Jubilant Industries Ltd

Stock Opportunities
21

Hi Anand,

Find my replies in bold…

55-65 cr. that i am talking about is approximate initial costs that company will need to incur on all 4 mall-cum-hypermarkets…

**As I told you before in my reply to your query before this post… for retail, specifically hypermarket business, you need to consider 1.2-1.5 times turnover on the overall investments done… hence, to achieve scale which is critical for profitability, continuous investments need to be incurred… now, if we consider here the scale of retail business of Jubilant at ~600 cr. in FY13, it will need an additional investment of 160-175 cr. over and above the current investments (343 cr.) that retail division presently has…this investment has to be made in current FY12 or, — if the court approval gets delayed and merger happens in Q4FY12 ---- then in first half FY13… **

In addition to this, its existing businesses like Consumer Products (Jivanjor Brand) as also Food Polymer (SPVA) will require further investments as also in all probability, it will go for debottlenecking of existing SSP fertilizer capacity in FY12-end or FY13 to cater to the rising demand…

To sum-up, company has to put aside ~30-35 cr. for present core businesses growth and so with the existing cash of listed entity it can only meet the initial expenses as also working capital requirement of retail business and has to infuse more funds to keep the cash rolling and be in a comfortable position…

This is perfectly logical financially as also operationally, as by raising 150-200 cr. on an equity dilution of ~25-30 %, the company can attain an overall scale of more than 1100 cr. by FY13 with reasonable leverage (~200-250 cr.) that too on a tiny equity capital even after the dilution…However, all these is quite far away as equity dilution if any has to be at a much higher rate than the present market rate.

Rgds.

Thanks a ton Mahesh for your insight…

…

22

Posted in this and next post is my reply to queries raised by a knowledgable member…

Dear Mr Mahesh,

I could go through your report. It is an excellent work. I would like to add only few points which I feel is missing in your report.

1). JIL will transfer ACP (Agro + Consumer Products) Divn to its subsidiary. These divn contributed more than 30 cr of PBT of FY11 of JIL.

2). JIL Subsidiary will purchase on slump sales basis Retail business of Enpro Oil Pvt Ltd (100% promoters owned co).

Retail business has done business of around 315 cr in FY11 but has been incurring losses of more than 50-60 cr every year. I have figure for FY10 when it incurred loss 70 cr and in FY09 loss was around 75 cr. I believe loss in FY 11 must be more than 50 cr or more. I will provide exact figure after some time.

Now, this loss will come to the books of JIL subsidiary from FY12 and will fully erode the profit of JIL when books will be consolidated. Else on standalone basis PBT will be significantly lower in FY12 than what it was in FY11.

In its briefing to BSE, the company has clearly mentioned the reason of transferring ACP business to finance the losses of retail buisness.

I have my reservation on Retail buisness going ahead.

regards

Thanks Mr. **** for the material… It was really useful…I must say it again here that your deep analysis and the skill to read behind the lines are excellent… Its great interacting with a knowledgable person like you…

Now coming to the discussion on Jubilant Industries, yes, in my research note the details regarding the scheme are absent as I didn’t feel it proper to discuss the scheme unless its entire details are known as to how much debt retail division is bringing alongwith it, how much accumulated losses will be transfered to JACPL (in case they are transferred), etc.

I agree to your contention that the whole purpose of this merger process, even as per the managment, is to finance the retail business (here I will not use the phrase “financing the losses” because Retail is a capital intensive business with an investment turnover ratio of 1.2-1.5)… You see Mr. ****, retail is an exponentially growing business which even you can make out from the 70 % growth in topline attained in FY10 (FY11 stagnation can be attributed to saturation of existing infra and thats why expansion is planned) by Jubilant and the profitability requires scale, say around 800-1000 cr. This is because, if you go into detail regarding hypermarket business model, you will find that entire model is based on discount retailing and the only way to attain profitability is to achieve economies of scale as the backend and other related costs doesn’t rise as exponentially as scale…Now, the question here arises as to are we betting on just hope (on which no investment can be based) as no retail business (except pantaloon to an extent) is profitable or even close to profitability… My answer here will be a clear NO considering the immense potential Indian Retail segment has and the present immature or unsaturated stage of organised Retail where even FDI is quite far away (I am talking here only about hypermarket format)…

Let’s keep sectoral talk aside for the time being as its a debatable issue on which each person might have his own view and talk here only about logic in investment…As you are a veteran, you must be aware of the fact that for taking an investment call in favour of a company we need to look at many aspects in addition to pure P&L and BS aspects… We need to consider all the aspects collectively rather than stressing on a particular aspect (unless that particular aspect is hugely negative overshadowing all positive aspects)… Logic is a vital parameter which drives succesful investment decisions (this is my view based on my decade old knowledge and I might be wrong)…

In case of Jubilant Industries, let’s apply logic asto what promoters gain by doing this merger by raising the equity of listed entity to 11.84 cr…The funding route… No way can the existing core businesses with a cash generation of ~40-50 cr. per annum can sustain the exponential growth of retail business or purely feed the retail division…Hence, funding is an absolute necessity and it should be in the range of 150-200 cr… Now, if we assume that the dilution will be at current market rate of Rs. 180 the equity dilution has to be between 70-90 % which is highly unlikely…Hence, the dilution has to be in the range of 25-30 % which will keep existing promoters holding at 50 % +…

As you also agree that retail division is so far funded by only promoters in their personal capacity so whatever loss, say 200 cr. (details I will discuss later) is there is funded by them only which is evident from the exisitng share capital and securities premium account… Recently, the promoters have decided to reduce the share capital of Enpro (details attached) before the merger from 42.58 cr. to 8.43 cr. by cancelling their exisitng shares as also adjust 62 cr. odd share premium to reduce accumulated losses from FY11 figure of Rs. 284.72 cr. to Rs. 188 cr…Hence, what ultimately promoters are gaining by transferring 315 cr. topline retail business with two other malls getting operational in FY12 (one already got operational in June’11) which is 100 % owned by them at present ??---- only an increase of 18 % shareholding in listed entity from current 47.5 % to 65.5 % which at present market rate totals to only Rs. 70 cr.

If this merger process doesn’t become fruitful and the merged entity doesn’t perform well, it is actually promoters which will loose maximum as compared to minority shareholders…

Now, lets look at peers aspect which I have already covered in my note but will discuss in detail here… consider here the valuations commanded by retail companies on the bourses at present… Once the retail division gets merged and has a revenue of 500 cr. + probably in FY13, the company has to be valued at just slight discout to its peers… Here lets take the example of Hypercity which is the most proper comparable peer with a revenue of 570 cr. for FY11… In FY08 when Shoppers Stop acquired 19 % stake in this company, its topline was Rs. 168 cr. with PBT loss of 36.6 cr… Now, recently in 2010, when Shoppers Stop increased its stake in Hypercity from 19 % to 51 % its topline was 335.29 cr. with PBT loss of Rs. 56.94 cr. and accumulated losses of Rs. 206.77 cr (which got further increased in FY11 to Rs. 275.38 cr.)… For a 51 % stake, Shoppers Stop made an investment of Rs. 153.72 cr. in the share capital of Hypercity in June 2010 which means that Hypercity was valued at 0.45 times FY10 sales for the acquisition…Hypercity had a debt of 221.89 cr. as at FY10…

Now, lets consider the transfer of ACP business logic and merger of Retail division into this… What the company will gain from this is saving of taxes… Because of the retail division’s loss, company will most probably be not required to pay taxes which will mean a saving of ~8 cr. for the company which can be further used to grow retail business…

To sum up, the story here is gross undervaluation at present which can’t sustain for long as the promoters themselves will not gain anything from that…In case the retail division grows satisfactorily and is close to attaining breakeven by FY15 it will be an added plus…

The downside looks limited from the present rate and its a rare company wherein in case of any faltering in business plans, promoters loose more than minority shareholders which gives certainity to the possible upsides…

Feel free to get back to me in case of any query and do share your candid views…I will send you my other research notes also published so far this year…

Rgds.

23

I will reply to each of your point 1-by-1… Please find my replies in bold…

To be really honest, I am still not comfortable with retail bsuiness valuation. I tried to talk to Noel Tata in Trent AGM but really could not come to any conclusion. Take the case of Total, they almost reached saturatation level in FY11 when they achieved top line of 315 cr but incurred (assumed) losses. They need tp expand to achieve economy of scale. I am just trying to understand what is this scale. Just by opening more stores economy will come or there are something else which these promoters will have to do. Is it supply chain ? (I feel I am missing lot of things in understanding this business. I would like myself to be updated.)

Let me talk here about discount retailing of which hypermarket format is a great winner… I am not aware of the details of your conversation with Mr. Tata but hypermarket format is the real way forward for organised retailing in India… This is because its the consumers who are the real beneficiaries and in any business wherein we, the end consumers are benefited will be a hit…

You talked here specifically rgdg. Total… as to saturation was reached and they needed to expand… yes, you are right… This is because when a mall-cum-hypermarket is opened in an area, it can connect with people of a particular radius, and once almost all the people are catered and no further expansion of radius is possible, its called saturation and this is true for every consumption business…

To cite an exapmple wrt. Western Mumbai, a Virar-residing guy will not come to south bombay hypermarket often and if he can get similar hypermarket in say Borivali or Malad he will go there…Hence, to cover the entire western mumbai belt, a chain will have to open in south mumbai as well as catchy suburb like Malad, Kandivali or Borivali…

Now, your point regarding incurring of losses inspite of 315 cr. revenue… This is because, food & groceries item, which form the bulk of sales of present hypermarket chains, have a margin of 2-3 %… Hence, to compensate for this lower margins and attain profitability, a company has to attain scale…

**Scale drives prfitbility via 3 ways, **

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**first, it gives bargaining power as company can skip middlemen and look for more discounts because of bulk purchase… **

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second, there is no expenditure involved on backend infrastructure, particularly for Total till it reaches operational store level of 10 which reduces cost as % of revenue thereby enhancing margins…

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third, with Scale, the higher margin apparel & accesories sales also rise which drives margins improvement…

In case of Trent, I thought westside is a matured brand, being in existance for last 13 years and have opened more than 50 stores but still this brand is in loss or may be in a very marginal profit. Can you give me some insight, at what level westside stores can make money.

You are talking about Westside which is not a discount retailing business and so is not benefiting us, end consumers, hugely and so pressures will come… I am not saying that format of Westside is not proper but its just that it has a kind of luxury in focus if we compare it to hypermarket model…

To cite an example, South mumbai where i live in, there is a westside store in hughes road (just 10 minutes away from my residence) since last many years but we only occasionally visit there specifically for fashionable apparels… as compared to this, there is a Big bazaar store, which is a hypermarket, in mumbai central (around 20 minutes away) as also lower parel (around 40 minutes drive) and our family visits in both the stores often to source many requirements as also gift items (specifically in lower parel store where the range is better) which we were normally sourcing from crawford market which is a wholesale market…

Hence, as far as Westside or for that matter Zara is concerned, it will achieve supernormal profits in absense of much competition or booming economy environment but if there is competition or a sluggish economy, Star Bazaar, which is Trent’s hypermarket chain, will drive revenues for it… As far as profitability of Star Bazaar is concerned, its again the matter of scale and once it approaches 900-1000 cr. mark it should start breaking even.

I know, all businesses undergo investment phase but that phase must end someday for investors to make money.

You are absolutely right in your saying that every businesses undergo investment phase but here one thing is missing is the learning phase… The investment phase you are talking about is true in general for retail segment overall and not particularly hypermarket format… The only hypermarket chain of India which has attained good scale is Big Bazaar from pantaloon but its presence in other formats will continue to drive its profitability lower… Its hypermarket business (or specifically value retail business) grossed ~3000 cr. revenues in FY10 with an EBITDA of ~230 cr. and PBT of 74 cr. with current FY11 grossing ~6900 cr. with an EBITDA of ~530 cr… Now, these are not small numbers but the most important point here is scale which is driving profitability… Capital Employed in value retail business is ~3700 cr. which means an investment turnover ratio of 1.8 which is highest…

Years of learning has proved that formats which will hugely benefit end consumers will drive scale and profitability and hypermarket format comes under that umbrella… As you must have read in my research note also rgdg. the comparision of hypermarket chains, except pantaloon still no hypermarket chain has attained a considerable scale and so the profitability is quite far away but it will come and surely come as depicted by pantaloons model…

Specifically with regard to Jubilant, it is occupying 2nd position in Bangalore, a highly growing city with 20 % marketshare and once it achieves scale the profitability should come by FY15-FY16

Do our market is comfortable with a company having such a diverse business portfolio, where profit of one business will seed the other.

Yes… I have experienced this in case of Pi Ind. wherein its Agri business feeded CSM business for a decade and now when both the businesses have started bearing fruits, its showing exponential growth in profitability as also revenues… Although PI is a different stock which doesn’e have as capital intensive business as Retail but still markets are very shrewd to value every growth…

Also, the logic I apply to assess the undervaluation of a company which has diverse business portfolio, is a simple method to assess how much investment I will need to make in case I wanted to achieve the stage of the businesses which the diversed-business-company has in each business…

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**If I take here the example of Jubilant and count each businesses lowest set-up cost, SSP plant with a 4.29 lacs T capacity will take approx. 30 cr., SPVA plant will involve an investment of around 8 cr., Latex will involve a cost of around 8-10 cr., CP will involve a cost of around 12-15 cr… This is just an initial set-up cost of the plants and the brand-building costs as well as distribution-network-set-up costs are not calculated… **

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**Based on the set-up cost of plants of core businesses only, the price per share works out to be ~Rs. 75 which lowers the downside risk from current levels to minimum. Now, here if I count retail business set-up cost too then it will come to Rs. 90 cr. for 6 mall-cum-hypermarkets and this is just the initial set-up cost and no other cost I have counted… **

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Hence the per share working on just the set-up cost of retail business will work out to be Rs. 76 which if we add to core business set-up cost then the total bare minimum valuation based on minimal set-up costs of all businesses will work out to be Rs. 151 below which it will be a great acquistion target for me wherein without spending my time and brand-building resources, I am getting readymade businesses… the only caveat here is the management’s voting right with which it can sell businesses at any valuations but that is safeguarded by the presence of Jubilant Bhartia Group who have their roots firmly with prominent groups like HT which will safeguard my interests in the company…

Feel free to get back to me in case of any query.

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Rgds.

24

My Q2FY12 Estimate for Jubilant Industries (Consolidated) :

Total Revenue = INR 134 - 148 cr. (Q2FY11 â 138.36 cr.)

EBITDA = INR 12.1 â 13.8 (Q2FY11 â 15.6 cr.)

Breakup of Revenues â Segmentwise

Agri Input = INR 58-65 cr. (Q2FY11 â 68.6 cr.)

Performance Polymers (CP, Latex & Food Polymer) = INR 76-83 cr. (Q2FY11 â 82.5 cr.)

25

Sir,

The leadership of the company in the segments it operates is established. Other than retail what are the expansion/diversification plans of the company going forward?

Regards

26

Hi Harsh,

As you must have read in the research note, company has just recently doubled the capacity of Food Polymer segment and debottlenecked capacities of Latex business to increase it by 15 %… Hence, in the near future, say till Fy13, the focus will be on improving capacity utilization rather than any expansion in the current core businesses of the company… Only in SSP space, I think company might need to debottleneck the capacities considering huge demand anticipated in the segment in coming years…

Hence, apart from retail segment there are no significant expansions or even diversification plans of Jubilant atleast till FY14…I think it will focus all its energies on making the merged retail business profitable by increasing its scale exponentially and therefore till Fy14-FY15 we might not see much exapnsions in the existing businesses…

Rgds.

Sir,

…

27

Hi Mahesh,

Just trying to understand the retail business.

1.The retail business would continue to make losses until they reach a scale of 1000 cr and it would eat up the money that the rest of the business is making.

2.the 5 stores are making about 325 cr and after adding another 5 stores would they be able to reach that level.You had mentioned that a store would reach a saturation after catering to the catchment area.I personally find it easier to buy groceries,food items etc from the neighbouring kirana store,he even gives home delivery above a certain order value.Maybe there would be other supermarkets opening which would provide competition.

3.they have to open more stores in banglore to get the economies of scale,opening a store in a new city is going to eat up more cash.Maybe mysore would be an option.

4.I didnt understand the hypermarket/mall concept.a general doubt,does jubiliant/big bazar own the stores or is on long lease/any other format.

5.Capital employed calculations -some kind of a break up/capex,working capital/where do they spend the money on

Somehow the retail business seems to be a cash guzzling business,Hope you can clear my doubts on the retail business in general/how does the big bazaar/pantaloon format work

regards

biju

28

Hi Mahesh,

Just trying to understand the retail business.

1.The retail business would continue to make losses until they reach a scale of 1000 cr and it would eat up the money that the rest of the business is making.

2.the 5 stores are making about 325 cr and after adding another 5 stores would they be able to reach that level.You had mentioned that a store would reach a saturation after catering to the catchment area.I personally find it easier to buy groceries,food items etc from the neighbouring kirana store,he even gives home delivery above a certain order value.Maybe there would be other supermarkets opening which would provide competition.

3.they have to open more stores in banglore to get the economies of scale,opening a store in a new city is going to eat up more cash.Maybe mysore would be an option.

4.I didnt understand the hypermarket/mall concept.a general doubt,does jubiliant/big bazar own the stores or is on long lease/any other format.

5.Capital employed calculations -some kind of a break up/capex,working capital/where do they spend the money on

Somehow the retail business seems to be a cash guzzling business,Hope you can clear my doubts on the retail business in general/how does the big bazaar/pantaloon format work

regards

biju

29

Hi Biju,

Before starting my reply, let me again stress on the fact that investment argument in favour of Jubilant Industries is strong currently because of Gross Undervaluation of current as well as to-be-merged businesses and a certainity that promoters will loose more than minority shareholders in case of any adversities… Business apects, whether its Jivanjor & Ramban Brands orcompany’s domestic as well as world-leadership status in Food Polymer, Latex and Retail segments will come into picture once the gross undervaluation gets corrected and therefore provides a greatamount of safety towards any possible downsides from the current levels…

Please find my replies in bold below :

**Yes… to an extent… However you can’t pinpoint exactly the scale figure and it could even start breaking even at 800-900 cr. scale depending on same-store-sales-growth (SSSG) attained by the company… **

In FY10 SSSG for retail division (to-be-merged) was 53 % while for FY11 it was ~20-22 %… Just to give revenue figures of retail division since inception…In Fy06 it was ~18 cr., In FY07 it grew by 90 % to Rs. ~33 cr., In FY08 it grew by 183 % to reach Rs. ~100 cr., In FY09 it grew by 68.5 % to reach a figure of Rs. ~166 cr., In FY10 it grew by 68 % again to reach Rs. ~281 cr. while in FY11 it grew by 11 % to reach Rs. 315 cr…Operating Loss (EBIT) which was at 11.8 % of revenues in FY06 got increased to 36.2 % of revenues in FY07 which further got increased to 40.1 % of revenues in FY08 which is normal for a retail business which was in a scaling-up phase, and, once a reasonable scale was achieved, the operating loss started reducing to 36.2 % of revenues in FY09 which got further reduced to 18.2 % of revenues in FY10to finally stand at ~15.3 % of revenues in FY11…

No… its not 5 stores that are generating 315 cr. revenues its 4 stores as the 5th store was opened only in June’2011… So, with 4 stores, the company has generated 315 cr. revenues in FY11…

With another 6 stores under itsarm by FY14, with two of them being opened in current fiscal itself, the total 10 operating stores should easily reach 1000 cr. revenues…

Yes… You are right that to break the tradition of buying from neighbourhood kirana stores is very tough, but the hypermarket format is atpresent working as a complimentary thing rather than a substitute with advantages of it being all the items (which are not otherwise available in Kirana Stores) available under one roof at a price which is at par, if not at discount, to Kirana Stores offerings… With this format its we, the consumers, who are the real beneficiaries and therefore this format is here for the long term and Kirana stores should not be a threat to this format…

Copetition will definetly intensify as the potential in this segment is huge which is evident by the lobbying of global retailers to open-up multibrand retail in India… However, there is market for everybody atleast for next decade…Once the multibrand retail opens up and global retailers set-up shops here, till then those who have not broke even will find it difficult to survive unless they sell-out or form JV with global players… All these is quite far away and till then the existing serious big players including Jubilant will attain considerable scale…

What actually happens is a company has to create a strong back-end infrastructure to cater to hypermarkets… Once that is created normally it remains underutilised and therefore its cost as % of revenues rises or doesn’t fall considerably unless revenues rise sharply… Now, for revenues to rise sharply, the chain has to open more stores… and this is cache… If more stores are opened without utlising the backend infra already created and for opening further stores a fresh or an extension of existing backend set-up is required, the costs pile-up which hinders quick attaining of break even… In contrast to this, if existing backend infra is fully utilised and company is able to exponentially increase scale without spending much on backend infra, costs as% of revenuesget considerably reduced which drives quick break-even…

To sum-up, once the regional footprint is established in Bangalore, only then the company can go for national expansion which will entail huge investments…

Its on long lease…However, the difference is again the business model… wherein Big Bazaar leases it in any mall or high foot-fall areas independently, Jubilant leases entire mall and provides family entertainment options as also judicious tenant mix which encourages consumers to visit malls often which improves the sales of its hypermarkets… Like this way, Jubilant also gains from low lease rentals for its hypermarkets…

To explain in a simple way, Jubilant leases entire mall and opens hypermarket in it as also sub-rents it to private lables which have high brand recalls which ensures higher footfalls…To continue, it also adopts a unique concept which is first of its kind in India, wherein, alongwith popular brands like Levis, Adidas, Gitanjali, Kurl On, etc. and all popular electronics & FMCG Brands, private labels like Madison Street & Bangles sit together which ensures higher footfalls as well as higher sales/sq.ft.

Money gets spent on rentals (major portion), advertisements, backend management, etc… Its a cash consuming business which is evindent from an investment turnover ratio of just 1.2-1.5…This is because, hypermarkets have to forego margins to benefit us and drive sales while at the same time ensuring that more people come to them and for that they need to spend on interiors, ads, offers, etc…

Expected Capex for Jubilant’s retail business should be around 120-150 cr.

Already in my reply to a members before, I have explained in detail regarding business model and operations of hypermarkets… To state it briefly again, the entire model revolves around discount-retailing or value retailing as is called… For this they normally operate at 2-3 % margins, drive sales, attain scale and then achieve break-even by strong SSSG… Once break-even is attained, the scale itself will take care of cash generation growth…This is where the attractiveness of retail business is there as still organised retail, especially hypermarkets, is very nascent in India which offers great scope, and what all big players are seeing and therefore investing heavily in it, is this only thing that once the profitability starts generated at higher scale, it will enable huge cash generation…

Lastly, to make the point again which I made in the beggining, while looking at Jubilant Industries one needs to look at SOTP and on that scale its grossly undervalued… If you look at retail business alone and project its scale to just 550-600 cr. by FY13, at current rate even this retail business doesn’t get discounted properly forget the existing core businesses of Jubilant which themselves deserve a valuation which is 65 % above current valuation…Markets have to give it its deserved valuations sooner rather than later as its backed by a strong group like Jubilant Bhartia which will attract institutional interest very fast.

Rgds.

Hi Mahesh,

…

30

In anticipation of huge demand for SSP fertilizer, Coromandel International has joined the league of other major players, to set-up new SSP Plant…

CoromandelInternational Limited, part of the Rs. 17,000 crore Murugappa Group, has announced plans for setting up a Greenfield Single Super Phosphate Plat at Punjab with an estimated Rs. 116 crore.

The plant has been finalised in the light of the ballooning prices of phosphate fertilisers and the 800 tonne per day plant including 400 TPD granulator plant is expected to be ready within two years, Coromandel Fertilisers Chairman A. Vellayan said.

31

Based on this info, I think it’s time for all of us to have a serious look at Liberty Phosphates.

32

Board will meet on2nd November 2011 to consider Q2FY12 results…

Rgds.

33

Jubilant Industries today announced its Q2FY12 results… Results beat the upper range of our estimates by ~8 % …

Total Revenue = INR161.25 cr. (Our estimateâ 134-148 cr.)

EBITDA = INR14.83 cr. (Our estimate â 12.1 â 13.8cr.)

Breakup of Revenues â Segmentwise

Agri Input = INR73.15 cr. (Our estimateâ 58-65 cr.)

Performance Polymers (CP, Latex & Food Polymer) = INR87.27 cr. (Our estimate â 76-83cr.)

My Initial Take post Q2FY12 numbers :

Company’s performance polymers business (which includes Consumer Products, Food Polymer &Latex) is growing robustly while Agri-Input segment is proving to be a steady cash generator as anticipated…

Agri segment would have even performed excellently especially on EBITDA front provided Govt.'s favourable ruling had come on subsidy front which is still under consideration and decision is expected shortly… In case of favourable ruling, PAT for H1FY12 would increase by ~9 cr. which will add to the robust cash generated by Agri division… It is worthwhile to note here that while majors like Coromandel and Khaitan have published their Q2Fy12 results without making provision for adverse ruling thereby including the revised subsidy figures into the results, Jubilant has decided otherwise and not included the revised subsidy figures into H1FY12 results signifying great amount of transparency adopted in accounts…

The scheme of merger of retail division is already filed on 14th September 2011 with Allahabad High Court and approval should be received by December 2011…

For Q2FY12, Jubilant Industries has attained EPS of Rs. 12.46 while for H1FY12 company has attained an EPS of Rs. 24.33…On full year basis, company should easily attain an EPS of Rs. 40 + for FY12 which means that at current market price of Rs. 190, its trading at a p/e multiple of just 4.75, forget here the mcap-to-sales which is dismally low at 0.26…

Balance Sheet is very strong with a debt-free status and cash of Rs. 39.25 cr. on books as at 30th September 2011 in addition to parked money in liquid funds amounting to Rs. 13.18 cr. which simply means Hard Cash & Cash Equivalents of Rs. 52.43 cr. on books as at the end of H1FY12…

With :

_Rs. 66 per share as cash on books, _

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a 550 cr. revenue of core businesses which are themselves expected to grow by minimum 20 % for atleast next 3 years

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~Rs. 370 cr. + revenues generating Retail business to be merged with the listed entity,

: make Jubilant Industries grossly undervalued stock on the bourses and it can’t trade for too long at a forward p/e of just 4.75 and a mcap-to-sales of just 0.26…

Views Invited and feel free to ask any queries…

Rgds.

34

Mahesh,

What about the performance of the retail division,post merger wouldnt the eps reduce,as the retail division is still making losses,sorry if it is a very basic question,quite confused with this.

regards

biju

35

Rgdg. retail division the numbers are not disclosed as scheme is still pending approval of court…However, you are right in your saying that EPS will surely reduce considerably once the retail division is merged… But, once the retail division is merged, it will get valued on mcap-to-sales basis and its EV will be considered rather than its EPS… Hence, with core businesses, the company will be able to generate around 550-600 cr. revenues with an EBITDA of around 53-60 cr. provided rabi season doesn’t provide good growth for SSP fertilizer space ; if rabi is good for SSP and industry can turnaround lacklusture performance of kharif then the numbers will be better… As far as retail division goes, company should report revenues of around 350-380 cr. with losees of around 50-60 cr…

So, eventually, what we will have is Jubilant Industries reporting a consolidated revenues of around 950-1000 cr. for FY12 with close to break-even on an expanded equity capital of 11.84 cr. (1.184 cr. shares) … The story of profits is slight far away say in FY14-FY15 when its retail division will reduce losses considerably and its other divisions like Food Polymer and Consumer Products will contribute handsomely to the profits…

Hence, at current market price of Rs. 190-195 odd rs., we have this company available at just 230 cr. mcap which is extremely cheap vis-a-vis revenues of 950-1000 cr. for FY12 of which first half has already passed… This is the reason why I say that the downsides from current levels are limited but upsides are huge in this company… Such gross undervaluation can;t remain for too long and once retail division merger is approved by court somewhere in Dec.'11, this compan y should trade at a reasonable valuation and get corrected from current undervaluation…

this company forms part of my core portfolio and my views should be taken in that regard…

Views are invited and feel free to ask any query…

Rgds.

36

Hi Mahesh,

One small question…their agri product sales reduced QoQ…i was wondering whether the whole sector shrunk because of very good distributed monsoon or it is one off case with this company only…

SSP is very important for this company as there is big opportunity waiting for the best product available in the market.

Rgds,

37

Hi Anand,

Yes, the entire SSP sector faced headwinds, especially in Q1 because of late new NBS directive given by Govt. because of which crucial initial period was missed…The revenues would have been higher by 13.69 cr. on H1 basis provided the company had recognised the subsidy as was done by Coromandel and Khaitan…Because of pending judgement, the co. has prudently decided not to include the figures in the results thats why you are seeing very sluggish performance… Also, rock phosphate availability was a problem because of which entire Indian SSP sector degrew by around 16 % for H1FY12…

Rgds.

Hi Mahesh,

…

38

Huge volumes and nice accumulation seen today in the stock. Have been comparing volumes over the past 1 month and 9th, Nov is one of the highest volumes day

Regards,

Sandeep

39

Jubilant Industries Ltd. [ NSE â JUBLINDS ; BSE â 533320 ] last week announced its results for Q2FY12 (H1FY12). The results surpassed our estimates and we maintain our outlook for the stock as 'Grossly Undervalued' which is on the verge of getting significantly rerated once Retail business merger is approved by court in Q3FY12.

Given below are the highlights of the results and our view post Q2 numbers. Also included are management's estimates for FY12 and FY13 for each of the operational segment as also our own estimates for current and next fiscal vis-a-vis management's estimates :

  1. Consolidated Revenues (excluding Retail business) for Q2FY12 grew by 16.5 % YoY to stand at Rs. 161.25 cr.. For H1FY12, consolidated revenues (excluding Retail business) degrew by 0.8 % YoY to stand at Rs. 304.63 cr. mainly because of the non-inclusion of subsidy income for opening stock of SSP fertilizer and raw materials due to DOF's Office Memorandum dated 11th July 2011 which is being contested by the industry. In absence of such directive, revenue would have been higher by Rs. 13.58 cr. for H1FY12 to stand at Rs. 318.21 cr.

  1. Consolidated EBITDA (excluding Retail business) for Q2FY12 grew by 10.6 % YoY to stand at Rs. 14.83 cr.. For H1FY12, consolidated EBITDA (excluding Retail business) degrew by 11.3 % to stand at Rs. 28.56 cr. mainly because of the non-inclusion of subsidy income for opening stock of SSP fertilizer and raw materials due to DOF's Office Memorandum dated 11th July 2011 which is being contested by the industry. In absence of such directive, EBITDA would have been higher by ~Rs. 9 cr. for H1FY12 to stand at ~Rs. 37.56 cr.

  1. The key highlight for the quarter as well as 1stHalf'FY12 was the exceptional performance of 'Performance Polymers' segment which includes Consumer Products (Jivanjor Brand) , Food Polymer (SPVA) and Latex. The segment grew its YoY revenues by 95.9 % in Q2FY12 and by 34 % in H1FY12. EBITDA of the segment also saw healthy growth by growing 43 % YoY in Q2FY12 and by 44.3 % YoY in H1FY12.

  1. The growth in 'Performance Polymers' segment can be largely attributed to better capacity utilisation of the expanded capacities, healthy order-flow in Food Polymer segment as well successful new product launches in Consumer Products segment. It is worthwhile to note here that company enjoys a strong market-leadership position in each of its operational segment with its Consumer Products segment brand 'Jivanjor' standing second after Pidilite; its Food Polymer segment being the third largest in the world; and, its VP Latex brand being No.1 brand in India.

  1. Agri-Inputs segment of the company grew by 6.6 % YoY in Q2FY12 and degrew by 14.4 % YoY in H1FY12 mainly because of the non-inclusion of subsidy income for opening stock of SSP fertilizer and raw materials due to DOF's Office Memorandum dated 11th July 2011 which is being contested by the industry. In absence of such directive, revenues of Agri segment would have been higher by 10.2 % for H1FY12.

  1. Company has not given Q2FY12 as well as H1FY12 numbers of Retail business that is to be merged with the company because of pending court approval and the matter being subjudice. However, post FY11 results, management had estimated its Retail business to gross a revenue of Rs. 584 cr. for current FY12 (over FY11's Rs. 315 cr.). This estimate was given when economy was not so turbulent as is right now and we feel that this estimate will need to be revisited once the merger is complete. We will touch upon the management's estimates for each of the operational segment for FY12 and FY13 as well as our estimates for the two fiscals later in this note.

  1. Company has already filed an application with Allahabad High Court for merger of retail business and a court directed meeting of shareholders of the company is to be held on 2nd December 2011 for approval of the scheme of arrangement with that regard. The court approval should be received by 31st December 2011 and we feel from Q3FY12 onwards Retail business numbers will start reflecting in company's financials. Equity capital of the company will expand by Rs. 3.83 cr, to stand at Rs. 11.84 cr. (1.184 cr. shares of FV 10) because of the merger of Retail business and promoters' stake will go up to 65.5 % from current 47.5 % because of the merger.

  1. We feel Retail business merger will be extremely positive for the company in the long run, as, in the near term it will provide exponential Revenue growth while in the medium-to-long term it will enable robust cash generation for the company.

  1. Under the scheme of arrangement for merger of Retail business, Agri & Consumer Products segments (Jivanjor & Ramban brands) are to be demerged from the company and get transferred to a wholly owned subsidiary of the company viz., Jubilant Agri & Consumer Products Ltd.(JACPL). In consideration of such demerger, the listed entity will receive preference and other shares worth Rs. 164 cr. of JACPL because of which JACPL will become 100 % owned subsidiary of the listed company Jubilant Industries Ltd. (JIL). In JACPL, the retail business of the group will be merged for which a consideration of 0.3835 cr. shares of listed entity JIL will be issued to the promoters.

  1. Hence, as a result of the scheme, listed company JIL on a standalone basis will be present in Food Polymer and Latex businesses which are collectively referred to as 'Industrial Products (IP)' while JIL's 100 % owned subsidiary will have three brands, two of which are Jivanjor (Consumer Products) and Ramban (Agri-Inputs) which are collectively referred to as 'Agri and Consumer Products (ACP)' and the third brand being Total (Mall-cum-Hypermarkets) which is referred to as 'Retail'.

  1. FY12 & FY13 estimates by the management for financials of each of the operational segment post scheme of arrangement becoming effective are provided below :

FY'12

FY'13

Revenue

Agri & Consumer Products (ACP)

( Ramban & Jivanjor Brands )

Industrial Products (IP)

( Food Polymer & Latex )

Retail

( Total Mall cum Hypermarkets )

522.3

204.1

584.6

558.3

243.8

982.6

Total Revenue

1311

1784.7

EBITDA

Agri & Consumer Products (ACP)

( Ramban & Jivanjor Brands )

Industrial Products (IP)

( Food Polymer & Latex )

Retail

( Total Mall cum Hypermarkets )

59.7

23.7

(- 11.2)

68.5

31.5

+ 18.1

Total EBITDA

72.2

118.1

  1. Above estimates were made by the management when domestic economy as well as global environment was not so turbulent as is right now. Hence, we feel that these estimates need to be revisted once the entire scheme of arrangement is complete and Retail business merger is through. However, one thing needs to be mentioned here that management has kept its words of opening two mall-cum-hypermarkets in current FY12 with one already getting operational in June'2011 and the other one likely to be opened soon.

  1. Our conservative FY12 & FY13 estimates for each of the operational segment of JIL (post scheme of arrangement becoming effective) while factoring in all the negatives as on date are given below. We have kept enough room for the management to beat our estimates :

FY'12

FY'13

Revenue

Agri & Consumer Products (ACP)

( Ramban & Jivanjor Brands )

Industrial Products (IP)

( Food Polymer & Latex )

Retail

( Total Mall cum Hypermarkets )

426

195

410

510

228

630

Total Revenue

1031

1368

EBITDA

Agri & Consumer Products (ACP)

( Ramban & Jivanjor Brands )

Industrial Products (IP)

( Food Polymer & Latex )

Retail

( Total Mall cum Hypermarkets )

36.2

21.4

(- 24.5)

48.5

26.2

(- 18.9)

Total EBITDA

33.1

55.8

In our above given estimates for current fiscal FY12, we have assumed only Rs. 317 cr. revenues from current core businesses (IP & ACP) of JIL in H2FY12 as against Rs. 304 cr. achieved by the company in H1FY12. Also, with regards to EBITDA, we have assumed that it will gross an EBITDA of Rs. 29.04 cr. in H2FY12 as against Rs. 28.56 cr. EBITDA reported by the company in H1FY12. Such low estimates are given inspite of the fact that Q3 and Q4 are normally very healthy quarters for company's Consumer Products and Agri segments, so as to factor in any adverse impact of turbulent economic environment that we are witnessing right now.

With regards to Retail business, the two new mall-cum-hypermarkets that are opened in current fiscal will aid in a healthy revenue growth this fiscal. In FY13, 3 more mall-cum-hypermarkets are planned to be launched. However, contrary to management's estimates of grossing Rs. 584 cr. revenues in current FY12 and Rs. 982 cr. revenues in FY13 from retail business, we have thought it proper to let the new stores stabilise and factor in any possible adversities, in our estimates. This is the reason why we have estimated only 30 % YoY growth in Retail business in FY12 which will easily get scaled up to 53 % growth in FY13. However, we feel that retail business' EBITDA-level break-even, as estimated by management to be achieved in FY13, will take one more year and will happen only in FY14 when all the 10 mall-cum-hypermarkets of the company will be operational. Any positive development with regards to Retail business of the company asto quicker revenue growth or better profitability than our estimates will call for an unexpected significant rerating of the company on the bourses.

However, even if we assume that company will not surpass our estimates and will perform on expected lines of our conservative estimate of Rs. 1031 cr. consolidated revenues in FY12 and Rs. 1368 cr. consolidated revenues in FY13 with a consolidated EBITDA of Rs. 33.1 cr. and Rs. 55.8 cr. respectively, then also, on an expanded equity capital of Rs. 11.84 (post merger of retail business), Jubilant Industries Ltd. is currently trading at 0.24x FY12e sales and 0.18x FY13e sales with an EBITDA-multiple of just 7.7x FY12e EBITDA and 4.6x FY13e EBITDA which signifies a gross undervaluation of the company on the bourses and therefore calls for a significant rerating of the stock. We believe rerating will commence and gather momentum once Retail business merger is approved by the court in December'2011.

To conclude, we maintain our view that Jubilant Industries Ltd. is a rare Investment Opportunity wherein all the ingredients are present like :

  • credible and most efficient management,

  • presence in lucrative and growing operational segments,

  • established leadership position in each of the operational segment with No.1 or No.2 positioning,

  • scalable business model,

  • strong visibility of exponential future growth in financials

and, inspite of presence of above ingredients, the company is available at a valuation which can only be termed as mouth-watering mainly because of pending court approval for retail business merger as also thanks to current uncertain financial markets environment. With court recently giving go ahead to call a shareholders meeting under its chairmanship on 2nd December 2011, the approval can be expected well before 31st December 2011 which means the company is on verge of a significant rerating and the rerating process should start sooner rather than later.

40

Chart Focus: Jubilant Industries a Buy

Yoganand D

BL Research Bureau

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November 13, 2011:

Investors with medium-term perspective can consider buying the stock of Jubilant Industries (Rs 214.4). It is a diversified company in agri and performance polymers business. Ever since it’s listing in the mid of February, the stock has been trading in a broad range between Rs 155 and Rs 261. The stock has a significant support band between Rs 155 and Rs 165, which cushioned its decline in mid-August this year. The stock has been on a medium-term uptrend since than. While trending up, the stock breached its 21- and 50-day moving averages conclusively in late October and is trading well above them. Last week, the stock jumped 13.5 per cent decisively, breaking through its important resistance at around Rs 205. We observe that there is an increase in weekly volumes over the past two weeks. The 14-day relative strength index is featuring in the bullish zone and weekly RSI has entered the bullish zone from the neutral region. Daily moving average convergence divergence is hovering over the positive territory and weekly MACD is on the brink of entering this territory. Both daily and weekly price rate of change indicators are featuring in the positive terrain indicating buying interest.

We are bullish on Jubilant Industries’ stock from a medium-term perspective. We believe that the stock has the potential to sustain its bullish momentum and reach our medium-term price target of Rs 256. However, we do not rule out a minor pause at around Rs 235 while trending upwards. Investors with medium-term perspective can consider buying the stock while maintaining stop-loss at Rs 193.

(This recommendation is based on technical analysis. There is a risk of loss in trading.)