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 company to be undervalued under 52 Week High/Low 167.5 Rs/ 105 Rs 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.