2 Stocks I am eyeing when the real sell-off begins
2 businesses from 2 different sectors I am very bullish on
Disclaimer: Please do not consider this post as an investment advice. I am not a registered financial advisor. Please consult a registered financial advisor before making any investments.
Credits: Most of the content of this post is public information that has been referred from the company websites, annual reports and conference call transcripts.
As I write this post, the Indian benchmark indices Sensex and Nifty are down over 16% from their peak in October 2021. The US Federal reserve is finally waking up to the sin it committed in April 2020 by infusing too much liquidity into the world market. The same excess liquidity has now led to runaway inflation across the world. The other things that added fuel to the fire were supply chain disruptions and the Russia’s stupid invasion of Ukraine.
But all this is good news for intelligent long term investors who have been mostly sitting on the sidelines, analyzing good businesses and waiting patiently when Mr. Market offers them at great valuations.
Well enough of the general Gyaan, lets take a look at the 2 businesses I am really excited and bullish about with great tailwinds and growth backing them.
1. Intellect Design Arena
First up on the list is a tech company.
Intellect Design Arena Limited. It works globally in the fields of Financial Technology for Banking, Insurance and other Financial Services.
The company has a comprehensive portfolio of products across Global Consumer Banking, Central Banking, Risk & Treasury Management, Global Transaction Banking and Insurance and is also engaged in the business of software development.
It competes with some of the best and well known companies in the banking and finance tech space - Temenos, Backbase, Oracle, Fiserv, Infosys, etc.
Key Products
iGCB - Intellect Global Consumer Banking,
iGTB - Intellect Global Transaction Banking
iRTM - Intellect Risk, Treasury and Markets which addresses the requirements of the respective Banking verticals.
iSEEC - Intellect SEEC caters to the Insurance carriers, predominantly in the P&C segment and leads the data business.
iWealth - is an emerging vertical aligned to the Wealth Management, Private Banking segment.
iGov - Business manages the Government eMarketplace (GeM).
iCommerce - caters to the Retail chains
Achievements
Intellect was ranked Global # 1 in two of the largest Banking verticals – Retail Banking
and Wholesale Banking in the IBS Sales League Table 2020. The company then went on to repeat the same feat in the 2021 edition as well.
Apart from retaining the # 1 position in Retail and Transaction Banking, the company also won the #1 position in InsurTech as well. At present, the company has won the # 1 position three years in a row in Retail Banking, twice in Wholesale/ Transaction Banking and now in InsurTech.
Fundamentals
Intellect has been able to grow its sales by more than 15% and profit by more than 60% in the last 5 years. The company has net cash of 470Cr that can be used to fund any acquisitions for growth. There were some pledging issues in the company that have been resolved now. It has a PEG ratio of less than 0.5 as it is growing its earnings very rapidly.
Investment Rationale
The company’s products are targeted towards Banking and financial institutions. Most if not all of these institutions use legacy technologies and face a lot of integration, maintenance and performance issues (e.g. the net-banking issues at HDFC).
Intellect offers cutting edge products using latest tools and technology that can be installed both on-premise and on the cloud. Banking and financial are usually slow in adapting to latest tech, but once they do select a tech partner they generally stay with the tech partner for a very long term (sticky revenues).
Intellect charges its customers for the initial deployment, installation and configuration (one time revenue), annual maintenance (annual recurring revenue) and also offers pay as you go model (monthly recurring revenues).
Anti-thesis
The company cash positive only 3 years back after putting in years of hard work and cash into the research and development and marketing of its products.
It is affected by attrition issues, but to a lesser extent than traditional IT services business.
Frequent disruption in technologies would require the company to continuously invest into product R&D and improvements.
2. Indian Energy Exchange
Next on the list is the first electricity exchange of India.
Indian Energy Exchange is a Power Exchange, licensed by the Central Electricity Regulatory Commission (CERC) for spot trading in power / electricity and trading of Renewal Energy Certificate (REC) and Energy Saving Certificates (ESCerts). The main activity of the company is to provide an automated platform and infrastructure for carrying out trading in electricity units for physical delivery of electricity.
IEX is the first and largest energy exchange in India providing a nationwide, automated trading platform for physical delivery of electricity. The exchange platform enables efficient price discovery and increases the accessibility and transparency of the power market in India while also enhancing the speed and efficiency of trade execution.
IEX has 6700+ registered participants from 29 States, 5 Union Territories (UTs). Over 4,800 registered participants were eligible to trade electricity contracts and over 4,400 registered participants were eligible to trade RECs, as of Feb 2020. Out of participants registered to trade electricity contracts include 56 distribution companies, over 500 electricity generators, and over 4,200 open access consumers.
Key Product Segments
DAM (Day ahead market)
IEX allows its participants to transact electricity on a 15-minutes block basis, a day prior to the delivery of electricity.
TAM (Term ahead market)
For buying/selling electricity for a duration of up to 11 days.
REC (Renewable Energy certificates)
The Renewable Energy (RE) generators can opt to get RECs against the green attributes of their generation. These generators can then sell RECs through the exchange.
ESCERTS (Energy Saving certificates)
These are the tradable certificates under the Perform, Achieve, Trade Scheme of Bureau of Energy Efficiency, a market-based mechanism to incentivize energy efficiency in large energy-intensive industries.
Monopoly
There are two energy exchanges in India - IEX and PXIL. Currently less than 10% of the overall energy generated in India is traded on the exchange and IEX enjoys a market share of more than 95% within this 10% energy traded on the exchanges.
New products in pipeline
Ancillary Markets, Capacity Markets, Gross Bidding Contracts, National Open Access Registry etc.
Fundamentals
IEX has grown its sales by more than 15% and profits by more than 25% in the last 5 years. It has net cash of more than 1300Cr. It has virtually no capital expenditure requirements and therefore converts more than 85% of its profits into cash. IEX also distributes more than 50% of its profits as dividends to shareholders.
Investment Rationale
The government of India intends to bring the total share of energy traded on the exchanges from 10% to around 25%. This would mean a whole lot more volume being traded on IEX.
IEX holds stake in the country’s only gas exchange - IGX. The exchange facilitates trading of PNG.
Anti-thesis
There are basically one thing that acts as a risk for IEX.
Market Coupling
IEX is a monopoly because the “order matching” and “price discovery” happen at the exchange level. Which basically means that both the buyer and the seller of electricity have to be on the same exchange (either on IEX or PXIL) for their orders to be matched and executed.
Under market coupling, the process of “order matching” and “price discovery” will shift to the proposed “Market Coupling Authority”. This basically means that a buyer on PXIL will be able to buy electricity from a seller on IEX and vice versa.
The good thing is, this is still a proposal as currently only a very small amount of the overall electricity produced in the country is traded on exchanges. However, market coupling could be implemented if and when MBED (Market based economic dispatch) is implemented. MBED is basically when all the electricity generators and distribution companies are registered on the power exchange, which is extremely difficult and long term process to implement.
I hope you liked this article and would dive deeper into these businesses so that when the real bear market comes, you are ready.
Please do share the post with your friends, family and other connections.
I would be publishing more such articles where we would analyze an industry or a particular Indian “dhandho” (business) so that we all become better informed investors. So, please consider sharing this space.
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Until next time. Take care.
Sahil