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Stock Research Valuation Analysis

SPICEJET: A POTENTIAL MULTIBAGGER AND TURN AROUND STORY

 

Value investors always look for an opportunity. One of the sector which look glamorous from outside but most of the times, fail to deliver any good returns is Aviation sector. Aviation is very capital intensive business therefore only a few players are able to drive this market. Few of the listed Indian aviation companies are SpiceJet, Aviation InterGlobe, Jet Airways.

In last 2 years, airline sector has caught investors attention because of following reasons

  1. High aviation passenger growth in developing countries.
  2. Growing traffic shows growing income.
  3. Still underpenetrated market.

Today I want to share a turn around story of SpiceJet which happened in late 2014.

Most of us will be aware that SpiceJet was near to close in late 2014. The airline failed to pay its dues on multiple accounts and caused a disrupt in its daily operations which finally lead to cancellation of its numerous flights. link

In Dec 2014, Ajay Singh, the founder of SpiceJet came to its rescue and purchased 58 % stake from Maran and his investment arm Kal Airways. During the acquisition, of Spicejet Singh also took the company debt of 1400 Rs Cr.

Within a year of management change, SpiceJet came out with shining colours. Its occupancy rate improved up to 93%. and in fact was higher among all its peers. Link.

After the Singh takeover on SpiceJet, Ajay completely turned the side of the company. He made the loss-making company into a profitable one. But that did not end, as the company was having huge debt on books so it needed to clear that off. and since Singh acquisition, SpiceJet has been continuously posted profitable results.

One noteworthy take is since the Singh acquisition, SpiceJet share has soared to 150 from 20 levels which translates to more than 800% returns to its faithful investors. Till date, SpiceJet is the best performing airline stock. Recently legendary investor Warren Buffet also took airline sector seriously and invested in the sector in early 2017. This also triggered various brokerage firms to add views on the aviation sector.

But airline sector is susceptible a huge number of wide changes like

  1. Fluctuating fuel oil expenses.
  2. Low occupancy rates on fewer routes.
  3. Wafer thin profit margins.
  4. A lot of government regulated norms
  5. The competitive pricing structure of tickets.

Due to all the lot of external dependence on fares of the airline, SpiceJet is increasing margin from its merchandise business. It has started selling tickets well in advance to increase its working capital.

Recently SpiceJet has also ordered new aircraft which are more fuel efficient and will help in decreasing running cost. Currently, SpiceJet trades at 140-150 levels and it is all set to expand its fleet in coming years.

Links:

  1. SpiceJet orders 40 Boeing 737 MAX 10s, worth $4.74 billion
  2. In Jun 2017, SpiceJet started its first phase of  UDAN (Ude Desh ka Aam Naagrik) scheme.
  3. SpiceJet is all in news due to the recent spike in its share price and thus grabbed a lot of investors attention.
  4. With undaunting management, SpiceJet is all set to touch the sky.

Read: Analysis on Multibagger, Avanti Feeds

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Stock Research Valuation Analysis

FUTURE CONSUMER: IS THIS COMPANY WORTH INVESTING FOR FUTURE?

Today we will try to analyze a retail company which is part of the Future group. Over the last 5 years, the Future group has expanded in many verticals. Let us come to basics and try to understand the structure of this conglomerate group.

Future group has been running several companies under their umbrella. Their retail business are mentioned as under

  1. Future Retail Ltd
  2. Future Lifestyle  Fashion Ltd
  3. Future Consumer Limited
  4. Future Enterprise Limited

Today our discussion will be limited to Future Retail Ltd. The company runs stores such as BigBazaar, Easyday, FBB, Foodhall, e-Zone and HomeTown. Besides these stores company own a lot of FMCG brands which they sell in their own stores and in some partner’s stores. They own following brands

  1. Golden Harvest- Offers staples like rice, wheat, sugar etc
  2. Fresh & Pure- Give wide range of edible oil, ghee, tea and coffee etc
  3. Ektaa- Brands collection of some specific local tastes preferences in rice, pulses, snacks and other ethnic food items.
  4. Veg Affair- Offers collection of frozen vegetables, ready-made mixes etc
  5. Desi Atta Company- Provide various types of flours
  6. Tasty Treat- Ready made snacks and frozen snacks as well
  7. Soo Fresh- Provides consistent quality of fruits and vegetables
  8. Sangi’s Kitchen- a delicious range of Indian and International dips and sauces.
  9. Nilgiris- Dairy and bakery products
  10. Karmiq- Provide variety of dry fruits and health-centric oils (rice bran, olive etc)
  11. Sunkist- Mix varieties of juices & beverages
  12. Think Skin- Gives Skin products
  13. Kara- acquired by Aditya Birla group, gives personal hygiene stuff for sanitizing wet wipes
  14. Care Mate- Provides products in personal hygiene space (face tissues, hand wash aluminium foils etc)
  15. Clean Mate- Give collection of portfolio of cleaning bars, room fresheners, toilets etc

The retail industry is always been capital intensive and this company is doing innovation to stay ahead of its competitors.

The overall Indian FMCG market is estimated to be USD 185 billion, of which the branded portion constitutes merely USD 65 billion. This branded portion of the market is expected to almost double by 2020 and touch USD 240 billion by 2025. At present barely one-third of the market is branded, which is largely skewed towards home and personal care and beverages. Urbanization, growing income levels and aspirations are leading to premiumization and growth of branded products.

Future retail is understanding customer needs and trying to adopt the same at very faster pace. They maintain these brands to give a customer a varied variety of items with keeping margin level higher. In the last 1 year, they have started developing, manufacturing and distributing items from their owned food park in Karnataka.

Recent Business Developments

  1. The company has partnered with the Government of Rajasthan’s public distribution network to upgrade each of the fair price shops and help them sell a wider range of assortment.
  2. Additionally company has entered into joint venture with Mibelle AG, a Swiss-based entity for marketing and distribution of imported personal care products under the brand name “Swiss Tempelle” in India.
  3. Further, the company has also commenced its operations for marketing and distribution of oats and oats based cereal products in India through its subsidiary company at Sri Lanka.
  4. With a focus on exploring cross-border opportunities, and developing new markets in food/FMCG category, your Company has also formed an entity at Jebel Ali, UAE.

Competitive Edge

  1. The Company has access to over 700 modern retail stores of the group spread across various formats to cater to the needs of different customers.
  2. Manufacturing capabilities of the Company are underscored by strong manufacturing abilities in dairy and bakery, frozen vegetables and snacks, chutney and oats.
  3. The company has partnered with a data analytics company to analyze its customer patterns and cater its customer needs. The company is already having payback loyalty programme and mobile wallet to enhance brand support.
  4. The company also strengthened its social media teams to engage on multiple platforms including Twitter, Facebook and Instagram. Now option such as prebooking of products is also available.
  5.  The Future Pay app is being used by 1.2 million customers and 3 Lakh bills have been verified by the Price Match feature. The price match feature allows its users to get the lowest price available.

 

Company financial highlights

We will be comparing QoQ results only as Future Retail was separated from its parent company in 2015 itself.

The company is consistently showing good quarterly results with significant improvement in Sales, Operating profits.

Coming to borrowing or debt of the company. The company has negligible debt as of Mar 2016. After the restructuring of parent Future Consumer Ltd, most of the long-term borrowings are transferred to its parent company.

Long-term borrowing: 0.81 crores

Short-term borrowing: 1077.59 crores

The company is taking the considerable amount of money to feed its working capital requirements which is not good.

 Read: Learn Fundamental analysis

Valuations

CMP: 500, P/E: 57, Industry P/E: 106.54

Retail in India is still at a nascent stage and is expected to grow till 2025.  Looking at the market size of the company we see that there will be a significant increase in Revenues and profits will follow it.

The average industry P/E is trading at huge valuation and demanding large growth with the retail sector. The present levels are definitely expensive with no margin of safety. There may be a significant correction if the sector does not perform as demanded by markets.

We should understand the risk of a downturn and invest with caution. We can add or buy on any good correction of the market. The market has a huge expectation with Retail industry and with huge expectation come greed which will never allow retails stocks to trade at low P/E levels.

Read: New to investment, try Zerodha’s SmallCase

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Stock Research Valuation Analysis

ANALYSIS OF A MULTIBAGGER : AVANTI FEEDS

Today I want to highlight a company which is well known for its frozen foods in USA, Europe, Japan, Australia & Middle East. But wait there is something special about this company that why it is very popular among market analysts and investors.

Avanti Feeds has given whopping 7000% returns to its faithful investors in last 5 years (compared on 10/2017). Yeah, that is massive return a company could give to its investors in such a short duration.

Have a look at its 5yr market performance.

Lets us analyze the company?

Company business

  1. The primary export business of frozen seafood( shrimps).
  2. Secondary business of power generation (wind-based power plants)
  3. Investment in 2 power generation companies with a stake of 25.88 % and 49.99 %.

 Market opportunities 

The company brags its primary source of revenue from exporting frozen foods in USA, Europe, Japan, Australia & Middle East. The seafood consumption is increasing all over the world as compared to other forms of meat. With the long coastline, India is ideally suited for the development of seafood industry. Avanti Feeds has grabbed this opportunity and in 2016-17 their exports sum to 11.35 lakh MT.

Company Financials

Avanti Feeds has indeed very healthy financial figures and the same is reflected in it endless returns of last 5 years. If we look cost of goods sold numbers those also shown a 32.8% CAGR. That is marvellous for a company.

Even the company has grown its net profit to 214.3 Cr in mar 2017 from 70.4 Cr in mar 2014, which gives a CAGR of 44.9%, wonderful.

See that company has maintained its net profit margin which helped in generating stellar profits.

Now coming to borrowing taken by the company. As a company is not involved in capital-intensive business we can see debt level as low. Besides company is decreasing its debt levels YoY.

In the last year, they have taken long borrowing of Rs 14.89 cr for implementation of shrimp processing project at Yerravaram, East Godavari (Dt.) by M/s. Avanti Frozen Foods Pvt. Ltd.

The company is beautifully maintaining its EBITDA margins.

Have a look at company’s ROE. The company has maintained a double-digit return on equity. The share capital of the company is Rs 9.08 crores.

 

Business expansion & Growth Opportunities

Avanti Feeds as always tried to be at par in terms of industry standards. In order to secure global recognition for shrimp processing and export business, the Company during the year 2015-16 transferred this division to its own new subsidiary ‘Avanti Frozen Foods Private Limited’ (AFFPL). Thai Union Group joined this Company with a 40% stake in July’16 to extend support in this business. The subsidiary Company (AFFPL), which is continuing the operation of existing plant took up implementation of a new state of the art shrimp processing facility at Yerravaram in East Godavari District of Andhra Pradesh in December’15. The project work of this factory is complete and it is waiting for statutory and regulatory approvals to commence operations and we expect that all the approvals will be received and it will commence commercial operations shortly.

Read: A potential multibagger touching the sky

Valuations

Given the fact that Avanti Feeds maintain such a healthy financials, such a business could not come at a low valuation. As of now (02/10/17) Avanti Feeds shares trades around 2000 with a P/E of around 27.

Now the share is trading at par but still has a scope of expansions of profits. For a value investor, there seems to be hardly any gap of a margin of safety which makes it an expensive deal.

Read: Learn Fundamental analysis

Source: Company’s Annual Report’s

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