THE ECONOMICTIMES

M U M BA I / P U N E | M O N DAY 2 5 J U N E 2 0 1 2 | 4 Pa ge s w i t h E T

Which to Pick and What to Skip

A look at the laggards, gainers and the runaway winners. We go beyond the boring stats to bring you up to speed with the Street 3
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Peer comparison is generally considered to be a good way of judging the worth of most things. But what if they are the only one of their kind? Well, there are ways of evaluating them too. ET Intelligence Group shows you how it is done for India Incs lone stars

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o know if you are paying the right price for a stock, comparing its valuations with other stocks of a similar kind is generally the way to begin. For example, to know if a banking stock like Axis Bank is rightly priced , you would tend to compare it with the valuations commanded by HDFC Bank or ICICI Bank. But what if there is no other listed entity for an investor to compare with? In such cases, one can either look at the historical valuations of the company or if it is a newly-listed company compare its valua, tions with its international peers who have similar operations. However, while doing so, the investor must keep in mind the different growth trajectories the companies in different markets would have. For example, a consumption stock in an emerging market would naturally command higher valuations than its peer in the developed economy owing to the more promising growth prospects in the emerging market. ET Intelligence Group this week analyses a bouquet of such companies that do not have any listed peer to compare with. For example, Coal India, which has a monopoly in coal mining; MCX Indias first commodities exchange to get listed and Talwalkars Better Value Fitness Indias leading health and fitness company It is not that these companies do not face any . competition in their respective markets with the exception of Coal India. It is just that they do not have any listed entity to benchmark against. One interesting company that didnt feature in our list was Delta Corp Though it was the only listed company that runs casinos, this business formed only onefourth of its revenues.

On the bourses, the companys stock is trading at a price to earnings multiple of 74.4. These valuations are high even when compared to its historical valuations. The company was trading at a P/E of 55 when it got listed. Based on market cap, it is valued at 7.8 times its FY12 revenues. The companys valuations can be compared with two international peers viz. Philippines-based Jollibee Food Corporation and Fastfood Indonesia. Both these companies are present in emerging markets and face similar growth prospects. Jollibee owns franchises and manages a network of fast food restaurants under its name. With a market cap of `14,280 crore, the company is valued at almost twice its FY12 revenues. Its stock is trading at a price to earnings multiple of 32.6. Fastfood Indonesia operates KFC franchise restaurants throughout Indonesia. Its stock is valued at twice its revenues of `1,871 crore and is trading at a price to earnings multiple of 26.4. While Jubilant has posted an average growth of 55% in its revenues during the last two years, Jollibee and Fastfood Indonesia have grown at 16% and 21%, respectively in their last , five years. However, this still does not justify the high valuations being commanded by the stock right now. Jubilants revenue growth in the future is not likely to be so high given the high base. Investors can expect some rationalisation in the companys valuations going ahead.

VIP Industries

VIP Country Annual Sales (`Cr) OPM (%) Mcap/Sales Ratio P/E Ratio P/B Ratio India 854.2 13.8 1.3 16.5 4.3

Samsonite Intl Eminent Luggage Hongkong 7303.0 15.7 1.8 27.7 2.5 Taiwan 437.8 4.0 0.4 15.3 1.2

Coal India

Coal India Country Annual Sales (`Cr) OPM (%) Mcap/Sales Ratio P/E Ratio P/B Ratio India 62415.4 25.1 3.5 14.5 5.3

China Coal Energy China 64415.9 21.2 0.3 7.0 0.9

Shanxi Coal Intl China 60425.7 0.0 1.1 15.4 2.4

The state-run Coal India is the only company in India that is allowed to mine and sell coal for purposes other than captive use and therefore faces no competition. With reserves of 67 billion tonne, it is the largest coal-producing company in the world. As of March 2012, its annual production stood at 436 million tonne. It expects to increase production by 6% to 464 million tonne by the end of the current fiscal year, which appears achievable though it has been missing production targets over the past three years. It has a strong balance sheet with low debt and a cash pile of `58,200 crore as on March 2012. The companys production and offtake improved during the March 2012 quarter as reflected in the 29% increase in sales over the year-ago period. But profitability was impacted by a steep rise in the wage bill which resulted in a 5% decline in net profit. High wage cost will remain a concern for the company over the coming quarters as well. There are several companies that operate in the coal mining business, the largest being BHP Billiton and Rio Tinto. But because of the massive scale of their operations, the valuations of these companies are not comparable with Coal India. A better comparison would be with China Coal Energy or Shanxi Coal International Energy Group Company In ru. pee terms, the Chinese coal miners earned revenues of 644 billion and 604 billion, respectively, in the trailing 12 months (TTM). This is compared with Coal Indias TTM revenue of `624 billion. China Coal trades at a PE of 7.45 times and has a market capitalisation which is 1.13 times its sales. Shanxi Coal trades at a PE of 16.6 times and has a market capitalisation which is 0.3 times its sales. The stock of Coal India has fallen 13% in the past 12 months. It currently trades at a PE of 14 times which is at par with its Chinese peers. While its market cap to sales ratio of 3.48 times could make the stock seem expensive, it is important to note that coal prices in India are significantly lower than those in China.

VIP Industries is Indias largest moulded luggage manufacturer, which annually sells nearly 5 million pieces of soft and hard luggage under an array of brands including VIP, Aristocrat, Alfa and Carlton. The company operates through a large network of 10,741 retailers spread across 1,839 towns and cities. However, the bulk of its sales comes from metro and tier-1 cities. Around 2,000 shops contribute 80% of its revenues. Two-thirds of the companys business and over 85% of its profits come from soft luggage. The companys performance has been under severe pressure in the last few quarters due to the rupees depreciation. The company is heavily dependent on imported raw materials and hence its operating profit margins suffer when the rupee depreciates. Increased competition from Samsonite and American Tourister has also made the company increase its adspend significantly in the last couple of quarters, which also put pressure on its margins. The company plans to enter the ladies handbags market in FY13, which will be a totally new market, but a logical extension to its current product line. However, this may entail additional adspend. The April-June quarter is always the best for the company bringing in one-third of its annual revenues. As a result it typically stocks up raw materials in the Jan-March quarter. This may have helped the company maintain its margins in the June 2012 quarter in spite of the rupees heavy depreciation in the last 2-3 months. The company typically spends around `12-15 crore annually on capital expenditure, which goes into three main areas hard luggage development, soft luggage development and retail store set-up. The company plans to add 80 exclusive stores for VIP 10 for Carlton and 20 for Skybag brands. , In addition, it aims to add 150-200 retailers under distributors. VIP Industries is currently trading at a price-to-earnings multiple (P/E) of 16.3 and price-to-book-value (P/BV) of 4.2. Its competitor Samsonite International is being valued at P/E of 27.2 and a P/BV of 2.5. VIPs valuations may not improve till the rupee starts appreciating again.

Speciality Restaurants

discount to the Hong Kong Stock Exchange. Considering its dominant domestic position and the growth potential of the Indian economy the current valuation of MCX appears to be justified. ,
(Publishers disclaimer: Bennett, Coleman & Co Limited or its subsidiaries hold a 2.24% stake in MCX as on 31st March 2012)

MCX

Talwalkars Better Value Fitness

el and facilities leasing and management. Japan is a developed market with a large ageing population. In that strict sense, the companys valuations cannot be compared with those of TBVF. However for want of a better alternative, if one compares the valuations of the two companies, we do not find any major difference between them. While Central is trading at a P/E of 14, TBVF is trading at 17. The valuations of TBVF, therefore, appear to be fair.

Specialty Restaurants Berjaya Food BHD Noble House China Country Annual Sales (`Cr) OPM (%) Mcap/Sales Ratio P/E Ratio P/B Ratio India 173.6 23.1 5.8 62.2 6.7 Malaysia 140.0 0.0 2.5 17.3 3.7 China 94.8 17.2 1.4 24.2 3.2

Jubilant Foodworks

MCX Country Annual Sales (`Cr) OPM (%) Mcap/Sales Ratio P/E Ratio P/B Ratio India 526.2 63.6 10.1 18.6 5.4

Intl Exchange US 6511.6 70.8 8.4 17.8 2.8

London SE UK 6162.8 59.4 3.7 5.1 1.9 Country Annual Sales (`Cr) OPM (%) Mcap/Sales Ratio P/E Ratio P/B Ratio Talwalkars India 130.5 43.7 2.8 18.0 2.7 Central Sports Co Japan 3321.6 5.7 0.3 14.3 0.9 Lifetime Fitness US 4992.3 18.9 2.2 18.5 1.9 Country Annual Sales (`Cr) OPM (%) Mcap/Sales Ratio P/E Ratio P/B Ratio Jubilant Foodworks India 1018.6 14.7 0.7 71.6 25.0 Fastfood Indonesia Indonesia 1871.6 5.8 1.9 27.4 7.4 Jollibee Philipines 7232.0 5.5 1.9 32.7 5.4

MCX, which commenced operations in 2003, is Indias only listed commodity exchange and is a demutualised entity marked by a separation of ownership, management and trading membership. The exchange currently allows trading in 49 commodity futures from bullion, metals, energy and agriculture. Its unlisted peers in India include NCDEX, Indian Commodity Exchange (ICEX), National Spot Exchange, Ace Derivatives and Commodity Exchange, NMCE, Indian Energy Exchange (IEX) etc. MCX claims that it has the worlds highest turnover in silver contracts, the second largest in gold and third largest in crude oil and copper. The average daily turnover at MCX is now close to `51,400 crore. It has grown over 3.5 times in the last three years. India currently does not allow trading in commodity options or indices. Also, foreign portfolio investors, mutual funds and banks are not allowed to trade in Indias commodity futures markets. Any regulatory changes on this front are bound to boost traded volumes on commodity exchanges including MCX. The companys business generates a high amount of cash, has low capex and is debt-free. Considering that the company cannot invest in unrelated businesses, it could potentially emerge as a high-dividend paying company . MCX is currently trading at a price-to-earnings ratio of 18.1 and a price-to-book-value ratio of 5.2. Its enterprise value (EV) is 6.8 times its revenues and 10.7 times its EBIDTA. On all these valuation parameters, it is at par with the Intercontinental Exchange, at a premium to the London Stock Exchange, but at a

With 128 health clubs across 68 cities serving 1.25 lakh members, Talwalkars Better Value Fitness or TBVF is the only listed fitness and wellness company on the Indian bourses. It enjoys the highest market share of around 10% in the countrys organised health club market. The companys revenues have increased from `71 crore in FY10 to `130.5 crore in FY12. Its net profit has tripled during this period from `7.8 crore to `22 crore. The companys EBITDA margin has increased from 37.8% to 43%. Being the largest player in the fairly nascent sector of health and fitness in India, the company has a positive growth outlook. However, the company faces competition from the unorganised players that largely dominate the sector. There are very few listed companies globally that exactly match with the companys business of operating a chain of fitness centres and providing services like gyms, spas, aerobics and health counselling. Globally most of the large and lead, ing fitness companies are unlisted with stakes owned by private equity players. They value the company at 12 to 15 times its EBITDA. At a market cap of `369 crore, the company is valued at 2.8 times its FY12 net sales. It is trading at a price to earnings multiple of 16.7. The stocks P/E has been steadily decreasing from a P/E above 70 levels it traded immediately after listing. Japan-based Central Sports Co is one of the few listed companies engaged in operating membership-based gyms. It also sells fitness articles and equipment and is also engaged in trav-

Jubilant Foodworks has the exclusive franchise for Dominos Pizza and Dunkin Donuts in India. It is the only listed company in the quick service restaurant format. It has a network of 465 Dominos Pizza Stores (as of March 31, 2012) and is the market leader in the organized pizza market with a 54% share and 70% share in the pizza home delivery segment in India. The companys revenues have increased 2.5 times in the last three fiscals to `1,019 crore. During this period, the net profit has tripled to `103 crore. The EBITDA margin has increased from 15.5% to 18.6%. This performance has been driven by good same store growth achieved by the company and increased investment in advertising & promotion. The company expects to open around 90 Dominos stores in FY13 to maintain same store sales growth at 18-20% during FY13. But this is lower than the 23% same store growth averaged by the company in the last five years. The macro outlook for the company under the fast-food category remains positive given the low penetration of pizza joints and significant youth population and changing demographic needs. However, increased competition from other players like Yum Foods (distributor of Pizza Hut and Kentucky Fried Chicken joints) is likely to make it hard for the company to grow.

Speciality Restaurants is one of the leading fine-dining restaurant operators in India. The company is known chiefly for its Chinese cuisine brand Mainland China. It contributes 60% of the companys revenues. The company also operates other restaurant chains including Oh! Calcutta, Machaan, Sigree, Flame & Grill and Haka. The company also has a confectionery brand Sweet Bengal in Mumbai. At present, the company has 69 restaurants. Of these, 20 are under the franchise-owned and company-operated model and the rest are owned and operated by the company In the fine dining con. cept, the company is the only listed player. In the last four years ending FY11, the companys operating profit has grown at a compounded annual growth rate (CAGR) of 26%, while net profit has grown at a CAGR of 17%. This consistent growth has been achieved at a very low level of debt. In the last five years, the companys debt to equity ratio has been consistently below 1. The company has funded its capital expenditure requirements through equity dilution and internal accruals instead of stretching its balance sheet through high debt. The company has achieved this by following the asset light model where all its properties are company owned and the operated restaurants are on lease agreements, saving huge real estate cost for the company Going ahead, keeping this model in . consideration, the company intends to use the flagship brand to promote its other brands. At present, the company has eight such restaurants in place (four combos and four multi-brands) where it includes other brands like Flame & Grill or Sigree or Machaan alongside its Mainland China restaurant. On the valuation front, the company is trading at a price to earnings multiple of 60 times and has a market capitalisation of `970 crore. Its two international peers Berjaya Food BHD (market cap of `361 crore) and Noble House China (market cap of Rs126 crore) which are of almost size and turnover, are trading at a price to earnings multiple of 17 and 24 times respectively Though Speciality Restaurants appears to be expensive now, . its very presence in Indias consumption theme and low debt would work in the long-term. The fine-dining concept in India has huge acceptance and attracts a huge volume of customers.
Kiran Kabtta Somvanshi & Crystal Barretto With inputs from Rajesh Naidu & Ramkrishna Kashelkar Notes: Data inthe table is the latest available annual data sourced from Bloomberg. OPM: Operating profit margin, P/E: Price to Earnings and P/B: Price to Book Value.