oil and the widening current account deficit.
Through the period, Nifty traded between 11,123 and 11,760, reaching an all time high of 11760.20 points on 28th August, 2018. Similarly, BSE Sensex traded between 37,129 and 38,989 points.
Despite the weakening global cues, the board’s analysis has achieved it’s targets. The companies so chosen have extremely strong fundamentals and a detailed report of the analysis has been attached with this document.
Currently, the board maintains a HOLD position on Ashok Leyland, while for Havells, the board had a SELL call on the 4th of September.
Regards, The Investment Board
AT A GLANCE - HAVELLS INDIA LTD.
Havells India Limited is a leading Fast Moving Electrical Goods (FMEG) Company and a major power distribution equipment manufacturer with a strong global presence. Havells enjoys enviable market dominance across a wide spectrum of products, including Industrial & Domestic Circuit Protection Devices, Cables & Wires, Motors, Fans, Modular Switches, Home Appliances, Air Conditioners, etc.
Today, Havells owns some of the most prestigious brands like Havells, Lloyd, Crabtree, Standard and Promptec.
Havells India limited (NSE Code: CMP as on 6th August Nifty 657.70 HAVELLS) was selected on 6th August at Sensex 656.25 a market price of Rs. 657.70 in NSE with a stop loss of Rs. 620. Outstanding Shares 625.25 Million The stock peaked on 31st August with a Face Value 1.00 Rs market price of Rs. 725.25. The stop loss price was adjusted to Rs Market Cap 411,161.15 Million Rs 700 at this stage.
The board exited the stock at 700 Rs on 52 Week High/Low 728.25 Rs/ 450 Rs 4th September as the stock hit the updated stop loss.
AT A GLANCE - ASHOK LEYLAND
Ashok Leyland, flagship of the Hinduja group, is the 2nd largest manufacturer of commercial vehicles in India, the 4th largest manufacturer of buses in the world, and the 12th largest manufacturers of trucks. Pioneers in the Commercial Vehicle (CV) space, many product concepts have become industry benchmarks and norms.
Ashok Leyland has a well-diversified portfolio across the automobile industry. Ashok Leyland has recently been ranked as 38th best brand in India.
CMP as on 1st August Nifty 118.90 Ashok Leyland Ltd (NSE Code: ASHOKLEY) was selected on 1st August, 2018 at a market price of Rs. Outstanding Shares 2935.53 million 118.90 with a stop loss placed at Rs. 94.
Face Value 1.00 Rs The stock is trading at 127.85 Rs as of 13th September, 2018 and the board Market Cap 349.03 billion Rs continues to hold it’s long position in Ashok Leyland as it has evaluated the 52 Week High/Low 167.5 Rs/ 105 Rs company to be undervalued under current circumstances.
The board believes Ashok Leyland due to its increasingly strong fundamentals is expected to post higher revenues and increase its profit margins over the next year.
FUNDAMENTAL ANALYSIS OF HAVELLS INDIA LTD.
I. Product Portfolio
Kitchen appliances Lighting for domestic, commercial and industrial applications LED lighting Fans Modular switches and wiring accessories Water heaters Industrial and domestic circuit protection switchgear Industrial and domestic cables and wires Induction motors Capacitors Electrical Appliances
II. Segment Diversification
Lloyd: Air Conditioners, Washing Machines, LED Televisions Crabtree: Switches, Switchgear, Video Door Phone, Home Automation Standard Electric: Fans, Switches, Cables, switchgear, water heater Promptec: LED lighting, Solar lighting, Outdoor lighting
III. Peer Comparison
(Rs. in crores)
Return on Capital Net Profit Inventory Debt to Equity S. No. Company Employed Margin Turnover Ratio Ratio 1 Havells 26.68 8.75 5.09 0.03
2 V Guard 23.34 5.75 7.44 0.00
Bajaj 3 8.07 1.77 8.13 0.77 Electricals Crompton 4 22.24 7.93 13.45 0.82 Greaves
Revenue 52-week Market S. No. Company P/E PEG P/B P/S Beta (All numbers in range Cap thousands)
1 Havells 56.54 4.31 11.35 5.05 454-723 1.20 423.761B 8,14,64,100
2 V Guard 64.08 3.94 11.76 3.88 177-254 1.53 89.21B 2,32,57,265
Bajaj 3 38.22 1.41 5.62 1.15 335-706 1.41 63.147B 4,70,74,494 Electricals
Crompton 4 44.53 - 17.33 3.66 204-295 1.06 163.33B 4,07,96,600 Greaves
Price to Earnings Ratio: The P/E ratio of Havells is close to the industry average of 55.40, signifying that it’s not over-valued.
PEG Ratio: The lower the PEG ratio, the more the stock may be undervalued given its earnings performance. Since the P/E ratio (Numerator) of Havells is in with the industry average, it signifies it that the expected earnings growth (Denominator) of Havells is not as high as its peers, which results in a high PEG ratio.
Price to Book Ratio: Havells’ P/B ratio is line with the industry average, which suggests it’s not over-valued when it’s book value is taken into consideration. Havells is trading at nearly 11 times of its book value.
Price to Sales Ratio: A low ratio may indicate possible undervaluation, while a ratio that is significantly above the average may suggest overvaluation. Since the consolidated sales of Havells are the highest amongst its peer group, it’s P/S ratio is higher than the average.
IV. Financial Analysis
The company has increased its non-current financial obligations. This can be attributed towards the acquisition of Lloyd.
(Rs. in crores)
Mar ‘18 Mar ‘17 Mar ‘16 Mar ‘15 Mar ‘14 Particulars 12 Months 12 Months 12 Months 12 Months 12 Months Long term borrowings 81.00 0.00 1.67 226.40 705.57 Short term Borrowings 34.38 208.33 83.92 69.63 118.39 Trade Payables 1640.01 633.45 500.53 1051.11 1197.21 Tangible Assets 1307.82 1254.60 1185.97 1158.10 1127.68 Intangible Assets 1186.66 31.87 24.50 24.43 34.73 Cash and Cash Equivalents 1561.57 1974.47 1468.00 777.47 881.94
(Source: Annual Report of Havells India 2017-2018)
1. Havells has significantly decreased its long-term borrowings over the years. The rise in long term debt in the can be due to the acquisition of Lloyd.
2. Although, the short-term borrowings have decreased over the years, there has been a significant rise in the trade payables
3. There has been a significant rise in the Intangible Assets of the company on account of the trademarks and goodwill of the company due the acquisition of Lloyd.
4. The cash and cash equivalents have been volatile over the years. Despite the rise in the net cash flow from operating activities over the past year, the balance of cash and cash equivalents have decreased due the cash used in investing activities to acquire Lloyd. Further repayment of short term borrowings, and the interest paid over the past year have decreased the cash flow from financing activities.
V. Key Ratios
(Rs. in crores)
Mar ‘18 Mar ‘17 Mar ‘16 Mar ‘15 Mar ‘14
Profitability Ratios
Operating profit Margin (%) 12.80 13.29 9.95 8.41 9.07
Profit before Interest and Tax Margin (%) 10.92 11.08 8.09 6.75 7.62
Gross Profit Margin (%) 11.08 11.33 8.19 6.79 7.65
Net Profit Margin (%) 8.13 8.03 17.07 4.49 5.45
Return on Capital Employed (%) 26.55 23.98 22.81 29.93 26.83
Liquidity and Solvency Ratios
Current Ratio 1.33 1.90 2.17 4.49 5.45
Debt Equity Ratio 0.03 0.06 0.03 0.16 0.49
Long Term Debt Equity Ratio 0.02 -- -- 0.12 0.42
Interest Cover 41.11 62.66 13.06 9.90 9.02
Total Debt to Owners Fund 0.03 0.06 0.03 0.16 0.49
Management Efficiency Ratios
Inventory Turnover ratio 5.06 7.00 9.61 6.51 5.48
(Source: Annual Report of Havells India 2017-2018)
1. The profitability ratios of the company are on the rise due to the secular rise of profits over the years. There was a slump in the performance of Havells in FY 15-16, which resulted in decrease of revenue and adversely affected the profitability ratios of the company.
2. The current ratio is on the decline. The current ratio in FY 15 -16, was 2.17 which was significantly higher than it’s per group, which suggests that short term assets were being relatively unutilized.
3. The decline in the interest coverage ratio suggest that, Havells is in a better position to repay its interest obligations despite the rise in the finance cost.
4. Havells debt component in its balance sheet has decreased over the year on a whole. Total debt to owners’ funds also shows that the proportion of debt of Havells is in check. The rise in the long term borrowing to acquire Lloyd does not increase the financial leverage of the company as the debt was of the company was negligible in the FY 16-17 and Lloyd significantly improved the revenue of the company, and let Havells enter a new segment of the market leading to expansion of the company.
5. Havells needs to improve its efficiency in terms of churning/converting its inventory into sales, as the inventory turnover ratio has decreased over the years. The ITR of Havells is also lower than the industry average.
FUNDAMENTAL ANALYSIS OF ASHOK LEYLAND
I. Sector Report
The Indian commercial vehicle industry has seen a massive growth in FY’18 with a total domestic sale of 8.56 units against 7.14 lakh last year which is a 20% growth (approx). Such turnovers were last seen in FY’12 after which low GDP growth, inflation, implementation of GST and shift to BS-IV emission norms managed to hamper growth.
II. Competitors
Tata Motors and Mahindra are the 2 largest competitors of Ashok Leyland acquiring 42.1% and 24.9% of the market share, respectively in FY’17.
M&HCVs:
Tata Motors lost 15% Market share to 47.1% in FY’17 from FY’09 in the following segment while Ashok Leyland gained 6.7% to 32.4% in the same period. Mahindra on the other hand is barely exposed to M&HCVs with a market share of 2.4% in FY’17.
LCVs:
Tata Motors lost another 21.8% market share over the last 8 years while Mahindra gained 14% acquiring 42% of the market. Ashok Leyland being a new player in FY’09 had only 0.3% of LCVs market share which it managed to expand to 7.5% in the same period showing a CAGR of 49.33%.
III. Segment Diversification
LCVs vs M&HCVs:
The LCV segment has been gaining market share over the last few years. The comparison below shows the trends of LCVs and M&HCVs over the last 8 years where the former has gained 5% share in the commercial vehicle industry. In FY’18 itself the LCV segment grew 25.42% against M&HCV at 12.48% only*.
Trends
The Q1FY’19 numbers have gone significantly up, the M&HCV segment grew 114% YoY while LCV grew at 35.27%. The regulators have also increased axle load truck capacity which is expected to decrease the demand but at the same time will increase consumption of the asset and might nullify the effect of the situation to some extent. Eicher motors also launched India’s first ever 41 tonne capacity truck on July, 2018 which is expected to affect sales of other Medium and Heavy Trucks.
Note: *Increase in share of Light commercial vehicles does not represent LCVs capturing the market of M&HCVs but signify that the former segment is growing at a faster pace than the latter.
IV. Sales and List of Customers
Sales for Ashok Leyland have grown drastically in both the M&HCV sector and the LCV sector. Sales in the M&HCV sector grew at nearly 25% whereas sales in the LCV sector grew at about 37.9%. With the LCV sector growing at a rapid pace due to increasing demand, Ashok Leyland would be expected to experience increased sales in their LCV segment at a rapid rate and continue to capture more of that market.
Their list of buyers include:
VRL Logistics (350cr, 1200 trucks) Karnataka Govt. (650cr) Ahmedabad BRT (50 electrical buses) Tamil Nadu Govt (321cr) Defence (100cr) Burkina Faso’s Ministry of Higher Education (9.57 Million Dollars)
V. New Investments
1. Ashok Leyland's new technology named 'iEGR' incurs an additional cost of only Rs 20,000 in converting a BS-III engine to BS-IV. While competitors use SCR technology that costs Rs 60,000-80,000 for the same. The technology has less electronic components, hence it is more suited to Indian roads with lower maintenance. Besides this, it has 10% higher fuel efficiency in comparison with its peers.
2. Ashok Leyland’s products costs around five per cent more compared to competition, but it gives 18 per cent extra value and this is what makes its best-selling product Dost stand out in the crowd. Even if BS-IV or Euro-VI comes, Ashok Leyland’s Neptune engine can match the standards.
3. They make cabs today that meet European safety norms. The Boss was selling in Europe and they not only brought it here but upgraded it too. The Captain was designed and engineered in Europe and is also made here. In safety and emission, they have absolutely no issue.
4. They make what the customer wants. Ashok Leyland was the first to introduce tractor- trailers and airbags. When BS-III came in and all went for common rail systems, they provided BS-III in inline pumps because it was easy for roadside mechanics to maintain. The Jan Bus has 24 patented features.
VI. Promoter Holding
Number of Shares held as a % of grand total of No. Name of Shareholder shares 1 Hinduja Automotive Limited 34.83% Hinduja Foundries Holding 2 0.24% Limited Hinduja Bank (Switzerland) 3 16.2% Limited
Together, promoters hold more than 50% stake in the company which is a very good sign as it indicates high confidence in the business and can also prevent any type of hostile takeovers from its competitors. The company also maintains a healthy Dividend Payout Ratio of 44.9% which shouldn’t raise any cause of concern for its investors as of now, however, if the payout ratio gets really high, it might mean that the promoters have other ideas than to continue to invest heavily and grow the business. Also, the promoters have only pledged 5% of their shareholding which again doesn’t raise any concern for investors.
VII. Financial Analysis
Ashok Leyland continued to post strong numbers during Q1FY19, keeping up with the trend that was observed during the year ended March 2018.
The company posted a record revenue of ~Rs.29,800 Crores and a record profit of ~Rs.1,800 Crores during FY18 which is quite commendable.
SUMMARY OF CONSOLIDATED STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED MARCH 31, 2018
------in Rs. Cr. ------
Mar ‘18 Mar ‘17 Mar ‘16 Mar ‘15
INCOME
Operating Revenues 29,619.57 22,870.97 21,259.90 15,340.89
Other Income 199.88 130.69 163.62 188.83
Total Revenue 29,819.45 23,001.66 21,423.52 15,529.71
EXPENSES
Cost Of Materials Consumed 17,317.71 14,069.56 12,821.94 9,824.58
Purchase Of Stock-In Trade 750.50 1,403.62 1,616.03 645.51
Changes In Inventories Of FG,WIP And Stock-In Trade 1,149.86 -739.47 -464.18 -41.46
Employee Benefit Expenses 2,257.48 1,850.00 1,710.67 1,536.11
Finance Costs 1,231.72 1,048.80 925.05 872.29
Depreciation And Amortisation Expenses 645.89 572.79 523.94 579.91
Other Expenses 3,895.59 2,993.32 2,596.51 1,845.03
Total Expenses 27,248.75 21,198.62 19,729.96 15,275.96
Profit (before Exceptional, Extraordinary Items And Tax) 2,570.71 1,803.04 1,693.56 253.76
Exceptional Items 0.39 40.09 -406.33 -295.32
Profit/Loss Before Tax 2,571.10 1,843.13 1,287.24 -41.56
Total Tax Expenses 751.12 196.12 496.57 172.42 Profit Loss From Discontinuing Operations -12.73 -4.23 0.00 0.00
Profit/Loss For The Period 1,807.25 1,642.78 790.66 -213.97
EARNINGS PER SHARE
Basic EPS (Rs.) 6.06 5.52 2.00 0.00
Diluted EPS (Rs.) 6.02 5.52 2.00 0.00
The income from operations increased by 29.6% YoY, while the margins improved slightly by ~0.7%. The margins did not improve significantly because the company used numerous sales promotions techniques like discounts to boost sales. However, the company’s management has decided to reduce the discount on sales this year to improve margins.
Though margins improved, a major increase in other expenses was due to increase in machinery maintenance costs, power and fuel costs as well as selling and administration expenses. However, this is justified as the company boosted its production and sales and also expanded the dealer network.
The net profit for the period after tax increased by about Rs. 265 Crores.
The company has been showing a positive trend on other parameters relating to Profit and Loss over the years, proving that the company is in good financial health.
This positive uptrend is expected to continue in the coming years with the company showing excellent growth in the commercial vehicle segment.
BALANCE SHEET ANALYSIS
Consolidated Balance Sheet of Ashok Leyland ------in Rs. Cr. ------
Mar ‘18 Mar ‘17 Mar ‘16 Mar ‘15
12 months 12 months 12 months 12 months
EQUITIES AND LIABILITIES
SHAREHOLDER'S FUNDS
Total Share Capital 292.71 284.59 284.59 284.59
Total Reserves and Surplus 7,127.88 6,108.36 4,979.11 4,226.72
Total Shareholders’ Funds 7,420.59 6,392.94 5,263.70 4,511.31
Minority Interest 825.33 588.99 417.29 263.15
Total Non-Current Liabilities 11,080.59 9,287.07 8,275.91 6,877.47
CURRENT LIABILITIES
Short Term Borrowings 1,919.20 1,034.71 1,072.68 826.64
Trade Payables 5,074.65 3,450.15 2,701.12 3,081.95
Other Current Liabilities 6,584.75 5,565.11 4,267.13 3,504.49
Short Term Provisions 612.89 349.35 200.87 459.63
Total Current Liabilities 14,191.48 10,399.32 8,241.81 7,872.70
Total Capital And Liabilities 33,517.99 26,668.32 22,198.71 19,524.62
ASSETS
NON-CURRENT ASSETS
Tangible Assets 5,069.47 5,072.23 4,692.74 5,386.65
Intangible Assets 418.93 410.82 443.14 456.74
Capital Work-In-Progress 251.11 195.92 66.26 165.79
Intangible Assets Under Development 188.31 48.27 21.11 50.34
Fixed Assets 5,927.83 5,727.23 5,223.24 6,059.52
Non-Current Investments 966.84 845.21 766.97 806.37
Deferred Tax Assets [Net] 141.78 113.48 75.74 21.80
Long Term Loans And Advances 9,935.69 6,701.86 5,705.43 4,253.94
Other Non-Current Assets 1,016.56 1,009.82 804.53 129.62
Total Non-Current Assets 19,096.43 15,505.35 13,329.80 11,956.91
CURRENT ASSETS
Current Investments 3,415.74 1,088.11 264.11 693.00
Inventories 2,207.69 2,901.03 1,922.33 1,566.45
Trade Receivables 1,175.50 1,238.40 1,461.38 1,353.77
Cash And Cash Equivalents 1,230.51 1,063.61 1,716.52 905.09
Short Term Loans And Advances 5,117.99 4,132.99 2,772.04 2,609.29
Other Current Assets 1,274.13 738.84 732.52 440.12
Total Current Assets 14,421.56 11,162.98 8,868.90 7,567.71
Total Assets 33,517.99 26,668.32 22,198.71 19,524.62 The balance sheet of the company looks pretty attractive, with key figures improving year after year. The company is rich in cash, which means that it has a good liquidity position. The trade receivables have decreased which could be responsible for increase in cash. Increase in cash is beneficial for the company to support its expansion plans. The company has also increased its current investments in mutual fund units, which in the time of boom would benefit the company with good returns.
On the other hand, the reserves and surplus has increased, the funds of which may be used to fund the expansion of the company. The shareholders’ funds (inflow) has significantly increased. This is responsible for raising the non-current liabilities. The current liabilities have also increased, mainly because the production capacity was suddenly raised during the year. However, the management would ensure that such credit taken is paid off quickly henceforth. Thus, the overall balance sheet looks attractive.
CASH FLOW ANALYSIS
Cash conversion cycle has improved by -55 days, due to increase in payables to 91 days from 80 days, and decline in inventory days to 34 days (FY17: 65 days).
Standalone operating cash flows also increased because of working capital changes.
The creditors payment days has increased while trade receivable days have decreased.
There have also been significant cash inflows from maturity of bank deposits, dividends and interest income.
VIII. Key Ratios
Mar ‘18 Mar ‘17 Mar ‘16
Basic EPS (Rs.) 6.06 5.51 2.40
Revenue from Operations/Share (Rs.) 101.19 80.37 74.70
PBIT/Share (Rs.) 12.99 10.02 9.20
Net Profit/Share (Rs.) 6.17 5.77 2.78
Profitability Ratios
Return on Capital Employed (%) 19.67 17.52 4.88
Return on Assets (%) 5.25 5.95 3.07
Total Debt/Equity (X) 1.64 1.55 1.63
Liquidity Ratios
Current Ratio (X) 1.02 1.07 1.08
Quick Ratio (X) 0.86 0.79 0.84
Inventory Turnover Ratio (X) 13.42 7.88 11.06
Coverage Ratios
Interest Coverage Ratios (%) 3.09 2.72 2.83
Valuation Ratios
EV/Net Operating Revenue (X) 1.83 1.46 1.80
EV/EBITDA (X) 12.20 9.78 12.15
Price/BV (X) 5.73 3.76 5.87
P/E (X) 19.88 15.42 -
The ratios, overall indicate that the company is performing well over the past 2 years and has been improving its financial conditions.
The Revenue from operations/ Share improved significantly from 80.4 to 101.2, while the Earnings per Share (EPS) improved by 9.9% YoY.
The PBIT/share improved from 10.02 to 12.99 in FY18. The return on capital employed has also been increasing year after year.
The total debt / equity ratio has increased, however a note must be made here that the standalone company has reduced its debt during the year, but the debt in its subsidiary company has increased thus increasing the overall ratio in the consolidated statement.
The return on assets has declined slightly due to purchase of new assets during the year.
The current ratio has improved from 1.07 to 1.02, which is excellent.
The quick ratio is slightly less than 1, which means that the company depends on its inventory sales to meet its liabilities. However, it is only slightly less than 1(~0.86) and such a ratio is expected given the nature of the company’s business. Also, the quick ratio has been improving over the years.
The inventory turnover ratio has increased significantly during FY18, which is evident from the increased sales numbers.
The interest cover ratio has also increased significantly, showing that the company is able to pay off its debts with greater ease.
Finally, the valuation ratios of the company look attractive, however, these are increasing year after year given the strong fundamentals that drive the company.