Description

RPSG Ventures, f.k.a CESC Ventures ($168mn market-cap, 40% free-float), is an India listed holding company for the Sanjiv Goenka lead RP-SG group. For a background on the company’s spin off and the controlling family, see SpringLafayette’s excellent writeup dated June 2020. 

We think the current market price for the company presents a compelling opportunity for long-term oriented investors, as the holding company discount is even higher today, at a ~84% versus the ~81% when it was first profiled, setting up the stage for yet another rally (since the SpringLafayette write-up, the share price is up 3x), as investors in India hunt for undervalued stocks in an otherwise hot market. As we will detail, we think there is an opportunity for a 3-4x return over a 2-3 year horizon.

Discount to NAV as of 7/14/2023, all numbers in INR crore. 1 crore = 10mn, 100 crore = 1bn

Key assets

1. FSOL – controlling stake (57.2%)  in NSE/BSE listed BPO and IT services company, FirstSource Limited (NSEI: FSL)  - 51% of NAV

We are bullish on shares of FSOL limited as they are cheap (15x P/E versus peers in mid teens to low 20s PE forward) while trading on trough earnings, as the company’s mortgage business is underearning, as is the company’s collections business. Thus earnings are likely to compound above trend revenue growth of HSD% in INR to more like mid-teens EPS growth next 3-5 years  as earnings in both segments normalize. The company pays a 2.5% dividend yield so along with growth investors should hope to earn a  low to mid teens type IRR in USD holding the stock over the medium term, well above cost of equity and broader indices.

Sanjiv bought FSOL out of near bankruptcy as a financial investment and could eventually look to sell it to PE as he is not married to the business and likely considers it more like a financial investment. The group has indicated a desire to move away from B2B businesses and into B2C and PE has been fairly active in the space (see recent Hinduja transaction) so we believe there is a free-option on a FSOL sale, which would be beneficial for FSOL holders, but even more so for RPSGV holders as you would get more than half of NAV in cash, or multiples of the market cap of RPSG V, but don’t know if there are any signs that point to a near term sale.

2. FMCG – 13% of NAV

RPSG group has been investing in various snacks and other consumer brands in order to build the next growth engine for their group, by funding it with dividends from other assets within RPSGV. They aim to get to 10,000 crore in revenues as per public statements (v/s current size in the ~700 crore range) but so far, the company has missed revenue growth targets with high cash-burn, which contributes to some of RPSG’s high discount.  We view this as a free-option with limited downside as they have built real brands which could be valuable to a competitor or PE if they decide to exit and can’t scale the business, with real upside should they come close to hitting their upside case.

3. Other assets – 13% of NAV

RPSG also owns some smaller assets which are not worth mentioning much in detail – they own a Class A mall in Kolkata that is fully leased – we value this at a 9% cap-rate which could be 100-200bps too conservative for an asset of this quality. The IT Svcs business provides services to other group companies (outsourced IT department across CESC Ltd, Phillips Carbon Black, etc.) and could eventually be merged with FirstSource in order to pave the way for a tax-free spin off of FirstSource shares to holders. For now, these assets serve to fund growth capital needs at the FMCG business

4. IPL – 23% of NAV

This is the most exciting part of RPSG V and why we think there is a medium term opportunity.

For those unfamiliar, think of an Indian Premier League Team as NFL, NBA, NHL, and MLB all in one – as India is a one-sport country (Cricket!) in a country of over 1.4bn people. 

Sanjiv paid the highest price ever for an IPL team, with newspapers initially dismissing his purchase as a vanity buy. This price however, soon proved to be cheap, as the media-rights for IPL were renewed at a staggering increase in the most recent cycle in 2022, which meant that not only revenues for teams went up, but also that Sanjiv’s deferred purchase price for the IPL team could be paid largely by EBITDA derived from media-rights and other revenues net of player expenses.

While IPL itself is a jewel asset and a play on the Indian consumer story which should compound well above nominal GDP (already in the low-teens in INR terms), we think there is an immense opportunity for RPSG V holders as this asset is likely to be monetized in the next 3-5 years for holders, either via-an IPO and spin, or via a PE placement before a full spin.

We think this is likely as CESCV doesn’t have the cash-flow required to fund the IPL purchase price, as dividends from FSOL, and other assets are being used to grow the FMCG business. Both public and private markets are likely to have a lot of interest in an IPL team given these are scarce assets which rarely come up for sale, and Sanjiv has a vested interest in seeing his own net-worth rise by getting a higher mark on one of his jewel assets to show the world that not only did he buy a trophy asset, but he made money doing it.

Given shares trade at a massive ~84% discount to NAV, this would be highly accretive – not only would you get 613/share of IPL value, the remainCo would likely trade at closer to a 30-60% discount to NAV (2098/share pro-forma), or Rs. 839-1468/share.  Thus one can earn 3-4.4x MoM plus cost of equity (hopefully more) compounding on such a value unlocking event, so even if it takes a few years, patient investors have a chance to earn a strong return.

Risk:

Delays in IPL spin

Capital markets conditions worsen making a separate IPL listing less attractive

Catalyst

IPL team transaction/spin progress

Growth in FMCG business/narrower losses

Discount to NAV compressing

Sale of FSOL