In True Democracy You Never Walk Alone

In True Democracy You Never Walk Alone

With the current NDA government celebrating its two years in power and huge celebration taking place by the ruling government that “Achhe Din “are here is a subject of debate and depending on what facet of society you represent everyone has its own version and answers. However, the common consensus is that more has been promised and spoken about and less has actually been delivered.  The NDA government has not been able to work with the other parties and despite having won significant majority in the 2014 Lok Sabha elections, BJP led NDA had only 24% seats in the Rajya Sabha in the upper house. For NDA, this lack of majority in the Rajya Sabha has translated into delays in implementation of legislations such as GST (Goods and Services Tax), Land acquisition bill, etc. Recently, the budget session of Feb-May 2016 saw improved co-ordination between political parties resulting in clearance of multiple legislations such as real estate bill and bankruptcy bill among others. After the Lok Shaha election the present composition of the Lok Sabha is as follows:

Lok Sabha Seats		Seat %
NDA	336	61.88%
Others	147	27.07%
UPA	60	11.05%
TOTAL	543

The Rajya Sabha (i.e. Council of States, 245 members) has similar powers in terms of legislation as the Lok Sabha, except in money bills. The number of seats in Rajya Sabha is defined for each state and Union Territories (UT) and members are elected by the elected members of respective state assemblies (&12 members are nominated by President) for a period of 6 years. 1/3rd of the members retire every two years and new members are elected as and when there is a vacancy/retirement. During 2016, elections will be held for 58 members (incl. 3 vacancy) and for 10 members in 2017. The NDA tally is expected to rise by 5 seats to 69 seats within next 1 year (based on the analysis of current state assembly strength), they will still remain a minority with 28% share even as the share of the key opposition party UPA is expected to weaken to 68 seats (1 below NDA).  

The present composition of the Rajya Sabha is as follows:

Group & Party	No. of Members	Member %
NDA
Bharatiya Janta Party	49
Telegu Desam Party	6
Shiromani Akali Dal	3
Shiv Sena	3
Naga Peoples Front	1
Republican Party of India (A)	1
Bodoland People's Front	1
TOTAL NDA	64	26.12%
UPA
Indian National Congress	64
Nationalist Congress Party	6
Jharkhand Mukti Morcha	1
Kerala Congress (M)	1
Rashtriya Janta Dal	1
TOTAL UPA	73	29.80%
Samajwadi Party	15
Janta Dal (United)	13
All India Anna Dravida Munnetra Kazagham	12
All India Trinamool Congress	12
Bahunjan Samaj Party	10
Nominated	9
Communist Party of India (Marxist)	8
Biju Janta Dal	7
Independent & Others	6
Dravida Munnetra Kazagham	4
J&K Peoples Democratic Party	2
Communist Party of India	1
Indian National Lok Dal	1
Indian Union Muslim League	1
Janta Dal (Secular)	1
Sikkim Democratic Front	1
Telangana Rashtra Samithi	1
TOTAL OTHERS	104	42.45%
NDA+UPA+ Others *	241
* 3 Seats vacant & 1 empty nominated seat

The key states where NDA/UPA will gain/ loose seats in the Rajya Sabha in the next one year is as follows:

States	NDA	UPA	Others
Rajasthan	3	-1	-1
Maharashtra	2	-2
Arunachal Pradesh	1	2	1
Bihar	1	2	-3
Goa	1	-1
Gujarat		1
Uttar Pradesh		-1	1
Tamil Nadu		-1	1
Haryana	-1		1
Karnataka	-1	1	1
Telangana	-1	-1	2
TOTAL	5	-5	3

          

Legislative activity picked-up in last session of Rajya Sabha, during last two years, Rajya Sabha has seen high variation in its utilization, with working hours going as low as 11% (monsoon session 2015) to the high of 90% (budget session 2016). Co-operation with regional parties as well as with UPA (on select bills) has led to a number of bills being passed during the 2016 budget session. However, the passage of GST bill (constitution amendment) requires broader consensus - approval from 2/3rd of the members of each house and passage from at least 15 state assemblies. Based on current strength and opposition from UPA and Left parties on GST; ruling NDA would need votes from almost every other member for its passage in Rajya Sabha which is not an easy feat to achieve.

After the landslide victory of the NDA in the Lok Sabha election in 2014, it has been witnessed that the NDA is trying really hard to make its presences felt in the various state election but the results have not been very favorable except in case of the recent Assam state elections, the number of seats in the Rajya Sabha is state specific and hence each state has a certain representation in the Rajya Sabha. The Rajya Sabha seats at present state and party wise is as follows:

Rajya Sabha seats at present State & Party wise	NDA	UPA	Others	TOTAL
Uttar Pradesh	3	3	25	31
Maharashtra	7	11	1	19
Tamil Nadu		1	17	18
West Bengal		1	15	16
Bihar	4		12	16
Andhra Pradesh	4	6	1	11
Madhya Pradesh	8	3		11
Karnataka	5	4	2	11
Gujarat	8	2		10
Nominated	2		9	11
Odisha		1	9	10
Kerala		5	4	9
Rajasthan	5	3	1	9
Assam	1	6		7
Punjab	4	3		7
Telangana	3	4		7
Jharkhand	1	4	1	6
Chattisgarh	3	2		5
Haryana	2	2	1	5
Jammu & Kashmir	1	1	2	4
Himachal Pradesh	1	2		3
National Capital Territory Delhi		3		3
Uttarakhand	1	2		3
Puducherry			1	1
Arunachal Pradesh		1		1
Goa		1		1
Manipur		1		1
Meghalaya		1		1
Mizoram		1		1
Nagaland	1			1
Sikkim			1	1
Tripura			1	1
TOTAL	64	74	103	241

At present there are 3 seats vacant and 1 empty nomination seat there by taking the total tally to 245 members in the Rajya Sabha.

Hence the NDA would like to capture a majority in as many as states as possible so that in turn their tally of members in Rajya Sabha increase which would enable them to pass the key bills.

NDA would need support of regional parties to pass key legislations and may be in case of the opposition from UPA and Left.

NDA needs at least 59 votes to pass bills in the Raja Sabha

UPA+ Left	82
NDA	64
Half Way	123
Additional Votes required	59

For constitutional amendment bills such as GST, support of 99 members (out of 104) is needed at present.

UPA+ Left	82
NDA	64
2/3 votes required	163
Additional Votes required for 2/3 strength	99

          BJP led NDA won 62% of total seats in Lok Sabha (Lower house of parliament) during May 2014 General elections, with BJP on its own obtaining 281 seats (51%). Despite its significant majority in Lok Sabha, a weaker presence of NDA in Upper House (RS, 24% of seats at May-14) has impacted passage of legislation such as GST bill, which need 2/3rd approval from both the houses of Parliament. In addition, Government has faced opposition in passing land acquisition bill due to lack of majority in Rajya Sabha.

           

    Rajya Sabha members are elected by the method of proportional representation and members keep retiring after their 6-year tenure and elections take place as and when there is a vacancy. Rajya Sabha meets in continuous sessions, and unlike the Lok Sabha is not subject to dissolution.

  Rajya Sabha (Council of States) has similar powers in terms of legislation as Lok Sabha except in case of money bills. In the case of conflicting legislation, a joint sitting of the two houses can be held. Joint sittings of the Houses of Parliament are however rare, and have been called in only three times in independent India, last in 2002. However, unlike Lok Sabha, a member of the Rajya Sabha cannot bring to the house, a motion of no confidence against the government.

Over the last two years, NDA has seen marginal increase in Rajya Sabha members to 64 (May-16), up from 59 in May-14, but still trails behind key opposition party Congress led UPA (73 seats).

Rajya Sabha has seen wide variation in performance and loss of up to 89% of time in the 2015 Monsoon session. However, the last two sessions have seen much lower disruptions and passage of a number of bills – across departments. The passage has been enabled by the help of regional parties and also principal opposition group UPA in some of the cases.

Hence in order for the NDA to carry out the desired reforms it is extremely important for them to reach out to the other parties to get the support in the Rajya Sabha to pass the key bills hence floor management and ability of the NDA government would be tested in the next two years to a large extent.

As in a true democracy like India, in spite of having a super majority in the lower house of parliament it is extremely important to have a collaborative effort and ability to reach out else passage of key bills would be rather difficult resulting in overall lack of progress for the economy and the country on the whole. As in a true democracy you never walk alone.

_ Farzan Ghadially

EU-UK Saga

EU-UK Saga

Volatile times till UK votes on EUROZONE

  

With six weeks to go before Britain’s EU referendum, which is scheduled to be held on 23rd June there are many political as well as financial implications for Britain’s growth, demographics and currency. Hence it is imperative to look at rebalancing/ re strategizing the overall portfolio at the macro and micro level.

The possible options for the investors, rising uncertainty over whether the UK will leave the EU is putting your wealth at risk. With little over a month to go until Britons decides whether to back a Brexit or remain in the union, the polls are close, sterling has taken a pummeling and the UK economy appears to have paused for breath.

 As time comes closer, more adventurous investors are seeking to take advantage of the uncertainty by placing strategic bets on what the markets will do in the event that the UK stays, or leaves.

Investors in the FTSE 100 have been largely sheltered since; this is due to the large proportion of companies listed in the leading share index who make profits outside of the UK.

But those owning shares in companies with a high UK exposure have not fared so well, with the likes of Lloyds Banking Group and fashion chain “Next” having dropped substantially in the last six months.

Far from seeing this as an opportunity to bail out, many investors who are confident that Britain will vote to remain in the EU see this as a short-term buying opportunity.

The wide consensus so far has been that UK will remain as a part of EU then the hope is that the UK will bounce back to business as usual, with Brexit-sensitive shares and assets rallying in relief.

However, fear that a vote to leave the union could cause at least two years of volatility in the value of your investment portfolio and in the wider UK and European economy.

Brexit would increase the chances of the British pound weakening against the dollar and the euro by as much as 20 per cent, That would not only increase Brits’ cost of travel and doing business abroad, but also make it costlier for British investors to buy European or US shares or bonds in their home currency.

  

This will also result in the job market in UK in a tight spot with the uncertainty

Businesses expansion by companies in the UK would be very uncertain. One of the sectors that would be hit the hardest would be the financial services industry.

With this kind of uncertainty in the near future it is important for professional fund managers to carry out what is referred to as “hedging” and rejig your portfolio to minimize the risks of both outcomes.

The possible options in the coming weeks could be as follows:

·      Hedge your risks

So what should investors do about all this Brexit uncertainty? Investors should simply batten down the hatches, ignore the expected market volatility and simply make sure they are as globally diversified in their investments as possible. This long-term view is especially skeptical of one tactic, namely to insure your portfolio of investments against risk by in effect insuring the potential downside risk in form of hedging.

The benefits and costs of hedging a portfolio of long-term investments, there are some benefits in the short term in insuring against market swings, but over time, the costs outweigh the benefits. As any insurance always comes at a cost.

Nevertheless, hedging against market volatility could work for investors with shorter time horizons. For adventurous types, the best hedge is to make a profit from a big contrary move that impacts your portfolio. The simplest strategy might be to invest in mainstream ETFs what’s called a currency hedging “overlay”. Many active managers in international funds have already built this into their strategy especially in the much more volatile markets of Asia, for instance but now also buy mainstream ETF trackers that are either monthly or daily hedged.

A typical example from the biggest ETF issuer could be if you want to carry on investing in euro-zone equities but don’t want the risk around sterling falling you could track the MSCI EMU index — a basket of large-cap Eurozone blue-chips. It’s possible to do this via an ETF with the ticker EMUU. Its total expense ratio (TER) is 0.38 per cent while the non-hedged version (ticker CEU) has a TER of 0.33 per cent, implying that the hedge costs 5 basis points a year.

It’s important to understand with a hedging strategy that volatility either way is removed so you might protect yourself on the downside, but you also miss out if the foreign exchange rate moves in a more favorable way.

·      Take the Gamble:

Alternatively, investors may be tempted to try to profit from the possible turbulence and mayhem. This involves a much more adventurous take on the markets and requires you to be opportunistic and tactical there is an absolutely need to protect against the downside of making the wrong call on inherently unknowable outcomes. In simple terms, keep any “speculation” or “bets” to a minimum and constantly watch your position, and be ready to use stop-loss positions to cut your losses if the market moves the wrong way.

Spread betting can be simple and cost effective but losses can spiral out of control quickly. Many exchange traded products especially short and leveraged trackers can be invested in, but they come with their own costs and they usually track daily volatility of markets which means that you could lose out on a big trend if the market moves violently up and down in a short period of time.

 

·      Bet on Brexit

In order to take an out on the market, let’s look first at a vote for Brexit, the first big call would be to short sterling against the dollar. The logic here is simple.US investors might panic about holding sterling and local assets and sell the pound.

The markets will initially over react. A pound currently buys around $1.45. It could fall abruptly after a “leave” vote, so that one unit of sterling might purchase only $1.30. However the same logic may not be able be applicable between the Sterling and the Euro.

Brexit could be perceived as being bad news not just for the UK but also the Eurozone, possibly even accelerating the collapse of the union. In this eventuality, with a very high possibility that the Eurozone equity could also fall sharply with mid sized and small companies being hit the most also resulting in the overall equity risk off sentiment which would affect emerging markets like India.

Sticking with the equities theme, most traders are likely to take risk off the table, and sell UK equities the FTSE 250 index being most vulnerable with certain sectors hit very badly anything in the consumer discretionary spending area and house building could suffer as investors worry about consumers postponing spending decisions.

In the medium term, it would result in much more cautious about the UK financial services sector, also car manufacturers and engineers would be at a high risk of disruption but that the chances of regaining EU access would also be high. For financial services, the risk of disruption was high but the chances of regaining access low. That’s potentially bad news for those financial services firms with big European operations.

One last counterintuitive trade could be the UK government bonds or Gilts. Foreign investors might panic at first, selling off these gilts but the Bank of England is unlikely to sit idly by and not intervene.  It could start aggressively buying Gilts, pushing prices up as foreign investors sell.

·      Bet on No Change

If the UK votes to stay? In most cases we can expect a reverse of the above, with a relief rally in many key asset classes.

Sterling could strengthen markedly with the cable rate between sterling and the pound possibly pushing past $1.50 and maybe even moving within spitting distance of $1.55.

The dollar is already looking vulnerable as uncertainty about the pace and number of rate rises in the US grows, so a resurgent sterling could add to the turmoil. It’s also worth noting that since 2010, sterling has rarely traded much below $1.50.

Investors might also react enthusiastically about risky assets such as UK equities and consumer-focused sectors the most likely to benefit as well as house-builders and financial services firms. Over in the Eurozone whether might also see a sharp rally in small-cap equities as investors stop worrying about the break-up of the Eurozone? And maybe we will see a small gilts sell off.

Finally the most difficult scenario to plan for in investment terms is the “leave, but then re-enter” scenario. This would involve the UK voting to leave, but then renegotiating a new deal to re-enter the EU at some later date after umpteen concessions are agreed. This presents numerous obstacles not least prolonged uncertainty spanning many years. If this suddenly starts to seem like a distinct possibility the best idea for investors might be to accelerate their international diversification and batten down the hatches.

_Farzan Ghadially

PARAG MILK: IPO ANALYSIS

PARAG MILK: IPO ANALYSIS

Not as Sweet as Milk.

Parag Milk Foods is entering the primary market to raise Rs. 300 crore via a fresh issue of equity shares of Rs. 10 each and an offer for sale (OFS) of up to 205.73 lakh equity shares, both in the price band of Rs. 220 to Rs. 227 per share. With a issue size of Rs 767 crore at the upper end of the price band.

Retail investors will get a Rs. 12 discount on the final issue price. OFS portion is Rs. 467 crore. Representing 15.8% of the post issue paid-up capital at the upper end.

Parag Milk Foods sells milk, ghee, cheese, paneer, curd and other dairy-based products under Gowardhan, Go, Topp Up and Pride of Cows brands, with an aggregate milk processing capacity of 2 million liters per day. It has cheese production capacity of 40 MT per day and distribution network comprising of 15 depots, 104 super stockiest and over 3,000 distributors.

Geographically, nearly western regions contribute 55% of company revenues.

Growing Pan-India Distribution Network: The Company has established a pan-India distribution network, which comprised 15 depots, 104 super stockiest and over 3,000 distributors as of February 29, 2016. Their depots are present in 13 states and union territories in India with a wide network of retail stores. Total milk processing capacity is 20lakh liters/day and average milk procurement is around 10 lakh liters /day. On account of their short shelf life, the fresh milk and fresh milk products are largely sold in the western and southern regions of India, in proximity to the manufacturing facilities at Manchar and Palamaner. They sell farm-to-home premium fresh milk directly to retail customers in Mumbai and Pune and also beverages to direct consumption outlets such as canteens, railway stations, roadside and highway eateries and educational institutions. It has established a separate route-to-market to focus on the distribution of low unit price products including ghee, flavored milk, UHT milk, dairy whiteners and gulab jamun mix in Tier 3 cities and rural areas in India. They cater to institutional customers, hotels, restaurants and caterers directly through distributors appointed by them.

For FY15, consolidated revenue rose 32% YoY to Rs. 1,441 crore. Dairy business having wafer thin net margin, standing at 1.8% for FY15, led to net profit of just Rs. 26 crore, yielding an EPS (basic) of Rs. 4.47. Although EBITDA rose 28% YoY to Rs. 108 crore, EBITDA margin slipped to 7.5% in FY15, from 7.7% of FY14. Despite sales CAGR of 24.6% over FY13-15, PAT CAGR registered only 12%, as rise in finance cost and employee expenses restricted bottom line growth

Object of the Issue: Where the money raised would be utilized :

·      Expansion and Modernisation Plan (Rs.147.70 Cr) :

    The company currently operate from two manufacturing facilities, the Manchar Facility in Pune, Maharashtra and the Palamaner Facility in Chittoor, Andhra Pradesh, with milk processing capacities of 1.2 million litres per day and 0.8 million litres per day, respectively. In line with the strategy of increasing value added products portfolio, PMFL propose to enhance the production capacity for products such as cheese, whey and curd. Further, they propose to enhance the facilities for milk handling, milk packing, warehousing and cold storage and other facilities at the existing sites. They further propose to set up a research and development center at the Manchar Facility to develop new products and processes. The above expansions will enable them to meet the increasing demands for their products, increase the penetration of the products in markets, increase value-added products portfolio, improve operational efficiency and reduce production costs.

·      Expansion and modernization of the subsidiary- Bhagyalaxmi Dairy Farm (“BDFPL”)

    Company’s subsidiary, BDFPL, is involved in the business of, amongst others, purchasing, selling, importing, exporting, breeding, raising, acquiring, owning, holding, dealing in, using and rearing milk animals and dairy farming. They have set up Bhagyalaxmi Dairy Farm, through BDFPL, at Manchar, Pune, in 2005. The BD Farm is a fully automated cow farm, housing over 2,000 Holstein breed cows with superior quality yields. The company proposes to utilize the proceeds from this investment in BDFPL towards (a) setting up of a technology center; and (b) undertaking utility expansion, at the BD Farm. Such investment is being undertaken in furtherance of the Company‘s objective of using the BD Farm as a research and development base, to meet the increasing demand of its milk products.

·      Partial repayment of the Working Capital Consortium Loan

    Company’s business is working capital intensive and they fund majority of the working capital requirements in the ordinary course of its business from internal accruals and from various banks and financial institutions. The company has availed of the Working Capital Consortium Loan through the working capital consortium Agreement, as supplemented from time to time. The amounts outstanding under the Working Capital Consortium Loan are dependent on several factors, which may vary with the business cycle and could include interim repayments and drawdown. The company intends to utilize Rs.100 Crores in Fiscal 2016 to repay a part of the Working Capital Consortium Loan. Such repayment will help reduce the outstanding indebtedness.

·      General corporate purposes.

For 9MFY16, however, PAT of Rs. 32 crore (EPS Rs. 4.67 for 9 months) has already surpassed FY15 PAT of Rs. 26 croreby 23%, as also EBITDA margin has widened by 127 bps over FY15, to 8.77

Company’s net worth, stood at Rs. 278 crore, with promoters currently holding 61.13% stake, which will shrink to 54% post IPO, as 2 promoters are participating in the OFS, along with India Business Excellence Fund (Motilal Oswal PE) and IDFC PE Fund. Company’s consolidated net debt stands at Rs. 340 crore, (down from Rs. 424 crore, as on 31.3.15). This will further reduce by Rs. 100 crore, thanks to repayment via fresh issue proceeds, while balance proceeds will be used for expansion and modernization of existing manufacturing facilities.

At upper end of the price band, Parag Milk will have market cap of Rs. 1,598 crore and Enterprise Value of Rs. 1,838 crore, which leads to EV/EBITDA of about 12 times, on an estimated EBITDA of Rs. 154 crore for FY16. Company is likely to close FY16 with an EPS below Rs.7, on an equity base of Rs. 70.42 crore, leading to a PE multiple of over 32 times. While the growth and margin expansion in 9MFY16 are quite encouraging,

Leverage position

PMFL had a very high debt-equity ratio of 7.7x as of FY2011, which the company has gradually reduced to 1.3x as of December 2015. Going ahead, the company plans to further improve the leverage position to below 1x by FY2017. Further, PMFL’s larger portion of debt is towards working capital loans. In the event if the company is unable to generate adequate cash in the future to meet the working capital needs, than the debt levels could rise going ahead

When compared to the other listed peers the valuations for the proposed issue seem very stretched:

·      Kwality Limited, having 3 million litres per day milk processing capacity, which is not only 50% more than that of Parag, across 6 units in North India, but also has nearly 4 times the sales of the latter, at Rs. 6,000 crore, indicating higher value added products. It is currently ruling at EV/EBITDA and PE multiples of 10x and 18x respectively, based on FY16 estimated earnings.

·    Heritage Foods, with current milk processing capacity of 1.5 million liters per day and retail network of 1,08,000 outlets, is currently ruling at PE multiple of about 25x.

·  Prabhat Dairy, which made its debut a few months ago, has milk processing capacity of 1.5 million liters per day, is currently trading at EV/EBITDA multiple of less than 10 times, based on annualized 9mFY16 earnings.

Outlook: Parag milk foods ltd is the integrated farm company, which has presence in entire value chain. Each of its brands is positioned to get premium pricing. It is growing its business in value added products like ghee, butter, cheese, Paneer, Whey protein, etc. and is having 32% market share in cheese market. Revenue for 9MFY16 is around 12,311.8 Mn and is growing around 21.6% CAGR over 5years. Its EBIDTA for 9MFY16 is around 8.8%, which was 7.8% in FY11. PAT for 9MFY16 stood at around 319.2 Mn and the margin was around 2.6% compared to 0.1% in FY11. We believe with Parag being in production and distribution of cow milk and all other products being vegetarian is positive for a company.

While dairy business may aspire to get valuation of FMCG companies, reality is a lot different. Wafer thin margins coupled with lack of pricing power in producers’ hand due to commoditization of products and extremely competitive landscape, remain some of the key challenges facing the industry.

To conclude, despite healthy growth expected, Parag Milk Food’s IPO is richly valued, especially in relation to peers. All future financial upside seems to have already been priced in, leaving little room for growth.

Hence the dairy business is a could be a great avenue for professional investors like Private equity funds but for the relatively smaller investors with this kind of valuation in place the upside seems relatively limited and the IPO should be avoided.

_Farzan Ghadially