Wednesday, 15 May 2019

TRENDS


TRENDS
There has been a lot of talk on the street about an economic slow down in India, the key indicators being taken as a proof for the same are sluggish auto sales trend and a few fmcg majors like HUL (Unilever Plc) moderating their growth forecasts for the Indian market.
I feel, this is not an economic slow down but a major economic shift that India is going through. The high young population percentage of India means a lot of decision making and disposable income coming into the hands of millennial and if we have to think or talk about the future we need to get an inside scoop of the millennial thinking, How young India thinks and acts.
Note: This is not a well researched piece so pardon me for inaccuracies, This is more of what I have observed or heard from people as I travel or talk to people across India and try to observe them, their thinking pattern and catch a trend. Since this is more of general talk, I am not attaching data of any kind to the whole thing but just logic that i feel is correct.
I pen down a lot of my thoughts on a very scattered way on Twitter, so I thought of writing this one piece where I can integrate many of it into one.
So here are some interesting observations or say my own millennial thinking on stuff :-
Banking:
Retail banking was a pretty big theme for investing in India, 10-15 years ago a large percentage of our population was not connected to the banking system.
Today, almost entire India is connected to the banking system after Jan Dhan Yojana. Leaving aside a small percentage of population that continues to be disconnected to the banking system.
Therefore, any new bank or even a old bank trying to get hold of a lot of accounts might not really work out even if they expand their branch networks aggressively.
Infact, Technology which has replaced the middle-men across the sectors will emerge as a major threat to traditional banking system going ahead. With the emergence of Fin Tech Companies: Your mobile wallets, digital bank accounts and mPOS have already started to disrupt the financial world. Now going ahead, traditional banking which is the largest middle man in the economy will witness challenges from P2P lending and many such intriguing concepts. The banking giants which actually slept on technological innovation will have to wake up and smell the coffee sooner or later to compete with these fintechs and smaller banks aspiring to grow big have to create fintech brands or keep trying to talk about biting the retail banking cake and end up being eaten.
Auto Sector:
On my personal twitter handle, Last year in September I had posted about an impending auto-slow down.
In real terms the auto slow down came a bit late but now it is the biggest talking point on the street.
While many are taking this as an economic indicator of prosperity and financial power I feel otherwise.
We had a good amount of growth in the 2 wheeler and 4 wheeler space in India, most of the metro cities in India are over populated both with humans and vehicles, Parking is a huge issue for all the car owners, Maintenance costs are high, Petrol Diesel haven't been really cheap despite Acche Din.
The car buying is slow not because people dont have money but because people have options like Uber & Ola in big cities, they are now venturing into small cities as well.
The buying a second car idea is not even on most minds anymore.
If you have options to spend small and get services like Uber & Ola you might not instantly look to spend big on a vehicle and pay EMIs, you would rather spend it on some other things (This is how the millennial thinking is shaping up)
Plus due to the above stated issues a large percentage of people no longer see a car as a status symbol, flaunting an iPhone or flaunting about a holiday on Instagram has become more interesting or worthy rather than driving your tall boy Wagon-R. Now going ahead the Car Sales will soon turnaround because while cities are done with owning a car obsession, smaller towns and cities would witness a trend to buy cars and even if they don't once Uber & Ola start to penetrate your smaller towns and cities you will anyway see amount of growth returning in the sales figures soon.
Meanwhile 2 wheelers will be a growing trend, A lot of second car buying would convert into owning a 2 wheeler for quicker commute, Plus the rise of Swiggy, Zomato, Uber Eats largely the Delivery Boy Culture will also trigger a good amount of growth in 2 wheeler buying.
FMCG:
HUL which is present across so many categories of FMCG has cut its growth forecast in their latest quarterly results and the volume growth was unexciting for analysts.
This whole thing of FMCG slowdown that is being peddled may not be a slow down but a case of shrinking market share for these large mncs.
Just think about it a Patanjali which came out of nowhere and disrupted and grew big even though even that is slower now points out at what?

It points out at a lack of loyalty in the mind of Indian consumer, this young Indian consumer is not shy of trying new brands and things or eat new stuff.
For instance, India's total potato chips market both organized and unorganized stood at close to 18000 crores in 2017 while the leaders continue to grow at exciting or moderate growth rates, the latest entrant with a niche of baked healthy snack, crisps, chips and innovative products like foxnuts and quinoa puffs "Too Yumm" a brand by CESC endorsed by Virat Kohli went on to clock almost 300-500 crore sales in their first year which is not a mean feat. Even DFM Foods in their latest march quarter delivered a 30% revenue growth backed by new launches like cheese balls and more.
The entire thing about India being hugely populated country and FMCG being a huge growth story has caused a lot of start-ups, new companies venturing into this field of business with a renewed focus on pricing and innovation, these small companies with their small brands are so many in number that they are managing to dent the market share of these biggies (It is actually good for India)
Its not just limited to food but across the board, E-Commerce push has also helped to cut off distribution headache and making it easier to sell your new brand to large population.
For instance the best selling shampoo on Amazon right now is WOW's Apple Cider Vinegar Shampoo priced at a discounted rate of 384 for 300 ML and it has 5951 customer reviews already and on an average 4 star reviews.
Their website: buywow.com tells us that Wow Skin Science is a beauty company based in "Bangalore" so you know now its a start-up.
HUL's clinic plus comes as second best seller.
Across skin care there are brands like Skinsalad, Jovees, mcaffeine and practically a lot many which are slowly starting to have their own set of customers and are biting the market share of biggies.
Another example is that the best seller product in Chips category on Amazon is Too Yumm's Multigrain Dahi Papdi Baked Chips and the second best seller is Lays American Onion
So one thing is becoming clearer that the young millennial Indian customer is not a very loyal or attached fellow to any brand, He is not shy of trying things and he/she has a lot of options now compared to what they had earlier.
FMCG / Fast Food/ Restaurants contd:
Packet food is also getting disrupted by availability of fresh food through swiggy and other such food delivery apps which can replace your hunger of Maggi with a paneer wrap from your nearby Dhaba.
QSR, Take Away and Food Delivery is becoming a pretty booming business in India, big cities like Mumbai or Kolkata or smaller towns like Indore: The Demand is Real.
A simple question also is, if HUL’s growth forecast turning tepid hints at recession does the mad growth of food delivery apps and restaurants hint at India becoming an economic super power? NO for both.
This is not such a great news for a Dominos or Mc Donald’s because of variety of options becoming available to people.
But in turn it is also fueling the hunger across people to order so they are not complaining as they all are targeting the Kitchens as well not just each other.
Overall:
I have left many sectors uncovered here, But the moot point I am trying to make is that the disruption is pretty high and across industries, and there are many opportunities for many companies and start-ups to make it big.
A lot of the listed company’s results or growth forecasts might or might not reflect this due to shrinking market shares for big companies.
But this whole consumption slowdown does not seem very real to me, Investors as well as young businessmen should try to identify new themes in the consumption or service bracket to tap.
There is a lot at stake for FMCG Biggies and also a lot of Stake in the market share to be won by younger companies.




Friday, 3 May 2019

Varun Beverages Ltd - Value Pick





















VARUN BEVERAGES LTD
CMP: 900 (ACE Equities clients at 840)
Market Cap: 16100 crores
Book Value: 110
52 Week High/Low: 954/654
FY18: Sales 5105 crores, Net Profit 293 Crores, EPS 16.03.
Mcap/Sales: 3.16, P/E 56.
Promoter Holding: 73.56%.

VBL is India's bottling partner (contract manufacturer) for PepsiCo.
With recent development in Feb 2019, States of Gujarat, Maharashtra, Karnataka, Kerala, Tamil Nadu, AP, Telangana too are now in Varun's fold as the leading Pepsi bottler.
Apart from India, Varun is also Pepsi's partner for countries like: Nepal, Sri Lanka, Zambia, Zimbabwe and Morocco.
Almost 80% of Varun's revenue come from India, Nepal & Sri Lanka.

Brand products of VBL are: Pepsi and all its varieties, 7up, Mountain Dew, Mirinda, Everess, Tropicana, Nimbooz, Aquafina, Gatorade.

As per data:-
The carbonated beverages segment is around 80% of Varun's revenue pie.
The remaining 12-13% is from Packaged water and another 6-7% is from non carbonated beverages such as Tropicana fruit juice.


- The company with recent re-franchising by Pepsi now stands to gain a major foothold in west India and south India market of beverages.
- Consumption of Soft-Drinks stood at 44 bottles per capita in India in 2016, in USA it was 1496 bottles, Mexico was at 1489 bottles and developing economy like Brazil was at 537 bottles.
- Large section of Rural India did not have access to electricity, If electricity is pushed to all villages, A village can have atleast one public fridge, and cold drinks are popular because they are consumed cold.
- The per capita consumption of Cold Drinks would increase significantly with electrification and access to fridge and cold storage.

Key Risk: Health awareness, Competition, Swadeshi Awareness etc.

At 3 times Mcap/Sales being the largest cold beverage maker in India, VBL does not look expensive, the valuation can easily stretch to 5 times market cap to sales.

Which leaves a price target of close to 1500 with current set of numbers.

However, With the recent addition of states a HUGE percentage of market gets captured by VBL which means revenue would grow very sharply in forthcoming fiscals.

A price of north of 2000 is what we expect in the Long-Term from Varun and give it a space in our portfolio.


Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.

Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that i might have Varun Beverages Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.

Friday, 1 March 2019

The Road Ahead

Dear Readers,

2013 to 2018 was one way bull run in midcap small cap, with every tom dick harry becoming a stock picker and every tom dick harry stock becoming a multibagger. When such excesses are there we have a bear market impending (I had warned in Nov 2017 with my post Be Value Sensitive) post Jan 2018 this time the bear market came but on midcap and small stocks mainly and not on the indices, now most of the dust is settled and bull run in mid & small cap will begin meanwhile individual cases where there are excesses will continue to get punished.

All these are normal market phases we need to adapt to.

We have recently witnessed Media Outlets are picking up any stock and announcing that they have spotted corporate governance issues and as a result stocks crashes 10-20% just like that.

Remember, how in 2017 there were "Rocket Emojis" flying all over the whatsapp groups related to stock markets, every stock picker was having a great time, every stock was a potential multibagger. 

Just like that now every other stock has issues, is a fraud company, or over-valued according to popular belief.

Some popular beliefs that got trashed recently was Market will crash due to BJP losing state elections, Market will crash due to Auto nos being weak, Market will crash due to Urjit Patel sudden resignation.

Another popular belief that has made space in everyone's mind now is that Midcap and Small Cap will continue to fall, Everyone believes till election nothing will happen in the midcaps and smallcaps.

Markets generally are under no obligation to reward popular belief.

I feel we are now in a situation when valuations are comfortable but panic is high, fear mongering about corporate governance is at peak. But, there might not be any panic selling left because there is no one left who would sell.

Some people also believe the current India Pakistan tension is going to play a big spoil sport for the markets. I beg to differ on this, India is a growing economy with comfortable macros for now after the Crude price crash, Pakistan will not be able to afford any war with India and escalations would just be hyped by Media.

So the point i am trying to make is, Like the BULL RUN had its excesses and it got reversed I feel the BEAR RUN in midcaps and small-caps is over now and it is time for a sharp rebound in quality mid & small cap names and it should start before the general elections itself.

2013 to 2017 was a period of many multibaggers, Right stocks went up 5x and 10x easily.
2019 to 2021 will be a period of many right stocks doubling and/or tripling, One should not get huge 10x multibaggers easily right now as the cycles and markets have started to mature up.









Which are these stocks? Right from 2014 I have been writing about stocks I like for free and would continue to do so going forward.

We also provide research to our clients at ACE Equities.

For more about ACE Equities, readers can Whatsapp on +91-9163555553.

Thanks & Regards,
The Ace Investor

Wednesday, 16 January 2019

Coffee Day Enterprises Ltd - Value Pick

Related image

Coffee Day Enterprises Ltd.
CMP 280 (ACE Equities clients at 260)
Market Cap: 5980 crores
Book Value: 115
52 Week High/Low: 374.60/237
FY18: Sales 3274 Crores, Net Profit 106 Crores, EPS 5.03.

- Headed by V G Siddhartha (ex JM Financial portfolio manager).
- Cafe Chain started in 1990s which triggered cafe culture in India .
- As of date is India's largest cafe chain with a foot print of 1600 + stores across 220+ cities in India. 
- One of the rare chains to have sustained in the same business for more than 2 decades despite regular competition from global players like Costa Coffee, Barista, Coffee World and now Starbucks.
- CCD also has outlets outside India in countries like Nepal, Malaysia, Czech Republic and more.
- Coffee Day Enterprises as the holding company for Cafe Coffee Day outlets business and Coffee Machine vending business, It has stake in Mindtree (17%) 53.8% holding in SICAL Logistics, Land parcel of 135 + acres in Bangalore and Mangalore, The Serai (resorts) and 85% stake in way2wealth stock broking.
- In late 2018, Cafe Coffee Day signed exclusive agreement with UBER Eats to launch new cloud kitchen brands in partnership, Cafe Coffee Day outlets would have new exclusive menus for Uber Eats that will create exclusive brands.
- Company tied up with Australian dairy player named Frosty Boy for milk shakes (The deal went largely under-reported in Indian media). FrostyBoy remarked it as their entry to Indian Food Market.
- Company also recently tied up with PowerSquare to offer wifi charging soon at all its outlets.
- Company has launched interesting combos as it looks to take on the entry and increasing competition from Starbucks.
- Company has launched its own app called CCD and gives discounts etc to users. Also the ability to order on the go through the app, take a pick up and stuff like that. 
- Company has announced a restructuring plan to divest their stakes in group businesses such as Sical Logistics, Kotak is advising them on the same.



 I believe Coffee Day which is India's first cafe chain is cautiously cooking up something really interesting, First their tie up with FrostyBoy, then their exclusive tie-up with Uber Eats and now their plan to divest stake in various other businesses.

As remarked above: Cafe Coffee Day holds 17.08% stake in Mindtree, Current Value about 2400 crores, CCD has total debt of 5000 crores, Interest Cost FY18 was 349 crores on PAT of 106 crores, if interest cost is halved PAT would be 280 crores and EPS of 13 in FY18 itself.

This Uber-Eats tie up and creation of new exclusive brands can create lot of value for the shareholders sooner or later.

The company's first brand with uber-eats is named Home Cravings and is offering combo meals and home cooked style food experience in Bangalore. The brand appears to be in beta stage to test the market dynamics but the ratings across bangalore on the Uber-Eats app have been good.

Key Risk: Failure in combating Starbucks threat and deteriorating brand value.

However, here actually our bet is on the Jockey (V G Siddhartha) more than the horse itself, A guy who was doing a stock market job and can do so many exciting things such as Way2Wealth, Build such a great empire, Pioneer Cafe Culture in India, survive in the business despite global competitors would surely do something to sustain further. The developments they have been under-taking such as tie-ups and all does hint at one thing, The promoter is not willing to let this business die a slow death.

All in All, Coffee Day at 1.40 mcap/sales does not look expensive to me at all.
The Costa Coffee acquisition by Coca Cola with an eye on China network does show us how the sector is exciting with more global players looking to get into this space.



Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.


Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that i might have Coffee Day Enterprises Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.

Friday, 11 January 2019

Finolex Industries Ltd - Value Pick


Image result for finolex pipes

Finolex Industries Ltd.
CMP 530 (ACE Equities clients at 500)
Market Cap: 6650 crores
Book Value: 216
52 Week High/Low: 713/463
FY18: Sales 2738 Crores, Net Profit 299 Crores, EPS 24.06.

Half yearly FY19 EPS for Finolex is at 14.48 for Sept 18 v/s 8.71 Sept 17. (66% bottom line growth)
The margins growth latest quarter was backed by good growth in their PVC Resin segment (Which is not going to be around for a long time)
Since the company is converting from B2B to B2C, Most of their PVC Resins will be utilized in their PVC Pipes manufacturing itself.

Even though numbers look very rosy the annual eps projections for FY19 are pegged between 27 to 29 v/s 24 of FY18.
At an EPS of 27, current P/E for Finolex is at around 17.
If we look at the five year average P/E that Finolex has commanded it has been around 17.
The peak P/E was 79 (though erratic) lowest p/e was 9.65.
If we look at the P/E it had at all time high of 760+ in 2017, It was at a P/E of 27.


- The company is changing from B2B to B2C with total focus now on Pipes segment.
- 70% of pipe sales are Agriculture driven.
- Is increasing focus in plumbing pipes, their total capacity is 3,70,000 MT for Pipes & Fittings.
- Has entered the higher margin Cpvc Pipes business (Astral's core area)
- In 2017, Co. signed agreement with Lubrizol the inventor and largest manufacturer of CPVC compound in the world.
- Has a capacity of 6000 MT for CPVC, did sales of 5900 MT in FY18 at 147 crores. 
- Is going to increase the CPVC Capacity to 15000 by FY20.
- We are seeing a total shift in demand from construction sector in favour of Plastic Pipes v/s DI Pipes and Iron Pipes.
- Old buildings, socieities also witnessing repairs in rusted pipelines leading to demand for Plastic Pipes.
- We believe the market can grow at a pretty aggresive growth rate soon and branded players like Finolex which has great distribution reach should be able to tap it to their benefits.
- Company holds stake worth 1000 crores in family owned Finolex Cables (Though bothers within the families have been at loggerheads) 


Key Risk: CRUDE price volatility, It is widely known that the company will witness inventory losses because of sharp crash in crude (PVC Resin segment)
However, with migration towards B2C, tapping margin accretive category such as CPVC we expect the company to negate some of the risks.

At annual EPS of 27 the stock is at a P/E of 18, and at a MCAP/Sales of 2.19.
cPVC Pipes player Astral Poly trades at a P/E of 61 and a Mcap/Sales of 5.32.

Stock has remain muted due to volatility in Crude prices, it will be very interesting to see how the management has managed the crude risk in next two quarter results.
Considering the future outlook, discounting short-term hiccups due to crude volatility throwing the spread for a toss, lower crude price is a long-term positive for Finolex Industries.
Once the business becomes totally B2C focussed, and builds on the brand value and makes a mark in the cpvc segment, will not be surprised if it is given a rating similar to Astral which trades like the Paint Sector.

Hence we have a LONG TERM buy rating on Finolex with recent lows of 430 expected to be a potential bottom for the mid/long term.

NOTE: When we bought Finolex Industries, we anticipated that the company will suffer an inventory loss due to crude fall and erosion in the value of pvc reisins, like last time when crude fell. However, This time despite the crude price correction, PVC Reisin has seen a price increase, Which means there should not be any inventory loss. 




::LINKS::
Finolex Website
Latest Investor Presentation
Screener of Finolex



Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.


Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that i might have Finolex Industries Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.

Thursday, 3 January 2019

Friday, 21 December 2018

Aster DM Healthcare - Value Pick




Aster DM Healthcare
CMP - 149
Mkt Cap - 7500 Crores
Revenue FY18 - 6721 Crores
Net Profit FY18 - 269 Crores
P/E - 29x (FY18 Full Year)
Debt To Equity - 0.96
Promoter Holding - 37.45%
ISSUE PRICE - 180-190.

Aster DM Healthcare is a healthcare stock as the name suggests.
Aster is headed by Dr. Azad Moopen (Padma Shri 2011)
Aster is the only listed hospital business which has a wide reach outside India.
As of date, ASTER has 10 Hospitals across GCC (Gulf Countries), 104 Clinics and 216 Pharmacy Stores.
While in India, they have 11 Hospitals and 9 Clinics.

If we look at total Beds, Across GCC they have 1048 beds and in India they have a total of 4038 beds.
Out of which total operational beds are 841 in the GCC and 2906 in INDIA (Total 3747 operational beds)
Occupancy is around 60% on a consolidated basis in total.

Aster has the largest number of medial centers or Poly clinics in the GCC it also is the largest chain of pharmacy in UAE.
Aster's key focus area remains GCC however they had expressed interest in tapping Tier II, Tier III cities in India but a properly structured plan has not emerged yet.
Aster has taken over many sick hospitals that have not been performing great which is why their operational beds figures as well as India numbers remain suppressed with lower realizations too.

Aster operates with an Asset Light Model in GCC, most of their hospitals are leased and not owned properties.
While in India, Aster's majority of hospital properties are owned.

Aster came out with an IPO in February 2018 with an issue Price of 180-190.
There is some degree of cyclicality in its business which makes December and March quarter their best ones.

Aster reported 83% revenue from GCC and 17% revenue from India.
If we break up the segments, 46% of the revenue was from Hospital Business, 28% from Pharmacy and 26% from Clinics.
The bottom-line had 50% contribution from Hospitals, 23% from Pharmacy and 27% from Clinics.

Coming to the valuations, While the market chorus would say there is other income and everything else in the figures.
What makes ASTER a buy at current valuations?
We feel ASTER is the cheapest hospital stock available in the markets right now.

Lets take a look at ratios :-
Aster trades at a P/E of 29 (including large other income in profits)
Apollo trades at a P/E of 144 (consolidated)
Apollo trades at a P/E of 70 (standalone)
Fortis P/E is n/a as its loss making.

On price to book front :-
Aster trades at 2.60
Apollo trades at 4.64
Fortis trades at 1.84.

Now they key ratio which I like to look at is Market Cap to Revenue.
Let us look at the latest M&A in this industry first, that is IHH Healthcare takeover of Fortis Healthcare.
Fortis today trades at a market cap of 7200 crores on a revenue of 4561 crores.
Fortis has a total of 4800 operational beds, Fortis has been largely under the clouds and litigation for wrong doings of their erstwhile promoters.
Thats a mcap/revenue of 1.57.

Now take a look at Apollo Hospitals.
AH trades at a market cap of 17316 crores on a revenue of 7720 crores.
AH has a total of 10084 operational beds and we can call it the listed market leader.
But if we take Apollo Hospital consolidated numbers the revenue figure is 8243 crores.
That's a mcap/revenue of 2.10.

Now ASTER DM
On a Market Cap of 7500 crores, its total revenue for FY18 was 6721 crores.
With total operational beds at 3747.
Aster trades a mcap/revenue of 1.11.

Yes, lower valuations compared to the often called "cloudy" Fortis.
The promoter of Aster has recently been buying from open market according to insider trade declarations. 
I have chosen to ignore smaller listed players like Shalby Hospitals which command far more premium at 3.55 mcap/sales and also at par valuation smaller players like Narayana Hrudalaya and Kovai Medical.

All in all we feel Hospital & Healthcare sector is going to be in focus going forward, Aster is a good bet and a unique Multi national healthcare business available at cheaper valuations.

With the buzz word being Political-Risk free and also Recession-Proof, Hospital Industry is supposed to do well both in India and abroad.

While most of the hospital businesses listed in India have a Pharmacy element of atleast 15-20% in their bottom-line and the way e-Pharmacy becoming a threat in India.

We think Aster hedges that risk well because it is a GCC focused business which is not a HOT start up arena for E-Pharmacy.

::LINKS::
Aster Website
Latest Investor Presentation
Screener of Aster


Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.


Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that i might have Aster DM Healthcare Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.

Monday, 5 November 2018

Are you having Free Lunch or you are someone's Breakfast?

Original Story: SeekingAlpha
Logan Kane

Robinhood Is Making Millions Selling Out Their Millennial Customers To High-Frequency Traders

Summary

Robinhood is marketed as a commission-free stock trading product but makes a surprising percentage of their revenue directly from high-frequency trading firms.
It appears from recent SEC filings that high-frequency trading firms are paying Robinhood over 10 times as much as they pay to other discount brokerages for the same volume.
Robinhood needs to be more transparent about their business model.
In English folklore, Robin Hood is an outlaw who takes from the rich and gives to the poor. Robinhood was founded to disrupt the brokerage industry by offering commission-free trading. They may not be all that they represent in their marketing, however. The question you should be asking whenever someone in the financial industry offers you something for free is "What's the catch?" And yes, there is typically a catch.
After digging through their SEC filings, it seems that today's Robinhood takes from the millennial and gives to the high-frequency trader.
Not only does Robinhood accept payment for order flow, but on a back-of-the-envelope calculation, they appear to be selling their customers' orders for over ten times as much as other brokers who engage in the practice. It's a conflict of interest and is bad for you as a customer.
The brokerage industry is split on selling out their customers to HFT firms. Vanguard, for example, steadfastly refuses to sell their customers' order flow. Interactive Brokers (IBKR), which is the preferred broker for sophisticated retail traders, doesn't sell order flow and allows customers to route orders to any exchange they choose.
Robinhood not only engages in selling customer orders but seems to be making far more than their competitors from it. Among brokers that receive payment for order flow, it's typically a small percentage of their revenue but a big chunk of change nonetheless. Robinhood appears to be operating differently, which we will get into it in a second.
All brokerage firms that sell order flow are required by the SEC to disclose who they sell order flow to and how much they pay. The people Robinhood sells your orders to are certainly not saints. Citadel was fined 22 million dollars by the SEC for violations of securities laws in 2017. Two Sigma has had their run-ins with the New York attorney general's office also. Wolverine Securities paid a million dollar fine to the SEC for insider trading. It's easy to miss, but there is a material difference in the disclosures between what Robinhood and other discount brokers are showing that suggests that something is going on behind the scenes that we don't understand at Robinhood.
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Well if this is happening in a strictly compliant developed market like USA, Wonder how you might be getting ZEROed in India?

Sunday, 23 September 2018

Violent Moves


Dear Readers,

Market is abuzz with a lot of rumors right now.

There were violent movement across stocks on Friday (21st September 2018)

Many stocks including shares of NBFC companies led by DHFL (Dewan Housing) crashed 20-50% in Intraday last week on Friday (21 September 2018) some recovered some did not..

Lets look at past instances of large companies ideally part of the F&O segment crashing by more than 20-30% in a day or intraday and how they are doing as of date. (Except 2008 January crash on P-Notes news when Indices hit the lower circuit).

1- Satyam Computers: 17th December 2008 (Before the Scam) and 7th January 2009 (Scandal)

Talk about a Satyam crash and everyone starts talking about 2009, But before the eventual Satyam Scandal break-out that happened in Jan 2009.
Shares of Satyam Computers (traded in F&O) crashed more than 30% on 17th December 2008. The stock ended close to 226 on 16th December 2008 and went on to hit a low of 153 on 17th December 2008. (32% crash)  The trigger behind the crash was management decision to acquire two promoter related companies (Maytas Group) Companies promoted by Raju’s son. The company later cancelled the plan to buy the two companies.

Satyam chairman B Ramalinga Raju expressed surprised at the market reaction to this decision that was supposed to “delight” shareholders but resulted in a shock, He said the board "decided to call off these actions. . . in deference to the views expressed by many investors".

Satyam Computers: 7th January 2009 (Satyam Scandal)

After the Dec 2008 crash, Satyam in 2009 crashed again. This time the one last time.
The stock on 7th January 2009 crashed from 179 to hit a low of 30.70 (82 % crash).
Shares of Satyam which means Truth in Sanskrit saw this collapse after B Ramalinga Raju announced his resignation as the chairman of Satyam confessing manipulating the books to the tune of under 15,000 crores. The stock eventually went on to hit single digits and was later on taken over by Tech Mahindra and eventually merged with Tech Mahindra.


2 – Akruti City (Akruti) now (Hubtown) : 20th March 2009 and 26th March 2009.

Today you see Hubtown Ltd is a listed company with a market cap of 300 odd crores at a Stock Price of 50.
But the company has a rather glorious past. The share prices of Akruti rose 2300 in March 2009 from 800 at the start of the month. A rally of almost 190% in an F&O stock.
But on 20th March 2009 struck the bears, The shares of Akruti which was heavily traded in F&O collapsed from 2210 on 19th March to hit 1570 on 20th March 2009 almost 30% crash in a day. The main reason behind the crash on 20th was merely NSE announcing F&O exclusion of the stock amid growing question marks on the sharp unusual rally in the stock while other real estate stocks were biting dust.

On 26th March 2009, which was the last traded day for this stock in F&O as all forward contracts expired on this day. The stock crashed 1850 to hit a low of 700 (62% crash in a day).
The stock ended close to 1000 (still being down by close to 45%) versus a day ago.

Post removal from F&O admist SEBI enquiries on the rally and the fall and all the WHYs and HOWs among traders and investors the stock went to hit levels close to 300 (Almost 90% wealth destruction from highs) in the next couple of months and eventually faded to oblivion.

3 – Core Education & Technologies aka Core Projects : 10th October 2008 and later February 2013.

Heavily traded F&O counter, Core Projects (Core Education) plummeted from 250 on 8th October to hit 123 on 10th October 2008, A fall of more than 50%.
After lot of whys and hows the stock started trading normally, went on to recover and traded above 300 later on in next couple of years.

In September 2012, the Stock was kicked out of the F&O segment.

Later in 2013, Core Education shares tumbled more than 80% in three days. From 300+ price on 22nd February 2013, the stock hit 56 bucks on 27th February 2013.
A crash of more than 80% in a couple of days. Again a case of lot of Whys and Hows with various theories. The key reason claimed was sell of pledged shares which was repeatedly denied by the company, S&P even assigned a B+ stable rating on the company’s bonds.

The stock later became a penny stock and as of today it ceases to exist, as shareholders still wonder what went wrong.

4 – GTL Ltd: 17th June 2011 and 20th June 2011.

Telecom Infra stock GTL Ltd, another well traded counter of F&O was the victim or rather the culprit in June 2011.
On 17th June 2011, Shares of GTL Ltd crashed from 408 day ago to hit 314 (23% crash) before ending the day at 338.

What followed was your usual sweet nothings from the management, denying any material change in business, any negative, any selling etc. Etc.

However, Next day when market opened on 20th June 2011, Shares of GTL Ltd crashed from 338 to hit a low of 124 (Almost another 65%)

That is a Total 70% crash in couple of days, Investors continued to wonder what happened, again management clarified they are pious.

The company even filed a complaint to SEBI asking them to enquire what is wrong with their stocks price.

Note: Not just GTL another group entity listed by name of GTL Infra cracked 55-60% in two days.

As of today, these two loss making debt laden companies continue to serve as a horrific memory of euphoria and panic for the market participants.

5 – Infibeam Ltd: 25th September 2017, 29th December 2017 and 21st September 2018.

One of the few listed fancy E-Commerce business, Infibeam seems to often have discount sale on their share prices too.
This F&O Counter has had a great track record of aberrations.

Infibeam shares ended at 143 on 22nd September 2017, Opened at 143 on 25th September and went on to hit a day low of 87.15 (Almost 40% knocked off) before closing at 120.
Everyone wondered what happened there.

Then up next on 29th December 2017, Infibeam from 165 crashed to 98 (40% crash) before ending the day at 141.
The company clarified that it is business as usual for them, and whatever info was due to be shared was already shared with the exchange.

But now again on 21st September 2018 the stock crashed from 235 to hit low of 141 (40% crash) to later end the day at 182.


6 – PC Jeweller Ltd: 2nd February 2018, 15th February 2018 and later on.

Shares of PCJ a listed jewellery chain tanked 484 to hit low of 218 on 2nd February 2018 (down: 55%) later the stock recovered to end at 364, Next day the stock rallied back to 470.
The trigger behind this correction was a link with Vakrangee (A busted listed company that went from 500 to 30.
Apparently, Vakrangee from open market bought 20 lakh shares of PCJ. PCJ denied any link with Vakrangee and later it became business as usual.

Then on 15th February 2018 PCJ again crashed from 376 to hit a low of 302 (Almost 20%) before ending the day at 356.
This time it was because of Nirav Modi scam that broke out, The company clarified that they do not function like how Nirav Modi had functioned and remains clean.

Later in the year, repeated rumours of the CEO being arrested to ED quizzing the management and much more, Today the stock hovers at around 70 bucks. (Down 85% from where it all started).

7 – 21st September 2018- DHFL, YESBANK, INDIABULLS HOUSING, SHRIRAM TRANSPORT FINANCE, INFIBEAM ETC.

DHFL a leading housing finance company part of the F&O segment corrected heavily on 21st September 2018.
The stock which closed at 610 on Thursday, Opened at 615 on Friday, Made a low of 274.75 (55% crash) and closed the day at 337 resulting in a Day on day down tick of 44.80%.
Despite various clarification, con-calls and everything else the stock still ended the day at some of the worst seen single day crash for a large company of 20,000+ crore market cap size (now 11000 crores).

The key trigger for such an euphoric crash is still not clear: There were some murmurs about reclassification of Loan Against Property being shown as Home Loans in the books of NBFCs. While the key reason being pinpointed by everyone right now is that: DSP Mutual Fund sold the DHFL NCDs at a higher yield triggering speculation of a rating downgrade.

DSP sold NCDs — short-term debt instruments issued by company — of DHFL worth ₹300 crore at a yield of 11%. The yield was way higher than the rate at which the previous deal happened, sparking speculation that DHFL could be facing liquidity issues, which has been strongly denied by the company.

The company did quite a few concalls and televised interviews to counter allegations. Yet the stock ended the day almost 45% down.

YES BANK shares too ended the day being down by 30%, after RBI made it clear that Rana Kapoor has to resign and YES has to find a successor for him at the Bank's top soon (Jan 19) citing concerns over asset quality disclosures

INDIABULLS HOUSING FINANCE shares went wild on Friday, the stock went from 1160 to hit 765.65 (A crash of  34%) it also recovered sharply to end the day at 1062.

SRTRANSFIN like all NBFCs too went wild on Friday, the stock went from 1192 to hit low of 970 (A crash of  18%) it also recovered sharply to end the day at 1161.
Not a long ago on 4th July 2018, Shriram Transport went down from 1297 to hit a low of 1048 (19% crash) later closing at 1145.
The reason for 4th July was that Lenders of SVL Ltd, an unlisted holding company of the Shriram group, are planning to invoke the guarantees of Shriram Transport Finance Company (STFC) after a majority of the SVL's investments turned bad. SVL's subsidiaries like Shriram EPC, Orient Green Power and Haldia Coke are facing insolvency proceedings in the National Company Law Tribunal after a loan default.

INFIBEAM as pointed out above gave another huge crash on Friday (21st September 2018) and it remains a stock to watch for violence going ahead.

There have been many more stocks that have crashed over the years such as Vakrangee, Amtek Auto etc, where the movements were violent, however we left out of some due to lack of data availability and clarity.


ALL IN ALL: While some investors are of the view that these are good opportunities to bottom fish these stocks, I feel as the above data points out, 20-60% violent movements in stocks that are actually big in terms of market cap is not a normal occurrence.

There are less chances of smoke without any fire.


Hence, I would not subscribe to the "this time it is different" feeling and make it a point to avoid these counters that have given violent moves.

Such HUGE Draw-downs are not normal.



Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.


Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that i might or might not have the discussed stocks in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.