@Donald wrote:

Hi Guys/Ladies,

Greetings in the New Year!!
Its been a long sabbatical . Last I posted was probably in Mar 2018 on NGL Finechem! I regret the prolonged absence - much of it was unavoidable due to (energy sapping) poor personal health issues and critical condition of some elders in extended family. The good news is, as we struggled through and came to terms with the loss, the worst is probably over - I have learnt to manage the chronic condition much better, have regained back much on the health front.

Of late my VP friends/colleagues kept urging me, that while fortuitously it was probably the best time to sleep through the carnage of last 1.5 years, its high time I stepped back in the ring; high time we reignited much of the passion we were known for when we started out in 2010; high time we kick-started fresh initiatives to build on an excellent foundation towards extending VP’s sustainability and longevity - the VP Competitive Advantage!!

The keyword being reigniting the “Passion”!! I have no hesitation in owning up that I struggled for answers for much of last couple of months and more, until a simple observation offered me the most profound insight. What worked for us best in 2010 was that we found a way to involve and collate insights/advise from best of investing minds (that we had/could get access to) in a systemic way for influencing and directing our individual and community’s concerted efforts towards getting better at the Investment game.

So then 2020-2029: What’s my Role in Team VP
Don’t have to do much different now!!

Investment Learning Curve
My “role” remains that of the catalyst to attract smarter and smarter folks (skills we admire) around Team VP (get inside their heads, sort of) in a bid to distill and communicate back to the VP Community all that wisdom in crisp and hard-hitting ways (that hopefully doesn’t drown in our information overload age). But, now that us greenhorns have spent a decade ourselves in the market there is phenomenal track record, and diverse skills in Team VP itself , it’s imperative for me to first harness and capture that . Have already started the process, met up some VP and non-VP folks I admire last week and this, in Bangalore. Next week I am in Kolkata, and will catch up with some dudes there!

Expert Network
This may not be top-of-mind off hand for most of us but if you think about it, Team VP’s informal Expert Network - highly skilled domain professionals in every conceivable field/niche - basically our Go-to-Guys - who simplify, help us make sense of complex stuff and provide us huge insights (that otherwise we may spend enormous time and effort and still not get to real grip on) is simply huge. It’s such an incredibly rich resource base - something that we simply HAVE TO FORMALISE and leverage towards the community’s advantage. This will need sustained focus and drive (and active collaborators, more on that later) to deliver on, something I am sufficiently charged up to commit devoting significant energy and passion towards - as I can almost envision the grand outcome . Again as I ponder on this, there is no gainsaying within VP itself (~30K user base) every guy/gal is a domain expert in his/her own roji-roti - profession/business/trade!! Besides, there are a few guys within VP (and outside) on my radar who have taken such deep dives within a Sector, that they themselves might soon qualify to be a Sector Expert!

By now, most of you must be coming round to …theek hai baba…yeh sab to theek hain…anytime you showing me the Money?? Where are the real Actionables???

Hmm! A good answer is to redirect your attention that hey let’s concentrate on the process, the results will speak for themselves (like every Team India cricketer we see espousing today, and rightly so). But no, a better answer is that we are again re-dedicating us to being ACCOUNTABLE for all the free “timeless gyan” that we spend much energies on re-packaging and re-emphasising .

VP Public Portfolio
Some of the recent VP members may not know that our singular claim to fame in the first five years (2010-2015) was the hugely successful experiment around maintaining a public portfolio that we initiated within the first year, and updated regularly every 6 months. We were extremely lucky (business/industry tailwinds and very cheap valuations) and the experiment had a phenomenally successful track record (Mayur, Astral, Ajanta Pharma, PI industries, Poly Medicure, Alembic Pharma, Atul Auto, Canfin Homes, Avanti Feeds are top of the mind recall) - simply amazing to recall that home run stretch - many old-timers within and outside VP inform us whenever we meet, that this singular aspect was hugely impactful in their investment journey (just as it was in ours).

As I ponder about this, one aspect of the investment process diligence is brought home to me very very powerfully. We held ourselves accountable, and we did the due-diligence every 6 months first individually and then among the VP Core group, debated at length and then put up the buy/hold/sell recommendations, even as many of us individually might have had slightly divergent viewpoints on inclusion/exclusion of certain picks and Portfolio composition (without much market cycles experience -not really, we weren’t suave enough then).

Key is we tried to deliver as much of a risk-mitigated call as our collective skills then permitted. And proof of the pudding was in the eating - while our buy calls were always luckily on the money, our exit calls were also equally bang on in avoiding any draw-downs. We might have erred massively in recommending quitting Suprajit Engineering early as also an Astral Poly after 3 years, but we could anticipate business deterioration and correctly called an exit on Gujarat Reclaim and Atul Auto in time after a phenomenal run. There may have been many acts of omission, but perhaps there was hardly a single mis-step or big drawdowns! Yes we were LUCKY, but due credit would also be given to our solid INTENT, and some to adherence to due process (even as they might have been half-baked then).

Long story short, the very fact of being accountable for the VP Public Portfolio forced a certain kind of collective diligence on us and adherence to due process. Unfortunately we had to voluntarily stop the VP Public Portfolio service in 2015 once the SEBI regulations were announced on Buy/Sell/Hold recommendations, as we did not want to run foul on Compliance and endanger the VP Community survival itself based on the strict advise of many of our seniors/well-wishers and Mentors.

VP Model Public Portfolio 2.0
As we all probably have experienced individually and among investors we know, the runaway hits in 2017 yanked most of us away from due process - it was too easy to make money, anything with a hint of quality/growth were out of reach if you didn’t act in 2weeks ; everyone was probably guilty of diluting our own standards on Valuation/Conviction in small or large degrees. And we have all seen the result of that in 2018 with some pain still continuing for many of us.

So while we cannot continue with buy/sell/hold recommendations like we did in 2010-2015, what we can certainly do is display a VP Model Public Portfolio that is current and accessible to everyone that we update periodically (as needed) with the same due diligence as before, but without the attendant time-sensitivity of before. We enable the next best option of providing a periodically updated Guideline/Model Portfolio that we will again hold ourselves accountable for. I am convinced this will be both for our own individual good as well as for the VP Community and the larger investment community.

We are ALWAYS willing to put our necks (and some not-deserved reputations) on the line, in order to learn from the mistakes, and steepen the Investment Learning Curve. There is no reason why again we can’t deliver a satisfactory public performance record, as collectively we are supposed to have matured and become more refined investors , even as we will have to depend much more on skills than luck to ensure repeatability of success.

As we embark on a new decade, we rededicate VP to the Goals we started with in 2010 - Democratic (free unfettered access to all), Actionable Insights, Accountable.

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By the way, the biggest example and inspiration for democratic access in our Markets today is Ayush Mittal and Pratyush Mittal’s Screener.in - which they keep refining and making it more useful, every year. (Did you know VP was the first in India to debut with a techy power-user kind of screener in 2010, and likes to claim the credit for inspiring Pratyush for his extremely user-friendly version debut).

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A big thank you to all of you for making VP what it is today !! Looking forward to see how this resonates with you. Your views and active participation in this re-dedication bid is invited. I will be grateful if all of us remain slightly conscious of not cluttering the thread and try and respond with actionable suggestions around what I like to call the Investor Learning Curve - stuff around what and how we can refine and actively participate on 2.0 Frameworks for Stock Picking, Business Models and Business Quality, Management Quality, Capital Allocation, Portfolio Structure and Management, Expert Network, Scuttlebutt Network, Management Q&As, Stock Stories, most importantly THREAD CLEAN UP, and other aspects in VP that you think needs FIXING, that may be your top of mind, or come to you as you ponder on above.

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Thank you for your patience, on what might have been a long read. I hope it proves useful enough to spur energy and passion back into VP discourse, as much as it has energised me.

Before I forget, no amount of gratitude is enough for the selfless work continued dedicatedly by VP stalwarts like Hitesh (hats off to you Sir). Abhishek & Manish Vachhani both deserve special mention on their thankless moderation workload. Ayush, Dheeraj, Kedar (Zygo), Yogesh Sane, Ankit Gupta, Rupesh Tatiya, Sandeep Patel for their exemplary dedication as also the newer set of Top Contributors like Rupani Amit, Rahul, Vivek Mashrani, Kumar Saurabh, Harshit Goyal, Deepak Venkatesh, Narendra - I am hoping to meet up soon with and pick their brains. They all deserve a toast for their exemplary contribution towards making VP what it is today!! As do folks like Dhwanil Desai and Anant Jain who have contributed immensely in the recent past even if not immediately noticeable(?) in the past year (like my absence for past 2 years almost.

Request VP old-timers and Top Contributors to also put their hands-up here on any aspect from these Actionables mentioned, or something not mentioned that energises them and would like to get their hands dirty with and/or drive the effort. If anything, it will expose commonly desired Actionables to many new members and help energise them into collaboration efforts.

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@Divyanshu_Bagga wrote:

I finally managed to convince my father to move a part of his real-estate investments to equity. So I am trying to build a portfolio for him which has low volatility and yet gives decent return (inflation + 7-10%)

The criteria for selecting stocks in the portfolio is

1. There should be huge opportunity size available to business for growth.

2. It must have sustainable competitive advantage to ensure that large opportunity is captured in its bottomline.

3. Management integrity is not questionable.

Such a stock, if well discovered, will trade at high earning multiple, carrying only valuation risk, as there is no management quality or business quality risk. Hence we plan to buy the stocks in the portfolio in a staggered manner, investing a fixed amount every month.

Following is the portfolio:

Stock	Weightage
Dmart	10%
Bandhan Bank	10%
Page Industries	10%
Asian Paints	10%
Pidilite	10%
3M India	10%
Info edge	10%
Hdfc bank	10%
Nestle	5%
HUL	5%
Drreddy	5%
Bajaj finance	5%

I intend to hold all stock until

• Its competitive advantage starts eroding away.

• I find a better opportunity

Hence I am actively looking for pointers which suggests the competitive moat may be weakening in my stock picks or suggestions to replace my pick with idea having better prospects will lesser risk.

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@Donald wrote:

The objective is to arrive at a more holistic framework for evaluating businesses with “Emerging Moats”. Businesses not fully-discovered by the market yet, or discovered, but not-fully-valued yet, businesses that we think has the potential to scale majorly from here. The framework attempted is NOT for Mature businesses.

Those of us who got our hands dirty the first time round around Business Quality (BQ) evaluation seem naturally enthused at another formal go at it. We know the IMPACT it had on prodding us into looking/investigating a business - at a far far more granular level.

For the benefit of new VP Members and those who might have missed paying attention earlier to our BQ/MQ efforts, here are quick reference points. Also for anyone interested, but not familiar and starting from ground zero, going through the threads, responses and counter-responses will be very instructive I can assure you.

1. Business Quality Value Drivers - Apr 2012
2. Business Quality Value Chain - Oct 2014
3. Business Quality Insights - Mar 2015

Those who want to jump to the meat of earlier work straightway, here it is
VP-Business-Quality-Insights.pdf

We covered some six businesses (Astral, Mayur, Ajanta, Shilpa Medicare, Kitex, Avanti Feeds) from the VP Portfolio - as you might have noticed, some of them we had already held for almost 4-5 years, had multiple engagements with through extensive Management Q&As, seen them (so to say) walk the talk. Yet when it came to filling up the BQ Template we came up with, it proved very very tough , believe me. The mind just wasn’t trained to think the BQ way!!

The first valid objection was that these had the major benefit of hindsight, there was probably inherent bias (which it had plenty, now we know). We should showcase an exercise for a new business we come across, which we did follow-up with.

MPS Business Quality - Nov 2015 (link to a pretty lengthy video, almost 2 hours I think).
We fell flat again. Got carried away (most probably due a suave Management) and majorly ignored SCALABILITY of a niche player even as we were convinced of a durable competitive advantage.

Till 2015 (when we finished the first published draft), I had only seen businesses going in one direction - up, up & up . And then we started seeing a Mayur faltering, and then an Ajanta, and an Alembic. That Reversal to the Mean is a Law, that even seemingly flourishing businesses succumb (something invariably changes in industry, regulations, technology, competitive dynamics, and the like) became emphatically clear to me.

So then, earnest search started for businesses that can defy the Reversal to the Mean LAW (@deepinsight calls these the rarest of the rare). We then came up with this

Self-Reinforcing-Business-Models-Scrutiny-Framework.pdf - June 2016
Self-Reinforcing Business Model discussion
Bajaj Finance was the business presented.

This time the objection was that this was probably too cumbersome, too heavy. If I remember correctly, we couldn’t get too many enthused to carry out an equally detailed exercise on other businesses they liked/admired. Then it struck me that perhaps we needed to go back to basics - simplify - how do I explain/elucidate on the basic business model at the core of a business we like, and then build up from there to BQ,and more refined exercises.

In a moment of inspiration, before a CCL Products Management Q&A, I came up with this, which I thought was really simple to create - for anyone who thinks he knows a business well. All one had to do was first describe what you know about the Market place - customers, how you reach the Customer, who are the Players. And then you describe the other half - what you know about the Product - product positioning, production, technology; and that was it!

Business Model Canvas
And again there were objections Ha ha

It’s a complex exercise we had undertaken. And despite some crucial insights gained in all these off-and-on exercises right from 2012 as you can see, there are huge gaps (holes even) in our grasp and analysis, we were too liberal with assigning the final verdict (A, A+ and normalised valuation ranges) as we now know - again with perfect hindsight

However, THIS IS a very very valuable pursuit. If we make bold to participate, persevere, and see through this exercise - our understanding of businesses will mature significantly. Yes, we need to bring a lot of sustained focus - improve on the template, plug the gaping holes, consult available business model literature, pick the brains of colleagues/Mentors we admire, exemplify through businesses we like…and yes, I know, SIMPLIFY!!

An astute observer - some senior VP Member - can’t remember who right now - had a terse comment to offer. Donald, simplicity, or the ability to abstract, comes only after a lot of hard detailed work. Persist with the hard work!

Our job is cut out. I am excited to embark on this journey! Are you?

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@Divyanshu_Bagga wrote:

I finally managed to convince my father to move a part of his real-estate investments to equity. So I am trying to build a portfolio for him which has low volatility and yet gives decent return (inflation + 7-10%)

The criteria for selecting stocks in the portfolio is

1. There should be huge opportunity size available to business for growth.

2. It must have sustainable competitive advantage to ensure that large opportunity is captured in its bottomline.

3. Management integrity is not questionable.

Such a stock, if well discovered, will trade at high earning multiple, carrying only valuation risk, as there is no management quality or business quality risk. Hence we plan to buy the stocks in the portfolio in a staggered manner, investing a fixed amount every month.

Following is the portfolio:

Stock	Weightage
Dmart	10%
Bandhan Bank	10%
Page Industries	10%
Asian Paints	10%
Pidilite	10%
3M India	10%
Info edge	10%
Hdfc bank	10%
Nestle	5%
HUL	5%
Drreddy	5%
Bajaj finance	5%

I intend to hold all stock until

• Its competitive advantage starts eroding away.

• I find a better opportunity

Hence I am actively looking for pointers which suggests the competitive moat may be weakening in my stock picks or suggestions to replace my pick with idea having better prospects will lesser risk.

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Participants: 15

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@hack2abi wrote:

Firstly, I would like to deeply thank Mr Pratyush Mittal and his team at Screener.in for developing this amazing website and making it freely available to everyone to use, without them this project would not have been possible.

A brief introduction to pivot tables and charts, they are a really handy tool that is a must-learn for sorting and analysing data in Microsoft Excel. I learnt them myself a few weeks back, it is something that almost everyone should be able to use after watching a few videos on Youtube. I have already created a blank template for this tool, and even people who do not fully know how to use these tools can simply copy and paste the raw data and be ready to compare any companies of their choice within a few minutes.

If you are already familiar with Pivot Tables, Pivot Charts and Slicers, you can download the data from any of the below links and get started. If you are not, I recommend watching a few videos to familiarize yourself with the tools before using the templates.

Dropbox

Google Drive

One Drive

I will explain the procedure to use the template below. This links above will download a folder named “Company Peer Comparison”, once it is downloaded, open it.

In it, you will find 2 folders and 2 files. Starting with the folders first, the “Industry Wise Data” folder contains the past 10 year and 10 quarter data for major companies in major sectors all ready to analyze. I have included most companies in every sector, which were above the 500 cr market capitalization threshold.

Click on any of the excel sheets and the sheet should open to the “PT Chart” worksheet. Most of the sheets will have 2 charts in this worksheet, one for “%” figures and another for “Absolute” figures. Do not worry if your screen does not show the entire sheet, I have sized the sheets as per my screen size. You will have to resize the charts, slicer tables as per your screen size to make full use of the tool. Your worksheet should look like the image below.

Screenshot 2020-01-24 09.26.432568×1408 135 KB

On the right, you will find the slicer tables which you can use to get different parameters on which you can compare the companies. This template has over 50+ parameters to choose from. To select multiple parameters to display in one go you just need to have “ctrl” pressed on your keyboard and select the parameters you wish to display simultaneously. You can do the same for the company slicer table, select anywhere from 1 to all companies to view their historical figures. You can even choose to only view quarterly or annual data or both.

Due to limited screen size and excel capabilities, the template works best for comparison of a few companies, up to a 10 is manageable. Beyond that, you may have to sort the companies into sub-segments for the chart to be readable. I have already done that for a few industries where the number of companies was too many to display at once. Try not to select all the data points at once, that can sometimes make your excel crash if your system is not powerful enough and the chart becomes unreadable anyways.

Although 10 years and 10 quarters is a good enough timeframe to compare companies, as the years pass the time series will grow if one keeps adding the recent data. We are limited by the number of data points that Excel can take. I will test the limitations of the template in the future. Once we have enough data, say for 2 decades, I can revise the template, to slice for specific time periods and view the time series data like a 3 or 5-year moving picture.

Sometimes some company’s particular data will be totally different from the sector due to various underlying factors, and the chart may not display the smaller figures properly. You can use the company slicer tab to remove that particular outlier company to get a standard chart. The “PT Chart” worksheet has 2 charts for most of the industries, one is for absolute figure comparison and another for %. scroll down to see the 2nd chart. In a few industries where segmented data is available, I may put more than 2 charts in this sheet. Be sure to scroll down to see all the charts.

As you will notice I have left out the industry data for financial services industry, including banks, NBFCs, AMCs, Insurance, and Broking. These industries have unique KPIs which need to be manually entered from their respective Investor Presentations. You will find the templates for these in the “WIP” folder. This is a work in progress that I have just started and will take time. I have introduced more segmented data based on loan books, capital sourcing, ticket size, geographic distribution, NPAs etc. in these templates. If you are interested in this sector you can take this forward with these templates. If you want to add just the screener data for these industries you can follow the steps below.

Create your own Customized Comparisons

The other two excel sheets in the folder, namely “Astal Poly” and “Blank Industry Data” is what you will need to customize and compare the data for the companies that you want to analyze.

Just go to the link below and upload the the “Astral Poly” Excel sheet to the screener website.

Screener Excel

Now search for the company you want to compare in the screener, and export its data to Excel via the link on the top right of the website. Repeat for other companies that you want to compare.

Open this downloaded file and the excel should open by default to the “PT Data” worksheet, if it doesn’t, select it. The tabular data should already be selected for you, if it is not, select the data in the table, without the headers.

Open the “Blank Industry Data” excel sheet, it should by default open to the “Data PT” worksheet. Right-click on the cell that reads, “Ambika Cotton Mills” and then paste the data as “Value”. This step is important, paste the data only as value or else it won’t work. The last column in the table, the “Parameter Type” should populate automatically as the data is entered, if it is not, just copy the formula in the 1st row of the column to other rows.

Repeat the same steps above for the data on other companies that you want to compare. Make sure that there are no blank rows in the table, or the pivot table won’t work.

Once you have all the data copied to the “Blank Industry Data” excel sheet, go to either the “ABS PT” or “%PT” worksheet, right-click on the blank pivot table on the top left. Usually, it should be in the cells A4-B6. Click “Refresh” in the drop-down menu, and the pivot table should populate itself with the data that you had copied beforehand.

At this time it would be wise to “Save As” this excel sheet as per the name of your liking. This will save our work up until now. Now just go to the “PT Chart” worksheet and your PivotChart and Slicers should be ready to use.

If the Pivot Chart and Slicers are not all visible together in your screen, just go to the “Blank Industry Data” excel sheet, go to the “PT Chart” worksheet and resize them to fit your screen and save the template. This will ensure that you will not have to resize them again and again for every comparison that you do.

Updating the Comparison Sheet

Updating the old data with new quarterly, Financial Year figures is easy. Just download the respective company excels from screeners at the relevant time. In the “PT Data” worksheet, go to the time period header in the data table, select the data parameter for the latest time period you want to update (ex. Q3FY20 or FY20) and just copy-paste the new data as value to the old comparison sheet. You can copy-paste the data in any order, the pivot table will sort it out.

After you input the new data, just go to any of the pivot table worksheets, right-click on the pivot table and click refresh. The new data should be updated automatically. That is all.

Time Period Sorting

In the template, the data is already sorted for time periods from oldest to recent. This is important as the data needs to be sorted for time periods in the pivot tables worksheet, and this is how it will appear in the Pivot Charts.

If in future while adding new data the sorting is broken follow the steps below.

Firstly, the automatic sort function in excel does not work on these headers. So here is what we do.

If the time periods are totally random - Find the oldest quarter, right-click it, and press first “M” and then “E” on your keyboard to move it to the end. Ex. for recent quarter data the oldest data is for Q1FY18, right-click it and press “M” and “E” on your keyboard. Q1FY18 will shift to the rightmost column. Repeat this for Q2FY18, Q3FY18 and so on until you reach the latest quarter. Repeat the same for financial years if they are not sorted. You can choose to display them to the left of the quarters in the chart like I have or the right. To move the financial years to the left, right-click on the most recent financial year, ex. FY19 and press “M” and then “B” on the keyboard. Repeat the same in descending order.

If only the latest quarter is not in order, just right-click it and press “M” and “E” on your keyboard to move it to the end. If the latest financial year is not in order, right-click it and press “M” and “U” or “D” on your keyboard to move it left or right until it is in its rightful place.

For Power Users who want to Customize

If you know how to use the “INDEX” function in excel you can you can customize and add your own parameters to the screener sheet in the “Formulae” worksheet and link those cells to the table in the “PT Data” worksheet.

I have hidden the columns in the PT Data worksheet which convert the time periods from the Screener’s date format to quarters and financial years. I have tested the formulae and they work for new incoming quarters as well as for some weird data time stamps that some companies may have. If this feature breaks just contact me and I will try my best to sort out the issue.

If you want to add industry-specific KPIs from the relevant Investor Presentations into the pivot data you can do that as well but it has to be done manually. Just make sure to update the legend on the right of the “Data PT” worksheet for the “Parameter Type” column to update itself. If you introduce some new parameter type into the legend, you will need to update it in the pivot table as well. Usually, it will be in the drop-down menu at the top of the pivot table next to the parameter type cell. Make sure to add the absolute figures in the “ABS PT” worksheet and percentage figures in the “%PT” worksheet for optimal use.

I created this template because I was unable to find similar comparison and customizability options anywhere. If you find this tool useful, please do share it in your investing circles. I believe it will truly benefit the analysis capabilities of all investors.

I also believe that if the data is available the templates can be used in other markets as well. It will open an avenue for comparison and benchmarking with global peers. If you are aware of such semi-automation possibilities in other markets and would like to collaborate contact me on abi.mehrotra@gmail.com

If you face any problems with the template you can contact me on the address above. I will try to solve the issue as soon as I can.

Happy Analysing!!!

Blogpost: https://oldschoolfinance.wordpress.com/2020/01/24/using-pivot-tables-charts-slicers-screener-to-semi-automate-historical-peer-analysis/

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@deevee wrote:

Hi All

Starting this thread on Galaxy Surfactants as I could not find any thread on it. Moderators please feel to change if required. Thanks.

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What are surfactants?

Surfactants are compounds that lower the surface tension (or interfacial tension) between two liquids, between a gas and a liquid, or between a liquid and a solid. Surfactants may act as detergents, wetting agents, emulsifiers, foaming agents, and dispersants. The word surfactant is a blend of surface-active agent.

Surfactants can be classified into 5 types:

• Anionics (largely cleaning applications)
• Non Ionics (cosmetics and personal care applications)
• Cationics (conditioning, softening aids)
• Amphoteric Surfactants (Mild Surfactants)
• Surface active preparations (pre-formulated blends of surfactants)

Source Wikipedia

Global market for surfactants

In terms of revenue, the Surfactants market is expected to touch USD 39.69 Billion by 2021 and USD 45.16 Billion by 2024 growing at 4.4 percent per annum. This growth will be primarily driven by the Amphoteric and Cationic Surfactants which are expected to grow at 6.9 percent and 6.6 percent till 2024. Among the four segments, anionic and non-ionic surfactants are the dominating ones, accounting for two thirds of the total surfactant market in value.

Asia Pacific is expected to become the largest market by 2024 and will also be the fastest growing market growing at 5.8 percent CAGR (2015-24).

Indian market for surfactants
The Indian Surfactants market is a USD 1.35 Billion market (2015) which is expected to grow at a CAGR of 6 percent to touch USD 2.28 Billion by 2024. In terms of volumes, it is a 778 KT market growing at a CAGR of 5.8 percent and the same is expected to touch 1221 KT by 2024. In terms of application, household cleaning and personal care together made up for 49 percent of the total surfactants market. Also in line with the application market, personal care surfactants market is expected to be the fastest growing market growing at a CAGR of 7.6 percent till 2024.

Anionics have the largest volume, but in terms of growth, Cationics are expected to grow the fastest, at a CAGR of 8.2 percent (value terms) till 2024.

Global preservatives and preservatives blend market

Phenoxyethanol preservatives are largely used in the home and personal care industry as preservatives in finished products.

In terms of volume, the global demand for phenoxyethanol preservatives stood at 39.2 kilo tons in 2013 and is expected to reach 51.2 kilo tons by 2020, increasing at a CAGR of 3.9% between 2014 and 2020. In terms of revenue, the phenoxyethanol preservatives market was valued at USD 95.8 Million in 2013 and is anticipated to reach USD 143.2 Million by 2020, expanding at a CAGR of 5.9% between 2014 and 2020. The global phenoxyethanol preservatives market is driven by strong growth in cosmetic products coupled with shift towards phenoxyethanol-based blends in the cosmetic industry. The global phenoxyethanol preservatives market was moderately fragmented in 2013. Companies such as The Dow Chemical Company, Clariant, Galaxy Surfactants Limited, and BASF SE were some of the leading players in the phenoxyethanol market in 2013. In 2013, Galaxy Surfactants Limited had a 12.7% market share in the

global phenoxyethanol preservatives market, whereas The Dow Chemical Company had a 16.3% market share, BASF SE had a 12.7% market share, Clariant Corporation had a 10.7% market share and others had a 50.6% market share.

The global preservatives blends market size was USD 133.5 million in 2015, and is expected to grow to a size of USD 215.9 million by 2024, at a CAGR of 5.6%. Asia Pacific region held the major share of preservative blends market in 2015 as demand for beauty and personal care segment is rising at a speedy rate.

Business of Galaxy Surfactants

Established in 1986. First IPO withdrawn in 2011. Successful IPO in 2018. They are manufacturers of surfactants and other speciality ingredients for the personal care and home care industries (essentially oleochemicals). Their products find application in a host of consumer-centric personal care and home care products, including, inter alia, skin care, oral care, hair care, cosmetics, toiletries and detergent products.

The product lines are organized into 2 groups

• Performance Surfactants: over 45 product grades includes anionic surfactants and non-ionic surfactants
• Speciality Care Products: over 155 product grades includes amphoteric surfactants, cationic surfactants, UV filters, preservatives, preservative blends and surfactant blends, speciality ingredients such as mild surfactants, syndet and transparent bathing bars and proteins, fatty alkanolamides and fatty acid esters, and other care products.

Started as a local player but has become a global supplier.

Patents

Since 2002 49 patents have been granted to them (as per Annual report FY18). 37 patents are in process.

Research & Development

INR 50 Crs of R&D in 2016-18. R&D team of 63 people in 2017. R&D expense in FY18 was 13.62 Crs.

Customers of Galaxy Surfactants

• Cavinkare Private Limited
• Colgate-Palmolive (India) Limited
• Dabur India Limited
• Henkel
• Himalaya
• L’ORÉAL
• Procter & Gamble
• Reckitt Benckiser
• Unilever Etc.

Claim to enjoy over 5 years of relationships with their top 10 customers. But a risk is called out that in FY17 their top ten customers generated 58% revenues. Though this has been coming down year on year.

Plants

They have 3 locations for manufacturing with a total of 7 plants

• 5 in India: 3 in Tarapur Maharashtra (32,880 MTPA) , 1 in Taloja Maharashtra (1,59,000 MTPA), 1 in Jhagadia Gujarat (79,500 MTPA)
• 1 in USA (600 MTPA)
• 1 is Egypt (91,500 MTPA)

Corporate Structure

Industry Trends

Promoters

Promoters have been since inception in 1986. On an average with 35 years of experience with 30 years in Galaxy Surfactants. MD, CFO & COO salaries in FY18 was ~2.1 Crs. Managing Director Mr. Unnathan Shekhar is since 1986. He is an alumni of UDCT Bombay and IIM Calcutta.

Raw Materials

Fatty Alcohol is the key raw material for the performance surfactants. It constitutes over half of total material cost. Fatty Alcohol is a palm kernel oil derivative and is sourced from South East Asia. It is a highly volatile raw material.

Brent Crude Derivatives - Brent crude derivatives is also a raw material. The major ones are Ethylene Oxide, Phenol and Linear Alkyl Benzene. These make up for close to 1/5th of total purchases.

Fx Hedge

65% customers are outside India and 60% raw materials are imported. So the management says they are naturally hedged.

Failed IPO 2011 & Successful IPO 2018

Book Running Lead Manager to the issue informed the Exchange that the Book Building had been withdraw (Motilal and Centrum). Book running lead managers for 2018 were ICICI securities, JM Financial and Edelweiss.

Shareholding

No shares are pledged by the promoter.

Certain risks in DRHP 2017

1. No long term supplier agreements
2. Forecasting errors can occur
3. Operations are hazardous
4. Customer concentration though they have been reducing it
5. Ethylene oxide (7% of raw materials) is via a single supplier
6. Tightly regulated & has to ensure environmental & health specifications
7. Strict quality requirements from customers
8. Fx exposure
9. Side effects or harmful effect of products could impact the company
10. Political instability of Egypt

Debt to Equity
0.29 Currently. Company has been bringing down its level since 2015.

P&L Metrics

Return Ratios

Efficiency

Cash flow from Operations

Competition

No major competition in India. Internationally BASF, Clariant, Kao, Kuala Lumpur Kepong, Saudi Kayan.

Brokerage Expectations

From Edelweiss June 24 2019

Rated Buy with a Target Price of 1405 (17% upside). Currently market cap of 4.3K Crs and trading at 1,238 per share.

Identifies low EBIDTA margin with moderate growth expectations. But medium ROCE high barriers to entry and high product complexity. Growth opportunity is identified as international (currently 1700+ clients).

Valuations

Valuations given are 20.4 PE FY20e and 17.4 PE FY21e. ROCE expected in FY21 is 25.6%. Sales & EBIDTA growth in FY19-21 is expected at 10.2%and PAT in same period at 13.1%.

Edelweiss DCF model indicates moderate growth of 14% in FY22-26E at target price of INR 1405. This company has achieved revenue growth of 10% CAGR in FY14-19. They have used 12% WACC and terminal growth of 6%.

Capex

90Crs in FY20 and 100Crs in FY21.

Growth Drivers

• Strong growth in end-user industries & existing markets
• Leveraging existing customer base to expand product basket
• Expanding customer base with new client additions across geographies
• Growing specialty care products along with performance care products
• Strong operating leverage in place
• Rising market share in developed markets
• Future capacity expansion at minimal cost
• Export opportunities encouraging
• Inorganic growth opportunities

---

In case anyone wants a PDF then its here.

Galaxy Surfactants_June 2019.pdf (1.3 MB)

I hope we can dig around and find out more. Inputs and discussions welcome on the opportunity.

Sources of information are from annual report (I didnt incorporate the FY19 as the annual report is not out but the numbers were better at top line level), DRHP 17 & 11, Edelweiss Report, Wikipedia, Screener, Tijori Finance, General articles on the internet.

Regards
Deepak

Disc: I am not a SEBI registered analyst/adviser. I am studying the company and have only a tracking position in the company. Not interested yet.

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@basumallick wrote:

Since the VP community keeps growing and a large amount of content keeps getting added every day, there is a need for all active members to help to keep the forum content quality at the standard we expect it to be as users of the forum.

I am soliciting help from all active members in flagging questionable content. Here are some basic guidelines to help you decide what to flag and what not to.

UNACCEPTABLE CONTENT - FOR FLAGGING

1. One or two line comments or questions which does not add much to the quality of discussion in the thread.
2. Offensive language or tone of a post. Here, think if you would be comfortable if a child reads the post. If no, flag.
3. Unnecessarily pumping up a stock. This one is especially important. All investors are expected to present their point of view, but pushing back on any alternate contrarian viewpoints is a definite question mark.
4. Unnecessarily linking to personal website/blog for generating page views. If required the content can be posted on VP directly.
5. Posting any copyrighted or paid material. (Magazines, news reports, articles etc behind paywall).
6. Asking or giving buy/sell/hold recommendations.
7. Creating a new thread when one already exists or putting content in wrong thread.
8. Lack of disclosure while creating a new thread or making a strong case for a stock.
9. Posting of technical charts in company threads. All technical charts are to be put in the technical analysis thread only.
10. Starting a thread with little or no content. I am giving a basic template. One can add more but atleast the minimum information expected should be there.

ACCEPTABLE CONTENT - SHOULD NOT BE FLAGGED

1. Any counter view of general consensus. For example, if members are bullish on a stock and someone posts a negative view with reasoning or asks pertinent questions.
2. Fundamental news about a company or industry.

Please feel free to reach out to @manish962, @hitesh2710, @ayushmit, or me (@basumallick) on private message if you want to communicate any perceived wrongdoing by any forum member.

I invite all members to help to maintain the quality of VP content.

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@suru27 wrote:

Was surprised to see that one of most well-known company does not have a thread and thought to create a thread for the same. However, going through researching this script has been one of complex experiences though exciting.

So, let us start from the start. United Spirits Limited, abbreviated to USL, is an Indian alcoholic beverages company, and the world’s second-largest spirits company by volume. It is a subsidiary of Diageo PLC.

Background:

The company originated as a trading company called McDowell and Company (also known as McDowell & Co, McDowell or McDowell’s), founded in India in 1826 by Angus McDowell, a Scot.

In 1959, Mallya established the company’s first distillery at Cherthala. McDowell’s began bottling Bisquit Brandy and Dorville French Brandy, from imported, becoming the first company to manufacture Indian Made Foreign Liquor(IMFL). The company opened India’s first distillation plant to manufacture extra neutral alcohol (ENA) at Cherthala in 1961.

Fast forward to 2013, On 27 May 2013, Diageo PLC acquired a 10% stake in United Spirits at a cost of ₹20,927,196,000 (US$300 million). It also separately acquired an additional 58,668 shares for ₹ 85,778,082. On 4 July 2013, Diageo bought an additional 14.98% of the company for ₹31.35 billion (US$450 million). Diageo acquired an additional 21.77 million shares at a cost of ₹1,440 (US$21) per share in an off-market-deal from United Spirits’ promoters, raising its holdings to 25.02 per cent of the company. Following that purchase, Diageo held 36.3 million shares in USL, acquired at a cost of ₹52,358.5 million (US$760 million), making it the largest shareholder. Under pressure from Diageo, some substantial changes to the management structure of the firm began to take place in 2013. In 2014, Diageo’s share holdings rose to 54.8% of USL.

There are many informative articles how the overall story unfolded and one can read:

Even though Mallya is out and Diageo PLC is done lot of clean up, still, there are some old wounds which continue to haunt USL and present in various annual reports and we will discuss further. However, below links can give a feel of kinds of tussle which went even post Diageo PLC taking over control.

Current Business and Product Portfolio

Company has 80 brands of scotch, whisky, IMFL whisky, brandy, rum, vodka, gin and wine. In FY 19 company sold over 81.6 million cases, second highest in the world. Company works through 19 manufacturing facilities spread across India.

The Transition from 2013 till now:
Now, let us see, what Diageo PLC has done in last 5-6 years post take over though it is evident from above links that lot of time went in fixing corporate structure itself to create the basic foundation to start any kind of financial and operational clean up

As it is evident from above tables that new management has been able to do the herculean task of bringing house in order from one of the worst-case scenarios to a respectable state by fixing balance sheet, cash flows as well as profitability. This has been achieved by:

1. Overall organization level clean up by getting a new leadership team
2. Fixing balance sheet by getting rid of non-core assets
3. Controlling operations and supply chain by improving efficiencies and improving margin
4. Deep focus on premiumization and improving share of premium segment from 53% of revenue to 66% of revenue in last 3 years through both double-digit volume as well as value growth rate and hence bringing profitability back on track
5. Improving route to customer strategy across states considering regulatory constraints
6. Leveraging improving profitability to strengthen balance sheet by improving credit rating and reducing interest cost further and deleveraging debt further
7. Strengthening and investing in core brands and marketing
8. Bringing best practices from parent company like technology and data driven marketing and business planning through salesforce automation, MDM and advance analytics

How has company performed recently:

Opportunity:

• Urbanization, Growth in per capita income and young population would provide enough scope for growth

• Premiumization is phenomenon playing out and should benefit companies like USL

• Very low chances of disruption

Risks:

• Highly regulated business with many regulatory issues occurring every 2-3 years like election driven state mandates, highway ban on liquor, non-ending tax hikes, price controls, state level complexities etc.

• Raw material price fluctuation of ENA making gross margins cyclic to some extent (depending on pricing power of brand and products)

• Raw material price fluctuation in terms of glass prices for bottling

• Highly working capital-intensive business with working capital to sales ratio around 40%

• Legacy legal issues related with banks and state governments

• Non-core legacy investments like IPL Bangalore

Sources:

1. Google Search
2. Annual Reports
3. Company Presentation
4. Screener.in
5. Wikipedia

Disc: Hold a tracking position. Please do your own research. This is not a recommendation by any means

Note: There is much more to cover in terms of industry analysis, financial analysis and legacy and financial issues and will cover slowly in next set of posts. This is just a start.

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@dd1474 wrote:

Turn to Look at Return

While reading CSFB Annual return studies, which provide for Global Equities and other asset class return over the years and also for individual country, I realize that they did not have any return for the Indian equities. This led to me to search for return in Indian equities over the long period. While researching on the subject, I could not get hold off any study which provides insight before 1980s. Since Sensex has base year of April 1, 1979; most of the studies in India, take Sensex return as quasi benchmark for equities return.

While that is the best indication of return over last 4 decade, I still wanted to check what Indian equity market returns were over a very long period. I started collecting data from various sources on Google. The most important support to my study came from BSE historical eBook on their website. I downloaded most of this material and studied.

Approach 1: Bottom Up

While there was no indicative Index to calculate return, 1946 Year Book (which I believe a must read for anyone interested in equity market) provided detailed financials and valuation details for many companies. I took that as a base, put all information in excel and compile first approach of aggregating return from large surviving companies during 1945-2018 period. The approach has limitation as it does not consider diversification/ merger/ demerger of divisions and companies. The other limitation was while Banks like Bank of Baroda and Central Bank have survived; they were private bank in 1940s, nationalized subsequently and have constant equity dilution over 8 decades. Nevertheless, this provided whatever indicative return information for surviving companies.

Approach 2: Market capitalisation

While working on Capital goods sector industry study, we did compile data on Indian GDP and Gross Fixed Capital Formation from RBI and CSO website. From RBI website, I realize that we can collect Indian equity market capitalisation data for various years. Hence, I tried to compare decade wise growth in Market capitalisation and compared same with Constant Price GDP growth and Current Price GDP growth. One can consider difference between current price and constant price GDP as Inflation. While I have not checked whether we have inflation data since 50s from RBI, we can improve on same if get same.

The major weakness in this approach was also same as first one. There were frequent equity infusions over the period in the company and also new companies listing/ delisting of many companies. Hence, we do not have constant sample. I tried to address this problem by partially looking at past data from RBI which provided new equity issue. What I realize that range of equity IPO was in range of 0.5-1.5% of existing market capilisation. Hence, in order to adjust increase/decrease market capilisation, I applied around 1% reduction from market capilisation growth to get indicative equity return.

Approach 3: Adjusted Equity Index

In past Economic survey data, I came across another interesting concept by name of “Index of Variable Dividend Industrial Securities” (Old Index). This was indicator used by Government then to calculate return from equity market. I tried to search of Google about same and came across a Government Gazette which provided me over two decade value (with changing base year) for this Index. Accidently, we have April 1979 value of index being 100 while Old index values were also available for 1979. I started reworking on BSE Sensex and based on the Old index and got an adjusted index and calculated return of Indian equities over the period.

There are multiple issues and weakness in this approach. Index is adjusted with Rights and Bonus in Base and also with new company entry and exit of the company. For Old index, except for value, we did not even know which companies were included while calculating same.

The objective of this study is not to provide precise calculation of Indian equity markets over 7 decades. I have neither data nor expert knowledge to claim same. However, the objective was more the get indicative return. The slide in enclosed presentation is providing my finding. PLEASE READ THE DISCLAIMER SLIDE IN PRESENTATION.

I look forward to fellow forum member’s support to take this effort forward and work on improving on the finding. Feel free to send your feedback on this thread. I would also advise fellow members to go through excel sheet which used for working summary table in presentation.
BSE Old Data about Market cap VP.xlsx (228.1 KB)
Turn to understand past Return June 2019.pptx (68.0 KB)
BSE Ebook on 1945 https://ns.mstatic.in/LS/BSE_Book.pdf (Second book in list)
CSFB Year book on Return 2019
https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/csri-summary-edition-credit-suisse-global-investment-returns-yearbook-2019.pdf
India Past Economic Surverys:
https://www.indiabudget.gov.in/economicsurvey/allpes.php
RBI Data on Indian Economy
https://dbie.rbi.org.in/DBIE/dbie.rbi?site=home

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@Donald wrote:

Back after a small gap.
Quickly realised from discussions with committed VP old-(&new)-timers that probably the fastest, and the most impactful work that we can do at re-invigorating quality work at VP would be get started back with Stock Stories.

Not everyone would be aware that at one time (way back in the past:)) we used to maintain updated briefs (Stock Stories, on valuepickr.com home page you will need to scroll down to access) on a set of some 25 of our favourite businesses. And most of them have gone on to be wealth-creators, at some or other point of time, in the last decade.

Why we started and persisted with Stock Stories:

1. As Ayush first very discerningly pointed out to me sometime in 2009, Donald there is no place/site in our markets, where we can go and understand a business reasonably well in under 30 mins. All we would see at various sites are numbers, ratios, and they might mean something to a savvy investor, but again that would hardly equip him to understand the business, industry, competitive forces at play, barriers to entry, and so on.
2. While explaining/taking feedback on our favourite story to/from someone, we could get away with (literally) anything while speaking; but the written brief forced a certain diligence on us; we had to be really convinced and think twice thrice before we put forward a bullish or a bearish viewpoint, and had to back that up with data; This obviously meant the rigour that went in was of a higher order and we had to double-check on our facts before putting up for public consumption
3. The Structured Template (Check out this PI Industries story as an example) - Background, Main Products/Segments, Main Markets/Customers, Bullish viewpoints, Bearish viewpoints, Interesting viewpoints, Barriers to Entry - ensured that any sufficiently-interested reader could actually come to speed on the strengths (weaknesses) of the business in under 30 mins!
4. The compact brief - also ensured - we could communicate crisply and draw in valuable insights and value-adds from gurus and domain experts, which added immensely on the analysis part; similarly these helped us draw valuable comments and insights on business models, business quality vulnerabilities, and the like from investment Gurus we chanced upon or had access to, and helped refine our investment perspective/thesis.
5. While everyone in VP (and the larger investment community) benefited, those who were deeply involved in the stock stories benefited the most - we worked the hardest at our story, we engaged the contrary view with gusto and became somewhat better educated on what could kill our best ideas, because we took RESPONSIBILITY - that while we will never be experts on the business/domain but we would make sure that we caught hold of the best in the business/domain and incorporated their insights as much as we could, and kept the Stock Story UPDATED.

And then for a while (2015, onwards) moneymaking in our markets became too easy , and we lost track of the basics, ha ha. Then again hard reality hit us in 2018-2019. Meanwhile emphasis on technicals, and momentum, and algos have shifted to a different gear today. I am all for new learnings (especially if it can help structure and maintain my portfolio better), and there are undeniable aspects probably therein that I am told, every market participant should learn a bit about and have a healthy respect for (obvious say, from the way our @hitesh2710 Hitesh Patel keeps amazing us with absolute simplicity). But I can see some of us are again getting corrupted to thinking that there are free lunches, available. There aren’t!! Not on a sustainable basis, anyway

Our returns will normalise to the mean pretty soon, unless some of us (those naturally inclined on upping the Investor Learning Curve) get cracking on deep dives, and the art of capturing that crisply back for our own, and the communities benefit. We take up the responsibility to create/update the story on our favourite business and keep it updated on a event-basis, and/or regular periodic updates. And then engage others deeply interested in the business for more collaborative scuttlebutts, invite contrarian views, invite industry and domain experts to participate, and so on.

Am convinced, as we energise just 10-15 of us to take this up earnestly, this will create a momentum and snowball effect of its own, and engage many many folks to attempt a story on their own - even passionate newcomers. when we started in 2010, most of us writing the stock stories were investing greenhorns - even as we might have some penchant for structured thinking.

For those who might be thinking - how does this practically work? Well as mentioned before we have another part to VP site (which was dormant for last few years). our very own @pratyushmittal had beautifully enabled a simple CREATE-EDIT-PUBLISH workflow underlying this structured part - Stock Stories, Management Q&As (next on 2.0 Agenda), and the like (You will need to scroll down on the home page to reach these).

I am proposing that some maybe 30 of us are given CREATE permissions (any passionate hard worker as demonstrated in VP threads, with preferably slightly analytical bent of mind is welcome). Maybe some 10 guys/gals (more structured thinkers, better english ) re given EDIT permissions, and probably 2-3 guys/gals given PUBLISH permissions. This will ensure better collaborative efforts among participating seniors, and hopefully among passionate juniors and more seniors, too.

I can foresee some hands going up on improvements needed - after all if its VP Stock Story 2.0, what changes are we bringing in? I can think of a few - e.g we might have to ensure additional 4-5 new placeholders to the existing template - where we add a para or two on
a. Business Model - strengths/differentiated-ness, or otherwise
b. Valuation Model - some businesses like D’Mart deserve(?) elevated range
c. Current Market Trends - periodic scuttlebutt and/or from published figures
d. Corporate Governance Scan - debatable actions (if any) from publicly available records
e. Forensic Scan/Red Flags - Comments from VP Forensic experts @dd1474, @ashwinidamani, any more in-house experts here?
[Have been told to expect a VP Forensics Accounting 2.0 Framework initiation, with live practicals, soon]

Views invited on any more must-have placeholders in the stock story template that can help refine investment analysis.

The beauty of forcing a collaborative structured template on us, is that some pieces like business model and valuation models will naturally get collaboratively filled-in/refined by more senior investors after talking with the stock story creator/owner, but a passionate new learner is exposed to this right from the start!

That is probably invaluable!!
And I am excited to see where we can take this effort in the next 6 months by efforts of a committed few, and then how we will enjoy this snowballing into a regular investing activity by most passionate learners!!

Whole-hearted participation is invited; hard work and passion are the qualifying ingredients; refinements are achieved collaboratively, and magic is created Waiting for a good show of hands!!

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@ashwinidamani wrote:

On prodding of @Donald posting my exisiting work on Cement and further on will add inputs on Birla Corp

Cement can be sold to two sets of customers

• Retail Customer – Trade Segment – Has Higher Margins
• Infra Customer – Non Trade Segment – Has Lower Margins

Only those companies which target and grow Trade Segment win games. For that you need brand recall and shelf space availability because as far as the retail customer is concerned – cement is a push market industry – so whoever is able to push its product first to the customer, will be able to successfully sell it.

The reason being – at the end Cement is a commodity. A layman doesn’t differentiate between different brands. The lead sales influencer is the mason and the shopkeeper.

He goes to buy Cement only when he immediately needs it, and will buy whichever is immediately available. So it is important for a manufacturer that he is able to successfully push his product on the shelf of shopkeeper (ship it on time) and incentivise the shopkeeper enough (discount and commission) so that he sells your product…

Further the brand name should ring a bell with consumer so that he accepts easily what is being pushed to him.

• Sales Price is determined based on demand and supply. It’s a dynamic pricing market.
• Cement is a bulky material – hence handling this bulky material takes a lot of effort. It occupies a lot of space and carries a lot of weight. Hence higher the distance a cement bag travels, higher is the freight and handling cost involved and lower is the profit a manufacturer makes.

Finally you are selling something which costs 7-8 Rs a kg and hence there is a limit to which you can transport it

Cement also cannot be exported - so no China Risk

It is important that the manufacturer keeps his production unit as close as close as possible to the end customer, so over time players tend to become dominant in some regions, where they have maximum plants.

Obviously some good players like Ramco are exceptions to the rule. When Ramco found its existing South market with no demand, it started inflitrating Eastern India and yet sell above his marginal cost of production. So instead of bringing down production , it sold at small positive contribution in Eastern India so that his overall cost of production remains low (due to higher qty produced) and yet he doesnt suffer losses. Why Ramco was able to do this is his cost control. Ramco cost structure allowed. The cost per ton for Ramco is so controlled that he was able to travel all the way from South to East and still earn positive (but small) margins

• Cement is basically is made by heating limestone (calcium carbonate) with small quantities of other materials to 1450°C in a kiln. The resultant hard material which is recovered after heating limestone and chemicals is called ‘Clinker’ .

So obviously anyone who has limestone access is a winner.

Clinker looks like small lumps. These lumps are crushed with a small amount of gypsum into a powdery form – which gives the final product – ‘OPC Cement’.

So in essence following components are compulsory for making OPC cement

• Limestone – Natural Reserve, extracted or mined from Mines
• Heat – requires heat of 1450°C , ideally obtained from Coal or its variants.
• Gypsum –a mineral compulsory for providing the binding nature to cement

However with time, people figured out that limestone can be substituted with other materials namely Flyash or Slag, which will still provide the strength but to a lesser extent. The threshold limit of mixing Flyash is maximum 33%

For big infra projects, limestone component of upto 95% is required, but for the daily homebuilding use, the lower component limestone works fine enough.

• Thus, there are various varieties of Cement depending on the composition of materials, namely OPC (Ordinary Portland Cement), PPC (Portland Pozzolana Cement) and PSC (Portland Slag Cement (PSC).

Items	OPC	PPC	PSC
Clinker	95%	65%	45%
Gypsum	5%	5%	5%
Flyash	–	30%	–
Slag	–	–	50%
Total	100%	100%	100%
Margin profile for manufacturer	Lowest Margin	Higher Margin	Highest Margin

Now as I mentioned Limestone is very important. And this is the first question that I asked when I was shown Balance Sheet of Shree Digvijay Cement. It had not own mines …

How did I figure that out ?

Well Limestone Mining Rights are awarded by Govt and are for a definite period of time or till you have reserves in the limestone pit (whichever is earlier) . This right is shown as Intangible Asset in Balance Sheet.

Digivijay Cement had not major value against this

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@deevee wrote:

Hi there everyone,

In our IPO discussion thread we had posts prior to listing of IRCTC. I could not find a thread on IRCTC therefore I am starting one. Request VPers to start contributing

I intended to have a very crisp start to this thread by framing 3 simple questions which should set us on the path to understanding more about the company. I was inspired by the thread started by @Donald to have this framework approach to understand businesses. Aside I think IRCTC is a relatively easy business to understand. Please correct me if I am wrong.

Inputs and participation welcome from @dd1474 , @yourraj , @bheeshma , @Vivek_6954 , @rathi.saurav , @himanshupant , @jhasuraj , @pmehta , @bhaskarjain and others

The 3 questions:
1. How do they make money
2. Why do they make this money
3. How will they make more money

How does IRCTC make money?
IRCTC makes money via 4 business lines

1. Internet Ticketing
2. Catering
3. Packaged Drinking Water
4. Travel & Tourism

Finshots has a nice infographic capturing the numbers.

29 PM2026×1360 296 KB

Internet Ticketing:

• The only entity authorized by Indian Railways to offer railway tickets online via website and mobile apps
• 1.40 million+ passengers travelled on Indian Railways on a daily basis, which consisted of approximately 71.42% of Indian Railways’ tickets booked online (June '19)
• More than 0.80 million tickets booked through irctc.co.in and Rail Connect on a daily basis
• Transaction volume of more than 25 million per month and 7.2 million logins per day

50 PM1400×796 79.2 KB

Catering:

• Food catering services to Indian Railway passengers on trains and at stations
• On-board catering services are referred to as mobile catering and catering services at stations are referred to as static catering
• Provide catering services for approximately 350 pre-paid and post-paid trains and 530 static units
• Catering services through mobile catering units, base kitchens, cell kitchens, refreshment rooms, food plazas, food courts, train side vending, and Jan Ahaars over the Indian Railways network
• Offer e-catering services to passengers through mobile application Food on Track and e catering website, ecatering.irctc.co.in
• Operate executive lounges, budget hotels, and retiring rooms
  
  00 PM1350×848 80.3 KB

Packaged Drinking Water:

• Only entity authorized by the Ministry of Railways to manufacture and distribute packaged drinking water at all railway stations and on trains under brand ‘Rail Neer’
• 10 Rail Neer plants located at Nangloi, Danapur, Palur, Ambernath, Amethi, Parassala, Bilaspur, Hapur, Ahmedabad and Bhopal, with an installed production capacity of approximately 1.09 million litres per day, which caters to approximately 45% of the current demand of packaged drinking water at railway premises and in trains
• Setting up new Rail Neer plants at Sankrail, Jagi Road, Nagpur, Bhusawal, Jabalpur, and Una and further plants at Vijaywada Ranchi, Vishakhapatnam, and Bhubneshwar
• Installed water vending machines at railway stations to provide purified, chilled and portable drinking water

08 PM1358×594 55 KB

Travel and Tourism:

• Presence across all major tourism segments such as hotel bookings, rail, land, cruise and air tour packages and air ticket bookings

15 PM1366×648 57.3 KB

Why do they make this money
Regulatory advantage:
The second question has a straightforward answer - In 3 of the 4 business lines they hold a monopoly owing to regulations. They sell roughly 8-10 lakh tickets online daily which constitutes 3/4th of all the tickets sold in the country daily. In catering which constitutes the chunk of the revenue they are at an advantage owing to the Catering Policy of 2017. For packaged drinking water it is the only entity allowed to sell in rails and on stations. Though this is the smallest revenue contributor. The tourism segment is where they make quarter of the revenues but face competition. This segment has had a decline over the last 4 years. They have Rail Tour Packages which has seen major de growth and Land Tour Packages which has seen an uptick.

Pricing Power:
They truly dont have pricing power. Someone can correct me if I am wrong. This is one of the risks called out in the DRHP also. For instance during demonetisation they had to remove convenience fee on the directive of the government. Another instance is that they have a tender process for in rail delivery for which they charge 12% which is also fixed as per directives.

Network effects in ticketing business:
This business line reaps revenues without much increase in costs. It is directly linked to passenger numbers and adoption of online ticketing. IRCTC is also a very sophisticated payments player and has a lot of advantages owing to its monopolistic position.

A snapshot again by Finshots below

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How will they make more money

Growth in rail passengers:

• Passenger traffic on the suburban network is likely to grow at a 0.5-1.5% CAGR till 2024 while non-suburban passenger traffic remain flat
• Within non-suburban passenger traffic, share of upper class reserved ticket bookings in total railway passenger traffic is expected to grow slightly from ~2% in fiscal 2019 to ~3% in fiscal 2024, with the segment growing at a 5.5-6.5% CAGR during the period on account of growing preference for convenient travel
• Share of second class mail/express ticket bookings (reserved) is expected to inch up from ~17% in fiscal 2019 to ~18% in fiscal 2024, with the segment growing at a 1.5-2.5% CAGR
  
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Catering Revenues:
Catering revenue is expected to grow at 7.5-8.5% CAGR between fiscals 2019 and 2024 The growth in IRCTC’s catering revenues is expected to be driven by:

• Likely increase in passenger traffic due to addition of new non-suburban trains i.e. long distance trains
• Rising affordability and variety of food items available in catering services
• Increasing coverage of catering services through addition of base kitchens and static catering units
  
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Packaged Drinking Water:

Rail Neer distributes water to only a few Railway establishments in India due to constraints in capacity Rail Neer is expected to increase coverage to majority of Railway establishments in the country via PPP
Market size of railway establishment for the packaged water is estimated to grow at 2.1%-2.2% till '24

Travel, Tourism & e-booking:

• Domestic and foreign tourists expected to grow at 9%-10% CAGR till '24
• Government initiatives to promote tourism via improved infrastructure, easing of visa regime, assurance of quality standards in services of tourism service providers, projecting the country as a 365 days tourist destination and so on
• India contributes more to South Asia tourism than the average levels for the region
• Currently 50% of ebooking is for airlines, 30% for hotels and 20% for rails. IRCTC has complete market share in rails due to regulations. Overall growth till 2024 is expected to be 16%-17% on a CAGR basis
• IRCTC does not offer international hotels, buses and cabs in its ebooking product portfolio. So that is a scope of expansion
• IRCTC has special train tourist packages based on certain themes. Also luxury train rides
• All government entities book their airline tickets via only 3 entities and IRCTC is one of them
• They have their own wallet which I am not sure is actually making any revenues or not. They have a partnership with SBI to issue co branded cards. I believe this is quite popular

The achilles heel for IRCTC is what makes it a good investment today and that’s its monopoly. Any change in regulations with respect to opening up of
a) Ticketing to other players
b) Bringing in 3P vendors for catering
c) Allowing other packaged drinking water suppliers to sell at railway establishments
will take away revenues from IRCTC. It is in a very comfortable position as of now. And with growth in travel and online ticketing the numbers should keep coming in. This is something which I believe retail investors will have to keep gauging and reacting appropriately.

I am not touching anything on valuations. Feel free to do so in the posts below. Also lets ask 2nd and 3rd order questions. That is the key.

Regards
Deepak

Disc: Invested. Transactions in last 30 days. Not a registered advisor.
Sources: DRHP, Isec, Finshorts, HDFC sec

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@karu_lamborghi_ wrote:

I am initiating a thread on SBI Cards. The company has filed a DRHP with SEBI and is expected to come out with its IPO. This is an attempt to simplify the DRHP to better understand the details of the business. Since SBI Cards is a pure play on credit cards business the DRHP has interesting insights on unsecured lending business in India and growth going forward. I have tried to put some of this forward through this note.

SBI Cards

Company Background

SBI Cards was launched in October 1998 by the State Bank of India & GE Capital. It is incorporated as SBI Cards and Payment Services Limited when it turned from a Private Limited Company to a Public Limited Company in August 2019.

In December 2017, State Bank of India and the Carlyle Group acquired GE Capital’s stake in the company.

SBI Cards has over 9 million credit card customers and it aims to offer customers access to value added payment products and services. As on Sep 2019, the company had 9.46 million credit cards outstanding with total spends of Rs 1.03 trillion.

The company has an outsourced workforce of 33,086 sales personnel deployed out of 133 cities engaging with customers across multiple channels. In addition to this the company uses SBI’s network of 22,007 branches to market its cards to its customer base of 436.4 million.

Business Model

The company primarily earns revenue from two ways

• Interest charged on credit card receivables
• Fee income including interchange fees, annual fees, late fees and service fees

Let’s first understand how a credit card transaction works…

Revenue Model

Interest Income

Interest income is earned on revolving balances as well as equated monthly instalment balance. The total interest income earned is a function of both volume of receivable and yield earned on the outstanding balance. The aggregate amount of credit card receivable is a function of:

• Size of customer base
• Customer spending on credit card
• Customer repayment rates &
• Charge offs on the balance

The credit card receivable portfolio is viewed under three categories :

• Revolver receivables : Balances carried off from one month to the next and consequently accrue interest charges. Higher revolver receivable lead to higher interest income
• Transactor receivables : Balances which are paid off in full at the end of every month and don’t incur any interest charges. Also higher transactor receivables lead to lower interest income and positively affects NPA rates and charge offs
• Term loan receivables : Comprise of equated monthly instalment balance which has an interest component but lower than revolver receivables

Non-interest income

Non-interest income is earned primarily through fee income which includes

• Interchange fee: Primarily a function of credit card spends and earned when transactions are carried out by cardholders
• Subscription fees: Function of annual fees charged to cardholder

Instance based fee: Primarily a function of number of cardholders outstanding and charged via late fees, over limit fees, etc

Service charges

Service charges broadly comprise commission from selling third party products, share of accelerated rewards point cost recovered from partners, brand association fees charged to partners and transaction revenue from aggregators

Business development incentive income

This comprises of contractual business development incentives that the company earns from payment networks under long term contracts

Insurance commission income

This is comprised of the commissions/incentives earned as a corporate insurance agent in selling insurance products to cardholders

Here is a breakup of the operating income for the year 2019 & 2018 to understand which segment contributes how much to the total operating income of the company.

Operating income breakup

As we can see as on FY19, 51% of total revenues were interest income while 43% of revenues were via fee income.

Operational Overview

The company is the second largest credit card issuer in India with 18% market share in terms of number of credit cards outstanding as on September 2019 and 17.9% market share in terms of credit card spends as on September 2019.

Credit cards outstanding

In the illustration below we can see how the company has grown over the last three years in terms of number of cards outstanding and the market share. As we can see the role of SBI in the sourcing of new cards have been increasing over the years

Credit card spends

The total credit card spends is a function of number of cards outstanding as well as spends per card. As we can see in the illustration below the average spends per card has remained stagnant at a similar level while the increase in total spends have been entirely driven by increase in number of cards outstanding. Of the total spends online transactions continue to be less than 40% currently

Loan matrix

The loan book as on H1 2020 stands at approximately Rs 23,000 crores.

Borrower profile

As we can see in the illustration below the proportion of salaried cardholders has been declining sequentially over the last three years. This explains that a major proportion of the new accounts of credit card holders are being sourced from self employed people. Though this might seem a riskier strategy firsthand card companies also ask for a fixed deposit in its parent bank against which a credit limit is provided to the cardholders. Since SBI Cards is a NBFC this must not be a case with the company.

Co branding

Co branding in credit cards is a meaningful share of total business for any credit card issuer. Let’s understand how a typical co branding agreement works.

• Credit card issuers enter into fixed (3-5 years) agreement with different brands
• Agreements terminate upon expiry if not renewed
• Brands provide rewards or loyalty points for customers with a specific credit card

For SBI Cards, co branding business for year ended March 2019 represented 19.3% of total credit card spends. Also newly sourced co brand accounts represented 29.6% of total credit card accounts sourced as on March 2019.

Here is an overview of the offerings of credit card issuers in terms of various offers and co branding partnerships

Capital Adequacy

As a non deposit taking NBFC SBI Cards is required to maintain capital adequacy as per prescribed norms. As per norms of RBI, capital to risk ratio (comprising of Tier 1 & 2 capital) should not be less than 15% of aggregate risk weighted assets on balance sheet. The tier 1 capital at any point of time should not be less than 10%.

As on September 2019 the Tier 1 Capital stood at 14.8% and capital to risk ratio stood at 19%

IPO Summary

The company is jointly owned by SBI & Carlyle Group (through CA Rover Holdings). The holdings of Carlyle Group were earlier held by GE Capital. However GE Capital had sold its entire shareholding in the company to Carlyle Group on December 15th 2017

The company is coming out with an IPO comprising:

• Fresh issue: Rs 500 crores
• Offer for sale:
  • SBI: 37,293,371 shares
  • CA Rover Holdings: 93,233,427 shares

Promoters

Agreement with promoters

The company currently uses the SBI Logo as a part of a licensing agreement between the company and its promoter under which the promoter has allowed non exclusive right to the company to use the brand name “SBI” on its cards portfolio pursuant to payment of royalty fees. Also under this agreement the promoter has the right to terminate the agreement on occurrence of certain events which include promoter share falling below 26% or if the company fails to pay royalty fees to the promoters.

Under the bank distribution agreement, the company provides branch relationship executives at select branches of SBI. Also, SBI has agreed to provide referrals of customer via business analytics for a commission to be paid to SBI

Risks

The business faces two risks in its operations which can derail the operations significantly:

• Credit Risk
• Regulatory risk

Credit Risk

Since the company is into unsecured lending there is no recourse in case of customer non payment. Though the company uses data from agencies like CIBIL which maintain credit history to analyse repayment capacity of borrowers in case of a system wide repayment issues the company doesn’t has any asset for recourse.

Regulatory risk

Interchange fees, which in India are set by payment networks like Mastercard & Visa if are subject to a regulatory cap by the RBI could in future reduce the income that credit card companies could earn through this fee.

In India interchange fees on debit card transactions have already been set to a limit by the RBI and any further action on credit card transactions could affect the revenues of the company in the future

The company charges interest rates on revolving loans and EMI payments. In case of any regulatory cap on these interest rates the interest income that it earns can be significantly affected

Contingent Liabilities

The contingent liabilities against the company are not a very big amount considering the scale of operations of the company. A summary of the contingent liabilities against the company is presented below

Conflict of interest

• SBI & other banks have started offering EMI payments on debit card transactions as well. This will affect the business of credit card companies as a similar line of service is available in a competing product
• SBI CAP Securities which is a group company of SBI is also registered as a corporate agent and would be in similar line of business as SBI Cards

Delinquency levels

Unsecured credit card receivables present a greater credit risk than a portfolio of secured credit card receivables as they are not supported by realizable collateral. Thus there always remains a risk of delinquency of the portfolio in case of non payment by customers. However data over the last three years have presented a stable picture of delinquency levels in the unsecured loan market.

Competitors

Competitive landscape

Credit card is primarily a payment solution which provides users the ability to purchase on credit and then repay the amount either during the interest free period or after that with interest. Since it is a payment solution the industry faces threat from payment solutions offered by other parties including:

• Banks
• Payment Banks
• NBFC’s
• Fintech Companies
  • E wallet
  • Mobile payments
  • Unified Payment Interface (UPI)

Amongst credit card industry in particular the company faces competition from other banks providing credit card services. Credit card services usually compete on the following

• Reward programs
• Loyalty programmes
• Offers

Concentrated market

There are a total of 74 players offering credit cards in India but the top four players including HDFC Bank, SBI Cards, ICICI Bank and Axis Bank have a total market share of 72% in terms of number of outstanding cards and 66% by credit card spends as on March 2019.

Market share of top four players

• HDFC Bank: 27%
• SBI Cards: 18%
• ICICI Bank: 14%
• Axis Bank: 13%

SBI Cards and BOB Cards are the only two companies that are NBFC’s while all other credit card issuers are banks.

Payments landscape

A strong payments infrastructure is one of the most vital points to building an ecommerce ecosystem. There are many companies competing to become the most widely accepted payment solution across the ecommerce basket. Competition is coming from the following sources:

• Amazon Pay & Phone pe (Payment solutions by incumbent ecommerce companies)
• Credit Card companies (All companies are focusing on the ecommerce payments and providing offers to lure customers)
• Wallets (Paytm)

How credit cards stack up against other payment systems

As we can see the one differentiating factor which makes credit card unique against all other payment systems is the credit free period which is not provided by any other payment solution as of now. While UPI has emerged as an alternative to wallets and debit cards due to the credit free period offered and other value added services around a credit card payment system the offering still remains unique.

How technology is helping companies

In FY 2019, 45% of the credit card applications were decisioned by credit decision engines without the involvement of any human intervention. In future measures like these could lead to a big advantage for credit card issuers in terms of saving on personnel costs.

Industry

Credit Card spends

The credit card spends have grown at a rate of over 32% over the last five years. The overall market has tripled from Rs 2 trillion to Rs 6 trillion over last four years. This market is expected to grow at a much slower rate of 20% over next five years reaching to a market size of Rs 15.2 trillion.

Of the total growth in spends a higher proportion has been driven by increase in number of cards outstanding while annual spends per card has grown at a much slower rate as shown below. The factor that is driving volume growth in number of cards outstanding can be seen in the figure below

Penetration levels

As we can see the penetration level of credit cards when compared to other economies both developed and developing is very less.

Retail credit

The retail credit market has grown at a CAGR of 16% over 2015-2019. The size of retail credit market as on FY19 stands at Rs 58 trillion and is expected to grow at a CAGR of 15% over the next five years to reach a size of Rs 117 trillion.

Unsecured loan market

Of the retail credit market the unsecured loan market in FY19 stood at Rs 5.3 trillion (10% of the total). This is expected to grow at a rate of 22% over next five years to reach Rs 14.4 trillion (12% of total).

While personal loans form a majority part of the unsecured loan book outstanding, credit cards outstanding is expected to grow at 23% CAGR over the next five years driven by increased issuance in smaller cities, increased organised retail penetration and growth in payments infrastructure.

Per capita digital payments penetration

According to a NITI Aayog report(2017), per capita digital transactions are amongst the lowest when compared to peer and developed nations

Ecommerce spends

Another interesting thing to look at is the size of ecommerce industry in India and the growth going forward. Digital payments are a direct beneficiary of rising ecommerce transactions. Increasing internet penetration, online shopping and lucrative deals have led to ecommerce industry growing at a CAGR of 32% since FY14 to reach Rs 2.9 trillion in 2019. This is expected to Rs 9 trillion in 2024, growing at a CAGR of 25%.

Growth opportunities

Cash on delivery shifting towards card on delivery

Cash on delivery still accounts for a majority of ecommerce players transaction spends. This presents a problem for ecommerce players for multiple reasons. Companies have introduced card on delivery options to reduce the usage of cash where the customer can pay by swiping their cards on delivery. Since cash payments currently account for over 60% of ecommerce transactions as this market shifts towards card on delivery it could present a huge opportunity for credit card companies

Leveraging the branch network of SBI

The company intends to deepen its partnership with its promoter SBI as the customer base of 436.4 million presents a vast pool of untapped customers. On these lines in October 2017 the company had launched an initiative “Project Shikhar” to market its products directly to SBI customers as a result of which proportion of new accounts sourced from SBI’s existing customer base has increased from 35% in 2017 to 55% in 2019

Increasing penetration of organised retail

Peers

Operating metrics of the peers

The illustrations below show a comparative comparison of the top four companies in the credit card space in terms of market share and growth across various parameters across last five years

Financials

Major expense line schedule

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Disclosures: The company shares are not listed and the company has filed DRHP with SEBI for IPO. I do not hold any shares currently.

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@KC1986 wrote:

While I am writing this thread Buger King India received SEBI approval to listing. This IPO may be the most awaited IPO of 2020 considering the fact that India has long runway for growth in CDR/QSR segment.
The issue will comprise a secondary share sale worth Rs 600 crore by private equity major Everstone Capital and fresh fundraising worth Rs 400 crore, which will be used to fuel the burger chain’s expansion plan.

Promoter : (Everstone 87.5% , Burger Corp USA 12%)

Everstone Capital created an investment holding company F&B Asia Ventures to build a pan-Asian food and beverage platform with assets across multiple cuisines, geographies and formats. On the QSR front, the platform company plans to grow Domino’s Indonesia, as well as Burger King Indonesia and India, by 30 to 50 stores each annually. Currently, Burger King Indonesia has over 70 stores while Domino’s Indonesia has more than 130.

About QSR sector

Quick service restaurant platforms are getting much better valuations than casual dining since they can be easily scaled up. On the back of their good economics, these can also be taken to market easily.

According to GlobalData, the Quick Service Restaurants (QSR) & Fast Foods segment in India has witnessed steady growth and reached US$45bn in 2018 and is forecast to reach US$63bn in 2023 at a compound annual growth rate (CAGR) of 7%.Though the market is very fragmented, with smaller chains together holding 97% of value share in 2018, the growing inclination towards branded chains makes it lucrative for international fast food joints.

Burger King has had a presence in India since late 2014, but it hasn’t been alone in targeting the market since that time. According to the Economic Times, six burger chains, including Burger King, McDonald’s, Carl’s Jr., Fatburger, Wendy’s and Barcelos have planted a flag in India in the past five years. In March, Johnny Rockets also announced its return to India earlier this year.

There’s a reason for this movement. While smaller chains in the market made up 97% of market share last year, consumer inclination is shifting toward branded international QSRs, according to GlobalData research. India’s dine-out market is expected to reach $131 billion by 2022 with QSRs expected to grow 9.2%, according to Euromonitor data reported by the Economic Times. Western branded QSRs are projected to grow at a rate of 13.4%, making up $1.8 billion by 2022.

India’s per capita spend is much lower than other countries. This gap remains significant even if we compare the per capita spend in top-8 cities (which constitute 42% to food service market). When we analyze the per capita spend across cities on the basis of the nature of store, spend on unorganized food service is similar across the top-8 and the next-21 cities. The difference arises in the per capita spending on chained and organized standalone categories (Rs 2,546 / Rs 4,584 in top-8 cities versus Rs 587 / Rs 1,830 in the next-21 cities). This further strengthens our belief on the huge runway for growth for the chained players even in the smaller cities.

Comparison of QSR players (see figures) shows that the Indian players operate currently operate at 30-50% of their global counterparts. Domino’s India operates at 70-120% sales throughput of developed regions like Australia, Japan and Europe and believe that the chained players can get closer to the global throughput in the long-term.

India’s food service market at USD59bn constitutes 2.2% of GDP, a significant level when compared to other countries. However, more than 62% of this is unorganized market. Share of chained outlets (8%) and organized standalone outlets (27%) still remains low.

The share of chained QSR within the overall food service, at 4%, lags significantly as compared to the other countries globally.

Outperformance of chained market in India will be driven by category formalization, store network expansion by chained players and rising consumer preference for new cuisines and branded offerings.

Chained players within food service are likely to grow the fastest, at 20% over FY19-24, driven by increasing presence and rising preference of consumers to shift to branded players.

The per capita spend by an Indian is much lower than other countries, both developed and developing.

The gap remains significant even if we compare the per capita spend in the top-8 cities (Delhi, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Pune and Ahmedabad) versus other countries.

The top-8 cities in India together constitute 42% of the overall food service market. However, these cities contribute 87% of the total chained market in India – signifying huge opportunity for the QSR players to expand into the smaller cities.

Process Design:

Burger King has over 200 restaurants across 50 cities in India at present, which is far behind the more than 400 stores of rival McDonald, but with strategic investment and improvement in supply chain, the former aims to narrow down the gap.

Burger King’s process builds on a customized, made-to-order process. Rather than stock finished goods in inventory, Burger King produces and stocks standard components in a steam table and prepares the ingredients in a non-finished process. Then employees assemble the semi-products when customers place their orders. Burger King provides better, fresher food with this process, although the waiting time for the customer is comparatively longer than the made-to-stock process. Burger King should slightly change its process to stock some inventory for major products in peak times to reduce the waiting time.
Burger King has a machine called the Continuous Chain Broiler with a capacity of 8 burgers per chain, and it requires no human intervention. Patties are placed at one end, and after 80 seconds they come out the other end one-by-one. In the working station, Burger King only needs one worker to place the raw materials into the broiler and assemble them after the broiling process, and the worker could make 12 burgers (or 8 sandwiches) a time. The simple process implies that Burger King requires less staff than McDonalds. Burger King could generate 100 Whoppers and 200 burgers in an hour, which means the average cycle time is 12 seconds for a burger and 24 seconds for special sandwiches such as fish and chicken.
On the other hand, McDonalds cooks their hamburgers on grills, batching 12 patties per grill, and it requires human intervention to turn, sear, and pull the patties. This batching process favors the maketo-stock environment since it can produce a lot of product in a little amount of time. Cycle time for McDonalds is 100 seconds for a batch of 12 patties, so 8.3 seconds per patty, faster than Burger King. McDonalds’ idea was to serve uniformly high-quality food that was delivered quickly and in a clean atmosphere. The emphasis was on quick order times, in contrast to Burger King’s emphasis on fresh, custom-order foods. Both companies traded either time for quality or quality for time.
Burger King’s menu is best known for its flame-grilled cooking process, which results in better tasting burgers. Instead of developing a more creative menu or new burger flavors, Burger King prefers to maintain its menu by focusing on its core products, such as their flagship Whopper sandwich. Their products were also designed for bigger patties, thus their major customers are mostly teenagers and males. With the fast spreading concept of eating healthier, people are starting to care about a healthier diet. Burger King intends to broaden its products to meet this demand by launching expanding product platforms and introducing 21 new or improved menu items in 2012. However, compared with McDonalds’s menu, Burger King’s menu still does not provide as abundant choices as McDonalds.
Burger King applies special wrappers to maintain foods’ quality and freshness and to mark a number to show how long the food is being made. The pictures on the wrappers also represent the special recipes for special order customers. It could better prevent people who work at the counter from giving the wrong orders and having customers receive the wrong burgers. At McDonalds order-takers made note of special orders on a slip of paper and handed to the grill workers who then kept it under the bun top to identify it. Because of the extra time for additional requirements, consumers would be told to step aside while counter workers helped the next customers. This was also the process for regular sandwiches when a regular sandwich was not ready.
Burger King uses a microwave in its production process to keep food fresh and warm whereas McDonalds serves fresh burgers off the grill and stores them in a bin. At McDonalds, if the food is not served within 10 minutes, the food is discarded. Microwaving may affect the freshness and taste of the Burger King burger, and thus the quality of their burgers may deteriorate compared to McDonalds. However, because of this process, Burger King only presents 0.4% waste while McDonalds spends 1.9% more. Also, food wastage leads to paper wastage for McDonalds. McDonalds spends 0.9% more on paper wastage compared to Burger King.
Burger King receives supplies once a week, and the raw materials are ready to use. Burger King stores require a 2 hour preparation time before opening for the food and machine set up and 1.5 hours for cleaning after the restaurants close. McDonalds stores also receive one delivery per week from local suppliers of milk and buns. All food arrives ready to use. However, both opening and closing the store takes about an hour resulting in less setup and cleaning time than Burger King.
Burger King stocks inventory during the assembly as semi-finished goods on the “steam table,” and these goods are assembled after the customer places an order. Thus, the idle time for Burger King’s complete finished-goods are short, which means it could reduce the amount of discarded products. This has a financial advantage, because it is less costly to discard unused semi-finished goods since the total value of the product is not added together already. McDonald’s products are discarded as finished-goods inventory, so the total value is already added to the product, labor plus material costs.
At McDonalds the production area and the counter/drive-thru could not see each other, so a bin manager was required to call for production, manage the flow of product into the bin, and keep the bins stocked and organized. The bin manager also wrapped products. The store manager could predict sales volume pretty accurately and stock the bin to about 50% -75% of what was expected to sell in the next 10minute period. The manager could judge pretty well by experience and through the past few weeks’ data how much inventory was needed for the time and day of the week, noting any special events, the time of the year and the weather. Any product not used after 10 minutes was discarded.
While McDonald’s strategy is to put more emphasis on women and older group by offering healthier salads and upgraded its already good coffee, Burger King continued to market to young men offering high calorie burgers and advertisement featuring dancing chickens and a “creepy looking” king.
As the sun dawns, Varnan casts a glance on the army of employees scurrying around the office, pondering over what new offers should they bring to the table to win the customers who at the moment are loyal to McDonalds or KFC.

Competitive Advantage

Attractive entry-level pricing, a more comprehensive vegetarian menu than meal choices offered by peers in the global quick-service restaurant market and opening stores in crowded area (near metro station) than opening in Mall like competitors are well calculated competitive strategy from Burger King.

• Store Location
  The company took some time between opening new outlets to understand the consumer responses and tweak the strategies to make them more consumers’ centric.
  While the Burger King India restaurants are spread over 2,500 to 3,000 square feet, Varman said the company has up smaller restaurants over 300-400 square feet in the Metro stations in Mumbai and New Delhi and now exploring such stores in Hyderabad as well. It also has stores in airports in Hyderabad, Mumbai and Kochi and in highways in Punjab which too will be expanded. Although Burger King tried to open its stores next to McDonald’s, its overall reach is very less as of now. Also, Westlife Development will accelerate its store opening rate to 40-45 a year from FY20 going forward, which is line with the strategy of KFC and Burger King in India. Rather than competition , it will work as complement rather than competition and will increase the pie.

• Localization of Menu
  Burger King also found its groove with its menu approach, with a more robust vegetarian menu than its competition, including Starbucks. There are eight vegetarian items on the menu, for example, like the Crispy Veg Supreme and the Paneer King. Nearly 38% of India’s population is vegetarian, the highest rate of vegetarian consumers in the world. “India is a very different market compared to anywhere else in the world in terms of the country’s taste palate and unique vegetarian preference. Over 50% of the population here is vegetarian, so we couldn’t take the international menu and apply it here. It had to be completely redesigned.“Then we had to adapt our supply chain to be able to manage that level of complexity, because although it offers unparalleled variety to the consumer, it also has to offer consistency in taste and quality.”

• Pricing Plan
  The average price, both before and after promotions, was the lowest at Burger King compared with Domino’s and Pizza Hut between February and June this year, according to a UBS report.

• Supply-Side Economies of Scale and Scope; (Cluster Approach)
  The calculative move to invest in brand building and address the supply chain and operational inefficiencies is in line with the company’s growing interest in Indian market.Optimistic about the company’s growth, Sandeep Dey, Chief Supply Chain Officer at Burger King India, says that the brand’s franchise growth has offered more opportunities than challenges. “Our overall business philosophy has always been to grow deeper rather than grow wider; to strengthen our existing markets rather than entering new cities,” explains Dey. “That philosophy is actually helping us to leverage the supply chain cost and make it much more efficient.“When we open a new store in a new city, the initial distribution cost is slightly higher, because we are not utilizing the full potential of the warehouses and delivery trucks, for example,” Dey says.“However, when we open five or six stores in that region, the overall distribution cost will go down significantly and the stores will start becoming much more profitable. Therefore, scalability is driving profitability and vice versa.” The company purchases its ingredients and packaging materials through a single third-party distributor which in turn procures from its approved suppliers. The company claims this arrangement gives it access to third-party distributor’s multiple warehousing space and extensive logistics network, which supports its cluster approach and penetration strategy in a cost effective manner. The third-party distributor is ColdEx which is present in 210 cities and has a fleet size of 594 vehicles with 5 distribution centers. Chain restaurants can create distribution networks and systems that take advantage of supply side economies of scale. Has its own distribution cooperative which is, Restaurant Services Inc. (RSI), that manage and act as the purchasing agent for the Burger King system in the U.S… This ensures items move smoothly and efficiently from suppliers through regional distribution centers and each restaurant across the country. BK has a long term exclusive contracts with other strong brand names which was Coco Cola and with Dr. Pepper/Seven-Up, to purchase soft drinks for its restaurant.BK reduce its costs and boost efficiency by installing point-of-sale cash register system and flexible batch broiler to maximize cooking flexibility and facilitate a broader menu selection while reducing energy cost.

• Demand-side Economies of Scale (Network Effects);
  About demand-side economics nothing much to say apart from a few quantific measures like SSGF growth 12%. Sales per store 4cr highest next to MacD.

• Cost Leadership
  By optimizing the company’s distribution cost and leveraging shared services and infrastructure, Dey and his team are driving down transportation costs. Combined with the company’s relevant brand and flexibility in its supply chain, this has proven to be a recipe for success.“Our supply chain has played a tremendous role in helping set up Burger King as a brand in the Indian market,” asserts Dey. “To be able to find high-quality vendors who can deliver consistent quality at competitive costs has been challenging and a lot of effort has gone into the supply chain to ensure we can deliver our complex menu, but I think that has been the real trick which has helped us succeed in this market. We have developed a strong back end that can support our diverse, complex menu and which can fulfil our consumers’ needs.”

Profitability
( Don’t have much data to calculate sales/sqft , ROIC etc operational matrix will do later)

The restaurants are profitable, at the company level the business has become positive in earnings before interest, tax, depreciation and amortization (EBITDA) in 2018-19.

On a per-store basis, both Starbucks and Burger King posted average sales of Rs 3 crore, lower than rival Westlife Development which runs McDonald’s in the South and West and had average sales of Rs 4 crore at each outlet. India has been the fastest-growing market in terms of store expansion for both chains — Burger King had 129 stores while Starbucks had 116 outlets until March this year.

Burger King, however, notched up higher numbers than Jubilant Food-Works (JFL), where average sales per outlet were at Rs 2.6 crore from both Domino’s Pizza and Dunkin’ Donuts.

Peer Comparison

Considering Store economics at their similar stage like BK we have the below observation

Westlife has better sales throughput than BK and JUBI also best EBITDA on a per store basis.

Westlife rentals are lowest due to long term lease while BKs rental cost is the highest due to late entry and specified location like Ariport Metro etc.

JUBI has the best gross margin [PIZA has better margin than Burger] followed by BK then WestLife.

BKs ad spent is the highest since they are late entrance .

• Throughput : Westlife’s restaurant throughput in 2014 was greater than BK. This has further grown at 3% CAGR over FY13-19 to reach Rs49mn per store. JUBI’s throughput in 2008 was just 34% of BK’s, but has improved to 75% by 2019. Pizza outlet structurally operates at a lower throughput than a burger or snacking player.

• Gross margin : JUBI’s gross margin has been fairly stable since 2008 (+30bps in 11 years). Westlife, on the other hand, has improved its gross margin significantly to 64% in 2019, from 57% in 2014. Burger King already operates at 64% gross margin currently.

• Employee costs : A key difference between the employee costs across the players. Both Westlife (2014) and Burger King’s staff cost were at 13-15% of sales, while, Domino’s, given its higher reliance on the delivery model, used to incur 20% staff cost in 2008. Even today, this gap remains with Domino’s at 19% while Westlife and BK at 14-15%.

• Lease rentals : Westlife’s lease rentals are the lowest amongst the three. Even today, Westlife’s rentals average to Rs185 / sqft/ month which is much lower than c.Rs300 for both JUBI and BK. Westlife’s long-term rental contracts with 15% escalation every 5 years (every 3 years for other rental deals usually) gives it this edge over other QSR players.

• Ad-spends : BK spends 8.5% of sales on advertising expense, the highest amongst the three (JUBI and Westlife at c.5%). This is due to being a late entrant in the QSR market.

• Royalty : JUBI and BK have similar royalty rates (c.3.5% of sales). Westlife though already pays a higher rate (c.4.6%) and this is likely to increase to 9.6% by FY26.

• EBTIDA : Westlife had the best EBITDA on a per store basis when the three companies had similar number of stores. This is driven by Westlife’s higher sales throughput more than offsetting the lower percentage margin (versus JUBI).

In India, the revenue per store is higher for burger and snack chains versus pizza chains due to (1) greater affordability (smaller ticket product) and (2) more snacking nature of burgers leading to better throughput.

However, better gross margins at Indian pizza chains help them deliver an overall higher store level EBITDA margin. This results in a very similar EBITDA per store operating metric, ranging from Rs5-7mn.

Subway is the clear outlier with Rs2.5mn of EBTIDA per store due to consumers’ cuisine preference led lower throughput.

Concerns :

Cannibalized its existing sales by putting too much emphasis on value meals, which they sell it in lower price compared to its production cost. Thus, causing them to lose money.

Some food items, for example Pizza Burger, contains 2530-calorie. This served as a concern as Americans opt for a more healthy living.

Legislation for unhealthy fast food threatens not only Burger King but the quick service restaurant as a whole. For example, a health reform bill passed by the U.S. Congress in 2010 required restaurant chains to list the calorie content of the menu.

Lack of product Innovations The “barbell” menu strategies that was introduced at both the premium and low-priced ends of the product continuum did not really help much in the growth of Burger King. Since fast food often associated with low price. Furthermore, the premium items need to be constantly advertised. Moreover, its menu development was deemed as horrible and too much emphasis was given on value meals which causes dissatisfaction among the franchisees. The growing concern of health and fitness in the U.S. as well as the passing of the health reformed bill in 2010 by the U.S. Congress is one of the most important issues to be taken into consideration for the quick service restaurant (QSR) including Burger King. Burger King should be flexible in its approach of product offerings but failed to do so by promoting and creating high calorie and unhealthy food items on the menu.

The industry’s supply chain is fragmented in nature and marked by the presence of multiple intermediaries. The lack of appropriate infrastructure, inadequate technologies, and the non-integration of the food value chain are factors key to the wastage of nearly 30-40% of prepared food across the supply chain. Maintaining a cost-effective supply chain is a prerogative with this industry, failing which, all other input would be useless. It is also necessary to establish a chain of supply in a new region. For outsourced products or those procured from third parties, it becomes important to constantly monitor the quality of such goods.

One observation though, the development obligation to reach 700 stores by CY2025 creates a risk for BK India in a situation where it does not get good locations / favorable terms or if there is a prolonged slowdown in consumption. Remember JUBI’s performance over FY13-17 where average SSSG was 0.6% due to significant demand slowdown but the company almost doubled its store count to 1,117 (Mar’17) from 576 (Mar’13). This had led to an EBITDA margin decline to 9.3% for FY17 from 17.1% in FY13.

Also since it is promoted by a PE firm like Everstone so this is a real concern for me, because most PE fund not likely to hold their investment for long. I don’t understand their strategy or motive behing doing so. Also need to know how this PE firm Everstone has done with their previous investments? If anybody can highlight this then it will be a lot of help.

Reference :-

https://www.quora.com/What-are-the-economics-of-running-a-restaurant

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@naruto wrote:

Appreciation of capital is good but protection of capital is equally important.

Young gullible investors who just learn about terms like p/e or other ratios will find lot of companies that seem to trade at cheap valuations and misunderstand them as value buys.

In my limited experience, Indian stock market is as much treasure hunt as surviving a minesweeper.

I am trying to make a list of fraud companies and the symptoms through which the fraud is identified. A new investor after one-two instances of fraud grows skepticism on the market and maintains the opinion through his life avoiding stock market which is not healthy. They stick to known forms of investment like bank fd, real estate land etc., This compilation is for them.

8K Miles

• For beginners, this stock looks very attractive at a 1.73 PE.
• You google for them and they look credible and time to time AWS keeps awarding them the “best partner” award
• Red Flags
  – Company shows aggressive acquisition led growth
  – Forging a Auditor partner’s signature to transfer money to overseas

Manpasand Beverages

• Very attractive YoY growth & capture of market share
• curious case of manpasand beverages by 2point2capital
• MD, CEO arrested in fraud

Vakrangee

• A company that manages aadhar centers is valued at 50,000+ cr
• Once disclosure norms became strict and the promoters are asked to notify the exchanges about the acquisition / disposal of shares from promoter group, a new strategy emerged. Wolf in the skin of sheep - 1) They float countless companies which hold the stock and are not listed as promoter group entities. 2) Company keep reporting stellar numbers QoQ & these wolf entites keep selling as price goes higher and higher. A bit similar to [monkey seller joke] 3) Once the game is over, they stop reporting the stellar profits. (http://www.clickhere.gr/content/jokesdtlen.asp?jokesen_id=363)
• Phenomenal revenue and profit growth rates and they keep posting addresses of newly added kendras too
• Sebi gives clean chit to Vakrangee
• https://economictimes.indiatimes.com/markets/stocks/news/vakrangee-m-cap-at-rs-50000-crore-from-rs-50-crore-in-2009/articleshow/62613052.cms

Byke Hospitality

• Business model is asset light hotels by leasing hotels and renting it out.
• Sebi investingation of self trades

Satyam

• Once touted as the poster boy of Indian IT after biggies like TCS, Infosys
• Promoters had real estate investments which went into loss. To bridge the gap, promoter proposed merging the real estate company with
• Promoter steadily started reducing the stake from 25.6% -> 8.79%
• One day, promoter comes out and announced the whole fraud affair of over-stating the financials over several years
• As they had a tangible business, eventually the company got merged with Mahindra and it is still a formidable player in Indian IT.

Pincon spirits

• Business: Makes Alchohol beverages and the story was that they are looking to expand into karnataka.
• https://www.sebi.gov.in/enforcement/orders/may-2018/confirmatory-order-in-the-matter-of-pincon-spirit-limited_38952.html

@fellow boarders: Please share feedback and add other instances for the benefit of young investors.

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@rupaniamit wrote:

Moderator - if you think this post can be moved to an existing better suited thread, please do so. I didn’t find one, hence created a new thread.

Sorry for long post. But I hope your time spent reading it will be worth it.

I feel it is very difficult to build a process to avoid a big portfolio crash when markets crash. But a logical framework can work as guideline to help be level-headed. It’s a good time to use common sense when it becomes difficult to think through the options thrown at you by Mr. Market during carnage times.

I used to panic when market crashed like house of cards. Just to be clear – I didn’t get panic attacks when I looked at all that red or that I got sleepless nights. Clicking “sell-all” button and exiting the markets never occurred to me, especially when I got the feeling that the pendulum of emotions is clearly in the extreme zone. But my panic was mainly driven by my inability to take rational long-term oriented decisions for my portfolio, and feeling ineffective as far as brain functioning was concerned. It’s the anxiety which got the better of me disrupting the decision-making process that often leads to poor choices. May be its just the way I am wired naturally. My brain doesn’t function well under time crunching situations because of which I cleared CFA level 3 on my third attempt. It was not that I didn’t know the material that I prepared for in my first two attempts, but my brain used to shut off knowing that clock was ticking against me and my brain froze more and more with every tick.

I realized I need to nurture my natural deficiency. There was desperate need for guidelines, and framework that I needed to work upon to help myself in situations when everyone is losing their mind. You would keep slogging and grinding if the market is consolidating in a range. Generally the portfolio of a buy-and-hold investor like me is not going to do anything in consolidating markets. But, it’s the volatility that gives that opportunity to make those “right” decisions that makes the material portfolio difference. It’s the framework and practice of how to go about keeping calm and taking rational decisions during panic situations, which makes the real difference of taking one’s portfolio capital to the next level. Hence, I went on to creating that framework for myself few years back that has been very helpful to me.

Having a prioritized buy-list handy during good times happened to be the magic wand for most of my problems to handle panic situations. You never know when the market lights are going to turn amber from green, hence having it ready during green times is the key. If you have a prioritized buy-list ready, your brain doesn’t need to wander or it will not be allowed to get frozen, and the buy-list works as a program that has been written for the brain to simply follow the instructions.

History has shown that investors experienced more 10-15% drawdowns compared to larger drawdowns at index level. And there are good odds that in future we are going to experience more 10-15% drawdowns than 40-50% drawdowns. Hence we should spend a lot more time to have a framework in-place for 10-15% corrections.

Below I am sharing my thought process that went into building the framework for me for 10-15% correction situations and I am sharing it with the hope that it will help a new investor as a starting point and they would modify it as per their own investment objectives. It is a fluid generic framework and will evolve with my increasing experience and increasing coverage universe of business that I understand. I would not say that it is complete in nature or is the best one that works in all situations for all type of investors. NO. There is no one right way or one right answer in stock markets in panic situations. It all boils down to the individual’s preparedness and their situation with cash availability, investing style and temperament, type of capital one is dealing with, and ability to take drawdowns. So keep that in mind as you read below lines:

1) Average-up your winners: firstly, I give top priority to averaging-up the portfolio winners. If I have bought a structural business or a business with strong sectoral tailwinds (which are likely to continue in near future too) that has already been a winner and has further room for addition as far as % allocation is concerned, I go ahead and add more of it.

2) Dispassionately, cut your losers & ‘future losers’: rationally, I shouldn’t wait to cut my losers until market corrects itself. Losers should be taken care of much before. But still if they happen to be part of my portfolio after correction, I just generate some cash by ruthlessly selling my losers. Use these funds to add much stronger businesses. I referred to cutting “future losers” too. If the correction is event driven, you would know that event is going to lead certain sectors in medium to long term downtrend, confirming future fate of certain businesses and stock prices. An example here should help to understand what I mean. In Oct 2018 when IL&FS issue unfolded – it was relatively easier to predict that road ahead for certain NBFC businesses will be full of potholes making them “future losers”. I owned both Indiabulls Housing Finance and Bajaj Finance in my portfolio then. Both of them winners with BF a much bigger winner in comparison. I ruthlessly went ahead and cut Indiabulls Housing Finance (3% of the portfolio then) in one go and bought Bajaj Finance with all the proceeds in one go. Looking back, luckily, this move worked out well for me. So the point is to identify not just losers but future losers too and act rationally to it.

3) Reshuffling the portfolio: I perform a periodic exercise asking myself if I understand the business better with every quarter that passes by. On many occasions you won’t know everything about the important levers that move the needle for that business or would not have discovered unique insights about critical factors and hence these would be smaller positions in the portfolio. Thought process is to get foot-in-the-door and then get better understanding and scale it up as conviction increases. Sometimes I have many positions in the tail consuming anywhere from 5-15% of the portfolio. Such panic situation is the best time to reshuffle some of the low conviction businesses to higher conviction businesses. I can always get back to lower conviction businesses in future.

4) A core/compounder position gets higher priority than value plays: my biggest learnings from the market have been to try to get into a situation where you have to take least number of decisions. With a compounder you buy it and hold it as long as the thesis is working out for you (hopefully for many years). But usually a value play (a 2x) – if you are lucky, and if your thesis worked out as expected, you tend to get out of the position when your target is achieved and then you need to work on redeploying that cash to work. Not to forget the tax implications on selling it. Goal is to build a tax efficient portfolio of businesses that you can hold on during good times and bad. And per my experience not all 2x thesis have worked out as expected. Many have turned out to be 0.5x proving out to be mental torture eating away lots of energy that can be spent on understanding better businesses. Hence, stronger quality businesses get priority.

5) Have a plan/rule for how you would Buy that position : it’s not just about buying “right” but how you go about accumulating it may turn out to be much more important. It is very rarely that I have gone all-in in creating a new position during panic times. Most of the times, staggered purchase has worked out well for me. It’s OK if you happen to just accumulate 2.5% of the position during the correction, but your goal was to make it 5% of the portfolio. In panic situation, usually it gets worse before it gets better. So, don’t mind accumulating remaining 2.5% at higher level once dust settles down. Always, I have my next purchase price with quantity ready as I go about accumulation my position in any situation. Creating these rules to how to accumulate beforehand and sticking to them keeps me sane during rough times and good times in the market.

Along similar lines, there is a fluid framework that I attempt to follow for situations when market corrects 25-35% and then another for >50%. It dives more into how to go about thinking to reshuffle the positions since I would have run out of cash by then. And the aggressiveness options that can be applied when index drops more than >50%. I think this framework for higher correction scenarios is not that generic in nature that can be used as reference point by everyone. It is more custom in nature and applies specifically to my investment objectives and my investment style driven by how I handle my personal finances. So I will not be able to share anything about it here.

Finally, having a write-up of guidelines to be followed during panic times has been as much beneficial for me as write-up for why I am buying a business.

I thought to share my learnings and how I attempted to overcome my challenge of facing markets during panic times. But I know above guideline/framework is not a perfect one and has a lot of room for improvement.

We have many amazing investors on this VP platform. I request others (especially investors who have gotten grey hairs by spending time in the market ) to share about how they evolved to handle panic situations. How did you get better at handling curve balls that market throws at you during panic times? What is/are the particular thing(s) that you do differently now to take rational decisions during panic? Any particular real example that comes to your mind that can help us learn from it, would be great.

If you are a new investor with a framework that has worked well for you in panic situations, please don’t hesitate, come ahead, and share your work with everyone. This platform will always be hungry for quality work. And there is always to learn from everyone regardless of the market experience one has.

Cheers!

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@okhade wrote:

I have been a regular reader to this forum and benefited tremendously. My contribution was less so I thought to pen down my limited views to contribute to this forum. Below is my analysis and few recommendations:

Panic 1: Corona Virus
As per me, it has least impact over India as a country. We are poor nation and struggling to basic healthcare. Our fatality is far far higher for diseases for which cure is available e.g. TB, Pneumonia, Dengue, Hepatitis and so on. Statistically speaking, probability of being hit on the road is far higher than Covid-19!
As per me, Corona Virus is a developed world worry, their human life is much valued and due to lack of any vaccine their fear is far higher than us. Any death due to lack of medical treatment is a egoistic issue for them.
We have summer coming soon which is boon for India. Due to intense heat survival rate of virus drops.
Panic 2 - Oil price war
Needless to say, India is a net oil importer and this drop augurs well for us. But at the same time Rupee is depreciating so hard to estimate its impact on us. I believe net-net would NOT be negative for sure.
Panic 3: China Supply Issues
China is a global supplier of raw ,materials so current disruption will have cascading impact from across the globe. Its a near term serious issue for India especially for those sectors which imports raw materials from China. But any supply side issues are always short lived, people easily find the way to build a new capacity elsewhere. So this issue will have a short life span.

Opportunity:

I have very few but safe ideas to benefit from this opportunity which comes once in a decade. Focus is to spot the business which are grown locally and consumed locally. Below names may sound boring to many of you but they have huge margin of safety with decent appreciation ahead. Core investing idea is as summarised below:
I follow 5x10 = 25x2 rule: It means outcome will remain the same when either you invest 5/- with 10X gain vs 25/- with 2x gain. Left had side is definitely super sexy to get but very very hard to achieve while right hand side fairly predictable and achievable. So I have below recommendations based on RHS of this equation:

1- Paint Companies
Asian Paint and Berger Paint is the biggest beneficiaries. Oil derivatives (Ti2O) contributes biggest RM while there will be little drop in their demand.
2- FMCG
VST Industry: I don’t think this business has any impact of all above mentioned reasons. It will continue to sell tobacco and branded sticks, addicts gives a shit to global issues. VST Ind is slowly gaining market share from ITC and super clear to remain focused on its core business. They don’t have any diversification issues like ITC.
NESTLE: Its products are mostly for elite class of India except Maggie. I don’t see any kind of threat to its product. People won’t stop buying Katchup, Noodle, Chocolates, Coffee etc.
Pidilite: Again it’s a beneficiary of oil price drop. There is virtually no competition for its products in India.
3-Lenders
Indian Banking sector is in complete mess. PSU Banks troubles will be forever due to socialistic policies of the Govt and Pvt banks are also into deep shit e.g. Yes Bank, RBL Bank etc. So where the banking business will move too? They will be grabbed by only two lenders HDFC Bank and KM Bank! Kotak looks well placed to benefit the most. Its CEO is still young and knows banking deeply well. My Uday Kotak is a super shrewd banker and knows the art of lending way better than its peers.
SFB - AU Bank and Ujjivan are the best, they lend to poor and these folks I doubt ever heard about COVID or any other things for which world is worried right now. They continue to grow crops, sells vegetables etc. and life for them would be as usual.
Bajaj Finance: It’s already well known and researched stock. It lends to elite class of India, I hardly see any reason for a drop in demand or lack of repayment from his class.
4- Retailer
Titan: More the panic across the world more is the flight to safety which is GOLD. Titan is the best company in retail space, I don’t think Indian stop buying Gold for marriages or occasions and new investment will continue to happen in Gold. Little worry is falling Ruppe, there’s a large possibility that HNIs are buying Gold hence Rupee depreciating. Govt might regulate it so this variable remain a monitorable.

In addition to above there are opportunities in Sp Chemical or in API space but they would be short lives. As I said Supply side issues are always solvable, someone somewhere must be busy building new capacities hence a deep knowledge is must before one invests in this space. If you are sleeping and new supply comes up then it will hit your hard earn money overnight! So I don’t mean to say its not a white space but if you invest then be vigilant to monitor new supplies coming elsewhere in a world!

Good luck guys, looking forward to your valuable inputs to build a high conviction PF. It appears to be a god send opportunity to invest with conviction and get rewarded in next 1-2-3 years.

At last have a colourful and vibrant Holi!

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@dd1474 wrote:

Background:
Established in 1910, ITC is the largest cigarette manufacturer and seller in the country. ITC operates in five business segments at present — FMCG Cigarettes (since inception), FMCG Others (since 2001), Hotels (since 1972), Paperboards, Paper and Packaging (Since 1977), and Agri Business (since 1990).
More details are provided on company website:
https://www.itcportal.com/about-itc/profile/history-and-evolution.aspx

Segmentwise details:
Since the company has presence in multiple business, it may make sense to look segment financals provided by the company over the period. Since 2002, ROCE of the company increased from 40% in FY02 to 135% in FY19. FMCG -Cigarette ROCE improvement (despite lower sales growth) has been main driver to growth in ROCE. Hotel /FMCG-Others/ Agri business has mediocare ROCE (less than 10%) over the years. The company valuation are partially adversely affected by adverse capital allocation decisions of management in Past.

Positive Consideration:

1. Attractive valuation:
   At current price of Rs 160 (19 March 2020), the company is trading at lower than April 2012 close of 163 (31 times PE). From FY12-FY19, PBIT has almost doubled. Current TTM (trailing twelve months) PE of around 13 was last seen in September 2003. So current valuation appears modest if one compare with historical valuation parameter of the company.

2. Among most productive distribution
   I have compiled from various public information sources for various peers of ITC about retail outlet for distibution with March 2019 (or latest Audited sales) in Rs crore for various player. While the information has scope for factual imperfection, still from the compiled information, I find ITC having highest sales per retail outlet among Indian players.
   Enclosing extract of my working:
   

Building world lcass brands on leveraging on distribution network:
The company manage to scale its non-cigarette FMCG business over the large distribution network it built over the years.

The company has scaled up sales very well with almost no presence in 2000. It is also important to note, that the company started its Other FMCG business by entering into Expression Greeting card and WLS Lifestyle brands. In both these businesses, due to change in market dynamic, it was not able create impact and hence exited the business. However, the learning from failure has been used well by creating large brands.

3) Environment friendly operaton
The company has unique identification of being only company in the world to be Carbon positive (since last 14 years), Water positive (Since last 17 years) and solid waste recylcing positive (since last 12 years). This information is sourced from Sustainability report of the company. The company has been publishing sustainability report since 2004 which provide very good insights about company efforts in sustainable growth.
https://www.itcportal.com/experience-itc/index.aspx

4) Cigarette: Giant cash generating machine:
Despite volume de-growth and high taxes, the company enjoy great dominant market position. The company has till now manage to successfully pass on tax hike and also improved profitaiblity in Cigarettte business. ROCE in this business improved from 100% in FY02 to 388% (yes, I mean it) in FY19. PBIT from Cigarette business has grown at 14% CAGR over 17 years to reach Rs 15,412 Cr during FY19, which account for nearly 80% Consolidated PBIT of the company. This increase in PBIT needs special attention in the context of multiple hike in tax/lavies and negative volume growth during significant period under consideration.

Negative Points:
1) Adverse capital allotment
While the company generate large size of cashflow from Cigarette business, same are not utilised appropriately. Capital allocation to Hotel business is neglible 3% in FY19 and FMCG-other segment is around 6% in FY19. The ROCE of Agri business and Paper business are moderate at around 20%+ in FY19, still much inferior to Cigarette busniess.

While, hotel is definitely deserve special attention (or divestment) in my limited understanding, I would see FMCG-Others as future growth driver and Agri and Paper being critical support to growth of FMCG business. Nearly 1/3 of Agri business and Paper Business sales in value being utilised by the other segment of the company. Investment in Agri business is also critical for sourcing of Tobacco and wheat. More details are provided in E chaupal section. I personally would look at Agri Business as core component of business and would merge it with FMCG business.

While there is scope to hive off Paper business generate higher than cost of capital, still, none FMCG players have ventured into Paper business and highly successful. Hence, in my understanding, the company can improve ROCE by divesting from ROCE diluting non-core business of hotel and paper.

2) Higher Management Compensation
While BAT own ~30% stake in company, they are still not in control of operations. In past, the top managment (during 1990s) have defied BAT efforts to increase its stake to majority with support of Indian financial institution (specially LIC+SUUTI+General insurers), which own around 29% stake in company, and further 7% by MF which take difficult for BAT to control the operations.

Since, there was no entity in direct control, the remuneration to employee is relatively more relaxed in ITC. During FY2005-FY2019, Total ESOP cost (in respective year accounting standard) is around ~ Rs 4,000 Cr. Enclosing yearwise ESOP

On positive side, the employee has contributed around Rs 19,763 Cr towards ESOP. While it is difficult to understand how much shareholding employee currently hold as employees might have sold share in stock market post excersing ESOP, still amount involved is substantial enough align employee interest with wealth creation in my opinion.

3) Sin product and not fitting ESG requirement
One of reason for lower relative valuation of ITC as compared with peer companies is due to Cigarette being not good for society health. As a result, many institution are liquidating their holding in ITC and future demand for shares may be limited despite improved financial performance. Government also find Cigarette industry when it need to look out for additional resource to mobilise welfare for regular and contingency plans. This may continue to adversely affect ITC valuation in my personal opinion.

It may be noted that significant share of value addition in ITC is also shared with Government. This factor may provide sufficient breathing sector to keep going .

Barriers to Entry:
1) Regulatory constraint
Cigaretter has huge regulatory entry barriers as license to manufacture are not issued to new players. Also, there is no scope for a new player as advertising of product is not permitted.

2) E Choupal: An Indian micro entperising effort
Since 2000, ITC has develop an unique social infrastrcuture called E Choupal which reaches to rural area and farmers. One reason for successful brand building and having more than 40% market share by Ashirvad/Bingo to procurement of woods for paper is direct access to E Choupal.

Summary:
While there are issue about high taxation, inferior capital allocation and not fit to attract financial investor, given the valuation comfort and scope to improve margin in FMCG products and recent announcement of higher dividend payout, ITC may be interesting company to watch for.

Also, enclosing return for an investor who has invested in ITC IPO (not particpated in right issue and other issues) and calculated holding total shareholding return since 1970s. The XIRR for investor are 24.3% p.a. over 5 decades decades !!! This is excellent TSR for sure in my view. Having said that, past may not be indicative of future and hence one has to evaluate business propsect and growth before making any investment.

Disclosure: My view may be biased due to my investment. Bought share in last 15 days. Not a recommedation, Not SEBI registered advisor, Reader shall do his/her own due diligence before making any decision
ITC Past return 1971-2019.xlsx (24.0 KB)

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@Donald wrote:

Beginning of March, around Holi started speaking to some Market veterans I resonate with and who have seen 2-3 market cycles of this nature. Till then even I was in the sanguine camp, and largely ignoring the “extreme danger” “completely uncharted territory” signs being regularly planted by one of our most experienced members @deepinsight

I quickly realised the response that came almost universally from these astute folks was clear. This is no time to be DEFINITIVE. It was time to create and preserve ammunition. We need to have a better grip on 3 things before we take a position either way

a) Is the India curve going to turn exponential
b) When will the western curve flatten out/elongate - what timeframes
c) Combined economic response of all countries/central banks

Till then we should acknowledge we DON’T KNOW! Watch closely with care to identify above for a better grip on a continuously evolving situation - where no rules, apply. I had some ammunition, but not enough, so decided to purge Portfolio of all non-core bets.

Our @hitesh2710 summed it up nicely, on actions of some trigger-happy friends
There are no additional benefits on being the first-off to buy even if we get it right. Once the sentiments change they will be evident and clear to see. Next 2 weeks remain crucial for india as community transmission/containing takes centre stage.

I’m taking the liberty of selectively quoting Akash Prakash from this BS article Market Meltdown and the Virus! 17 Mar 2020. [Will write to him for permission]

This, however, is unlikely to be a typical recession, as it is a sudden stop to the global economy. Many sectors are going to face severe stress, as consumption evaporates and supply chains collapse. We have no idea how long this will go on. The central banks cannot solve this crisis. It requires action from government. This is primarily a public health crisis, which will morph into a financial crisis. Before this ends, we will most likely see bailouts of the airlines, hospitality and leisure industries.

For India, if we can manage to keep the virus under control, then this will be a buying opportunity. India benefits from lower oil prices, enhanced global liquidity and record low rates. We have been in a slowdown for more than a year, and are not as closely aligned to global supply chains as other countries. The huge redemptions in the EM world (last month has seen outflows of $36 billion) have hit India equally hard, as much of these are passive flows. Some of the tail risks for India are finally being addressed. Much of the corporate clean-up has been done. Valuations are coming into a more sensible range.

If India sees a spiral in cases, then we have a problem. Otherwise, this is a buying opportunity, with a significant longer-term upside. Take a breath and hold your nerve.

The other side of the coin now. There are many friends invested primarily in small caps. They knew they have to purge heavily, but it is very very difficult to have that inner conviction when you see such daily big routs, while hoping against hope for some respite like last Friday’s. Ammunition can be gathered, but at very heavy drawdowns!

I got back to the same seniors to ask what should one do if in that position, in such an unknowable situation like current. Again it was mostly a common refrain that at such times, we have to look at a decent survival first, to fight another day - which by all accounts - if we extend the timeframe - there is huge huge opportunity down the line, which can set you up for the next decade. One can also sell other assets from the overall asset allocation pie to take advantage. Take Loans from family (at zero interest). But all that can happen only if you bite the bullet and ACT to take losses on the chin, bravely. Yes, it takes guts, they said. Inaction is easy, but can be damaging, psychologically.

If you read Rajshekhar Iyer (I am sooo impressed) Interview in Masterclass With Super Investors, by Saurabh Basrar and Vishal Mittal, you might find very useful practical actionable guidelines on limiting drawdown losses. In essence this is what he says " Drawdown Management requires good risk management processes, and decisive decision-making. You have to survive to succeed. He has elaborated quite a lot on how he built his drawdown risk management processes.

They also say this is also the opportunity to work very hard at preparing ourselves for the coming opportunity - but with a peaceful, calm mind. They said you can do that, only if you are at peace, having purged portfolio of all non-core. That’s the only way to sleep well at night, rise up every day with renewed energy, dedicated to do a good job - for the next phase of the market.

I can certainly tell you from my personal experience of last 2 weeks, that yes I have slept very well since having purged my portfolio of non-core bets, with losses.

VP’s most experienced, but reclusive member @deepinsight put it this way, again today.
Wait for things to play out. Wait for personal clarity. See who are the eventual winners. Only then invest.
Presently the time is only to survive and play the losers game.
You win the losers game by not making mistakes!

I am hoping to get the more experienced Market hands to open up here, and advise the community on how to handle current situation, better. The Community will be grateful for it, and their showered blessing will see them prosper more in the next phase of market!

Will try and Invite more seniors inside and outside to contribute here. I am sorry that despite my pushing & pleading I could not make that happen (earlier). And I was too reluctant to pen down anything myself, without getting some inner conviction for myself, which I evidently have now .

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@NauticalTwilight wrote:

This post deals with overall introduction to the International Generics industry

At the outset, kudos to all the folks (@crazymama @ankitgupta @ananth @Donald @spatel ) who as industry outsiders tried to crack the International Generics puzzle and have been making their best efforts to track Indian pharma industry. I have some past working experience in the Industry and am happy to share my understanding of the subject and look forward to collaborate with interested folks. [@stockcollector]

Thanks to @Donald for creating this thread dedicated to International Generics (IG). [Having opened this thread in VP Expert Network, he should also get ready to open his wallet to foot my bill for anti-anxiety medicines that I need to consume to write posts that justify the Expert tag ]
This thread intends to cover all aspects of the IG value chain (R&D to Sales in International Market). In a few months, all of us (who are interested in understanding this domain) should have greater clarity (or confusion - some of the existing notions must get shaken!) on functioning of this industry segment, the key risks from investors’ point of view and understand the limitations (due to information asymmetry) that retail folks have to deal with.

Laudable work has already been done by VP community folks in the following threads: [If there are more, kindly point them and I will add them to the list]:

• ValuePickr Generics Pharma Dashboards - Focusing on asking the right questions!

• VP CHINTAN BAITHAK GOA 2015: Ananth Shenoy: GENERICS PHARMA PIPELINE BASICS

• Indian pharma: Industry perspective

• VP Chintan Baithak Goa 2017: Ankit Gupta: Challenges for Indian Pharma Cos

Though many members are already familiar with various aspects of the International Generics(IG) business, I am going to initiate coverage (this is the closest I will ever get to write an Equity Research report ) with the basics.

Absolute Basics

For people who are new to the sector, it is essential to understand the fundamentals of New Drug Development (also known as Brand / Innovator / New Chemical Entity) and Generic Drug Development.

New Drug Development

• Developing a new medicine that has specific mechanism of action and target disease(s) indication.

For example - drugs like Ramipril, Perindopril are ACE Inhibitors which are used to treat hyper-tension and heart related ailments. This video will make it clear:

Now, the process of New Drug Development:

Summary of US FDA’s framework for approval of New Drugs.

The distinction between New Drug Development and Generic Drug Development:

Brand / Innovator / NCE (New Chemical Entity) Drugs:

• Drug Development Cost - [upto bringing the drug to market] - Around 1 Billion USD. [Varies depending on the type of drug - but this is taken as a general benchmark number]
• Time taken to develop the new drug - Around 10 Years
• Out of 1000s of potential molecules, only a few get designated as drugs capable of treating a disease wherein their benefits of treating the disease indication outweigh their side-effects. During 10 year period of 2009-2018, 271 New Drugs were approved by US FDA - making it an average of around 30 drugs per year. [The comparable number for biologics is 85 but we are NOT discussing biologics and biosimilars here.]
• Patent term period - 20 years. There are complexities and nuances - but in a general sense the new drug gets a patent term of 20 years. There are various patents related to the new drug. The most basic being a composition of matter patent that is held for the mother compound (the new chemical entity / compound) and its derivatives. Patents can be challenged through non-infringing routes of development or a direct invalidation challenge to the patent claims filed by the innovator. The patent term begins from the date of filing. And by the time the drug is finally approved for marketing by a regulatory authority (like US FDA) around 8 years maybe lost by the innovator company. Hence there are patent term restoration rules.
• Regulatory exclusivity - Drug & Health regulatory agencies like US FDA provides exclusivity other than patents. A snapshot of the type of exclusivities provided by US FDA is given here.
• Clinical Trials are essential for proving - safety, effectiveness, efficacy. Done in 4 phases - Phase 1 : 20-80 (normally healthy) volunteers - objective is to see drug safety / adverse reactions. Phase 2 : A few hundred patients(100 to 500) - objective is drug safety + efficacy. Phase 3 : Upto 3000-4000 patients - drug efficacy / effectiveness, whether the drug’s benefits outweigh its risks / adverse reactions. Drug approval is done after Phase 3 results. However, Phase 4 continues post drug approval to check long term impact of the drug on human body.

Generic Drugs:

• Drug Development Cost - 1 Million USD to 5 Million USD . So this is around 1% to 5% of the Brand / Innovator drug. [1 Mil. - Simple products, 2-3 Mil. Complex Products, 4-5 Highly Complex/Speciality products.] [Most generic companies sell products in many regulated markets/territories. Their drug development process is focused on the first market where the product is intended to be launched or the most promising market. For making product filings in other markets, they reuse as much data and protocols that were developed for the first filing. The cost for dossier extension would be around 0.5 to 1 Million USD.]
• Time taken to develop the generic (from the API stage) - Around 3-4 Years
• Generic is developed based on literature published by the Innovator - reverse engineering is done for generic drug development.
• Can be launched only after Innovator’s patent term (in the relevant territory) has lapsed OR the patent is challenged by generic. But, normally, CANNOT be launched upto 5 years from Innovator’s launch because of Data Exclusivity granted to Innovator drugs. [i.e. the Generic CANNOT submit its drug application using Innovator’s data]
• NO Clinical Trials.
• Instead Bio-Equivalence is used to demonstrate that the rate and extent of generic drug’s absorption in the body (or at the intended site) when compared to Brand/Innovator does NOT have statistically significant differences. Get this fact clear - Generics do NOT have to prove efficacy / effectiveness of the drug!!. Innovator has already proved that the benefits of using drug outweighs the risks and hence is suitable for treatment of certain disease indications.

What is International Generics?
The term encompasses generic drugs market across the world - having regulated as well as non-regulated / semi-regulated markets. Normally, when reference is made to International Generics, it is for regulated markets i.e. those countries/territories where a health and drugs regulatory agency (like US FDA, MHRA UK, EMA EU, ANVISA Brazil) has codified (rather stringent) regulations for submitting an application (normally known as Dossier or US Specific ANDA) that is reviewed and approved explicitly before the drug can be launched in the respective market.
Not only does the final drug (known as Formulation or FDF - Finished Dosage Form) require submission of application, but an application - Drug Master File (DMF) or Active Substance Master File for the Active Ingredient (i.e. the medicine in its raw form - called as Active Pharma Ingredient / API / Bulk Drug) is also required.

What does generic drug development process look like?
Companies pursuing generic drug development will have the following processes and operating models:

1. Product selection - This is the stage where company identifies drugs which have a sizeable market (or even promising therapies in advanced Clinical Trials Stage - like Stage 3) in a particular geographic territory/country and across all the major regulated markets where the company intends to market the drug. The company creates a “business case” or “project initiation document” that captures the following:

• Volume - In terms of No. of tablets, No. of capsules (for Oral Solids), other units - ml, mg, gms etc. for other routes of administration like Opthalmic, Injectables, and Dermatological products. Volume is of paramount importance; because while the annual Brand Sales for a drug may be a few billion dollars, it may be driven solely by exorbitant prices (one pill selling at 1000 USD) and low volumes. So even if 3-4 generic companies can crack the code and get their marketing approval, the resultant market maybe a tiny fraction of the brand market.

• Price per unit/SKU and Market Size - Volume multiplied by the prevailing / expected price per unit/SKU will give the Market Size (Value) In $ Million. Guesstimates of annual brand drug sales and probable generic sales are worked for the next few years. This is done primarily using Industry specific databases / solutions provided by organizations like - IQVIA, [Please do watch the forecast link video given on the IQVIA page - will give you the overall idea of what is involved in the process], IPD Analytics, Clarivate Analytics Cortellis, Symphony Health etc. Expected competition from other branded drugs that treat same disease indication, generic competition, and Price Erosion scenarios are worked out. [Price Erosion defined: Assume the Brand / Innovator drug was sellling at 100$ per bottle. If the Generic drug sells at 2$ per bottle then 98% is the price erosion.]

• Guesstimating the expected market size involves several intricacies like:
  (a) Products which are not facing any generic competition when the business case is being worked out - The Gross-to-Net data for Brand drug sales may not be accurate. (This problem is specific to US Market)
  (b) Products already facing generic competition when business case is being worked out -
  Brand Net Sales + Generic Net Sales -> with market share captured from Brand as well as Generics and Price erosion to both the market sizes need to be applied.
  (c ) Existing Brand Sales may NOT reflect the appropriate base value of the market size ($ Mn and/or Vol. / Units) - Brand sales Value (price) or Volume is going to get affected by another competing product [different NDA / Brand small drug product] which treats the same disease maybe through a different mechanism of action. i.e. instead of Generics, a piece of the existing pie is taken away by a different Brand/Innovator.

• IPR Landscape around the world and priority of market launches - If generic companies launch their products after all patents of the brand/innovator expire then their operations are NOT going to be commercially viable. Heart of running a successful generic company is getting the IPR Strategy right! And Pharma IPR is a complicated matter. The company will scan IP landscape across all the territories and decide the development and launch strategy for each territory. The IP needs to be scanned for FDF/Formulation as well as the basic drug APIs. Generally, the dossier / ANDA development will be done for the most promising territory (say USA) and then it is extended to other markets; reusing data and protocols as far as possible.

• API (Active Pharmaceutical Ingredient) Source - Well the equation is simple - No API = No FDF / Forumation. Companies who are vertically integrated will try to have their own API in the filing. If the API is not inhouse then it will tie-up with an API manufacturer. As a part of derisking strategy, more than one API source may also be used in filing - because API switching after drug approval is a long process taking minimum 6 months.

• Estimated cost of manufacturing (Conversion Cost) - Depends on the type of product and expected commercial batch size. Normal Oral Solids could be between $5 to $15 per 1000 tablets/capsules, Oncology / High Potency drugs would be significantly more expensive because they require special containment facilities.

• Company’s competency (R&D and Manufacturing) in developing the drug.

• After evaluating the above parameters (and maybe some more), the company decides whether it should add a drug to its R&D grid/pipeline. Depending on the outcome of subsequent stages, some of the selected drugs may not see the finish line.

2. R&D / Chemistry stage to develop API (Active Pharmaceutical Ingredient - the real medicine which strikes the disease) drug development - also known as Chemistry - because we are developing/synthesizing new molecules. Actually, strictly speaking, not new molecules, but development of existing molecules through literature search and reverse engineering.
   API drug development can be done in-house or APIs can be outsourced from an API manufacturing company. Or a combination model - some APIs are manufactured Inhouse and some are bought from API suppliers.
   Manufacturing APIs need KSM (Key Starting Material). Again the KSM maybe made inhouse or (generally is) bought from KSM suppliers.
   The development of API starts in R&D center of the company at a Lab-Scale. The molecule is developed using literature available on the API used by the brand drug and studying the API (through dissolution and other analytical methods) . Route of synthesis is decided, tweaked and analytical tests are performed to check whether the molecule developed is same as the desired API. Pubchem can be accessed to understand chemistry of the molecules/compounds.

3. Scale up of API - Molecule developed in R&D is at Lab-Scale i.e. would be upto few grams to few 100 grams. The reactor sizes would be like 1KL- 3KL. Once it is established that R&D has successfully developed the molecule at Lab-Scale, it is scaled up to higher batch sizes in pilot plant or commercial plant. The larger size batches manufactured are preserved / stored for recording stability data and all the necessary documentation for Active Substance Master File / DMF is prepared. In case of vertically integrated companies, the ASMF / DMF would be filed only around 4-6 months before their Dossier / ANDA submission. Because filing an ASMF / DMF too early would reveal the drug development pipeline to competitors.
   Successful Scale-Up is of paramount importance. One cannot assume that if a 1 KG batch is stable and consistently successful then 20 KG, 200 KG or 2000 KG will also be successful simply by increasing the ingredients and reactor sizes by factor of 10x. The typical properties of each API make each stage of Scale-Up challenging. [On a lighter side if a non-technical person like me tries to do scale-up from 20 KG to 200 KG by increasing the ingredients and reactor size by 10x then we can expect to see some SpaceX style rocket launches from the reactors ]
   All finalized batches of API have Certificate of Analysis (COA) which certifies their properties and accompanies the regulatory submission or shipment to customer site / captive facility. The API manufacturing process looks like this. Its like a typical chemical manufacturing/synthesis process with lots of bad odor and high temperature around the manufacturing facility.

4. Formulation Development - Just as the case is with API, the company may (a) Do Formulation development in-house (b) Get it done externally - outsourced external devp. © Do in-house development for some drugs and outsourced for some. Formulation development first happens at lab scale inside the R&D center. The formulation development of generics is always done with reference to a Reference Listed Drug (RLD). Scientists access literature related to the brand/innovator (or the RLD if the brand/innovator is not available) drug, and use reverse engineering techniques involving dissolution and analytical methods to develop the formulation. Once the drug is formulated at lab scale, depending on the route of administration of the drug, the appropriate Bio-Equivalence activity is carried out in various phases.

5. Bio-Equivalence (BE) - Reiterating what I wrote earlier. BE is used to demonstrate that the rate and extent of generic drug’s absorption in the body (or at the intended site) when compared to Brand/Innovator does NOT have statistically significant differences. Get this fact clear - Generics do NOT have to prove efficacy / effectiveness of the drug!!. Innovator has already proved that the benefits of using drug outweighs the risks and hence is suitable for treatment of certain disease indications. There are different BE strategies for different types of drugs. Pharmacokinetics of the generic and RLD/Brand drug are to be compared and their difference is to be demonstrated as statistically insignificant. BE is normally done in first in the Pilot phase with limited no. of volunteers (would be less than 20) and drug dosing / drug application results are checked. If Pilot phase results are not successful then depending on the situation - either the protocols are redesigned and por even the formulation may have to be redeveloped. Once the Pilot phase results are promising then BE is taken to Pivotal stage. Pivotal Bio stage is a full-fledged BE study with greater no. of volunteers (upto 40). If Pivotal Bio fails then the company may either go through reiteration of protocol redesign, formulation development, Pilot BE and Pivot BE or looking at the market scenario, product potential and time and resources required for redevelopment, the company may decide to stop the drug development process at this stage. If Pivotal Bio is successful then preparations are done for technology transfer to scale-up the batch size and manufacture the drug at Pilot Plant / Commercial Plant for exhibit / regulatory submission batches.

6. Scale-Up and Exhibit Batches - Upto Pivotal Bio stage, the formulated drug was being manufactured at Lab-Scale. (e.g. Few 100s or 1000 tablets.) Once Pivotal Bio is successful, all the blood, sweat and tears are ready to create the ground for manufacturing Scale-Up / Test batches (net practice) followed by Exhibit / Submission batch. [Scale-Up batches would be of the size around 100,000 Tablets.]
   The current regulations require 6 months of stability data for the exhibit/submission batches. The entire set of documentation for filing Dossier/ANDA is prepared during this 6 month waiting period. On elapse of 6 months, the stability data is included in the Dossier/ANDA application and it is sent to the regulator! Phew!

7. Regulatory approval (or rejection) and IPR clearance - The general reviewing and approval process is explained succinctly here. After the application is filed:

• First hurdle to clear is RTR (Refuse to Receive) - Though one can contest against RTR, but not having RTR is what companies aim (and hope) for.

• If its ANDA filing then the patent certification (Para I, II, III, IV filing) is of great importance.
  Note : In US filings, ANDA filing (Para IV) is considered an act of Patent Infringement and the US FDA is involved in the Para IV filings with 30 Month Stay etc. In other markets, actual commercial launch is considered as an act of Patent Infringement and their Drug & Health Regulatory bodies are NOT involved in the patent litigation between Innovator and Generics.
  US ANDA filings related core part: Quoting directly from US FDA website:

• The Hatch-Waxman Amendments amended the Federal Food, Drug, and Cosmetic (FD&C) Act and created section 505(j). Section 505(j) established the abbreviated new drug application (ANDA) approval process, which permits generic versions of previously approved innovator drugs to be approved without submission of a full new drug application (NDA). An ANDA refers to a previously approved new drug application (the “listed drug”) and relies upon the Agency’s finding of safety and effectiveness for that drug product.

• The timing of an ANDA approval depends in part on patent protections for the innovator drug. Innovator drug applicants must include in an NDA information about patents for the drug product that is the subject of the NDA. FDA publishes patent information on approved drug products in the Agency’s publication “Approved Drug Products with Therapeutic Equivalence Evaluations” (the Orange Book) (described in more detail below). The FD&C Act requires that an ANDA contain a certification for each patent listed in the Orange Book for the innovator drug. This certification must state one of the following:

• Para I that the required patent information relating to such patent has not been filed`

  Para II that such patent has expired;

  Para III that the patent will expire on a particular date; or

  Para IV that such patent is invalid or will not be infringed by the drug, for which approval is being sought.

• A certification under paragraph I or II permits the ANDA to be approved immediately, if it is otherwise eligible. A certification under paragraph III indicates that the ANDA may be approved on the patent expiration date.

• A paragraph IV certification begins a process in which the question of whether the listed patent is valid or will be infringed by the proposed generic product may be answered by the courts prior to the expiration of the patent. The ANDA applicant who files a paragraph IV certification to a listed patent must notify the patent owner and the NDA holder for the listed drug that it has filed an ANDA containing a patent challenge. The notice must include a detailed statement of the factual and legal basis for the ANDA applicant’s opinion that the patent is not valid or will not be infringed. The submission of an ANDA for a drug product claimed in a patent is an infringing act if the generic product is intended to be marketed before expiration of the patent, and therefore, the ANDA applicant who submits an application containing a paragraph IV certification may be sued for patent infringement. If the NDA sponsor or patent owner files a patent infringement suit against the ANDA applicant within 45 days of the receipt of notice, FDA may not give final approval to the ANDA for at least 30 months from the date of the notice. This 30-month stay will apply unless the court reaches a decision earlier in the patent infringement case or otherwise orders a longer or shorter period for the stay.

• The statute provides an incentive of 180 days of market exclusivity to the “first” generic applicant who challenges a listed patent by filing a paragraph IV certification and running the risk of having to defend a patent infringement suit. The statute provides that the first applicant to file a substantially complete ANDA containing a paragraph IV certification to a listed patent will be eligible for a 180-day period of exclusivity beginning either from the date it begins commercial marketing of the generic drug product, or from the date of a court decision finding the patent invalid, unenforceable or not infringed, whichever is first. These two events - first commercial marketing and a court decision favorable to the generic - are often called “triggering” events, because under the statute they can trigger the beginning of the 180-day exclusivity period.

• In some circumstances, an applicant who obtains 180-day exclusivity may be the sole marketer of a generic competitor to the innovator product for 180 days. But 180-day exclusivity can begin to run - with a court decision - even before an applicant has received approval for its ANDA. In that case, some, or all, of the 180-day period could expire without the ANDA applicant marketing its generic drug. Conversely, if there is no court decision and the first applicant does not begin commercial marketing of the generic drug, there may be prolonged or indefinite delays in the beginning of the first applicant’s 180-day exclusivity period. Approval of an ANDA has no effect on exclusivity, except if the sponsor begins to market the approved generic drug. Until an eligible ANDA applicant’s 180-day exclusivity period has expired, FDA cannot approve subsequently submitted ANDAs for the same drug, even if the later ANDAs are otherwise ready for approval and the sponsors are willing to immediately begin marketing. Therefore, an ANDA applicant who is eligible for exclusivity is often in the position to delay all generic competition for the innovator product.

• Only an application containing a paragraph IV certification may be eligible for exclusivity. If an applicant changes from a paragraph IV certification to a paragraph III certification, for example upon losing its patent infringement litigation, the ANDA will no longer be eligible for exclusivity.

8. Commercial launch

• Once the regulatory approval is received, the company may launch the product with no IPR litigation (clean launch) or with ongoing IPR litigation (At-Risk Launch).

• If the generic company loses IPR battle, then “At-Risk” launch can prove to be quite costly. Teva and Sun had to pay USD 2 Billion to Pfizer for at-risk launch of Pantoprazole (Protonix). Apotex paid 76 USD Million to Astra Zeneca for Omaprazole (Prilosec).

• The company can have its own front-end / subsidiary company in the foreign market or can launch the product with a marketing partner.

• Depending on the product(s) involved in the agreement, the model with marketing partner may take any of the forms:
  (a) Pure profit sharing - Products from India are transferred at an agreed Transfer Price (COGS+ Manufacturing Margin). Profits are calculated on quarterly basis (after accounting for Net Sales, COGS, SG&A and other expenses). The profit sharing is generally in the range of 20 percent to 50 percent of the net profits earned on products. The SG&A (Selling General & Admin Expenses) are however charged flat as a % on the Net Sales number. In many cases this SG&A itself is a substantial profit for the Marketing Partner. Generics does NOT require field-force. The fixed cost structure doesn’t change much by taking new marketing agreements.
  (b) Pure Transfer Price model - The manufacturer sells at fixed transfer prices to the marketing partner. The manufacturer margin is fixed irrespective of the prices in market. The upside of profits from net realizable price in market belongs to marketing partner. However, if market price is under pressure then the marketing partner will work on negotiation towards revised transfer prices.
  (c ) Hybrid of (a) and (b) - Upto certain level of market prices the transfer price is fixed. Beyond a level there is profit sharing etc.

• For selling through own front-end - most regulated markets require country level and state level registrations of the company. Also there are restrictions on who can register the company (i.e. only local nationals are allowed in many cases). The supply chain is generally managed through 3PL. The front-end team broadly performs demand forecasting, contracting, negotiations, market intelligence and competition sensing functions. Generics do NOT require any field-force marketing efforts.

Some recommended Industry Resources

• IQVIA / IQVIA Institute (previously known as IMS) is the go to source for understanding macro scenario of all the major IG markets. Regularly publishes reports and webinars regarding prescription drug markets.

• Healthcare Triage’s YouTube channel - Has lots of easy to understand information on US and Other Healthcare markets.

• EdX course by Harvard - Prescription Drug Regulation, Cost, and Access: Current Controversies in Context.

• The Generic Challenge book by Martin Voet

• US FDA - CDER - SBIA Webinars and SBIA page for information on this matter

• Bottle of Lies book by Katherine Eban

• Drug Short - Dirty Money - Netflix

• Pharmacology and drug families - https://www.slideserve.com/kitty/pharmacology-simplified-not-mystified

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