Just Dial Ltd. - Crazy e-commerce valuations!! Nothing else!!

India has seen a flurry of Private Equity Investments happening in the e-commerce space over the last 2-3 years. Flipkart has been the poster boy of all this, attracting Investments of a few Billions of Dollars in the recent years. But there have been huge list of e-commerce companies which have seen foreign investors queuing up for a stake in their online ventures from varying fields. Some of the prominent names that has seen Foreign Investments are: Snapdeal, OlaCabs, Jabong, Myntra, Shopclues, Paytm, RedBus, Cleartrip, MakeMyTrip, etc. The list could be including a few dozen companies and many more could join the list soon. India is at the cusp of an Internet boom with millions of Indians joining the Internet bandwagon every quarter. And many of these Indians have started experiencing the convenience of doing online shopping, ticket purchases, etc. in-short e-commerce is booming in India. The transaction volumes are growing at a rapid pace month-on-month.

The huge surge in online transactions is what is leading to foreign investments being directed to many of these e-ventures, which has enabled them to scale up their systems & operations at a very rapid pace. But the kind of valuations that many of these online ventures are commanding during every round of fund-raising is mind-boggling to say the least. Take the case of Flipkart. During the latest round of fund raising in December'14, Flipkart is estimated to have been valued at around $11 billion, i.e. close to Rs.70,000 crores!!! I find this to be Crazy. Flipkart's 12-months sales currently are between Rs.7000 to 9000 crores and the company is still burning cash, i.e. it's still making substantial operating losses. Many people (including me) think that companies like Flipkart & Snapdeal, are using part of the funds raised to subsidize the products they sell in order to gain more & more share of Indian shopper's wallet and attention. Till when can this strategy work. The Investors pouring money will expect some returns on their Investments, sooner or later. Then these ventures will have to stop subsidizing their sales & look for profits. Just for comparison sake, look at Reliance Industries' Retail business. On 12-months basis, Reliance Retail's Sales have crossed the Rs.16,500 crores mark, i.e. about double of what Flipkart currently does. Not just that, Reliance Retail is posting some Profit before Interest & Tax (EBIT). It's EBIT stood at Rs.337 crores at the end of December'2014 & margins are improving with increasing scale. Reliance Retail has well over 2000 stores in different formats spread across several large cities in the country. And nothing stops the company from launching it's own online shopping site in the coming months. I think this combination of Online Shopping + large Physical Stores presence is a lot more potent combination than pure Online facility.

Coming to Just Dial, it's business model is that of providing an Information Bank facility, online or on-call. In simple terms, it was initially an Online-Classifieds service, which has grown big in scale and reach. A caller can get instant information about any service provider in his area, right from things like carpenter, plumber, driver, or even things like hospitals, day-care centres, food outlets, malls, kirana stores, service centres, etc. Just Dial hosts one of the largest such Information Banks and covers hundreds of cities across the country. The caller is not charged for the Information he gets. Just Dial offers Free & Paid listing to businesses & service providers. And that is where they generate most of their revenues. A few years ago, when Just Dial started, the competition was very very limited in India. But today there is competition to exactly the service that Just Dial offers. The increased competition is already showing impact on the growth rates that Just Dial enjoyed. The growth is clearly showing in the recent quarters.

Trailing-Twelve-Month numbers

( Click Here for a link to Just Dial's Results Summary page )

At the end of Dec'14, Just Dial had posted a Y-o-Y growth of 27% in T-T-M Total Income. At best this rate of growth can be called moderate, considering the fact that there were high growth rate expectations from the company at the time of IPO or before that. Now look at the EBITDA & EPS charts. They have been plateauing in the last few quarters!! There is hardly any growth on the profitability front. The increased competition in the Indian market is clearly rubbing off Just Dial's profit margins. Just Dial's stock got listed at around the Rs.600 levels in June'2013. At that point the T-T-M EPS stood at Rs.11.40, translating into a P/E rating of over 50. The stock rallied to levels of over Rs.1600 within 6-7 months of listing and since then the stock has moved within a range of Rs.1200 to 1800 for over a year now. At the current share price of over Rs.1300/- and an EPS of under Rs.18/-, the P/E rating stands at a whopping 74. This is lower than what it was a year ago, but much higher than what it was at listing time. But the slowing growth could make some long-term investors nervous and the valuations look super-exorbitant.

At the current price of little over Rs.1300/- per share, Just Dial is valued at over Rs.9100 crores. Just Dial's T-T-M Total Income is Rs.596 crores (Y-o-Y Growth of 27%) and Net Profit is Rs.126 crores (Y-o-Y Growth of just 17%). Just for comparison sake, there is company called Dewan Housing Finance Ltd (DHFL), which also currently trades at a Market Cap of about Rs.8900 crores. In comparison, DHFL's T-T-M Total Income stood at close to Rs.5900 crores and Net Profit of just over Rs.600 crores (both growing at 20% Y-o-Y). I know these are completely different business sectors and shouldn't be compared. But look at their comparative growth rates and valuations. Why should a company posting slower growth rates, just about one-fifth of the size in terms of Net Profit, be valued at a same or higher level?? Higher valuation is justified only when the company is in a business, which has huge potential growth, has competitive advantage, and is expected to post superior growth rates. Here Just Dial is already struggling to maintain some decent growth rates within 2 years of listing on the stock exchanges.

My view is clear. It doesn't make sense to be invested in such companies at such high valuations unless the company is clearly on a path to superior growth rates.

Happy Investing!!!

Maruti Suzuki Ltd. - Valuations have run ahead, growth yet to catch up!!

India's largest car-maker, Maruti Suzuki Ltd, sells over 1 lakh cars every month and commands over 45% share in the domestic passenger car market. It has over 1400 dealers across the country, selling an average of about 75 cars per month. Maruti Suzuki has managed to hold on it's sales volume & market share despite increase in competition from global car biggies in the Indian market over the last 5 years. Some of the global biggies like Hyundai & Honda, have managed to gain a substantial market share, while some others like Volkswagen, General Motors, Ford & Renault/Nissan, have struggled to grow beyond the initial euphoria. Many of these global auto manufacturers have successfully used their Indian units as an Export base, but struggled to penetrate the domestic market.

The Indian car market too has gone through a Up cycle & Down cycle in the last 5 years. Post US economic troubles in late 2008, the Indian Govt. implemented the 6th Pay commission in early 2009 and paid out previous 2-years arrears in lump-sum to all Govt. employees, which amounted to thousands of crores of rupees distributed & salaries of Govt. employees increasing by between 50% to 100%. Most of these people used this bonanza to buy property, cars, jewelry, tourism, shopping, etc. This resulted in car sales posting stupendous growth rates between 2009-10 to 2011-12. Most car companies expanded their manufacturing capacities & sales network. But after that excellent run for 2-3 years, growth rates have collapsed and most companies struggled to post any growth in the year 2013 & 2014. There have been hints of some growth picking up in car sales in the last few months.

Coming back to Maruti Suzuki, it is the only car company currently posting some decent growth in domestic sales after Honda & Hyundai. Maruti Suzuki derives a large chunk of it's volumes, revenues & profits from the Premium Hatchback & Compact Sedan segments. Even Hyundai is strong in these segments. But competition from other manufacturers is gearing up to attack these segments. Honda, Tata Motors & Ford are all planning new launches in these segments. Maruti Suzuki has posted a volume growth of about 13% in the first nine months of this fiscal. And the company would like to continue with it in the coming months too. But I am sure that competition will try to grab an increased share of incremental growth.

Maruti Suzuki's stock price has been on a dream run since October'2013, when it was trading well under Rs.1500 level. As of March'2015, Maruti's stock trades at over Rs.3500 level. So, what is it that is driving Maruti's stock price higher & higher, without any corresponding growth in revenues & profits. Between March'2012 & March'2014, Maruti's stock had never traded at a P/E rating higher than 24-25. The stock enjoyed these valuations when the company was posting growth rates higher than 20%. Maruti's stock trades at levels around Rs.3600/- now, which is about 33-34 times it's T-T-M EPS of Rs.107/-. These are ridiculous valuations unless the company is posting a growth of something like 30% or is expected to do so in the coming months. But neither of that is true.

( Click Here for Maruti Suzuki's Results Summary Page )

Look at the Total Income chart. The growth rate in recent quarters can at-best be called moderate, not the kind of growth that deserves high valuations. The T-T-M EBITDA and EPS are at about the same level as they were in December'2013, i.e. there has hardly been any growth on this front. At the very best Maruti Suzuki can be expected to grow in line with the growth of the industry, i.e. at about 10-12% Y-o-Y in the coming months & quarters. Even if the company manages to improve it's profit margins to some extent, the Net Profit & EPS might grow at about 15-17%. These growth rates Do Not deserve such high valuations.

Suzuki's manufacturing facility in Gujarat is slated to come up in the next 2-3 years, not before that. I think Maruti Suzuki's stock trades at about Rs.800 to 1000 over it's fair value. The stock might just hold around the current levels of Rs.3300-3600, only if the growth rates improve. Still it would be a good idea to investors to reduce their exposure to Maruti at current levels and re-enter a few months later when valuations are more modest.

Adani Ports & SEZ Ltd - Riding the growth in India's Global Trade!!

Adani Ports & SEZ Ltd (APSEZ) owns & operates India's largest Private Sector Port at Mundra in Gujarat. Initially it was a primarily a single Port company, but over the recent years the company has expanded it's presence across 5 different locations on the Western Coast and another 3 locations on the Eastern Coast. Most of the 7 locations, other than Mundra, are either recent acquisitions or recent implementations, and are much smaller in size compared to Mundra. They are either standalone Ports or Terminals near some Port. But the company will look to expand their capacities as per demand. Mundra on the other hand is a large Port integrated with a Special Economic Zone with all infrastructure provided by APSEZ. The company has even laid it's own 70+ kilometres Private Rail Line connecting the Mundra Port to the nearest Indian Railway junction. Thanks to the excellent Road & Rail connectivity of Mundra Port and the extremely efficient operations, Mundra Port has seen the Cargo Handling volume increase over the recent years. Be it Coal Imports or Automobile exports or Capital Goods imports or Textile Exports or import/export of any other goods, companies from not just Gujarat, but from anywhere in Nothern or Central states of India, prefer to move their goods via Mundra Port. Gujarat is also rapidly becoming the preferred destination for setting up Automobile manufacturing units with Ford & Suzuki also investing to setup large units in the state. A substantial part of production from these units is also expected to be exported and hence the Automobile exports from Mundra Port will increase substantially in the coming years.

Eventhough the Mundra Port & SEZ comprises majority of APSEZ's Revenues & Profits currently, the contribution of other ports & terminals to the company's numbers will increase substantially in the coming years. Most of these have joined the company recently and hence their impact on APSEZ's Revenues & Profits will be seen in the coming quarters. India is large country and with the economy picking up pace, there will be increased activity across the country and hence there will be increased Imports & Exports in all regions of the country. Hence APSEZ's strategy of having presence across multiple locations, both on Eastern & Western Coast, will pay huge dividends in the coming years. APSEZ has already reached a stage where the operational Cash Flows are healthy and the company's management has shown ample aggression in raising resources when needed to expand capacity or presence.

After plateauing for about a year, APSEZ's Total Income has started on the growth path again, which is clearly visible from the charts. The same is visible from the EBITDA, Net Profit & EPS charts. A part of the growth in the recent 2 quarters is the acquisition of Dhamra Port in Orissa on the Eastern Coast. APSEZ acquired Dhamra Port from the Tata Steel and L&T JV for about Rs.5500 crores in June'2014. Dhamra Port had a capacity to handle 25 MT of Cargo per annum and APSEZ is slated to implement the 2nd phase of expansion to take it to 100 MT per annum. In a year or two, Dhamra Port will be APSEZ's most important port after Mundra. First it is on the Eastern Coast, opening up access to trade with South-East Asian countries as well as Australia. Adani Group plans to import Coal from Australia and Dhamra Port could play an important role in this trade.

Valuation: Going by the expansion plans & scope for increased capacity utilisation, APSEZ can easily post a Y-o-Y growth of over 20% very easily in the coming few years. The company has already touched the $1 billion in T-T-M revenues with T-T-M Profits of close to Rs.2200 crores and Cash Profit of close to Rs.3000 crores. At the current price of just over Rs.300 per share, APSEZ commands a Market Cap of around Rs.62000 crores. As per the recent scheme of arrangement between all the Adani Group companies, all Port related businesses will be consolidated under APSEZ. A few Port-related activities are currently under Adani Enterprises Ltd, the parent company. Even these will be transferred to APSEZ under this arrangement. Even the shareholding structure will change due to this arrangement. Adani Enterprises Ltd (AEL) (Promoter Group) owns 75% of APSEZ currently. If I have understood the scheme correctly, then this 75% stake of AEL will get cancelled and APSEZ will issue shares to shareholders of AEL in the ratio of about 1.41 shares of APSEZ for every 1 share of AEL. Post the implementation of this scheme, the number of issued shares of APSEZ will remain about the same. The Promoter holding will drop to about 55% in APSEZ. The Revenues & Profit numbers will increase slightly due to this rearrangement.

Going by the aggressive growth plans, APSEZ will most probably continue to enjoy high P/E ratings. At present the P/E rating is about 30. There are some Logistics companies which trade at P/E rating of over 40. I won't be surprised if APSEZ is re-rated to a higher P/E rating in the future months. Even if it continues to be at this P/E rating, the stock could very well give annual returns of over 20% per annum, in line with the growth in it's revenues & profits. I am positive on the prospects of growth for APSEZ.

Tech Mahindra Ltd - Struggling with Profit margins in recent quarters!!!

Tech Mahindra Ltd originally started as a JV between the Mahindra Group & British Telecom, with the latter being the company's largest client and forming majority of the company's revenues too. Slowly the company started diversifying it's client base with the contribution of non-BT business increasing year after year. At one point BT decided to exit from the ownership of the company and the Mahindra group took complete management control. Mahindra group then wanted to shed the tag of being BT's outsourcing company as early as possible. Apart from aggressively going after growing non-BT business, the company was looking for acquisition. It grabbed the scam-tainted Satyam in the Govt. monitored auction.

Since the acquisition of Satyam Computers, the ride has not been smooth for Tech Mahindra, but it has done pretty well to gradually absorb all the hiccups and move towards growing the company to a respectable size in terms of Revenues as well as Profits. For a few years the company's management focused on bring back Satyam Computers (renamed as Mahindra Satyam) operations back to normal. It took some time to sort out all the court cases against Satyam, then there were some substantial write-offs, but all things were sorted out by FY'13. Till that point Mahindra Satyam was bigger than Tech Mahindra. By the end of FY'13, the merger of the two companies was decided and Tech Mahindra started declaring single consolidated results from FY'14 onwards.

T-T-M Numbers

( Click Here for Tech Mahindra's Results Summary Page )

Tech Mahindra has done well on the Total Income growth front, post merger. The company has managed to maintain growth in the 15 to 20% range. But the problem is with the company's profitability in the last 4-5 quarters. Look at the EBITDA chart. Tech Mahindra's T-T-M EBITDA has been more or less flat in the last 4 quarters, despite a decent growth in Total Income. Tech Mahindra's T-T-M EBITDA margin has dropped from 23.12% in December'2013 to 20.17% in December'2014. The Net Profit has been a bit lumpy mainly because a couple of large Exceptional Items during FY'13 and FY'14. The effect of the Exceptional Items got over by September'2014. So the T-T-M Net Profit reflects the true Net Profit the company has posted Operationally. For the 12-months ending Dec'14, Tech Mahindra has posted an EPS of Rs.115/- and a Net Profit margin of 12.88%. What is a bit of a concern is that Tech Mahindra+Mahindra Satyam had recorded an EBITDA margin of 22.28% for 12-months ending March'2013 (pre-merger) and the same has dropped to 20.17% by December'2014. A merger should have helped improve operational efficiencies in most cases, but in case of Tech Mahindra, there has been an erosion of margins. That could be due to change in business composition, but we will have to see how the numbers turn out in the coming quarters.

Coming to Tech Mahindra's valuations, the stock has seen a dream run in the last 2 years. During these 2 years, the Tech Mahindra stock has rallied from levels of around Rs.1100 to over Rs.2800 levels. Does the company deserve this kind of rise in valuations? At the current price of over Rs.2800/-, Tech Mahindra trades at about 25 times it's T-T-M EPS of Rs.115/-. This P/E rating is on-par or slightly higher than what TCS commands. I find this a bit on the ridiculous side. TCS has had a much more consistant history of stronger growth and profitability. Tech Mahindra in no way deserves a higher P/E rating than TCS. On the back of the huge rally in it's stock price, Tech Mahindra has recently announced a stock split of 1:2 and coupled that with a Bonus issue in the 1:1 ratio. That means a person holding shares of Tech Mahindra will see his holding multiply by 4 soon. On the Ex-date, the stock of Tech Mahindra will trade at about one-fourth of the current levels (i.e. about 75% lower).

My recommendation to shareholders of Tech Mahindra, especially the ones who have enjoyed the rally over the last 2 years to book atleast 50% profits, i.e. sell atleast 50% of your holding, if not more, either before the Ex-date or immediately after. As per my estimate, this stock should see a decent correction, unless the company starts posting improved profitability numbers in the coming quarters.

Happy Investing !!!

Tata Consultancy Services Ltd - Growth is slowing, will valuations come down?

Tata Consultancy Services Ltd (TCS), which is India's largest IT Services company, is rapidly approaching the Rs.1,00,000 crores in Annual Total Income mark. With T-T-M Total Income of about Rs.95,000 crores and Net Profit of Rs.21,500 crores, TCS amongst the largest companies in India in terms of Net Profit too. At the current share price of over Rs.2600/-, TCS is also the largest company in India in terms of Market Capitalisation of over Rs.5,00,000 crores. TCS's Market Cap has more than doubled in just the last 2 years, mainly on the back of strong growth numbers posted by the company in FY'2013 & FY'2014. TCS has posted a growth of 30% in it's Total Income in both FY'13 & FY'14, while the Net Profit grew by 34% & 38% in the 2 years respectively. Such strong growth in two consecutive years ensured that the stock got re-rated with it's P/E rating improving from less than 19 in December'2012 to over 25 in September'2014.

Trailing-Twelve-Month progress

As we can see, on a T-T-M basis, TCS's Total Income has seen a pretty linear growth without any noticeable dip in the last many many quarters. But if we look at the EBITDA numbers, it is tending to plateau in the last 2-3 quarters. The EPS numbers have already plateaued at a level close to Rs.110/-. If we look at the Quarterly numbers, TCS has clearly grown at a slower pace in the last 2 quarters. TCS's Quarterly Total Income, which was growing at about 22 to 35% Y-o-Y upto June'14, has posted growth of just 17% & 14% in the last 2 quarters. The situation on the Net Profit front is even worse. For 9 quarters upto June'14, TCS's Net Profit had grown at an average rate of over 35% and it has sharply dropped to 13% and 0% in the last 2 quarters. This is quite a shocking collapse in growth of the company's Net Profit. The company's Net Profit margin too has dropped from level of 24.3% in June'14 quarter to 21.2% in December'14 quarter.

The following chart shows the Y-o-Y growth rates for TCS's Total Income & Net Profit (T-T-M numbers):

Look at the sharp rise & then the sharp fall in TCS's T-T-M Net Profit growth. This sharp fall is having me worried. The share price of TCS still continues to trade over Rs.2600/- levels, i.e. at a T-T-M P/E ratio of about 24. For a company to command that kind of valuation, it will have to post improved growth rates in the coming quarters. The company should see it's Total Income & Net Profit growth rates to improve to atleast about 18 to 20% levels, if not better. If it fails to achieve these numbers, we could see a drop in the P/E ratio that TCS's share price is currently commanding. The share price could remain in a range for a longer period or even correct to some extent. So, please keep an eye on the next result. Those already holding TCS shares may consider booking atleast partial profits at current levels.

Happy Investing!!!

SKS Microfinance Limited - A Successful Turnaround story.

SKS Microfinance Limited has been the pioneer of the Microfinance industry in India. Microfinance basically means Small Loans. This business is mainly operated in rural or semi-urban areas, where the average Loan Amount is less than Rs.30,000/- and the average Repayment Duration is generally a few months only. The Microfinance business grew in popularity mainly as a much better alternative to local money lenders, who used to charge exhorbitant interest rates & used muscle power during recovery of loans, if not paid on time. SKS Microfinance had initially focused it's operations only in the state of Andhra Pradesh (AP) and expanded to other states only after reaching a business substantial size. The company grew by leaps & bounds until the year 2011, when suddenly the entire Microfinance industry faced regulatory ire from multiple sources. The main trouble source was action by the State Govt of AP. Probably the money lenders of the state, who were rapidly losing business to SKS, grouped together and used their political clout to clamp down on SKS's operations.

There was an upheaval in SKS's operations with loads of uncertainties surrounding it's survival. Borrowers suddenly stopped repaying loans, the company couldn't recover it's dues, the company's Capital sources also dried up, and then there were quarrels within the company's management. The Institutional Investors of SKS Microfinance finally took control of the company's management. They sought clarity from RBI about regulations towards the Microfinance industry. Then they reconfigured the company's management & operations to comply as per RBI's regulations. While restarting the business, SKS had to write-off most of it's Loan Book Receivables from the state of AP. All these things were completed by the September'2012 quarter. And from December'2012 quarter SKS started reporting Net Profit again, though on a very small scale of operations, compared to what it was 2 years ago.

Quarterly Numbers

Over the last 2 years, SKS Microfinance has grown it's operations at a pretty good pace. The company is back to over Rs.200 crores in Quarterly Total Income. All this growth is coming from SKS's operations outside the state of AP. SKS is making sure that a single state does not contribute more than 15% to 20% of the company's business at any given point. As other measures to limit the credit risk, SKS is keeping a close tab on the quality of assets contributed by each of it's branches. As soon as the percentage of Bad Loans from a particular branch goes above a certain level, the company immediately cuts incremental funding to that branch until the loan quality is back to normal. The borrowers of SKS Microfinance mainly comprise of farmers who need money to buy Livestock or cattle, or Ladies & Small businessmen who need money for their Tailoring operations or small Kirana stores. In short, the company focuses on giving loans to people who need that money for generating Income. This way there is a better chance of that borrower returning the money in the stipulated time period. 

SKS Microfinance has already reached a scale where it is disbursing loans amounting to about Rs.1200 to 1500 crores each quarter. The company securitises part of it's receivables regularly to improve it's Capital Adequacy Ratio as well as De-risk it's Loan Book. Since the quality of it's Loan assets is very good, the company is not facing any difficulty in securitising it. As per recent updates, SKS Microfinance has already securitised over Rs.1000 crores of it's Loan assets in the current fiscal.

Valuations: As you can see, SKS's stock was around the Rs.100/- mark in July'2013. From there the stock has rallied strongly over the last 20 months to reach a level of around Rs.450/-. As of December'2014, SKS's trailing-twelve-months EPS stands at close to Rs.14/-. That means the stock currently trades at over 32 times it's trailing EPS. Since SKS Microfinance can continue to grow at over 30% over the next 2 years, this valuation cannot be termed as expensive. With over 50% of India's population living in rural areas, there is unlimited scope for growth for all players working in the MicroFinance & Rural Loans space. The Govt of India too is trying to ensure that traditional banking services reach the masses living in the Rural areas and the Jan Dhan Yojana is one step in that direction. With more & more farmers getting access to formal modes of finance, the exploitation by the local money lenders will reduce & we will see improvement in life for people living in villages. Hopefully things will be a lot better on this front in the next 5 years. So I just hope that companies like SKS Microfinance continue to grow at a measured pace & help improve life in rural areas, without compromising too much on the quality of assets.

Happy Investing!!!

Yes Bank vs Indusind Bank comparison - Last 1 year progress update

About 1 year ago I had posted a comparison of Yes Bank vs Indusind Bank. Those who haven't read that, I would request them to go through it at the following link:

Yes Bank vs Indusind Bank comparison - 4th March'2014.

I had compared the 12-month figures (Jan to Dec) for the years 2009 onwards for Total Income, Interest Expense and EPS of the 2 mid-size private sector banks and then compared the same with their respective share prices. Now we have data for the year 2014 as well to add to the comparison. Have a look at the chart below:

As we can see, the status is almost similar to what it was a year ago. At the end of December'2014, Yes Bank's Total Income & Net Profit continue to be higher than Indusind Bank's numbers by about 10-11%, while the Interest Cost is higher by about 23% for Yes Bank and EPS is higher by 29%. But Yes Bank's share price continues to trail Indusind Bank's share price even now. With Yes Bank soon to be a part of the Nifty Index, we could see it's share price getting more attention from FIIs.

Eventhough Yes Bank continues to be larger than Indusind Bank on all operational numbers like Total Income, Interest Cost, Net Profit & EPS, while the latter commanding a substantially higher Market Cap, it is also interesting to see how the growth rates have panned out in the last 1 year, compared to previous years. On the Total Income front, Yes Bank had posted comparatively stronger growth rates during each of the 4 years from 2010 to 2013, but Indusind Bank has posted a stronger growth at 20% in the year 2014, compared to the former's growth of just 14%. On the Interest Cost front too, Yes Bank had grown faster in 3 out of the 4 years upto 2013, but again Indusind Bank has grown faster in 2014 at 17% compared to 11% of the former. There are 2 reasons for this: (1) Yes Bank raised substantial capital via issue of shares during the year; (2) Yes Bank's slower business growth (despite extra capital in hand) meant that it needed to borrow less incremental capital.

The slower growth in Interest Cost during most of the last 5 years has helped Indusind Bank post stronger growth rates on the Net Profit & EPS front. In the year 2014, Indusind Bank's Net Profit grew 28% compared to 22% growth posted by Yes Bank. Indusind Bank has posted substantially stronger growth rates for Net Profit in 4 of the last 5 years compared to Yes Bank. Maybe that is also one reason why Indusind Bank commands a higher valuation rating. Look at the P/E Ratios comparison. Indusind Bank has always traded at a substantial premium valuation compared to Yes Bank. Going forward it will be interesting to see how their growth rates pan out & the corresponding changes in their valuations. Currently both banks are well capitalised and can easily raise resources whenever needed. Both banks are getting aggressive in expanding their retail operations. Indusind Bank even has a Celebrity (actor Farhan Akhtar) endorsing it. With the economy picking up pace, the Banking industry will continue to see increased activity. And with the Govt. taking steps to discourage Cash transactions & encourage electronic transactions, all Banks will see a surge in number of transactions. The Banks with strong Technological platform will be the biggest beneficiaries.

Eicher Motors Ltd - Royal (Enfield) Ride to Super-High Valuations!!!

The stock of Eicher Motors Ltd has been on an unending upswing for about 6 years now. From levels of about Rs.200-odd in March'2009, the stock rallied to Rs.2500+ levels in March'2013 and further to Rs.15000+ levels in March'2015, i.e. now. The Eicher Motors stock has multiplied over 75 times in the last 6 years and about 5-6 times in just the last 2 years, despite having multiplied over 12 times in the previous 4 years!!!

If we look at Eicher's progress on the business front, the company's Total Income has gone up from Rs.3044 crores in FY'2009 to Rs.8846 crores in FY'2014, i.e. tripling in 5 years time. During the same period Eicher's Net Profit has multiplied seven & half times from Rs.83 crores to Rs.615 crores. This healthy growth in Eicher's business performance & the humongous rise in the company's Market Cap can be attributed to Two major developments in the company's business profile. Sometime during the year 2008, Eicher Motors entered a JV agreement with the Swedish Bus & Truck maker Volvo to jointly manufacture & market Commercial Vehicles. This was the single biggest reason for the start of the rally in Eicher's stock price from Rs.200+ levels in early 2009. This JV with Volvo propelled Eicher's Consolidated Total Income to more than double between FY'2009 to FY'2012, while Net Profit Quadrupled during the same period.

While this JV was powering Eicher's business growth, the company's MD, Siddhartha Lal was working on modernising Eicher's cult bike brand Royal Enfield. During these years the MD invested in R&D for Royal Enfield to make the bikes more reliable, modern, slightly more efficient, all this without compromising on the THUMPing factor behind sales of Bullet range of bikes. All these investments started paying off with increased demand for Royal Enfield bikes, which led to Eicher investing substantial capital to triple the subsidiary's bike manufacturing capacity during FY'2012 & FY'2013. From an annual capacity of about 1.5 lakh bikes, the company expanded it's capacity to nearly 5 lakh bikes. As the expanded capacity started coming on stream, the company started increasing the reach of it's Sales & Service outlets across the country. At the same time the company was reaching out to Foreign markets to ensure that there is healthy demand for it's bikes in the Export markets.

Trailing-Twelve-Months figures

All these efforts are showing terrific results with Royal Enfield's sales growing from monthly numbers of about 10-12,000 units in FY'2012 to about 25,000 units by the end of year 2014. The company sold close to 27,000 bikes in February'2015, again reporting close to 50% Y-o-Y growth, as the company continues to ramp up production at it's plants in a measured fashion. In short, Royal Enfield has been the primary reason of growth for Eicher Motors since FY'2013. The above charts are ample evidence of the same. As can be seen, Eicher's T-T-M Total Income growth, as well as the company's profitability, has picked up pace over the recent 4-6 quarters. For FY'2014, which ended recently, Eicher reported a growth of 28% in Total Income & a growth of 56% in Net Profit, with a very healthy expansion in Net Profit margin in the last year or so. Eicher's EPS for the year ended December'2014 stood at Rs.227/-, while the Cash-EPS stood at Rs.308/-.

Coming to the Valuations part, the Eicher stock trades at very very very Rich valuations. At the current share price of close to Rs.16,000/-, the stock trades at 70 times it's current EPS and 52 times it's current Cash-EPS, which is very expensive according to me. Remember that Eicher Motors Ltd is after all an Automobile manufacturer. These kind of valuations are generally attributed to companies in something like e-commerce space or other service industries where the companies can be expected to easily sustain high growth rates for the next 3-5 years. But an Automobile manufacturer cannot be expected to continue posting 50+% growth rates in Net Profit for many years at a stretch. Royal Enfield is currently growing at a strong pace of about 50%, but the base was small until a year ago. As the base grows larger, the incremental growth rates will taper down to more moderate levels of about 30% over the next 2 years and could go lower after that. One other factor is that cult bikes do sell because of Novelty factor as well as uniqueness factor. With more & more showrooms opening in several cities & towns, the company is selling more & more bikes. The Uniqueness factor will eventually wean away. Royal Enfield can continue to grow for many more years for sure, but I am not expecting the high growth rates to last for anything more than 2-4 years.

Another factor is yesterday's news of Volvo booking profit by selling over 4.50% stake in Eicher Motors Ltd in the open market. Volvo had acquired about 8.40% stake in the company during the JV agreement signing in the year 2008-09. Volvo had paid something like Rs.691 per share that time. That means Volvo made a cool profit of about Rs.14,500 to 15,000 per share on the stake sold, over 20 times it's acquisition price. I think retail investors too should think of selling atleast half of their stake or 3/4th of their holding at current levels. These crazy valuations might not last very long. I could be proven wrong, but I would still be a seller in Eicher Motors Ltd., if I had any shares.