My understanding of the investment opportunity in RPSG Ventures
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The business is structured beautifully. A cash cow feeding into potential high growth companies typically remind me of the BCG Matrix. In this case - the clear ‘cash cow’ is FirstSource Limited - a constant source of cash flows. These are then invested into potential ‘question mark’ companies in the holding company, hoping that they turn into ‘stars’ in the future
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A 53% stake in Firstsource does make RPSG Ventures seem very undervalued at the moment. Current market cap of FSL - 10,600 Cr. Current market cap of RPSG Ventures - 1192 Cr. This means the holding company discount (only including the FSL stake) - is currently at 79%. For a bull market, that does seem to be very steep.
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And it goes without saying - but other high potential businesses - including GuiltFree, Peel Works, Quest Mall, IT Venture, Herbolabs, McCaffeine - are not even included in this calculation. RPSG owns significant stakes in all of the above including 100% stake in a few
The 3 key questions I asked myself:-
- As a long term investor, do I see considerable value in the non FSL companies - could these be big value generation opportunities in the future?
My previous background is FMCG marketing, and what is happening currently in the industry is unprecedented. As other members have posted above - D2C and E-Commerce are the mega trends in the industry disturbing long held distribution MOATs. Amazon, Flipkart, Nykaa, Big Basket have all grown exponentially, especially their grocery divisions during the pandemic, and are still < 10% of FMCG sales. Brands are being made by trial, and not necessarily by advertising. This makes me very bullish on the E-Commerce centric plays in the RPSG portfolio - McCaffeine, Dr Vaidya etc are products perfect for this platform - on the cusp of a consumer mega trend.
Additionally. traditionally brand follows distribution. If distribution can follow brand, it makes the job of the sales teams so much easier and productive. For a product like Too Yumm, the approach being brand first is excellent. Significant investments in awareness and product credibility mean that in the next 3-4 years, when Guiltfree builds up distribution further, they get consumer off take, and that is the hallmark of a successful FMCG company. The much valued sales cycle can keep continuing - and more distribution investments can bring considerable growth. Brand investments would be needed - but much lower than before. Distribution will bring in all the gains - India is still > 90% Kirana stores and Modern Trade
Finally, with a portfolio of products under non competitive categories (Foods, Ayurveda, Personal Care) - the group companies can enjoy a common distribution ecosystem meaning excellent synergy and common costs - the salesman has to visit the same outlets and can cross sell extensively
In my opinion, I see a few of these companies growing to be considerable companies in the future. A base scenario would be small winners in their respective segments, a good synergy would be a full fledged FMCG company being born out of the venture. Great as a long term investor
- What about dependance on Firstsource - is Firstsource not overvalued currently?
This was my major concern. Though no way to judge valuations and the market is always right, I still wanted to have a margin of safety where in I saw good progress in FSL. FSL has run up considerably in the recent past - but that is not only because of the small/midcap indexes. A new CEO has joined in 2019 (Mr Vipul Khanna) - who has brought the company back to a strong growth path through structural changes including changing people. Last years performance for each quarter for FSL has been great in terms of margins + growth. The market is respecting the growth. The guidance from Mr Khanna is 17-18% growth for next year - with the healthcare vertical supposed to take the growth leadership from the mortgage business. Either ways, my fears on overvaluation were quelled by the recent conference call.
- What about looking forward like the market does? What does the long term future look like?
I see businesses in the mix which would actually currently be affected but I would expect to pick up as COVID eases. Quest is a top mall in Kolkata with luxury brands, Too Yumm mainly relies on out of home sales which would pick up once things open up, and the E-Commerce companies in personal care should continue to do as well. FSL guidance remains strong, this might change if the IT/BPO market does not pick up as expectations are baked in, but which company does not have a potential downside?
Finally, the company fit in all my core parameters that I steal from a well known investment house - Longetivity (huge runway for growth), Quality (of businesses, brands and management teams), Growth (from the cash cow as well as the potential stars) and Price (relative undervaluation for holding company as well as some great upcoming companies available in the mix).
The key risk remains FSL not doing as well in the future - but as a long term investor - even if 1 or 2 of these companies pay off for the group - I think that could be a large wealth creation opportunity - so a lucrative long term reward outweighs the relatively short term risk.
On basis of all these parameters, I invested into RPSG Ventures with a multi year timeframe. Not going to worry about buying/selling short term falls/spikes in price - just going to stay invested and monitor the company every year on how things are progressing.
Discl : Invested. I am not a SEBI registered advisor. Above statements on valuation are as per my best understanding and I would request senior members to correct any of this in case it does not seem correct.