04 June 2018

Sohn India Conference 2018: Key highlights (a forward)

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SOHN India 2018 conference. The key takeaways of which are


Investment rationale: Value migration in banks from PSU banks to Private banks.
Four pronged strategy - QGLP ( Quality , Growth , Longevity , Price )
o Quality (both business and management)
The diversified loan book along with strong focus on risk management (GNPLs lower than HDFC bank).
High quality management with 20 plus years of experience. High skin in the game with 9.4% ESOPs.
o Growth:
The customer grown from 2mn in FY16 to 4.5 mn in FY18
The CASA momentum is also playing through with CASA ratio of 24%
o Longevity:
Banking is 50% of GDP versus 150% in USA and 200% in China. This suggest huge growth potential even on growing base.
The focus on risk management will ensure quality growth sustainability
o Price :
At 33x FY20 P/E, the stock is not cheap but given 38-40% EPS CAGR , this seems to be dependable. The comparison with HDFC bank ( from 1997 to 2005 holds uncanny similarity )
Risk :
o The nascent book, which has not yet seasoned out .
o 14% of the book is still pertaining to risky micro finance

NAVNEET MUNOT - Healthcare and allied Industry
Interesting Quote: “When you tell yourself there is no money . Then your brain start working . An amazing opportunity comes to you”
Opportunity size : Global IT industry size USD3tn, Auto - USd2tn, Oil - USD3tn, but then pharma is USD8tn ( sum of all the three )
o India health care growing but will grow (albeit on lower base). Three things that will drive growth are 3As of Awareness / Availability/ Affordability
Structural drivers in place like Under penetration,  rising income level,  changing attitude , arguing population , changing disease profile among others
Key pressure points : News flows has been negative for last few months (NITI Aayog wants all the drugs to be benchmarked). 
But things can change:  a) Lower revenue growth -  Better 3As can lead to growth b) Lower ROC: Better utilisation , Better realisation , Asset light model will lead to increase


Man Industries
Investment rationale : Strong earnings growth (utilisation at low levels) with discounted valuations
Business orientation: Comprising large domestic clients, along with best International clients.
Growth drivers: a) Expansion of national gas grid in India b) Large number if water projects in India and c) Massive export opportunity which is very high on margin (bidding for several African projects ) d) Highly  consolidated  industry as threat from China regarding and now top 3 players control 70% plus market share
Margin drivers a) Utilisation level at 24% will rise easily to 35% in FY19 and 45% in FY20 and will reach 65% over period of time

Investment rationale : Strong growth with attractive valuation
Strong growth  visibility over 3 years: a) Order book of INR100bn with more expected in due course of year b ) Signed MOU with technology players for defence product c) Setting up fibre manufacture plant in Hyderabad d) Key implementation partner for JIO and e) Pan India dedicated OFC network by government etc
Financials: a) Revenues registered growth at 52% CAGR over FY12-18 and EBIDTA at 52% CAGR with debt is down to only INR4bn (only for working capital) b) Expect PAT to double over next 2 years with ROEs to go to 20% from13% now.
Valuation: Compared to sterile this is trading at huge discount which will narrow over time.
Key readings: Promoter has increased stake from 9% to 36% - a promising sign


Investment rationale: Brand creation , Increase in value added products and Whey protein segment
Growth and margin drivers:  Expansion into new area and new products will drive growth. Growth in North India with focus on better margins Ghee and curd will drive the margin expansion.
Whey protein is the next key driver: INR10bn market, which is supplied by import. But 3 problems a) limited stock b) date of manufacture is farther away and c ) spurious and contaminated product.  Parag is the only key Indian player of the same.
Focus on increasing operating efficiencies: Re-organinsing sales and distribution with Vector consulting and leading effort. Pilot in Mumbai is extremely successfully and will be replicated across
Expected Financials : a) Mid teen revenue growth b) EBIDTA margin expansion of 60bps in FY19 and 50bps in FY20 c) EPS 28% earnings growth
Risk : Senior management team visibility. Currently family run business and new management team is very new so that will be critical

PRASHANT KHEMKA- Jyothy laboratories

Investment rationale : Forgotten and misunderstood FMCG company.  Making it great business with attractive valuation
Great business: Competitively positioned gaining market share, low category penetration , track record of value creation and fair dealing
Attractive Valuation : Lowest cash flow multiple among the peer and substantial under valuation to intrinsic value
Financials : a) revenue growth of 7% CAGR , expect that it will double to mid to high teen growth with EDBITA growth of over 20% versus 15% earlier
Growth drivers:  a) Increasing penetration (present in lower penetrated higher category products) b) expanding distribution (expanding reach by 20% each year) and new product and innovation  on new products (atleast one new product each year )
Strong governance practices : Seasoned management with strong record. MD owns over 66% of stock. Great free cash conversion cycle


Investment rationale:  Exchanges over 15 years across global  gave returns at more than 20% CAGR. This occurs because the inherent traits ( listed below)
Tend to become natural monopoly : True globally as well (as liquidity seeks  liquidity).
Exchange is a technology platform : a) Asset light model b) revenue / net fixed asset could be 4x c) customer fund growth (scalability without capex ). Cumulatively this should lead to higher margins and returns
Multiple reform : a) More commodities are being allowed b) Introduction of options  c) New participants and d) Longer duration products.
Can be much large: A) Revenue from INR2.6bn to INR10 6bn with GDP growth of 11% b)  Multiplier 0.5x to 2 x ( China's current ) c)  F&O mix to go to 20: 80 (future's fee half and option only on premium). Cumulatively have PAT of INR6.8bn versus INR1bn. At 20-25x the value of INR136-170bn versus INR37bn currently

SHIV PURI- Indian Private Sector Banks (Kotak Mahindra Bank)

Investment thesis : Exponential technology are disrupting industry one by one and the Indian industries are also vulnerable. Look at the Longevity of the business under exponential growth.
Investment in new paradigm should have 3 things a) massive transformational purpose b) customer centric (very hard to replicate this) and c) agile management (future more uncertain and should read through changes)
Indian private segment banks key investment idea based on a) building Digital ecosystem in India (Aadhar authentication) b) cost of financial intermediation has dropped significantly this will lead to financial inclusion c) bank will have customer database through UPI (Unlike in China) and d) regulators are not going to allow FinTech to grow without regulation
The bank which is most agile and focussed is Kotak Mahindra Bank a) strong and agile management b) customer focus on culture ( 811 is vindication) and c) best capital allocator

SUNIL SINGHANIA- India branded packaged food in India (Bombay BurMah)

Investment Rationale: Huge under-penetration with no substitute for food
Penetration level is much lower: S curve applies to food industry and India is way under penetrated (India at USD58per capita versus Mexico at USD578 and China USD258)
Long term growth driver: Availability , Affordability, Investment , Renders it  USD200bn food opportunity (can grow 5x in 10 years).
o Huge opportunity across segment
o GST has helped a lot reflected in the fact that across food category this has been lower
o Across companied are planning to diversify thus suggesting confidence in growth area
o Nestle 6x and Britain's 5x size in 10 years
Britannia is well placed - dominating in the categories it was present at, premiumisation has helped EBIDTA margins a theme that will further play. But valuations are expansive 
Proxy for Britannia is Bombay Burmah- One of the oldest company wirth zero debt and has 51% holding in Britannia.
Current holding company discount is 73% and any reduction in that will drive strong re-rating.

Another forward below

The Conference opened with opening remarks by Nitin Saigal,Founder &CIO, Kora Management
He explained the purpose of the Conference i.e. to raise funds for paediatric cancer care.

The format of the Conference was the same:
1. Every speaker will be allotted 15 minutes
2. The speaker have to give their best idea
3. No Q&A

The first speaker was Raamdeo Agarwal of Motilal Oswal:
Delighted that his best idea was my sentimental favourite…RBL Bank.
Said there is a multi-decadal opportunity in private banks due to value migration from public sector banks as well India’s low Bank Credit to GDP Ratio (only 51%)
Applied his well-known QGLP framework to analyze the company
He pointed out that the senior management and employees have significant skin in the game-ESOPs are 9.4% of the Capital Base
He had a very interesting comparison of HDFC Bank in its first 8 years of going public with RBL Bank…RBL Bank compared well if not better than most parameters
He gave a price target of Rs.1,145 in the next 3 years and felt it could be 10 bagger in the next 10 years

The second speaker was Navneet Munot from SBI Mutual Fund
Being from Mutual Fund Industry,compliance demands he can’t give stock picks but can speak on sectors
His pick was the Healthcare sector especially Hospitals
As per him, the challenges in Healthcare are Awareness,Availability and Affordability
He felt the Govt’s insurance program Ayushman Bharat and rising medical insurance penetration can change the sector
Currently the newsflow regarding hospitals is very negative-license suspension,price controls,low revenues,low returns etc
But he felt this would change with time with the right business model and with the formalization of the economy

The third speaker was Dr.Girish Chinnaswamy from the Tata Memorial Centre
Explained about pediatric cancer
Explained that cancer cure in India should not only be effective but also affordable
Appealed to participants to contribute to the Tata Memorial Centre

The fourth speaker was Shankar Sharma,from First Global
His first pick was Man Industries
As per him, the company is attractively valued at 6x FY19 earnings
Expected to grow at 80% this year
Its the third largest player in the LSAW/HSAW pipes category
Robust Order Book,Good Clientele,Low Debt,Low Capacity Utilization,No Equity Dilution etc makes this company attractive
His next pick was HFCL…this elicited eye-rolls from the audience
His investment thesis was robust order book of 10,000 Cr, Good Clientele including Reliance Jio, low valuations,increasing free cash flow, cheaper than Sterlite Technologies, new plants etc
He also provided updates on his picks from the earlier Sohn Conferences-A2Z Infra and MEP Infra

The fifth speaker was Ashwini Agarwal of Ashmore India Investment Managers LLP
His pick was Parag Foods and had 3 investment thesis
Investment Thesis # 1 – Rising share of Value Added Products
Investment Thesis # 2 – Extracting Efficiency from Operations
Investment Thesis # 3 – Limited Capex, FCF turns positive
He was very bullish about their Whey Protein powder Avvatar…said he had got the powder examined by medical professionals etc
Till now, Whey Powder used to be imported from outside.Parag can have a crack at this 1000 Cr market
He expects the stock to give a return of atleast 50% in the next two years

The sixth speaker(s) were two MBA students.Aneesh Sharma from MDI Gurgaon and Jigar Thakkar from IIM Khozikhode
They jointly presented on Delta Corp
Found it amusing that they gave a price target of Rs.601 with a time frame of 5 years !

The seventh speaker was Rukhshad Shroff, J P Morgan Asset Management
He mentioned that he still liked his picks from the earlier conference-HDFC Bank and Jubilant Food
His pick this time was MCX
Mentioned that traditionally exchanges have made money for investors
Liquidity begets liquidity and once an exchange is established, there is no need for another exchange.Hence they tend to be natural monopolies
Multiple reforms underway-More Commodities,Options,New Principals,Longer Dated Contracts etc
He had an interesting comparison of Total Commodity Derivatives Vs GDP of a country…as per that India is only 0.49 as compared to 1.98 China or 2.39 US
He then took a guess at where valuations could be in 2028 (!)…arrived at a multiple of 3.5x-5x current valuations
Astonishingly, he didn’t make any mention of MCX-NSE merger.

The eight speaker was Prashant Khemka of White Oak Capital
This is one person I was really looking forward to listening
His pick was Jyothy Labs…he called it a forgotten FMCG company
As per him, its a great business (superior ROCE,Scalabale, Strong Execution and Good Governance) and attractive valuations as per DCF and relative to Sector (50% cheaper than peers)
Really liked the way he emphasised cash flows in his presentation…even while doing sector analysis, his focus was on cash flows.
He ended his presentation with a memorable line “It will double without trouble in 3 years and will triple without ripple in 5 years”

The ninth speaker was Poonam Bagai of CanKids
CanKids is a NGO working in the field of Pediatric Cancer
She herself is a Cancer Survivor and explained the work of her NGO

The tenth speaker was Shiv Puri of TVF Capital Advisors
Was a very disappointing performance
Spent 90% of his time talking about technology, disruption etc
Then gave his pick…Kotak Bank !
Found that very funny

The eleventh speaker was Sunil Singhania of Abakkus Asset Managers LLP
Sunil was earlier with Reliance Mutual Fund and couldn’t give stock picks earlier due to compliance reasons
Since now he is on his own, the audience had high expectations from his presentation
Sunil talked about the branded foods opportunity in India-mentioned India spends one-third of its GDP on food and around $200 Billion on branded foods
This will only grow with time creating huge opportunities for companies in this space
Catch is most of these companies are trading at nose bleed valuations (60-70 P/E)
His solution? Buy Bombay Burmah…it owns 51% of Brittania and 38% of Bombay Dyeing
Currently, there is a holdco discount of 73%…which he feels may reduce with time
He then did an analysis of 3 scenarios which saw Bombay Burmah giving a return of anywhere between 53% to 183% in the next 2/3 years

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