At the outset, we (Amit and I) want to make one thing clear that Garware Hi-tech is a “messy business” with questionable management practices. Two things that interested us in looking at the business were 1) new line of businesses; solar window film and PPF (added recently) crossing over legacy commodity business and 2) management’s sudden change in stance to openly share the business changes with the investor community through con-calls. So before rejecting this business primarily only due to promoter issues, we thought that this business was worthy enough to dive deeper to better understand the changing landscape and check what the risk:reward proposition was being offered by the market. With that being said, our main goal is to share our understanding of the business that we have had so far, and the scuttle-butt findings. And it is upto the reader to determine whether the risk:reward proposition is favorable or not after getting the complete view.

Disc: both are invested.

Background:
Garware Hi-Tech Films Ltd (GHFL) is engaged in manufacturing polyester films. The company belongs to the Garware family. The Garware group was founded by Dr. Bhalchandra Digamber Garware. Dr. BD Garware has four sons; Ramesh Garware (Garware Technical Fiber), Shashikant Garware (Garware Hi-Tech Film), Chandrakant Garware (Garware Synthetics), and Ashok Garware (Garware Marine Ind). All the four companies are listed but only Garware Technical and Garware Hi-Tech seem to be fully operational.

A brief history of the GHFL’s evolution-

There are two broad divisions; Industrial and Consumer.

The company is shifting its focus on the value-added specialty business and has reduced the pie of the commodity business over the years-

Within the value-added business, one particular segment; Sun Control Films, is growing at a much faster rate-

So, even though the overall topline did not grow by much during this period as the commodity business was de-growing, the margins expanded. The company claims that sun-control films is a very high margin business and hence the margin expansion.

This growth in margins and sun-control business has coincided with an industry-wide upcycle and hence, it remains to be seen if GHFL trend is secular and not just a short-term phenomenon

Sun Control Business- These are the window films that we once used (now banned in India) on our car windows to protect from excessive heat and direct sun rays.

• Sun Control is a 450cr business for them (46% of FY21 revenues).

• The company does private labeling and also has 3 brands; Global Window Films (Global), SunControl Films, and Garware.

• The pie of branded business is not specified and the company does not disclose that but gives a broad range of over 60-70%.

• Their main brand is Global which is present in the US and European markets. Global has grown from a 30cr business in FY12 to 200cr in FY20 in the US. Source- Past annual reports
  

• USA contributed 20% to FY20 revenues and became 30% of overall business in FY21. This is a growth of 60% YoY.

Qualitative insights on the Sun Control Business-

• Garware calls itself a “high chemistry” company and claims to be the only company in the world with backward integration for manufacturing Solar control films. Extract from their website
  

• Extract from a User Manual-
  

• Third Largest Brand in the US- Garware claims that Global is the third largest brand in the US after 3M and Eastman. This was confirmed by a neutral industry expert who mentioned that Global is in the Tier-1 category along with 3M, Eastman, and Saint Gobain based on size, quality, and brand visibility.

  • We don’t know how the branded sales have shaped up over the years. The company does not disclose that data.

• Garware claims itself to be the only exporter manufacturer of Sun Control films in India.

• There are not many “quality” sun-control manufacturers outside of the US which is Garware’s key market for this business. Even though the sun-control film is a $300-$400M business in the US, only $75M was imported in CY20. The rest is manufactured in the US.

Key Growth Drivers-

• The company did 115cr capex in FY20 & FY21. 50-60cr out of this was for a new product called Paint Protection Film (PPF). The rest was for modernisation of existing facilities and to make them fungible.
• Paint Protection Film (PPF)- The company has invested 50-60cr and has installed a 300 lac sq ft capacity of PPF. The plant was commissioned in Dec’20.
  • They expect a turnover of 300cr by FY23 end with more than 30% margins.
  • Unlike Sun Control, they don’t plan to do any private label here.
• Expansion in sun control/Consumer Division- The current sun control capacity is running at 100% utilisation. Garware recently announced a 135cr capex to increase the existing capacity of the Sun Control business by 75%. This will take the manufacturing capacity from 2400 lac sq. ft to 4200 lac sq. ft.
  • They expect this capacity to be ready by end of FY22 and should contribute 300cr in 2 years time
  • This capacity is fungible and can also be used to manufacture PPF.
• PPF + Sun Control, they want this business to be more than 1000cr in 3-4 years time which is right now at 450cr.

PPF & XPEL:

PPF is an ultra-thin transparent film that protects the car from minor scratches and protects the surface of the car. It has self healing properties; it can instantly heal if the top layer of the body’s paint is scratched. This is a premium product and is installed only by luxury car owners. More on PPF here.

PPF is not a new product, the film was developed by 3M for military use during the Vietnam War. Until 2011, PPF or Clear Bra as it was known, wasn’t widely popular among car owners. XPEL introduced a self-healing PPF in 2011 for luxury car owners.

XPEL is a $2B company and is the largest player in PPF in the US and globally. Window Film and PPF come in rolls. Installers of Window Film and PPF use software and a cutting machine to cut the roll according to the size of the car. XPEL was traditionally a software company. Their software, Design Access Program (DAP), is considered the best and is used by a lot of installers in the US. DAP has the largest database of window and car surface patterns in the world. Until 2010, XPEL was a software company. Their revenues ballooned from $10M in FY12 to $180M in FY21. ~70% of this is from PPF which was Zero 10 years ago.

XPEL is a classic branding and marketing company which has innovated and mastered the supply chain in this industry and has given the likes of 3M and Eastman a tough time in the PPF market. There are tons of resources on XPEL on the internet since this is one of the best performing US microcap companies in the last 10 years. Sharing a few if someone wants to go deeper-

1. https://twitter.com/iddings_sean/status/1338645392217534466?s=20 4
2. https://seekingalpha.com/article/2676825-xpel-technologies-wrapping-up-a-sticky-model-and-hyper-growth-worth-multiples-of-todays-price 3
3. https://seekingalpha.com/article/1994221-xpel-technologies-an-undervalued-growth-machine-with-multi-bagger-potential 1
4. Xpel Technologies Part 1: Company Overview – Travis Wiedower
5. https://twitter.com/clueless_1337/status/1351306846762487808

Few extracts from XPEL’s presentations-

PPFs are installed by the same tinters who install window films. The supply chain is exactly the same and this increases the dealers/tinters’ offerings and profitability. Garware is confident of achieving 300cr sales from PPF in 2 years time and wants to capture 8-10% market share.

The industry insider confirmed that PPF is growing at double-digits and they think that it will continue to grow at the same rate for the next 5 years because of new car sales and low penetration.

Presence of China- There are three ways to manufacture PPF using- Thermoplastic Polyurethane (TPU), PVC, or a blend of PVC and TPU. Products that are only TPU based are of the highest quality and PVC is the lowest. China is mostly present in PVC and blended based PPF manufacturing, the market of which in the developed markets is very small.

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INTRODUCTION
We all know that a buy and hold (aka: shut up & wait/buy & forget) strategy has worked for investors investing in INDEX FUNDS in the US equity markets. But how has this approach fared for domestic Indian investors in an Indian INDEX? To answer this question I have analysed returns of an Indian index investor over the past 20 years ACROSS VARIOUS ROLLING TIME PERIODS.
In addition to analysing whether index fund investing has worked, I have also tried to analyse whether index funds have beaten Fixed Deposits, what is the ideal holding period for an index fund, how are the returns been for SIP investors, etc

METHODOLOGY
To analyse the returns for Indian Index investors, the first thing to decide is which index to use. I chose the most popular index – the NIFTY 50. However, if we just the Nifty it would understate the actual returns as it does not consider the returns arising from dividends. To get a true & complete picture of returns, the dividends received also need to be factored in. This is where the Nifty TRI (Total Return Index) comes to our aid as it provides the return including the dividends. NSE provides historical data for the Nifty TRI from June 1999 onwards on its website.

The second question to decide is the timeframe. I have come across several misleading posts/write-ups/brochures, etc where people cherry pick the starting and ending date of their analysis to make their point. In order to address this issue I have taken every month from January 2000 until July 2021 and provided returns for every possible rolling One year period, Three year period, Five year period, Seven year period, and Ten year period.
For e.g. January 2000 to January 2001 is the first one year period, February 2000 to February 2001 is the next one year period…………July 2020 to July 2021 is the last one year period. The same thing has been done for the other time periods as well. Consequently, we get 247 One year periods, 223 Three year periods, 199 Five year periods 175 Seven year periods, 139 Ten year periods.

The next question to decide is the method of investment: whether a lump sum investment or whether a Systematic Investment Plan (SIP). To get a comprehensive view, I have calculated the returns for all periods for both methods of investments. For the SIP calculation, I have assumed that a SIP investor will make a fixed investment ONCE every month (on the last trading day of the month) and shall continue to do it for the entire time period without fail. It is important to note that even a monthly SIP can be broken into many smaller investments over the course of month (instead of one large investment at the end of month) but I have not considered the effect of this complication (yet).

Now that we have the returns for the 1/3/5/7/10 year periods, we can run the usual descriptive statistics on them. However to make it more intuitive & visual I have also plotted the returns for each period on a histogram that has the same scale and same bucket size so as to make comparison easy.

Thereafter, I compared the Nifty TRI returns with the Fixed Deposit (FD) rates prevailing exactly at that time period and calculated the excess return over the FD for all the aforesaid time periods. The data regarding the FD rates is taken from the RBI website

NOTE: You may ask why January 2000 and why not earlier. The reason for this is that NSE website provides data for the Nifty TRI only from June 1999 onwards and consequently only from January 2000 onwards we get data for the entire calendar year. If someone knows of any reputed data source providing NIFTY TRI data earlier than June 1999, then please do let me know and also provide me with the data

AN IMPORTANT FACTOR TO KEEP IN MIND
Before talking about the results, one must keep in mind that the Nifty has shown a secular growth trend in the past 20 years (you can see it here). While there have been some years of flat/negative returns, our market is yet to see a LARGE time period (say a decade or more) of flat/negative returns. Hence, in the past 20 years, if you remained invested in the Index for longer time periods of 7 years & more you have ALWAYS got positive returns and that too greater than 5% even if you invested in the worst periods. No wonder that the mutual fund industry always tells that investing for longer periods yields good returns and treats the same as gospel truth.
However, this has not been necessary true for all indices even in the case of growing countries. For e.g. If you see the Shanghai Composite Index, it is around the same level today as it was in July 2009 and AT THE INDEX LEVEL there have been no returns. Now of course if we include dividends & buyback then the returns will be better but then if we invested in such a period then, intuitively, our returns are almost bond like as they are restricted merely to dividends/buybacks. If I manage to find the time, I shall try to do a more detailed study of returns for such markets in a follow up post.

Hence, in case we extrapolate the results given below into the future we must remember that we are implicitly also stating that the future will continue to remain like the past. While that may be the case it may not necessarily be true. Also the returns must be viewed in the context of prevailing inflation. With this in mind let us see the results below

ANALYSIS OF RETURNS OF INVESTMENT DONE THROUGH SIP

• One Year Period: As expected, the returns from one year periods were very volatile as seen from the wide range (max-min) and high standard deviation. Importantly, in 25% of the time we lost money and 1/3 of the time our returns were below 5%. The data seems to be normally distributed (though this is not evident in the above histogram due to the way I have made my buckets)

• Three Year Period: The 3 year returns were much less volatile and range & standard deviation drop significantly. We lost money only in 8% of the time (as compared to 25% in the one year period). The data is moderately skewed to the right

• Five Year Period: The volatility further reduces in the 5 year period. Also we did not lose money in any of the periods. Furthermore in 54% of the time our returns were in 5%-15% range. The data is heavily positively skewed

• Seven Year Period: From this period onwards the results start getting interesting. The volatility continues to narrow and the dispersion of the returns is closer to the average. Not only there is no loss of money, but also the returns in virtually all periods were above 5%. Furthermore 74% of the time our returns were above 10%. The data is heavily positively skewed and with high peaks

• Ten Year Period: The results continue to get better and a staggering 89% of the times, the returns were above 10%. However the returns>20% were only 12% of the time compared to 21% of the time in the 7 year period. NOTE: y-axis has been topped at 45% despite the fact that there is a data point above that number because I wanted to maintain comparison with charts of other time periods

ANALYSIS OF RETURNS OF INVESTMENT DONE THROUGH LUMPSUM
I have done an analysis of even the lumpsum investment and the detailed images for the same are on my blog post. Not posting it here as this write up already has too many images
However, the key takeways are:
*The results of even a lumpsum investment across the 1/3/5 year time periods mirrors the basic pattern seen in the SIP histograms. However the 7 and 10 year periods are different.

• The 7 year lumpsum return has a lesser range of 24% vis-a-vis 38% in the SIP return and thus the dispersion of returns is much lesser. This can also evident from the negative kurtosis of the lumpsum return vis-a-vis the positive kurtosis of the SIP return. A negative kurtosis typically means lesser data at the tails as compared to a normal distribution
• While the 10 year lumpsum return shows the same average, standard deviation and range as that of the SIP return, it has a significantly different distribution. As evident from the high negative kurtosis, the data shows a kind of uniform distribution which is very different then that of the SIP. It shows that 40% of the time the returns were in the 15-20% bucket as opposed to only 14% in the SIP. But 22% of the times, your returns could also be in the 5%-10% bucket as compared to only 11% in the SIP.

OUTPERFORMANCE OF LUMPSUM INVESTMENT OVER A FIXED DEPOSIT

As seen above, the times when the Index outperformed the Fixed Deposit improved significantly from the Year 7 onwards

CONCLUSION

If you want only one single takeaway from all of the above (with the caveat that the future would be similar to the past as stated earlier) then it is this: The ideal time frame for investment in an index is 7 years and above as not only did you not lose any money but also managed to get a return>5% in ALL of the periods. Furthermore, also remember how a return is calculated: it assumes that you WILL exit after your timeframe is over even if the market is pessimistic at that point of time. However, if you are not in need of any funds but are willing to wait till the tide turns (and even assuming that you don’t invest further money) then your returns could improve and more so in the case of an SIP where your exit matters more than the entry

If you want to print the results and wish to share them I have made a handy PDF for you to download from my blog. I would love to hear your critique on my process as well as your take on the results through comments / twitter.

There are many follow through analysis that can be done and if I get the time to do it I will post it here.

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Analysis of multibaggers and a few misses

Motivation for writing the thread comes after reading this excellent article https://buggyhuman.substack.com/p/are-you-really-sorted-out where he elaborates the two key criteria - (1) Knowing what works, (2) Knowing what works for me. In India, investors buying cheap companies are looked down upon and growth/“quality” is considered the only ‘true’ investing. This is hogwash. Deep value investing is perennial (praying at the altar of Graham). Whether it works for you or not, is the only question and I want to say that it does work for me. Here’s the proof. (This is not to say that growth/“quality” investing doesn’t work, it sure does, so does momentum, so does technical, but if anyone comes to you and says buying cheap companies doesn’t work, show this thread).

At the portfolio level: CAGR 24%+ over 20+ years. On a portfolio level, it’s a 9x bagger (early investments were very small).

Methodology

• Contrarian deep value, crisis situations, special situations (heads I win, tails I don’t lose much).
• Largely follow a classic Graham/Walter Schloss approach of buying statistically cheap cos, special situations, turnarounds etc.
• Book value and dividend yield remain important metrics apart from EV/EBITDA (you can add ROIC or RoE if you like Greenblatt).
• NOT a growth investor, NOT a macro, NOT a technical/momentum investor.
• Avoid cos with debt, dislike banks and other leveraged cos.
• Book part profit on a 40% gain, let the rest ride forever.
• Average down if conviction holds.
• Lollapalooza returns - when I buy a cigar butt stock which turns out to be high growth eventually.
• Investment horizon - 30 years, oldest holding: ~20 years. (Your investment horizon should be your own goals, there’s no point in assuming a 5 year or 10 year investment horizon if you do not need the money at that time)
• With such long timelines, the returns will be VC-like, following Pareto, 20% will deliver all the returns, rest 80% will be dead (4 out of 5 stocks will go down to zero, I’m ok with that).

Some choice examples (hits and misses) from my portfolio. ***I am deliberately avoiding recent buys. This is NOT a full list. (CAGR includes dividends, as calculated by valueresearchonline.com portfolio.) ***

Morepen labs

Detailed note

First bought: Dec 2014

Avg price: 8

Price Sep 2021: 61 (5x+)

CAGR returns: 43% p.a.

Learnings

Bought as a statistically cheap company among the sector, though a leader in certain products (see thread above). Took the risk of promoters not having a great reputation. The co has performed brilliantly over time.

Mastek Ltd

VP thread:

First bought: Sep 2014

Avg price: 99 (est)

Price Sep 2021: 2900 (~30x)

CAGR returns: 65% p.a.

Learnings

Bought as a risk arbitrage play during the Mastek-Majesco demerger and simply held on.

Datamatics Global

VP thread:

First bought: Jan 2015

Avg price: 62 (approx)

Price Sep 2021: 312 (~5x+)

CAGR returns: 32% p.a.

Learnings

Bought because it was a statistically cheap IT services company, part profit booked, then held on

Hinduja Global

VP thread:

First bought: Jan 2015

Avg price: 390 (heavily averaged down later)

Price Sep 2021: 3050 (~8x)

CAGR returns: 36% p.a.

Learnings

Statistically cheap services company, part profit booked, then held on. Promoter finally found some time to focus on it and it has given great returns.

Paushak

VP thread:

First bought: Oct 2014

Avg price: 342

Price Sep 2021: 8500 (~25x)

CAGR returns: 86% p.a.

Learnings

Statistically cheap company, good promoter background, high-risk products manufacturing with oligopolistic characteristics and high barriers to entry. Never in my wildest dreams did I think it would be trading at these valuations ever.

Vardhman Acrylics

VP thread:

First bought: Aug 2015

Avg price: 28

Price Sep 2021: 66 (2x+)

CAGR returns: 27% p.a.

Learnings

Statistically cheap company, good promoter background, part profit booked and held on to the rest.

Tata Steel Long Products (Tata Sponge)

VP thread:

First bought: Sep 2014

Avg price: 460 (massively averaged down)

Price Sep 2021: 890 (2x+)

CAGR returns: 13% p.a.

Learnings

Statistically cheap company, good promoter background, part profit booked and held on to the rest. Bought high and continuously averaged down, reaped the benefits as the commodity cycle turned. Averaged down with high confidence only because of promoter confidence.

Seamec

VP thread:

First bought: Jan 2015

Avg price: 70 (upon averaging down)

Price Sep 2021: 1100 (15x+)

CAGR returns: 54% p.a.

Learnings

Statistically cheap company, questionable promoter background, part profit booked and held on to the rest. Never thought it would give such wonderful returns, thanks to the shipping boom going on now.

Manali Petrochemicals

VP thread:

First bought: Jun 2014

Avg price: 14 (upon averaging down)

Price Sep 2021: 92 (6x+)

CAGR returns: 43% p.a.

Learnings

Statistically cheap company, part profit booked and held on to the rest. Never thought it would give such wonderful returns.

Trigyn Technologies

VP thread:

First bought: Feb 2015

Avg price: 29 (upon averaging down)

Price Sep 2021: 116 (4x)

CAGR returns: 27% p.a.

Learnings

Statistically cheap IT services company, part profit booked and held on to the rest.

HDFC Bank

VP thread:

First bought: 2003

Avg price: 104 (adjusted for splits/bonuses)

Price Sep 2021: 1550 (~15x plus dividends)

CAGR returns: 20% p.a.

Learnings

Bought based on a Wall Street Journal article. Then simply held on. I do not buy banks anymore.

Vinyl Chemicals

VP thread:

First bought: Aug 2014

Avg price: 35

Price Sep 2021: 230 (6.5x+)

CAGR returns: 44% p.a.

Learnings

Statistically cheap company, solid promoter background. I never thought it would give such wonderful returns, still dunno why the market values it so highly, but oh well, no complaints.

Prima Plastics

VP thread:

First bought: Nov 2014

Avg price: 52

Price Sep 2021: 128 (2x+)

CAGR returns: 22% p.a.

Learnings

Statistically cheap company, personally I expected more from this co, still do.

BSE

VP thread:

First bought: Nov 2014

Avg price: 363 (massively averaged down)

Price Sep 2021: 1236 (3x+)

CAGR returns: 15% p.a.

Learnings

Statistically cheap company, exceptionally strong business model, oligopolistic nature. Heavily averaged down on every fall, reaped good returns later as it recovered, booked part profit, holding on to the rest.

Voith Paper

VP thread:

First bought: Nov 2014

Avg price: 581

Price Sep 2021: 1300 (2x+)

CAGR returns: 23% p.a.

Learnings

Statistically cheap company, good promoter background.

PNB Gilts

VP thread:

First bought: Jun 2018

Avg price: 26

Price Sep 2021: 66 (2x+ plus high dividends)

CAGR returns: 31% p.a.

Learnings

Statistically cheap company, good promoter background, pretty much a risk-free trade.

Kirloskar Industries

VP thread:

First bought: Apr 2016

Avg price: 613

Price Sep 2021: 1578 (2x+)

CAGR returns: 28% p.a.

Learnings

Holding co discount, statistically cheap, commodity cycle.

Other multi baggers of note

Ashok alco-chem
2x+

Force Motors (29% p.a. CAGR)
2x+

Tainwala Chemicals (26% p.a. CAGR)
2x+

Ambika Cotton (16% p.a. CAGR)
2x+

Coral Labs
2x+

Other healthy returns so far, but not multi baggers (yet :-))

Indian Toners (15% CAGR) Indian Toners and Developers: Value buy or value trap?

MOIL (15% CAGR) Moil

Haldyn Glass (17% CAGR) Haldyn Glass Gujrat Ltd

Control Print (25% CAGR) Control Print - Deserves attention?

Exited with healthy profit

• Majesco (post dividend) Majesco Limited - looking Forward
• Capri Global (Sep 2014 - May 2018, 3x+) Capri Global Capital-Yes your money matters!
• Infinite computer solutions (delisted) Infinite Computer Solutions

Wiped out

It is important to note that this method leads to a full 100% loss on some investments once you go wrong.

• Lloyd Electric (LEEL) - promoter fraud - Lloyd Electric & Engineering Ltd (LEEL)
• DHFL (Promoter fraud) Dewan Housing Finance Limited
• Eros International (Questionable accounting) Eros international
• (quite a few in the early days, e.g Suzlon)

The bottom line (thanks for reading this far)

• Buying statistically cheap companies works in Indian markets
• There will be gut-wrenching ups-and-downs, stay the course. This is not easy, that’s your edge and that is why others can’t do it
• Read a lot, wait for the right time then buy and hold on for a long time. Do not follow the herd, ever (fundamentals of being a contrarian)
• By and large the only risks with deep value investing are 1. Promoter risk and 2. Leveraged cos. Avoid (2) like a plague and pray that the promoters do not steal from you.

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Hello Value Pickrs,
I am 35 year old businessman, execute water supply projects such as Electro-mechanical works of pumping stations, distribution Sub-stations etc (Gov. tenders), I was also dealer of electric motors(Bharat Bijlee) and pumps(Wilo Mather & Platt),

After running successful growing business for several years I slowly lost interest in running it mainly due to quality of people (customer) I had to deal with, so I was looking for something else to do.

After reading investment books I developed strong interest in analysing and valuing listed businesses. So I started to gradually increase time for investment analysis/studies and reduced time allocated to business activities, for 3 years I gave up growth and only bid for profitable orders and happily watched let go of many of my previous orders (did not bid). Had to continue with business for 3 years parallel with investment studies/analysis to have some income source for yearly family spending’s.

As business activities reduced, working capital got free and started investing this capital in listed securities since 2019, in 2020 covid sell-off my portfolio went down 55% on 23rd march. During that time I had mixed feeling to do either what is rational (as per my reading knowledge) or sell off as market can go down even more in uncertain economic times. I decided to keep away emotions from investments and took former option.

From the books/ letters/ blogs I read I think I’m more influenced by warren buffets technic of measuring portfolio results by looking at progress made by businesses you hold rather than price performance. As said in 3 idiots “Kabil bano, kamyabi zak marke piche aayegi”, same way focus on business performance, price will follow sooner or later.

I’m not a buyer of either value investing or growth investing side but invest solely based on future (owner’s) earning discounted to present value, the more margin of safety the more I like it. Growth is simply an important component of my calculation of value.

My investment thesis usually is to find a capable & rational management, running a business with good or improving economics, doing things differently than peers, and available at discount to intrinsic value.

Purpose of this post is to give & take knowledge and improve investment skills.

My portfolio with rationale as below,

1. Time Technoplast ( 20% of portfolio as on 18-3-2021)
Market leader in packaging in almost every country they operate, share of value added products is increasing so ROE, ROCE will increase in future. Stable business economics and growing.
Was available at deep discount.
Avg. buy price: 37.98

2. IDFC First bank ( 11% of portfolio as on 18-3-2021)
What is hidden under the book of financial institution is almost no one knows, so I think bet on financial institution should be based on honest & capable management.
Past track record of capital first, increasing share of retail assets & liabilities, management walking the talk, doing things differently than other banks (I like it most), legacy pain going away gradually.
Was available at discount.
Avg. buy price: 38.32

3. KG Petrochem ( 11% of portfolio as on 18-3-2021)
Techno-savy management (Father-son team) running the company,
Manufacturing and marketing of Terry Towel, Made-ups & Garments etc. in the international market as well as domestic, a fully computerized system maintains uniformity of quality, strength, colors, printing and any other customer specification. Supply to customer like Walmart & Saturday knight ltd., - good growth potential though competitive industry.
They entered Technical Textiles in 2018 - Manufacturing of Artificial (PU) leather, I think less competitive industry and high demand, a business with good economics.

Was available at deep discount.
Avg. buy price: 183.57

4. Vipul Organics ( 20% of portfolio as on 18-3-2021)
Its highly unorganised industry.
Due to strict environmental regulations in western developed world, polluting dye & pigment manufacturing shift to Asian countries,
Again due to implementation of strict environmental regulations in India, small unorganised players are going out of business and only handful of organised players will have all the market share. (Installing & running Effluent treatment plant is not economically feasible for small/unorganised companies)
Company recently completed capacity expansion (6 times existing) and now doing backward integration capex.
I think this 6 times capacity will absorb immediately in 1-2 years as even after such a large expansion it’s like a drop in ocean. (World fourth largest producer Sudarshan Chemicals have just 3% global market share, we can imagine how big unorganised sector is)
Global large players going out of business, this means their customers have to buy from Asian low cost manufacturer’s further scope of easy growth for Vipul

Environmental regulations act as an entry barrier as small manufacturers can’t afford Effluent treatment plant

Operating leverage will kick in due to expansion, backward integration & economies of scale

Improving economics of business from last several years and this trend is expected to continue.
Was available at deep discount.
Avg. buy price: 114.07

5. DHP India ( 10% of portfolio as on 18-3-2021)
DHP India Ltd is a Kolkata based ISO 9001:2008 certified company in the manufacturing of LPG regulators & accessories used for various LPG applications.

Many years ago company realised that by selling these products in India, they will have to face intense competition, low profit margins etc. so they decided to export finished products and only sale the machining scrap in India. This strategy worked very well for them.( Doing things differently, I like it)
This is a promoter run company and promoters have skin in the game with whopping 74.37% shareholding. They have strong and varied range of products as per requirement of varied markets, their products are of high quality & safe which is the requirement of quality oriented foreign markets, at the same time they sell it at affordable prices which gives them edge over foreign manufacturers, as manufacturing in India is cheap due to cheap labour, electricity & incentives from gov.
There is also need of a various Licenses and certifications required from each country to manufacture or sell such products within that country for specific technical requirements & safety measurements, gives another advantage to company, as it has already obtained such licenses & certifications in various countries. (Entry barrier for competitors)
The future global market is very optimistic relating to LPG Appliances.
Growing trend for consumption of Low Pressure Regulators & Gas Appliances.
Expanding into newer untapped markets.
Company is confident of obtaining satisfactory orders in the coming years.
Only issue is that management seems not a good capital allocator, as its generating high free cash every year and management has no clue what to do with that, if they do anything stupid with pilling cash, I will sell immediately.

Was available at discount.
Avg. buy price: 420.48

6. PPAP Automotive ( 13% of portfolio as on 18-3-2021)
Market leader in sealing systems,
Management seems rational with capital allocation, and at constant endeavour to save expenses.
Cyclical industry but economics of business are good.
Was available at discount.
Avg. buy price: 259.97

7. GNA Axle ( 11% of portfolio as on 18-3-2021)

Manufacture & supply axles to tractors in domestic market and to commercial vehicles in western markets
Lowest cost producer,

Taking market share away from competitors (Foreign competitors going out of business)

Margins improved from 13% to 15-16% due to latest machinery/automation & other cost cuttings, which seems sustainable

Price pass on mechanism with customers

Very high temp. in forging as high as 1000 degree C, not a good condition for workers, so robotics & automation gives advantage over informal companies

Cyclical industry
Was available at discount.
Avg. buy price: 264.99

8. NBR Bearing ( 03% of portfolio as on 18-3-2021)
Tie ups with auto OEM’s for customised bearing, so its long term association
Competitors can’t just get in, high entry barrier due to customisation
70% market share in domestic Needle roller bearing market
Strong R&D
Rising exports
Cyclical industry
Was available at discount.
Avg. buy price: 70.31

Today my portfolio value has increase to the point that if I sell out 65% of equity investments and invest that in fixed income instruments at 8% returns, all my yearly expenses will be covered. So I finally closing down my business activities entirely.

Your valuable suggestion and views are invited

91 posts - 27 participants

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TL;DR - Noob, Late entrant to market, Looking to stay invested for period of 15 (or more) years, seeking review of targeted portfolio and investment pattern over next 3-5 years.

Hi,

I have been somewhat interested in how economics work and stock since late 90s. Been observing stock market behavior from same period. But truly understood the principle of compounding and thus the opportunity lost only in the last couple of years. But never late than never, so last year after the crash (Approx aug 20 I started studying with a goal to invest). The last 6 months have been repeated rounds of reading (amidst all the other stuff life throws at you, hospitals, offices, kids, bills etc). Tried to ingest as much of ROE, ROCE, EPS, P/E, D/E, P/E By Industry P/E (this is something I made up to judge relative over or under valuation - because in current scenario, everything is over valued) value investing, growth investing, contrarian investing as much as I could. Discovered screener in the process (thank you, thank you. If you IPO, I am buying). Also discovered Saurabh Mukherjea and Ashwath Damodaran. Regretfully I could not finish the intelligent investor. Have a copy, but it progresses very slowly. Should I force myself through to the end? Sahil’s suggestion of ‘The Swedish Investor’ is much more my type. Read a lot of annual reports and other bse/nse docs as well (Understanding of the same has lots of room for improvement though). Also discovered valuepickr, and have read through most of the threads about the firms I have chosen. Usually from 2020 onwards, some from 2019. Have not read all the way from top to bottom though - you guys discovered some of these when they were basically non-entities.

My final portfolio chosen for investment is given below. A brief note of the investment rationale is also given. I follow it up with a brief about some of the other companies which came very close but I finally discarded with a heavy heart (Nestle for example). The portfolio has been chosen to approximately be equally exposed to large cap blue chips (consistent compounders), growing mid caps (growth) and small and micro caps (just discovered or undiscovered or value unlocking yet to happen). Don’t know if my choices are appropriate or not.

My plan is to invest in SIP fashion over the next 3 years, equal weights when buying. May not rebalance - but not decided yet. I have been looking for the last 6 months for the economy to catch up to the market, or vice versa, but that is not how the ground reality is playing out. So finally almost ready to jump in. Choosing SIP mode over lumpsum + SIP, cos with current valuations, markets correcting is very likely, but irrationally it may go up. Over the next three years though, we will probably have seen the up and the down and I would have managed to average - now whether I average upwards or downwards remains to be seen.

I would like to achieve long terms 20%+ on my portfolio - Otherwise funds like Axis Equity, Quant Active, PPFAS are doing 19%. Advisory services like Purnartha - 35%+, Rohit Chauhan and Vijay Malik - 19%, any one of those would work.

Current Targeted Portfolio

Category 1 : Blue-Chip or close, Consistent YOY growth, Relatively low volatility on screener charts, High ROCE - consistent compounder theory. I add the key tipping point or key doubt next to the stock.

Pidilite - excellent on all parameters. Secondly, this is an industry which should be dependent on the economy, but it hardly cares, good eco, bad eco, it keeps going upwards.

Atul - again rock steady growth, firm is around for almost like 100 years or so, international presence, highly diversified, favorable sector.

Whirlpool India - best rock-steady growth among the consumer durables, also good appreciation.

Britannia Industries (won over Nestle on account of better stock appreciation and lower per stock price, in spite of its near 97% monopoly in baby powder). Also more fair value (PE to industry PE) at the moment.

HDFC Bank - still don’t know very well about understanding banking and NBFCs, so going by recorded history on this one.

Bajaj Finance - primarily on account of the Saurabh Mukherjee analysis about the big data aspect of this business,

Asian Paints - again the Saurabh analysis about business process efficiency.

Abbott India - Growth Charts and relatively undervalued still. PE to Industry PE is 1 or thereabouts. (Divis is 2.47). Pharma sector.

Category 2: Growth Stocks - Usually mid-cap to large firms. Expectation is these have momentum, tailwinds and are in the expansion stage of their businesses, should be high gainers for a few years before they settle down to steady growth (but with the current markets and economy, will have to keep fingers crossed).

Aarti Industries - Undecided about this, late entrant, growth is rock steady, the DMAs are like straight lines, but the debt is worrisome.

Fine Organics - Rock steady growth since inception, high ROCE, good reputation, favorable sector.

GMM Pfaudler - The current correction from highs seem like an opportunity, Otherwise firm seems like a very good monopoly play across a whole bunch of industries, but especially a very solid proxy for the pharma and chemical sectors, both of which are pretty good sectors now.

Muthoot finance - Growing steadily, has harnessed the untapped gold in our country, lots of expansion still possible, caters to masses.

Dr Lal Path - Same as Muthoot basically, except this has harnessed health instead of gold.

Indiamart intermesh - Somewhat of a conviction bet against the valuation aspect. Platforms will be the next thing - google, facebook, whatsapp, airbnb, uber, ola, - same for this. Additionally first mover, and profitable. How many profitable tech unicorns there are out there - almost zero (uber, zomato, swiggy, etc etc). Info-Edge I let go just because of the profitability angle. Also their mobile first approach.

KPIT tech - Sahil was looking for an IT firm, Maybe he could take a look at this. Everything they are doing is in the sunrise sectors of tech - AI, robotics, etc. Recent listee.

Ratnamani metals - consistent compounder, only slower. Steady growth. even in a horrible sector. let go of maithan alloys, APL Apollo and APL Apollo Tricoat here just because this seems safer.

Indraprastha Gas - Best Gas bet I could find. Gas reserves in our country, drive against fossil fuels, solid growth.

Indian Energy Exchange - Sits squarely in the intersection of the platforms, deregulation, anti-fossil fuels, and mass participation plays. monopoly to boot.

Relaxo Footware - Consistent compounder, Consumer, Mass market, Steady growth.

Garware Tech Fibres - Parameters are good. But the story - An old indian company (in ropes, of all things), reinvents itself, rebrands itself, and becomes a leading player in scandinavian and australian fishing nets and in general, value added fibres - the management capability (vision, direction, execution) required to be able to pull off something like that is imho, incredible.

Category 3- Basically bets.

PI Industries - solid steady growth - consistent compounder type, big old company, agro-chem. This beat both coromandel and vinati.

Suprajit - valuepipckr forum thread was what convinced me at the end. Especially donald’s notes. And especially the part about where it foresaw the decrease in halogen OEMs and went for the after-market. International, quite diversified, seems to have fixed its problems in recent past. If auto revives, is well poised for growth.

RACL Geartech - The client list. Growth is somewhat steady but the spike last year worries me. Do we have runway still?

Chemcrux - quite old, very solid management with great academic backgrounds, excellent numbers. Easiest annual reports to understand.

Dixon - Overpriced, but huge opportunities and is perfectly placed. Wins over amber for its diversification.

Galaxy Surfactants - This is basically from Little champs by Saurabh Mukherjea, but their web-site was what convinced me. Also the client list. Basically a proxy for FMCG growth.

CDSL - again the platform play, duopoly, and consumer participation in stock market will invariably increase over the gyears.

Laurus - Similiar to Dixon. Very well placed, Very overpriced. Pharma tailwinds.

Suven Pharma - somewhat risky, but seems like proper value unlocking after demerger is not yet through. Plus pharma sector tailwinds.

IRCTC - monopoly. Will grow as the india railways grow.

Thats it.

Category 4 - Companies which lost out -
Affle India, AIA Engineering, Alkyl Amines, Amber Enterprises, Apollo Tricoat Tubes, Astral Poly Tech, Avenue Super., Bata India, Berger Paints, Colgate-Palmolive, Coromandel Inter, Dabur India, Deepak Nitrite, Dhanuka agritech, DISA India, Divis Labs, Frontier Springs, Gujarat Gas, Havells India, HCL Technologies, HDFC, Hind. Unilever, Honeywell Auto, Info Edg.(India), ITC, Jubilant Food., Kotak Mah. Bank, L & T Infotech, Larsen & Toubro, Lumax, Mahanagar Gas, Manappuram Fin., Mangalam Organic, Mishra Dhatu Nig, Navin Fluo.Intl., Nestle India, PPAP, Pulz Electronics, Refex Industries, Reliance Industries, Sanofi India, Shree Cement, SRF, Symphony, Tasty Bite Eat., Tata Consumer Products, Timken India, Titan Company, Trent, TTK Prestige, Hawkins, Vaibhav Global, Varun Beverages, Vinati Organics, Voltas, Axtel Industries, Maithan Alloys, MoldTek Packaging, TCS

A few questions that bother me -

Should I be entering the market at this time?
What should I be looking at for exit criteria?
What should be my monitoring frequency - in my understanding, if I have to monitor this daily, then my choices are, most probably, already wrong.

Apologies for a very long post. I understand this sort of question has probably been asked many times on this forum before so you may be tired of it. I wouldn’t have posted this, except that the current market valuations are very scary and diving in just like that seems, you know, a little foolhardy.

Any advise, ideas, suggestions, opinions - will be much appreciated. Thanks.

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At the outset, we (Amit and I) want to make one thing clear that Garware Hi-tech is a “messy business” with questionable management practices. Two things that interested us in looking at the business were 1) new line of businesses; solar window film and PPF (added recently) crossing over legacy commodity business and 2) management’s sudden change in stance to openly share the business changes with the investor community through con-calls. So before rejecting this business primarily only due to promoter issues, we thought that this business was worthy enough to dive deeper to better understand the changing landscape and check what the risk:reward proposition was being offered by the market. With that being said, our main goal is to share our understanding of the business that we have had so far, and the scuttle-butt findings. And it is upto the reader to determine whether the risk:reward proposition is favorable or not after getting the complete view.

Disc: both are invested.

Background:
Garware Hi-Tech Films Ltd (GHFL) is engaged in manufacturing polyester films. The company belongs to the Garware family. The Garware group was founded by Dr. Bhalchandra Digamber Garware. Dr. BD Garware has four sons; Ramesh Garware (Garware Technical Fiber), Shashikant Garware (Garware Hi-Tech Film), Chandrakant Garware (Garware Synthetics), and Ashok Garware (Garware Marine Ind). All the four companies are listed but only Garware Technical and Garware Hi-Tech seem to be fully operational.

A brief history of the GHFL’s evolution-

There are two broad divisions; Industrial and Consumer.

The company is shifting its focus on the value-added specialty business and has reduced the pie of the commodity business over the years-

Within the value-added business, one particular segment; Sun Control Films, is growing at a much faster rate-

So, even though the overall topline did not grow by much during this period as the commodity business was de-growing, the margins expanded. The company claims that sun-control films is a very high margin business and hence the margin expansion.

This growth in margins and sun-control business has coincided with an industry-wide upcycle and hence, it remains to be seen if GHFL trend is secular and not just a short-term phenomenon

Sun Control Business- These are the window films that we once used (now banned in India) on our car windows to protect from excessive heat and direct sun rays.

• Sun Control is a 450cr business for them (46% of FY21 revenues).

• The company does private labeling and also has 3 brands; Global Window Films (Global), SunControl Films, and Garware.

• The pie of branded business is not specified and the company does not disclose that but gives a broad range of over 60-70%.

• Their main brand is Global which is present in the US and European markets. Global has grown from a 30cr business in FY12 to 200cr in FY20 in the US. Source- Past annual reports
  

• USA contributed 20% to FY20 revenues and became 30% of overall business in FY21. This is a growth of 60% YoY.

Qualitative insights on the Sun Control Business-

• Garware calls itself a “high chemistry” company and claims to be the only company in the world with backward integration for manufacturing Solar control films. Extract from their website
  

• Extract from a User Manual-
  

• Third Largest Brand in the US- Garware claims that Global is the third largest brand in the US after 3M and Eastman. This was confirmed by a neutral industry expert who mentioned that Global is in the Tier-1 category along with 3M, Eastman, and Saint Gobain based on size, quality, and brand visibility.

  • We don’t know how the branded sales have shaped up over the years. The company does not disclose that data.

• Garware claims itself to be the only exporter manufacturer of Sun Control films in India.

• There are not many “quality” sun-control manufacturers outside of the US which is Garware’s key market for this business. Even though the sun-control film is a $300-$400M business in the US, only $75M was imported in CY20. The rest is manufactured in the US.

Key Growth Drivers-

• The company did 115cr capex in FY20 & FY21. 50-60cr out of this was for a new product called Paint Protection Film (PPF). The rest was for modernisation of existing facilities and to make them fungible.
• Paint Protection Film (PPF)- The company has invested 50-60cr and has installed a 300 lac sq ft capacity of PPF. The plant was commissioned in Dec’20.
  • They expect a turnover of 300cr by FY23 end with more than 30% margins.
  • Unlike Sun Control, they don’t plan to do any private label here.
• Expansion in sun control/Consumer Division- The current sun control capacity is running at 100% utilisation. Garware recently announced a 135cr capex to increase the existing capacity of the Sun Control business by 75%. This will take the manufacturing capacity from 2400 lac sq. ft to 4200 lac sq. ft.
  • They expect this capacity to be ready by end of FY22 and should contribute 300cr in 2 years time
  • This capacity is fungible and can also be used to manufacture PPF.
• PPF + Sun Control, they want this business to be more than 1000cr in 3-4 years time which is right now at 450cr.

PPF & XPEL:

PPF is an ultra-thin transparent film that protects the car from minor scratches and protects the surface of the car. It has self healing properties; it can instantly heal if the top layer of the body’s paint is scratched. This is a premium product and is installed only by luxury car owners. More on PPF here.

PPF is not a new product, the film was developed by 3M for military use during the Vietnam War. Until 2011, PPF or Clear Bra as it was known, wasn’t widely popular among car owners. XPEL introduced a self-healing PPF in 2011 for luxury car owners.

XPEL is a $2B company and is the largest player in PPF in the US and globally. Window Film and PPF come in rolls. Installers of Window Film and PPF use software and a cutting machine to cut the roll according to the size of the car. XPEL was traditionally a software company. Their software, Design Access Program (DAP), is considered the best and is used by a lot of installers in the US. DAP has the largest database of window and car surface patterns in the world. Until 2010, XPEL was a software company. Their revenues ballooned from $10M in FY12 to $180M in FY21. ~70% of this is from PPF which was Zero 10 years ago.

XPEL is a classic branding and marketing company which has innovated and mastered the supply chain in this industry and has given the likes of 3M and Eastman a tough time in the PPF market. There are tons of resources on XPEL on the internet since this is one of the best performing US microcap companies in the last 10 years. Sharing a few if someone wants to go deeper-

1. https://twitter.com/iddings_sean/status/1338645392217534466?s=20 4
2. https://seekingalpha.com/article/2676825-xpel-technologies-wrapping-up-a-sticky-model-and-hyper-growth-worth-multiples-of-todays-price 3
3. https://seekingalpha.com/article/1994221-xpel-technologies-an-undervalued-growth-machine-with-multi-bagger-potential 1
4. Xpel Technologies Part 1: Company Overview – Travis Wiedower
5. https://twitter.com/clueless_1337/status/1351306846762487808

Few extracts from XPEL’s presentations-

PPFs are installed by the same tinters who install window films. The supply chain is exactly the same and this increases the dealers/tinters’ offerings and profitability. Garware is confident of achieving 300cr sales from PPF in 2 years time and wants to capture 8-10% market share.

The industry insider confirmed that PPF is growing at double-digits and they think that it will continue to grow at the same rate for the next 5 years because of new car sales and low penetration.

Presence of China- There are three ways to manufacture PPF using- Thermoplastic Polyurethane (TPU), PVC, or a blend of PVC and TPU. Products that are only TPU based are of the highest quality and PVC is the lowest. China is mostly present in PVC and blended based PPF manufacturing, the market of which in the developed markets is very small.

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About the company:

Somany Home Innovation Ltd (SHIL) was formed by the demerger of Consumer Products & retail divisions of HSIL Ltd and further marketing and distribution of Building products of HSIL has been vested into Brilloca Ltd which is now a 100% owned subsidiary of SHIL. The company got Listed on 26 Dec 2019.

There is a thread on Valuepickr only about the demerger deal

The company’s strongest brand is Hindware and it has helped the company grow sustainably by expanding into new categories.

The company has 3 Product Segments:

Building Products: (71% of Revenue)

In this segment, Company has decades of experience and has an iconic brand in sanitaryware Hindware. Products range consists of sanitaryware, faucets, plastic pipes and fittings, premium and super-premium tiles.

Consumer products: (26% of Revenue)

Retail: (3% of Revenue)

The Retail portfolio, through the brand EVOK, consists of a range of products across categories, such as furniture, home décor, and furnishing, wall fashion, modular kitchen and wardrobes, and engineered wood furniture, with modern designs that cater to different styles and needs of the customers. With the presence of physical stores, franchise business partners, and robust developing platform www.evok.in, EVOK is on the path of becoming the most promising omnichannel brand in the furniture, modular kitchen, decor, and furnishing categories.

SHIL has grown its Total Addressable Market to 40000 Cr by diversification into new product segments consistently.

Financial Highlights:

Financials and annual reports for the company are available only for the last 2 years. Financial information collected from the last 2 years annual reports:

Revenue from building products has been stable and muted growth in the last 2 years. The Consumer Products division increased its revenue by ~50% and increased its share of revenue from 18% to 26% and also turned EBIT positive. Retail segment has been significantly affected by store closures due to Covid and Lockdowns.

One thing that can be observed from here is that Building Products is a stable business with stable margins and has room for margin expansion as the closest competitor CERA has its EBIT margins in its lower teens. Consumer Products division has been expanding aggressively not at the expense of margins but with improving margins, which is a good sign. Finally the Retail division which is a small % of revenue is a loss making venture for the company now but this shouldn’t be a major concern for investors at this point.

Let’s delve deeper into each category and its products:

Building products:

The Building Products division has some marquee institutional clients

Plastic Pipes and Fittings:

Plastic pipes and fittings segment, through the brand TRUFLO by hindware, comprises Chlorinated Polyvinl Chloride (CPVC), Unplasticised PVC (UPVC), Soil-Waste-Rain (SWR) pipes and PVC pipes for potable water & overhead water storage tanks

Concall snippet about TRUFLO:

TRUFLO by Hindware is a direct competitor to Astral and the SHIL is very aggressive in marketing and holding many campaigns with plumbers just like Astral. I personally met few stores and received positive feedback on the product and there is a good amount of traction here. Management says that they expect the size of pipes and fittings business to do a turnover of 1200-1400cr in the next 5 years

2021 annual report says TRUFLO is the fastest-growing pipes and fitting brand in India.

Key figures on the pipes & fittings industry from Astral annual report:

Sanitaryware & Faucets:

Sanitaryware market was pegged at 4800 Cr in 2020 and expected to grow at 7.4% cagr between 2021-2027. The Faucets market was pegged at 9000 Cr.
Hindware as a brand has a leading market share in sanitaryware and Faucets. The top 3 players have more than 90% market share among the organized players. A snippet from reliance securities on CERA and Sanitary & Faucets:


This is from CERA Concall where management says it’s difficult to precisely estimate the market shares for the sanitaryware segment

TILES:

Overall Indian Tiles industry is estimated to be 35000 to 40000 Cr in 2019 with exports comprising 35% of revenue. The tiles sector is largely unorganized due to limited product differentiation. However organized players are slowly increasing their market share. Exports for tiles doubled in the last 3 years and are expected to continue the strong growth.

Indian Premium Tiles market is estimated size of 10000 Cr and is at an inflection point. During 2019 SHIL forayed into Premium & Super Premium Tiles and sells under the brand NEOM. The portfolio consists of Glass vitrified, Ceramic, Full-bodied vitrified, Super-slim, Cladding & Parking Tiles.

Tiles is a commoditized business and premiumization is the only way to play here without losing margins

Consumer Products

The Consumer Durables market in India is estimated to be 76000 cr and likely to be double to 1.5 lakh crore by 2025 at a 11.7% CAGR according to Frost & Sullivan.

Home appliances are the fastest-growing segment in the Indian market and there are vast untapped opportunities in appliances like Kitchen Chimneys, Water Heaters, Air coolers, Microwave ovens, food processors, refrigerators, water & air purifiers, ceiling fans, and others.

Let’s delve into all Consumer products which SHIL sells:

Water Heaters:

A Frost & Sullivan Report from 2019 says that the market size was 2500 crores and is expected to grow over 10.5% CAGR to 4100 Cr by FY2024. Electric water heaters dominate this category by 82% market share and the rest in Solar. Solar heaters are expected to witness a higher growth ~17% cagr FY19-FY24

Hindware is the #6 player as per the latest investor presentation, which is commendable progress. In the year FY21, a JV has been established with Groupe Atlantic which has decades of experience in Water heaters. More details are below:

Personally feel the water heater business to scale up further by leveraging on the export market.
Kitchen Chimneys:

In FY20 Kitchen Chimneys also had a market size of ~2500 Cr and is also a fast-growing segment and expected to reach ~5200 Cr by 2025 at a ~16% cagr.

Kitchen Chimney Market Share

Source (StoveKraft RHP)
No Sign of Hindware here but the latest investor presentation says SHIL is the #2 player in the Kitchen chimneys segment.

Built-in Hobs:

Market Size for Built in Hobs is 473 Cr and is expected to grow to 800 Cr by 2025 at a ~11% cagr .

Market share for Builtin Hobs

Source (StoveKraft annual report)
SHIL Previously (HSIL) featured here with 5.6% market share making it the 6th largest player in this category.
Cooktops:

Cooktops as a segment has a market size of ~2500 Cr and is expected to reach 5300 Cr at a 15.5% cagr by 2025.

Air Purifiers:

Air Purifiers is a ~430cr market as per a report from Frost and Sullivan and the demand for air purifiers is concentrated around NCR and its not expected to grow.

Water Purifiers:

As per a report from Frost & Sullivan, Water Purifiers Market is a 4200Cr+ market and growing at a fast pace of 14% cagr.

Air Coolers and Ceiling Fans:

Every company has launched 100’s of SKUs of Air Coolers and Ceiling Fans. I see an intense competition here from multiple companies. In the Air coolers segments, there are incumbents like Symphony, Kenstar, Crompton, Orient, Bajaj, Havells, Voltas. Hindware also has products across multiple price points and Products also look aesthetically good and have a good rating on Flipkart & Amazon. Air cooler’s market size is expected to reach 9000 Cr by 2025. Symphony having a 50% market share among the organized players. Competition intensified in this segment which is visible from Symphony’s declining Operating margins.

Concall snippet:

Ceiling Fans also have competition from the same players but the premiumization of products could help here. This segment is a fragmented space and getting a market share of higher single digits is also a commendable job.

Management guides a revenue CAGR of 20-30% in the medium to long run for the whole consumer products basket.

Management guiding 14-17% margins in the next 3 years for both Building products and the Consumer business.

Investment thesis:

• The Sanitaryware is expected to grow at a CAGR of 7-8% for the next 6-7 years. the company’s leadership position and launch of premium and luxury products can help to improve the margins
• In the PIPES and fittings segment TRUFLO is a very fast-growing brand and management expect the sales from it to clock 1200 -1400 cr in 5 years
• The Consumer products division looks more promising from the management commentary. From what they have achieved in a short span of 6 years if they continue the growth guided by management and improving margins, SHIL can be one of the biggest players in the segment in few years.
• Valuations: Closest competitor in the Building products segment is CERA sanitaryware and Its 2021 sales were 1224 crores and SHIL revenue alone from the Building products segment is 1262 crores.
• CERA Market cap= ~5800 Cr and SHIL market cap= 3000 Cr The valuation gap is huge and with a fast-growing consumer products division that demands better valuation I believe SHIL deserves better valuations

Risks:

• Management giving very optimistic guidance and might not be able to execute
• Given the demerger has happened recently limited financial history is available for any forensic accounting checks

Disclosure: Holding a tracking position

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Our coverage of the midcap IT stories here at Valuepickr has missed Birlasoft, and I thought it’s time we keep a record of the investment thesis, and it’s development for posterity.

What’s the play?

Giant IT services companies like TCS and Infosys are the middlemen between customers that want to adopt modern solutions to cut costs, and pure tech companies such as Microsoft, Google, etc. that form their backbone.

We’ve seen the following trends in the last few years:

1. Having modern digital solutions to legacy problems are often an avenue to improve productivity and improve margins for companies. Covid has accelerated this spend, and will be a key driver of growth going forward.

2. Smaller IT companies have realised they can’t compete with giant incumbents and have healthy margins at the same time. The emerging solution seen across the pack is that they pick a few verticals and become the best solutions provider in their own niche.

Goal is to carve a niche in our verticals where we are better than the big players. We can’t solve every problem, but what we choose to solve, we can do much better than anyone else. - Dharmender Kapoor, interview with BQ, June 2021.

Okay, what are their verticals?

They have four main verticals. From the 2021 annual report:

Birlasoft helps customers in manufacturing to accelerate their Industry 4.0 adoption.

1. BFSI - to leverage open APIs and automate both front-office and back-office transformation;
2. Energy and Utilities - to enhance field collaboration and real-time service excellence, optimize operations and improve asset performance;
3. Life Sciences - to automate drug discovery and pharmacovigilance processes.

Here’s how the revenue mix has changed over the years:

Why now? What has the journey been in the last few years?

The story becomes interesting after 2015, when Birlasoft brought in Anjan Lahiri, and he worked on the company until 2019 when two things happened. They merged with KPIT Technologies and became the digital enterprise company of today, and Anjan Lahiri stepped down due to urgent personal reasons.

After this, they revamped the board, with Mr. Dharmender Kapoor taking over as MD, and in the last two years have onboarded senior talent. Their current CFO has been on the IBM senior management for 20 years, and this trend has continued if one looks at their hiring on Linkedin.

How has their business model evolved?

1. They’ve started focusing on their top clients and have trimmed tail accounts. Furthermore, they’ve started selling more to their top clients across their verticals. This is seen through three data points in FY21:

• Lower $1 million deal wins, more $5 million deal wins.
• 97% of new deals are from existing clients.
• Increasing TCV trend in deal wins, FY21 was their best year.
• Annuity has improved from 60% in FY20 to 70% in FY21.
• Deals are now multi service rather than single service. New deals don’t necessarily fall into one vertical.

2. They are constantly working on internal efficiency to improve operational metrics. The key metric management mentions repeatedly is the Days Sales Outstanding, and Utilisation rate:

Revenue per headcount across the quarters:

This has been steadily improving, with a drop in the latest quarter. Management commentary on the same:

We lost $1 million of bottomline due to covid. Employees in India took leave when the second wave hit, and we didn’t dock their pay. Without this, the quarter would have been even stronger.

Accounting for this, the profit/employee for this quarter would be 1.52 as well.

The last data point is important while considering the difference in wage costs between India and the US.

From the latest earnings call on the onshore/offshore mix (paraphrased):

We usually hire locals (onshore) if there is a crunch, as the hiring lead time is a lot quicker than in India where there is a 3 month lead time. When we hire offshore, we replace onshore subcontractors. Clients are also on the same page with starting projects on site and finishing it offshore. We improve our margins, they get comfortable with deal structure.

Okay, numbers are improving. Do they have ambition?

Paraphrasing what Mr. Kapoor said in June’s interview with BloombergQuint:

By 2025, we want to have 7500 Cr. of revenues (3500 Cr. today, implies ~18% CAGR). We will do this by:

• Growing top 30 accounts by > 20%;
• Platform strategy: partnership with Azure / AWS to offer solutions across the value chain;
• New channel for sales; good partnerships already in place.

Expecting profit CAGR to be much higher than revenue CAGR in the next 4 years. Profitability will grow. 3-4 quarters ago, this target of billion dollars was a dream. 2 quarters ago it became aspirational. Today, I’m far more optimistic and it’s looking like it can be a reality.

Absolutely no doubt that I and other top management will continue to work at Birlasoft until this goal is met. They’re motivated, excited, and handsomely incentivised to stay. We have our plans set in place for the next 3/4 years.

Financials and Cash Flows

• Are currently debt free and have 1100 Cr. of cash in hand.

Risks

1. The vision is entirely dependent on Mr. Kapoor and his close circle. If they leave in the next few years, big questions to ask.

2. Dependent on their partnerships with SAP, Microsoft, AWS. Currently a Microsoft gold partner, which gives them benefits to companies searching for solutions providers.

3. Execution - Reliant on better deal wins and client mining to meet their 7500Cr. target.

When we acquired KPIT, used to think 75 million dollar deal wins were a great target for a quarter. Today, 200 million dollars should be the average every quarter.

However, Q1FY22’s deal wins have fallen short of their own metrics.

4. Their target of 1 billion dollars is a nice headline, but it implies a mid teen CAGR going forward. This is something we have heard from other midcap IT companies like FirstSource. Hence, is their target super normal?

Disclosure: Invested from lower levels, no recent transactions.

With current valuations, it’s becoming increasingly difficult to find low hanging value fruit. This post isn’t necessarily to offer a slam dunk investment opportunity, but to track a company here that may become more attractive/unattractive going forward.

Two amazing sources of information on the company:

From our very own board member:

https://www.youtube.com/embed/0LeQR5R1Zas

https://www.youtube.com/embed/gG6F8tuwo0U

Finally, to those with a BQ Blue membership, the BQ Edge series with White Oak is a lovely window into the smaller IT companies.

Will write further posts on management commentary, and takeaways from the earnings call.

19 posts - 11 participants

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The Business

Tata Power (TPR) is India’s Largest Integrated Power Company with a generation capacity of 12,808 MW reaching 12.1 million customers. It has been the No 1 Solar EPC player seven years in a row with more than 30% in clean energy.

Tata Power, formerly a part of the three entities jointly known as Tata Electric Companies, is a pioneer in technology adoption and is India’s largest integrated power company.

TPR has started focusing on new age businesses in addition to its regulated business of power generation, transmission & distribution. EV charging, Solar rooftops, Solar pumps, Solar modules and cells, micro grids, utility scale solar EPC, solar RO systems and home automation systems are its new ventures and will drive the business of the future.

They have started investing in intellectual property and has received 2 patents in FY21.

GLOBAL INDUSTRY DETAILS

• With an increasing number of nations responding to the challenge of climate change, the energy landscape is undergoing change, with greater focus being lent to cleaner sources of energy. More than 100 countries have pledged carbon neutrality by 2050 and many more such commitments are on the horizon.
• Renewable capacity addition has beaten all previous records, with more than 260 GW being added in 2020, exceeding 2019 growth by 50% as reported by IRENA (International Renewable Energy Agency)
• Share of renewables in new capacity additions rose considerably for the second year in a row, accounting for more than 80% of the capacity additions, with solar and wind accounting for 91% of the renewables.
• As per International Energy Agency (IEA) World Energy Outlook 2020, renewables are expected to overtake coal as the primary means of producing global electricity in 2025.
• As per a Hydrogen Council report, there are more than 200 large-scale projects for a combined $ 300 billion of proposed investment through 2030.
• The three Ds – Decentralisation, Decarbonisation and Digitalisation – are driving transformation of the energy sector, creating opportunities for new business models like Energy-asa-Service (EaaS), which is likely to further disrupt the utility sector.

INDIA INDUSTRY DETAILS

• Govt of India plans to raise renewable energy capacity from targeted level of 175 GW in 2022 to 450 GW by 2030.
• Another major focus area of the government has been increased participation of private players in the Transmission and Distribution (T&D) space, through the Tariff-based Competitive Bidding (TBCB) route in transmission and PPP (Public-Private Partnership) or franchisee models in the distribution segment in a bid to improve performance. Distribution continues to be
• The weakest link in the power value chain, which faces challenges of high Aggregate Technical & Commercial (AT&C) losses, insufficient tariff hikes resulting in a widening Average Cost of Supply (ACS)–Average Revenue Realised (ARR) gap, accumulation of regulatory assets and cross-subsidisation.

Transformation plans for the future:

• New business: From a commodity player to a service provider for the end consumer.
• Customer growth in focus: From a ~ 3 million customer base in FY’ 20 to 20 million customer base in FY’25.
• Portfolio transformation: From a 30% clean portfolio to over 60 % Renewables portfolio in FY’25.
• Growth scale-up: From 12.8 GW to 25 GW capacity in FY’25.

Rooftop solar

• Market to grow from 6.6MW to 30MW by FY25
• Target of 5000 cr of revenues from solar roof tops by FY25

Residential and Industrial rooftop solar:

• 30,000+ total & 15,000+ residential customers.
• 500+ MW installed, ~40% CAGR (FY18-21)
• Ranked No 1 Solar EPC Player for 7 years in a row
• Pan India network of 250+ Channel Partners

Solar-powered water pumps:

• Over 35,000 Pumps across India
• Market Leader in Solar Pumps.
• Govt is encouraging the use of solar pumps for irrigation purposes under the KUSUM scheme with a 60% subsidy. The aim is to reach 3.5 mn farmers. Tata Power has 30K+ and is expecting to reach 1L+ by FY26.

Future Plans

• TPR has decided not to invest any further capital into coal based generation. TPR will phase out coal-based generation completely as their respective power purchase agreements (PPAs) expire, e.g. Maithon FY35, Mundra FY37, Trombay extended by five years to FY24 and Jojobera FY31/32.
• TPR has planned to move to 60% clean energy by FY25, 80% by FY30 and 100% by FY50.
• TPR expects commissioning of 900MW of its Renewable Energy projects over the next 6-9 months. It has doubled its solar PV manufacturing capacity to 1,100 MW of cell and modules under Tata Power Solar Systems Limited.
• The management expects to incur a capex of Rs.7000-8000 cr in FY22. Around 50% of this would be for its Renewables portfolio, while another Rs.1000 cr is related to Odisha DISCOMs.
• The company has prepaid 1,500 crs of 11.4% perpetual debt. The net debt slightly increased to 38,898 crs. The prepayment of high-cost debt has helped reduce the interest cost from 7.99% last year to 6.95% this year. The net debt to equity stood at 1.7-1.57 compared to 1.81 last year. Net debt to underlying EBITDA has also come down to a healthy 4.1x.
• Company expects Solar EPC to boost up its earnings for the next two years. The large-scale utility EPC order book continues to grow, with orders worth 743 crs won in Q1FY22, taking the total order book as on 30 June at 7,257 crs.

The future focus is on renewables

• Renewable energy unit IPO: Company is planning to raise just over Rs. 3,500cr by listing its renewables business.
• The company has a roadmap to be one of the major players in India in EV charging. It has tied up with OEM partners to provide home charging facilities to EV car buyers.
• It has set up close to 500 public charging points in nearly 100 cities and plans to expand to over 3,000 charging points in the next one year. It has also collaborated with fleet owners which serves as an assured revenue model. TPR plans to extend their charging points to 1 lakh by FY25.
• They have collaborated with Central Railway to launch EV charging points at Mumbai’s railway stations.

Electricity Amendment Bill 2021

De-license power distribution

• Allowing private sector players to enter the sector and compete with state-owned power discoms
• Giving consumers a choice to choose a distribution company in their area
• Universal service obligation to ensure companies do not cherry pick customers

Mandatory Renewable Purchase Obligation (RPO)

• Penal provision for missing purchase obligation

Experience from Orissa to manage urban, rural and semi-rural to be very helpful

• Tata Power has taken over the entire state’s power distribution
• Orissa distribution to be profitable by FY22

Tata Sons is backing the changes

• Tata Sons has reposed faith in the company and has bought into 2,600 cr of equity share capital on preferential basis. This has resulted in Tata Sons’ shareholding going from 35.27% in FY20 to 45.21% in FY21.
• Dr. Praveer Sinha is the CEO & Managing Director of the company and is a PhD. from IIT, Delhi with over 36 years of industry experience. He is also the Co-Chairman of the CII National Committee on Power as also on various Industry bodies. He is one of the most well-respected people in the industry.
• TPR tops the CRISIL ESG score for power companies in India.

Risks and Challenges

• Distribution continues to be the weakest link in the power value chain, which faces challenges of high Aggregate Technical & Commercial (AT&C) losses, insufficient tariff hikes resulting in a widening Average Cost of Supply (ACS)–Average Revenue Realised (ARR) gap, accumulation of regulatory assets and cross-subsidisation.
• COVID-19 induced challenges led to further deterioration in the financial position of Discoms as the deferment of bill payments by consumers reduced collections, thereby putting pressure on their revenues and limiting their ability to pay the Generating Companies.
• Receivables have increased from 4500 cr as of Mar-20 to Rs5600 cr as of Mar-21, however, they have remained stable at 55 days of sales in FY21.
• Fluctuation in coal prices and / or USD-INR currency can create challenges for the Mundra UMPP as it is dependent on imported coal.

Financials

Screener - Tata Power Company Ltd financial results and price chart - Screener

• The company has a low ROCE of 7.36% which is likely to increase with reduction in debt and increase in margins with higher margins coming in from new customer focused businesses.

• Orissa discom was loss making in FY19. It is expected to be profitable in FY22 under TPR which should aid in the increase in profits.

• The company has been generating healthy free cash flows in the last 2 financial years.

• TPR is planning to merge Mundra UMPP with the parent company. This is help in reducing tax outgo due to accumulated losses.

DISCLOSURE: INVESTED. MAY CHANGE OPINION AT ANY TIME.

58 posts - 19 participants

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TL;DR - Noob, Late entrant to market, Looking to stay invested for period of 15 (or more) years, seeking review of targeted portfolio and investment pattern over next 3-5 years.

Hi,

I have been somewhat interested in how economics work and stock since late 90s. Been observing stock market behavior from same period. But truly understood the principle of compounding and thus the opportunity lost only in the last couple of years. But never late than never, so last year after the crash (Approx aug 20 I started studying with a goal to invest). The last 6 months have been repeated rounds of reading (amidst all the other stuff life throws at you, hospitals, offices, kids, bills etc). Tried to ingest as much of ROE, ROCE, EPS, P/E, D/E, P/E By Industry P/E (this is something I made up to judge relative over or under valuation - because in current scenario, everything is over valued) value investing, growth investing, contrarian investing as much as I could. Discovered screener in the process (thank you, thank you. If you IPO, I am buying). Also discovered Saurabh Mukherjea and Ashwath Damodaran. Regretfully I could not finish the intelligent investor. Have a copy, but it progresses very slowly. Should I force myself through to the end? Sahil’s suggestion of ‘The Swedish Investor’ is much more my type. Read a lot of annual reports and other bse/nse docs as well (Understanding of the same has lots of room for improvement though). Also discovered valuepickr, and have read through most of the threads about the firms I have chosen. Usually from 2020 onwards, some from 2019. Have not read all the way from top to bottom though - you guys discovered some of these when they were basically non-entities.

My final portfolio chosen for investment is given below. A brief note of the investment rationale is also given. I follow it up with a brief about some of the other companies which came very close but I finally discarded with a heavy heart (Nestle for example). The portfolio has been chosen to approximately be equally exposed to large cap blue chips (consistent compounders), growing mid caps (growth) and small and micro caps (just discovered or undiscovered or value unlocking yet to happen). Don’t know if my choices are appropriate or not.

My plan is to invest in SIP fashion over the next 3 years, equal weights when buying. May not rebalance - but not decided yet. I have been looking for the last 6 months for the economy to catch up to the market, or vice versa, but that is not how the ground reality is playing out. So finally almost ready to jump in. Choosing SIP mode over lumpsum + SIP, cos with current valuations, markets correcting is very likely, but irrationally it may go up. Over the next three years though, we will probably have seen the up and the down and I would have managed to average - now whether I average upwards or downwards remains to be seen.

I would like to achieve long terms 20%+ on my portfolio - Otherwise funds like Axis Equity, Quant Active, PPFAS are doing 19%. Advisory services like Purnartha - 35%+, Rohit Chauhan and Vijay Malik - 19%, any one of those would work.

Current Targeted Portfolio

Category 1 : Blue-Chip or close, Consistent YOY growth, Relatively low volatility on screener charts, High ROCE - consistent compounder theory. I add the key tipping point or key doubt next to the stock.

Pidilite - excellent on all parameters. Secondly, this is an industry which should be dependent on the economy, but it hardly cares, good eco, bad eco, it keeps going upwards.

Atul - again rock steady growth, firm is around for almost like 100 years or so, international presence, highly diversified, favorable sector.

Whirlpool India - best rock-steady growth among the consumer durables, also good appreciation.

Britannia Industries (won over Nestle on account of better stock appreciation and lower per stock price, in spite of its near 97% monopoly in baby powder). Also more fair value (PE to industry PE) at the moment.

HDFC Bank - still don’t know very well about understanding banking and NBFCs, so going by recorded history on this one.

Bajaj Finance - primarily on account of the Saurabh Mukherjee analysis about the big data aspect of this business,

Asian Paints - again the Saurabh analysis about business process efficiency.

Abbott India - Growth Charts and relatively undervalued still. PE to Industry PE is 1 or thereabouts. (Divis is 2.47). Pharma sector.

Category 2: Growth Stocks - Usually mid-cap to large firms. Expectation is these have momentum, tailwinds and are in the expansion stage of their businesses, should be high gainers for a few years before they settle down to steady growth (but with the current markets and economy, will have to keep fingers crossed).

Aarti Industries - Undecided about this, late entrant, growth is rock steady, the DMAs are like straight lines, but the debt is worrisome.

Fine Organics - Rock steady growth since inception, high ROCE, good reputation, favorable sector.

GMM Pfaudler - The current correction from highs seem like an opportunity, Otherwise firm seems like a very good monopoly play across a whole bunch of industries, but especially a very solid proxy for the pharma and chemical sectors, both of which are pretty good sectors now.

Muthoot finance - Growing steadily, has harnessed the untapped gold in our country, lots of expansion still possible, caters to masses.

Dr Lal Path - Same as Muthoot basically, except this has harnessed health instead of gold.

Indiamart intermesh - Somewhat of a conviction bet against the valuation aspect. Platforms will be the next thing - google, facebook, whatsapp, airbnb, uber, ola, - same for this. Additionally first mover, and profitable. How many profitable tech unicorns there are out there - almost zero (uber, zomato, swiggy, etc etc). Info-Edge I let go just because of the profitability angle. Also their mobile first approach.

KPIT tech - Sahil was looking for an IT firm, Maybe he could take a look at this. Everything they are doing is in the sunrise sectors of tech - AI, robotics, etc. Recent listee.

Ratnamani metals - consistent compounder, only slower. Steady growth. even in a horrible sector. let go of maithan alloys, APL Apollo and APL Apollo Tricoat here just because this seems safer.

Indraprastha Gas - Best Gas bet I could find. Gas reserves in our country, drive against fossil fuels, solid growth.

Indian Energy Exchange - Sits squarely in the intersection of the platforms, deregulation, anti-fossil fuels, and mass participation plays. monopoly to boot.

Relaxo Footware - Consistent compounder, Consumer, Mass market, Steady growth.

Garware Tech Fibres - Parameters are good. But the story - An old indian company (in ropes, of all things), reinvents itself, rebrands itself, and becomes a leading player in scandinavian and australian fishing nets and in general, value added fibres - the management capability (vision, direction, execution) required to be able to pull off something like that is imho, incredible.

Category 3- Basically bets.

PI Industries - solid steady growth - consistent compounder type, big old company, agro-chem. This beat both coromandel and vinati.

Suprajit - valuepipckr forum thread was what convinced me at the end. Especially donald’s notes. And especially the part about where it foresaw the decrease in halogen OEMs and went for the after-market. International, quite diversified, seems to have fixed its problems in recent past. If auto revives, is well poised for growth.

RACL Geartech - The client list. Growth is somewhat steady but the spike last year worries me. Do we have runway still?

Chemcrux - quite old, very solid management with great academic backgrounds, excellent numbers. Easiest annual reports to understand.

Dixon - Overpriced, but huge opportunities and is perfectly placed. Wins over amber for its diversification.

Galaxy Surfactants - This is basically from Little champs by Saurabh Mukherjea, but their web-site was what convinced me. Also the client list. Basically a proxy for FMCG growth.

CDSL - again the platform play, duopoly, and consumer participation in stock market will invariably increase over the gyears.

Laurus - Similiar to Dixon. Very well placed, Very overpriced. Pharma tailwinds.

Suven Pharma - somewhat risky, but seems like proper value unlocking after demerger is not yet through. Plus pharma sector tailwinds.

IRCTC - monopoly. Will grow as the india railways grow.

Thats it.

Category 4 - Companies which lost out -
Affle India, AIA Engineering, Alkyl Amines, Amber Enterprises, Apollo Tricoat Tubes, Astral Poly Tech, Avenue Super., Bata India, Berger Paints, Colgate-Palmolive, Coromandel Inter, Dabur India, Deepak Nitrite, Dhanuka agritech, DISA India, Divis Labs, Frontier Springs, Gujarat Gas, Havells India, HCL Technologies, HDFC, Hind. Unilever, Honeywell Auto, Info Edg.(India), ITC, Jubilant Food., Kotak Mah. Bank, L & T Infotech, Larsen & Toubro, Lumax, Mahanagar Gas, Manappuram Fin., Mangalam Organic, Mishra Dhatu Nig, Navin Fluo.Intl., Nestle India, PPAP, Pulz Electronics, Refex Industries, Reliance Industries, Sanofi India, Shree Cement, SRF, Symphony, Tasty Bite Eat., Tata Consumer Products, Timken India, Titan Company, Trent, TTK Prestige, Hawkins, Vaibhav Global, Varun Beverages, Vinati Organics, Voltas, Axtel Industries, Maithan Alloys, MoldTek Packaging, TCS

A few questions that bother me -

Should I be entering the market at this time?
What should I be looking at for exit criteria?
What should be my monitoring frequency - in my understanding, if I have to monitor this daily, then my choices are, most probably, already wrong.

Apologies for a very long post. I understand this sort of question has probably been asked many times on this forum before so you may be tired of it. I wouldn’t have posted this, except that the current market valuations are very scary and diving in just like that seems, you know, a little foolhardy.

Any advise, ideas, suggestions, opinions - will be much appreciated. Thanks.

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Mint-green nail polish was an upcoming trend in 2016. All Pinterest boards, bloggers, YouTube channels were getting more and more swarmed by this specific trend.

They had ventured to their own private label for the first time, and used Nail Polishes to do so. The company was processing roughly 10,000- 15,000 orders per day during this time.

This is a major feat by Nykaa that they achieve and stay on top of even today. Being on the right side of the trend and supplying the Indian customers with what’s new and upcoming is a major contribution to their success.

In the last 5 years, fashion didn’t change. Trends were rather seen in the beauty and personal products space. This space created huge trends in the makeup and skincare space, from more makeup being launched internationally with collaborations with different artists and celebrities, from Korean skincare becoming the new way of life in skincare, to affordable companies coming up with active-ingredient based products focusing on the science of it all. This would’ve largely bypassed the Indian consumer if Nykaa hadn’t actively participated in it. During the makeup trends, it tied up with huge makeup companies like Huda Beauty, MAC and NYX, when tides changed to skincare and plenty of companies like Neutrogena and Clinique, and again when tides changed to Korean beauty companies like Innisfree.

The Supply of the Beauty and Personal Products category is very scattered. No brand has more than 1-2% market share in categories as consumer loyalty is very fickle and susceptible to new launches and trends. This gives the retailer an advantage over the brand.

HOW DID NYKAA GET ITS START?

The problem of counterfeit makeup was a much larger problem back then. Women thought they were paying for authentic product. You’d get swarmed by hawkers selling the Maybelline Colossal Kajal counterfeit and even if you used the original product all these years, you couldn’t recognise any difference in its packaging. This was the same problem in buying things online. Amazon and Flipkart had dodgy sellers for makeup with inconsistent pricing.

Falguni Nayar, the Founder & CEO spotted this problem and started the company in 2012 and invested a couple of million dollars of her own money.

Nykaa would buy in bulk from the makeup companies, warehouse it and when the item was sold, do the shipping and fulfilment for the order.

In 2012 the company was having 10 orders per day to a 100 orders per day in October 2013. The company in 2014 raised $3.5 Million in Series A, $9.5 Million in Series B in 2015, Rs 100 crores from Harsh Mariwala in 2016 for Series C. Valuation of Nykaa for Series C was 775 Crores. The company had expanded to physical stores by then for increasing brand visibility. By 2017 the company was processing 10-15,000 orders per day. The company now has 18 warehouses and 73 retail stores.

Nykaa pre-IPO has raised $341 Million dollars through 13 rounds.

BUSINESS:

The company’s business is largely divided into two: Beauty and Personal Care (BCP) products (84%); and Fashion (16%).

The BPC is an inventory-based model. Fashion is a marketplace model similar to other e-retailers. The company also earns some revenue from advertising on its platform.

• In FY2021, the total GMV was ₹40,459.8 million, which grew by 50.7% over the FY2020.

• Revenue from operations in FY2021 was ₹24,408.96 million, which grew 38.10% from FY2020.

• Restated profit for the year in FY2021 was ₹619.45 million, as compared to a restated loss of ₹163.40 million in FY2020.

• EBITDA of ₹1,614.26 million and an EBITDA margin of 6.61%

• The current number of unique annual transacting customers is 5.6m.

Beauty and Personal Care:

Colour cosmetics which comprise of makeup is the largest sold category in the BPC, followed by Skincare, Haircare, Personal care, Fragrances, Devices and others.

This is the category the company started with.

The company has 2 segments that provide different margins:

1. Private Label: Which is Nykaa’s own brand. The company outsources manufacturing and takes on the marketing and distribution under its own name. Here the brands can be 100% Nykaa owned or in a JV structure. The company envisions this category becoming 20% of the GMV as this gives the company the most margin.

2. Inventory: This is the way the rest of the 3rd party inventory is sold.

The consumer-spend per year for BPC on Nykaa’s platform is Rs 4,500 for FY21, a growth of 29% YoY, on account of Covid (larger order sizes). In FY20, the annual customer-spend was largely flat YoY. 17.1 million Orders were placed for beauty and personal care products with a total GMV of ₹33,804.1 million, a 35.3% increase over FY2020.

Fashion:

In this segment, the company has six own brands like 20Dresses which it acquired in 2019, and several other sellers selling all things fashion.

Apparel is the largest category, then bags & footwear, jewellery & accessories as well as lingerie, and electronics.

The company plans to do the same for fashion as it did for BPC. It will now venture into physical stores which is something the company hasn’t done yet for Fashion. The average value of Orders on Nykaa Fashion mobile application and website was ₹4,034 for the Financial Year

2021. The company in its IPO documents has said it will use 35 crores from the proceeds to set up Nykaa Fashion stores which will be on lease basis.

MARKET:

The market size for the BPC industry is Rs 1267bn for FY20. However, categories that account for large part of Nykaa’s BPC sales such as make up, skin care and hair care would be only a part of the Rs1267bn number, and within that, Nykaa’s share is quite respectable given the e-commerce penetration in India. Nykaa commands 2.2% market share in the overall BPC industry and 27.2% in the online channel as of FY21.

Similar to the overall retail space, India BPC is heavily dominated by the unorganized channel, which primarily includes local grocery shops and departmental stores. With Indian consumers becoming more evolved in their BPC shopping habits, share of unorganized BPC market had reduced to 71% in 2019 from 77% in 2016.

The online BPC sector further grew at 30% from 2019 to 2020 to reach ₹91 billion and penetrate 8% of the overall BPC market, which Nykaa is leading in.

The size of Fashion Market in India was ₹4,186 billion in 2016, constituting more than 9% of the retail market. Apparel accounted for approximately 80% of this market and footwear and accessories combined covered the remaining 20%. The Fashion Market grew at a 12% CAGR over the next three years to reach ₹5,838 billion in 2019.

The Fashion Market in India is projected to recover strongly and grow at 18% CAGR over the next five years to reach ₹8,702 billion by 2025. Apparel is projected to continue driving approximately 73% of the market in 2025.

The Fashion Market in India is currently dominated by the unorganized channel, majorly comprising of local apparel, footwear and accessories stores. Hence, the current market is underserved as most traditional retailers try to serve broad demographic and are slow in reacting to changing trends. The organized segment has grown at a much faster pace as its share jumped from 29% in 2016 to 38% in 2019.

The online fashion retail sector size was ₹439 billion in 2019 (based on checkout GMV), growing at 33% CAGR over the past 3 years. This led to online penetration growing 2x in 3 years to 8% in 2019, with relatively higher penetration in the footwear and accessories categories compared to apparel.

PROMOTER:

Total promoter and promoter group holding was 54.25% pre-IPO and will be 51% post. Falguni Nayar along with her children Adwaita and Anchit all work for Nykaa.

Promoter and Founder Falguni Nayar is well known in the business community for being an ex-Investment Banker in Kotak who helped in taking companies public.

IPO offer:

The company wants to use the 525 crores of IPO proceeds for 200crs in Marketing spends, debt repayment, General corporate expense, new retail stores and warehouses. The company has Rs 346 crores of total debt on books out of which roughly 130 crs will be retired.

The initial public offer comprises a fresh issue of equity shares aggregating up to Rs. 5,250 million, and an offer for sale of up to 43,111,670 equity shares being offered by the selling shareholders.

RISKS:

Regulations on e-commerce companies being able to sell their own brands on their platforms is under draft. This going sideways will have an impact on its business.

Competitors like Sephora, Tata, Myntra, and other startups like Purplle are looking aggressively in the BPC segment.

The new focus on the Fashion segment is yet to attain success and things are yet to unfold.

FINANCIALS

Screener: FSN E-Commerce Ventures Ltd financial results and price chart - Screener

DISCLOSURE: No financial interest in the company, only academic interest.

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TL;DR - Noob, Late entrant to market, Looking to stay invested for period of 15 (or more) years, seeking review of targeted portfolio and investment pattern over next 3-5 years.

Hi,

I have been somewhat interested in how economics work and stock since late 90s. Been observing stock market behavior from same period. But truly understood the principle of compounding and thus the opportunity lost only in the last couple of years. But never late than never, so last year after the crash (Approx aug 20 I started studying with a goal to invest). The last 6 months have been repeated rounds of reading (amidst all the other stuff life throws at you, hospitals, offices, kids, bills etc). Tried to ingest as much of ROE, ROCE, EPS, P/E, D/E, P/E By Industry P/E (this is something I made up to judge relative over or under valuation - because in current scenario, everything is over valued) value investing, growth investing, contrarian investing as much as I could. Discovered screener in the process (thank you, thank you. If you IPO, I am buying). Also discovered Saurabh Mukherjea and Ashwath Damodaran. Regretfully I could not finish the intelligent investor. Have a copy, but it progresses very slowly. Should I force myself through to the end? Sahil’s suggestion of ‘The Swedish Investor’ is much more my type. Read a lot of annual reports and other bse/nse docs as well (Understanding of the same has lots of room for improvement though). Also discovered valuepickr, and have read through most of the threads about the firms I have chosen. Usually from 2020 onwards, some from 2019. Have not read all the way from top to bottom though - you guys discovered some of these when they were basically non-entities.

My final portfolio chosen for investment is given below. A brief note of the investment rationale is also given. I follow it up with a brief about some of the other companies which came very close but I finally discarded with a heavy heart (Nestle for example). The portfolio has been chosen to approximately be equally exposed to large cap blue chips (consistent compounders), growing mid caps (growth) and small and micro caps (just discovered or undiscovered or value unlocking yet to happen). Don’t know if my choices are appropriate or not.

My plan is to invest in SIP fashion over the next 3 years, equal weights when buying. May not rebalance - but not decided yet. I have been looking for the last 6 months for the economy to catch up to the market, or vice versa, but that is not how the ground reality is playing out. So finally almost ready to jump in. Choosing SIP mode over lumpsum + SIP, cos with current valuations, markets correcting is very likely, but irrationally it may go up. Over the next three years though, we will probably have seen the up and the down and I would have managed to average - now whether I average upwards or downwards remains to be seen.

I would like to achieve long terms 20%+ on my portfolio - Otherwise funds like Axis Equity, Quant Active, PPFAS are doing 19%. Advisory services like Purnartha - 35%+, Rohit Chauhan and Vijay Malik - 19%, any one of those would work.

Current Targeted Portfolio

Category 1 : Blue-Chip or close, Consistent YOY growth, Relatively low volatility on screener charts, High ROCE - consistent compounder theory. I add the key tipping point or key doubt next to the stock.

Pidilite - excellent on all parameters. Secondly, this is an industry which should be dependent on the economy, but it hardly cares, good eco, bad eco, it keeps going upwards.

Atul - again rock steady growth, firm is around for almost like 100 years or so, international presence, highly diversified, favorable sector.

Whirlpool India - best rock-steady growth among the consumer durables, also good appreciation.

Britannia Industries (won over Nestle on account of better stock appreciation and lower per stock price, in spite of its near 97% monopoly in baby powder). Also more fair value (PE to industry PE) at the moment.

HDFC Bank - still don’t know very well about understanding banking and NBFCs, so going by recorded history on this one.

Bajaj Finance - primarily on account of the Saurabh Mukherjee analysis about the big data aspect of this business,

Asian Paints - again the Saurabh analysis about business process efficiency.

Abbott India - Growth Charts and relatively undervalued still. PE to Industry PE is 1 or thereabouts. (Divis is 2.47). Pharma sector.

Category 2: Growth Stocks - Usually mid-cap to large firms. Expectation is these have momentum, tailwinds and are in the expansion stage of their businesses, should be high gainers for a few years before they settle down to steady growth (but with the current markets and economy, will have to keep fingers crossed).

Aarti Industries - Undecided about this, late entrant, growth is rock steady, the DMAs are like straight lines, but the debt is worrisome.

Fine Organics - Rock steady growth since inception, high ROCE, good reputation, favorable sector.

GMM Pfaudler - The current correction from highs seem like an opportunity, Otherwise firm seems like a very good monopoly play across a whole bunch of industries, but especially a very solid proxy for the pharma and chemical sectors, both of which are pretty good sectors now.

Muthoot finance - Growing steadily, has harnessed the untapped gold in our country, lots of expansion still possible, caters to masses.

Dr Lal Path - Same as Muthoot basically, except this has harnessed health instead of gold.

Indiamart intermesh - Somewhat of a conviction bet against the valuation aspect. Platforms will be the next thing - google, facebook, whatsapp, airbnb, uber, ola, - same for this. Additionally first mover, and profitable. How many profitable tech unicorns there are out there - almost zero (uber, zomato, swiggy, etc etc). Info-Edge I let go just because of the profitability angle. Also their mobile first approach.

KPIT tech - Sahil was looking for an IT firm, Maybe he could take a look at this. Everything they are doing is in the sunrise sectors of tech - AI, robotics, etc. Recent listee.

Ratnamani metals - consistent compounder, only slower. Steady growth. even in a horrible sector. let go of maithan alloys, APL Apollo and APL Apollo Tricoat here just because this seems safer.

Indraprastha Gas - Best Gas bet I could find. Gas reserves in our country, drive against fossil fuels, solid growth.

Indian Energy Exchange - Sits squarely in the intersection of the platforms, deregulation, anti-fossil fuels, and mass participation plays. monopoly to boot.

Relaxo Footware - Consistent compounder, Consumer, Mass market, Steady growth.

Garware Tech Fibres - Parameters are good. But the story - An old indian company (in ropes, of all things), reinvents itself, rebrands itself, and becomes a leading player in scandinavian and australian fishing nets and in general, value added fibres - the management capability (vision, direction, execution) required to be able to pull off something like that is imho, incredible.

Category 3- Basically bets.

PI Industries - solid steady growth - consistent compounder type, big old company, agro-chem. This beat both coromandel and vinati.

Suprajit - valuepipckr forum thread was what convinced me at the end. Especially donald’s notes. And especially the part about where it foresaw the decrease in halogen OEMs and went for the after-market. International, quite diversified, seems to have fixed its problems in recent past. If auto revives, is well poised for growth.

RACL Geartech - The client list. Growth is somewhat steady but the spike last year worries me. Do we have runway still?

Chemcrux - quite old, very solid management with great academic backgrounds, excellent numbers. Easiest annual reports to understand.

Dixon - Overpriced, but huge opportunities and is perfectly placed. Wins over amber for its diversification.

Galaxy Surfactants - This is basically from Little champs by Saurabh Mukherjea, but their web-site was what convinced me. Also the client list. Basically a proxy for FMCG growth.

CDSL - again the platform play, duopoly, and consumer participation in stock market will invariably increase over the gyears.

Laurus - Similiar to Dixon. Very well placed, Very overpriced. Pharma tailwinds.

Suven Pharma - somewhat risky, but seems like proper value unlocking after demerger is not yet through. Plus pharma sector tailwinds.

IRCTC - monopoly. Will grow as the india railways grow.

Thats it.

Category 4 - Companies which lost out -
Affle India, AIA Engineering, Alkyl Amines, Amber Enterprises, Apollo Tricoat Tubes, Astral Poly Tech, Avenue Super., Bata India, Berger Paints, Colgate-Palmolive, Coromandel Inter, Dabur India, Deepak Nitrite, Dhanuka agritech, DISA India, Divis Labs, Frontier Springs, Gujarat Gas, Havells India, HCL Technologies, HDFC, Hind. Unilever, Honeywell Auto, Info Edg.(India), ITC, Jubilant Food., Kotak Mah. Bank, L & T Infotech, Larsen & Toubro, Lumax, Mahanagar Gas, Manappuram Fin., Mangalam Organic, Mishra Dhatu Nig, Navin Fluo.Intl., Nestle India, PPAP, Pulz Electronics, Refex Industries, Reliance Industries, Sanofi India, Shree Cement, SRF, Symphony, Tasty Bite Eat., Tata Consumer Products, Timken India, Titan Company, Trent, TTK Prestige, Hawkins, Vaibhav Global, Varun Beverages, Vinati Organics, Voltas, Axtel Industries, Maithan Alloys, MoldTek Packaging, TCS

A few questions that bother me -

Should I be entering the market at this time?
What should I be looking at for exit criteria?
What should be my monitoring frequency - in my understanding, if I have to monitor this daily, then my choices are, most probably, already wrong.

Apologies for a very long post. I understand this sort of question has probably been asked many times on this forum before so you may be tired of it. I wouldn’t have posted this, except that the current market valuations are very scary and diving in just like that seems, you know, a little foolhardy.

Any advise, ideas, suggestions, opinions - will be much appreciated. Thanks.

38 posts - 12 participants

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Quoting from one of the best threads in FY22, @sahil_vi’s write up on platform companies,

Let’s use the framework set up in that discussion to talk about PDS Multinational.

Business Model and Scalability

PDS is a platform which curates the supply chain for multinational companies. As a brand, where do you want your fabrics from? Are you looking for a design team to be onshore or offshore? Where would you like your manufacturing facilities and warehouses to be located?

PDS has spent the last decade expanding their network, and becoming an economy of scale:

The first thing that should stand out while reading this paragraph is that their clients include Walmart, Primark, Sainsbury’s and Tesco. These brands are known for selling clothes at the absolute bottom price range. If these people come to PDS, PDS must run an incredibly tight ship, and is a cost setter. Indeed, even Amazon is a customer.

If we were to assign a score to the scalability of the platform, it depends on two factors:

• If PDS is connecting brands with manufacturers, there is a huge potential for scaling as it entirely depends on PDS’ distribution network, and is not limited by physical assets or capacities.

• The second driver of scale is the number of repeat customers PDS has. If new business comes at the cost of people switching to a different sourcing company, PDS is on a treadmill. Crucially, 98% of PDS’ business is from existing customers, up from 89% in FY15.

This sourcing business takes up ~95% of their revenue. At this point, we should expect that anyone who sells to Amazon and Wal-mart won’t be a high margin business, and we would be right.

However, we note how both gross margins and operating margins have steadily been improving over the years. There are two important points to consider:

1. There is more to the margin profile than meets the eye.
2. Margin profile and return ratios are going to look much better from FY23.

1. Management’s Take On Margins

While their topline is 6000 Cr., the management looks at the gross margins as the revenue base. The 6,000 Cr. is the mechandise value of the goods they serve on the platform.

2. Margin Profile and Return Ratios in FY23

PDS has slowly started to fulfil some of the manufacturing contracts in house, padding the margin profile. In 2018, they made investments to create two state of the art manufacturing facilities in Bangladesh. In subsequent annual reports, they’ve mentioned that these two factories need about 3-4 years to break even from the high initial investment. The reason why I call them state of the art will become clear in the next section.

From being a new segment in 2018, manufacturing is now 6% of the topline.

These two plants are expected to turn profitable in the next 4 quarters, and the overall RoCE and margin profile will look a lot better. Let’s not make the mistake of assigning a multiple to a loss making component.

Durable Competitive Advantages

Aside from being a genuine economy of scale which is needed to thrive in such a cut-throat environment, PDS is actually a thought leader in sustainability.
In the west, there is a huge campaign surrounding the waste that is generated through various industries. In retail, 92 million tonnes of waste is produced each year, along with CO₂ emmissions. Brands are trying to clean up their supply chain to make sure:

1. Workers are paid living wage.
2. Factories have limited environment pollution.
3. Water consumption is moderated.

We have seen this play out in various chemical companies, renewable energy, etc. and ESG metrics are incredibly important to foreign funds investing in emerging markets.

When PDS built the two factories in 2018, here’s how forward looking they were with their design:

• Since investments in manufacturing was recent, we made sure they were completely sustainable - high automation, new technology.
• The environmental impact of these factories are minimal, they are 21st century factories. Solar panels, glass panelling reducing ambient temperature, comfortable for workers.
• Any waste is recycled using boilers to generate electricity.
• Salaries for workers are above industry normal, closing in on living wage.

This was planned in 2018, well before sustainability became a trend. Not only is this something they’ve perfected, but they’re passionate about this if you listen to the management speak. They recently acquired a majority stake in a company known as Yellow Octopus in the UK. What Yellow Octopus does:

• Yellow Octopus management is incredibly passionate about sustainability.
• Partnered with ASDA and George in the UK.
• If you think of Paypal for payment solutions within one ecosystem, Yellow Octopus offers the same function in sustainability.

1. Stock exits - assist retailers with excess inventory, customer returns.
2. Take back - We created the first digital take back app in the world https://regain-app.com/
3. Re-commerce - Most advanced recycling right now is re-using. Prolonging life cycle of products.
4. Impact investing - We invest in new innovations in circular fashion. Connect the dots

PDS Venture Capital Fund

The third business vertical is investing in a plethora of early pre seed sustainability startups.

Investment Thesis, Peers, and Valuations

The summary so far is that we have an end to end solutions provider, working at global scale with several marquee clients. They’re investing heavily on forward looking ideas that may pan out in the next few years to arrive at ever improving return ratios.

Today, they’re trading at a P/Sales of about 0.5x, and an EV/EBITDA of 10. (This is including a loss making component in the earnings!)

Risks

1. They have 100 subsidiaries. A lot of these have to do with the many ventures in the fund, manufacturing facilities, land deals, etc. Complex structure of subsidiaries would leave a bad taste for many investors. (Was a sticking point in the SIS thread, many similarities as some subsidiaries haven’t been audited by the main auditors.)

2. Low operating margins could wipe them out if there’s an even tighter run ship.

3. Risk from labour reforms in Sri Lanka / Bangladesh that could impact profitability.

4. Retail risk is seasonal, forecasting demand is crucial during holiday season to prevent overstacking inventory / loss of revenue from underestimating demand.

5. The largest revenue share comes from UK and EU customers, even though top 10 clients only account for 6-7% of the revenue each.

6. The stock is fairly illiquid with a 50 day average volume of 9000 shares, or about 1 Cr. daily turnover.

7. There is no analyst coverage from what I can tell. Investors are currently in this alone, and will have no external help on predicting revenues and working out pricing / valuations.

This is a work in progress thread.

To come:

1. Management discussion - Lots of recent senior hiring, will be addressed in the next post.
2. Venture fund composition - Many companies in this venture fund which include global e-commerce marketplaces, and sustainable companies that have partnered up with Nike / Adidas. These deserve their own post. This will underscore just how much attention they give to sustainability.
3. Summary from annual reports

Disclosure: Invested.

Inviting @Investor_No_1, @sahil_vi, @Lynch, @Malkd and regulars for comments. Thought you may find this interesting as we’ve had discussions on similar spaces to what PDS operates in.

27 posts - 11 participants

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Hello all,
I am sharing my portfolio along with my rationale . 2 years back I got into Stock market. I identified all these shares by reading articles, expert opinions and little bit of research from my part. I would love to get your opinion and suggestions. Please point out my mistakes as well.
The goal is to generate 20% compounded returns over the long term. (20-25 years). At present my portfolio returns stands 65 % in 2 yrs.

"**IPO Allotement ** - IRCTC , Rossari Biotech Limited

Highest weightage - laurus lab , deepak nitrite , varun beverages ltd , tata consumer, Astral Poly Technik

254 posts - 48 participants

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TARSONS PRODUCTS LTD.
Drhp Notes

• •TARSONS is among the top 3 plasticware laboratory equipments manufacturing companies of India. As of March 31, 2021,the co has a diversified product portfolio with over 1,700 SKUs across 300 products used in various laboratories across research organizations, academia institutes, pharmaceutical companies, Contract Research Organizations (CROs), Diagnostic companies and hospitals.
• • End consumer:The end customers of our Company’s products mainly include research organizations, academia institutes, pharmaceutical companies, CROs, diagnostic companies and hospitals (Indian Institute of Chemical Technology, Dr. Reddy’s Laboratories, Dr. Reddy’s Laboratories and Dr. Lal Path Labs.)
• •Scuttlebutt notes- Thyrocare using Tarsons products.
• •Tarsons has a large network of distributors of over 141 distributors on 31st March 2021; ~75-80% of the total distributors have been with Tarsons for over 20 years indicating a strong supplier and distributor relationship and a stable distribution network.
• •33% of total revenue came from overseas market in FY21 vs 26% in FY20. Tarsons sell products to more than 40 countries and has plans to export to ~120 countries in the next 5-10 year.
• •Revenue from sale of goods to top 10 distributors was representing 37.33%, 39.97% and 43.49% of total income from sale of goods for Fiscals 2021, 2020 and 2019, respectively.
• •Trade Receivable (cr)= 15% of total assets.

Net proceeds of the IPO to be used in 2 ways:

1. Co’s expansion plan- The net proceeds will be used for expansion at Panchla for current products as well as new products.

2. Repayment of ₹75cr of borrowings.

Opportunity size:

Global healthcare sector is expected to grow at a CAGR of 8.9% and medical devices & technology sector is expected to double by 2025F.

Thesis:

1. Shift happenning from glass consumables to plastic consumables as they have a long shelf life in addition to being unbreakable and inexpensive as compared to glass. Indian plastic labware market is ₹1225cr. Market share of Tarsons is around 12%. The domestic market for plasticware lab equipment in India is expected to grow at ~16% given the huge adoption of plasticware products over glassware products.

2. Debt equity and overall gearing ratio improved at 0.09x and 0.17x as on March 31, 2020 as compared to 0.37x and 0.46x respectively as on March 31, 2019.

3. Tarsons has 5 manufacturing facilities in West Bengal with the sixth facility under development. The latest facility that is to be developed in Panchla has a capacity and area equal to approximately the combined capacity and area of all its other facilities. This will allow the company to manufacture double of its current production effectively providing a potential to double its revenues as well. This facility is intended to be funded from a combination of internal accruals and proceeds of the Offer.

4. The Make in India initiative is aiding Tarsons to bring in affordable consumables and reusables by making them in India at 15- 20% lower prices than imported products.

5. The best profitability ratios in the industry.
   

Strategy going forward:

Tarsons is aiming at venturing into the development of new end products with high realization and higher value and transitioning itself from a Life Sciences company to a Bio-Tech company.

Tarsons’ upcoming manufacturing facility in Panchla will enable the entry and expansion of the company into the new product segment comprising of PCR, cell culture, Serological Pipettes among others.

Risks:

1. Around 75% of raw materials are imported. However, the prices these high-grade resins (despite being a crude derivate) are not as volatile as the crude prices, and are generally passed on down the value chain. In Fiscals 2021, 2020 and 2019, cost for raw materials was ₹44.8cr, ₹38 cr and ₹42.2 cr, respectively, which accounted for approximately 19.16%, 21.18% and 22.86% of total income, respectively.

2. Competition from large companies like Corning, Thermo Fisher and Eppendorf have dominated the market due to their strong R&D facilities and brand name.

(Thermo Fisher Scientific have increased their production for PCR based detection kits.)

3. The approval for conversion of majority of the Jangalpur Land from agricultural land to non-agriculture land is yet to be received. For Fiscal 2021, Jangalpur facility contributed 58.00%, of the total consolidated sale realisation of theCompany.

21 posts - 15 participants

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https://www.youtube.com/embed/Nb1WSL1Xc4o

Cabinet decision for $10Bn investment/incentive outlay for developing complete value chain/ecosystem chip/display fabs, packaging, PCBs for Semiconductor sector. As different from other countries offering 50% investments for Setting up chip/display fabs, this claims to be additionally offering a 20 year roadmap (including talent pool proliferation, design-to-startup incentives, et al).

Inviting Domain experts like @rambaranwal and others to lay this out better for us.
(Other undiscovered domain experts at VP, please put your hands up!)

10 posts - 8 participants

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Hello all,
I am sharing my portfolio along with my rationale . 2 years back I got into Stock market. I identified all these shares by reading articles, expert opinions and little bit of research from my part. I would love to get your opinion and suggestions. Please point out my mistakes as well.
The goal is to generate 20% compounded returns over the long term. (20-25 years). At present my portfolio returns stands 65 % in 2 yrs.

"**IPO Allotement ** - IRCTC , Rossari Biotech Limited

Highest weightage - laurus lab , deepak nitrite , varun beverages ltd , tata consumer, Astral Poly Technik

254 posts - 48 participants

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Everest Kanto Cylinders Ltd. (EKC) is India’s largest manufacturer of high pressure gas cylinders with a market share in excess of 50%. It manufacturers all types of cylinders – CNG, Industrial, Jumbo & Composite - & has a capacity of One million cylinders annually with fungible production lines of more than 200 SKU’s across different ranges. It has global scale plants in located in India, UAE & the USA.

With the Govt.'s thrust on cleaner fuel to help mitigate environmental concerns, CNG is being aggressively promoted by rapidly expanding its network in different states. The current CNG infrastructure is present only in a few states including Delhi & Maharashtra. This is likely to increase to about 10 states in the foreseeable future, before ultimately covering the entire country. With proven & accepted CNG technology, once the CNG infrastructure is in pace, the demand growth for cylinders is more than likely to explode. Leading gas infrastructure Co.’s are laying out aggressive expansion of CNG pumps & OEMs are expanding its offerings of CNG fueled vehicles to its customers. EKC is currently operating at 90% capacity in India & to meet this demand, it is going in for a brown field expansion at both its plants in Tarapur & Kandla at a capex of 35 crs that will enable the Co. to increase capacity by about 40% (400,000 cylinders).

EKC has been actively reducing debt over the last many quarters after divesting its subsidiaries in China & Thailand. It hopes to become debt free by next year. Its subsidiaries running plants in Dubai & the US are also showing decent growth & are already contributing to the numbers. The Co. is planning to set up a plant in Hungry to cater to the burgeoning European demand.

The business is in a sweet spot, as is visible in the numbers over the last few quarters. For the half year ended September ’21, the consolidated Sales have come in at 756 crs with PAT of about 139 crs, after providing for taxes of 60 crs (@30%). EKC should comfortably do profits of about 280 crs for the full year. The current price of about Rs. 150, makes the market cap under 1700 crs making valuations rather attractive. EKC is extremely efficient in utilising its resources. What makes the story even more compelling are the return ratios. For the full year 21-22, its RoCE is likely to be in excess of 40%! Clearly it’s a story waiting to be re-discovered!

September Qtr

Investor Presentation post Q2

Concerns: It’s a story waiting to be re-discovered. Therein lies a concern. Most investors are aware of EKC & it is not an unknown Co. with a somewhat chequered past. This perhaps also explains the current valuations. Companies too learn from experience! Ultimately, the numbers will determine the market cap.

On June 14, 2018 a news item appeared on CNBC TV18 quoting “Lenders move towards conducting forensic audit into books of Everest Kanto after allegations of fraud/siphoning of fund levelled by Ex-CFO, whistle-blower”.

Queried by the exchange, EKC responded that it had not received any communication from any lender with respect to forensic audit. It is relevant to note that more than three years have passed since the news item & the Co. has been in recovery mode in this period with no action taken by any regulatory authorities like SEBI or the stock exchanges.

Annual Report for 20-21

10 year numbers (Taken from Screener.in), for those statistically interested.

Consolidated Figures in Rs. Crores / View Standalone

GEOGRAPHICAL SEGMENTS

Disc: Invested

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Quoting from one of the best threads in FY22, @sahil_vi’s write up on platform companies,

Let’s use the framework set up in that discussion to talk about PDS Multinational.

Business Model and Scalability

PDS is a platform which curates the supply chain for multinational companies. As a brand, where do you want your fabrics from? Are you looking for a design team to be onshore or offshore? Where would you like your manufacturing facilities and warehouses to be located?

PDS has spent the last decade expanding their network, and becoming an economy of scale:

The first thing that should stand out while reading this paragraph is that their clients include Walmart, Primark, Sainsbury’s and Tesco. These brands are known for selling clothes at the absolute bottom price range. If these people come to PDS, PDS must run an incredibly tight ship, and is a cost setter. Indeed, even Amazon is a customer.

If we were to assign a score to the scalability of the platform, it depends on two factors:

• If PDS is connecting brands with manufacturers, there is a huge potential for scaling as it entirely depends on PDS’ distribution network, and is not limited by physical assets or capacities.

• The second driver of scale is the number of repeat customers PDS has. If new business comes at the cost of people switching to a different sourcing company, PDS is on a treadmill. Crucially, 98% of PDS’ business is from existing customers, up from 89% in FY15.

This sourcing business takes up ~95% of their revenue. At this point, we should expect that anyone who sells to Amazon and Wal-mart won’t be a high margin business, and we would be right.

However, we note how both gross margins and operating margins have steadily been improving over the years. There are two important points to consider:

1. There is more to the margin profile than meets the eye.
2. Margin profile and return ratios are going to look much better from FY23.

1. Management’s Take On Margins

While their topline is 6000 Cr., the management looks at the gross margins as the revenue base. The 6,000 Cr. is the mechandise value of the goods they serve on the platform.

2. Margin Profile and Return Ratios in FY23

PDS has slowly started to fulfil some of the manufacturing contracts in house, padding the margin profile. In 2018, they made investments to create two state of the art manufacturing facilities in Bangladesh. In subsequent annual reports, they’ve mentioned that these two factories need about 3-4 years to break even from the high initial investment. The reason why I call them state of the art will become clear in the next section.

From being a new segment in 2018, manufacturing is now 6% of the topline.

These two plants are expected to turn profitable in the next 4 quarters, and the overall RoCE and margin profile will look a lot better. Let’s not make the mistake of assigning a multiple to a loss making component.

Durable Competitive Advantages

Aside from being a genuine economy of scale which is needed to thrive in such a cut-throat environment, PDS is actually a thought leader in sustainability.
In the west, there is a huge campaign surrounding the waste that is generated through various industries. In retail, 92 million tonnes of waste is produced each year, along with CO₂ emmissions. Brands are trying to clean up their supply chain to make sure:

1. Workers are paid living wage.
2. Factories have limited environment pollution.
3. Water consumption is moderated.

We have seen this play out in various chemical companies, renewable energy, etc. and ESG metrics are incredibly important to foreign funds investing in emerging markets.

When PDS built the two factories in 2018, here’s how forward looking they were with their design:

• Since investments in manufacturing was recent, we made sure they were completely sustainable - high automation, new technology.
• The environmental impact of these factories are minimal, they are 21st century factories. Solar panels, glass panelling reducing ambient temperature, comfortable for workers.
• Any waste is recycled using boilers to generate electricity.
• Salaries for workers are above industry normal, closing in on living wage.

This was planned in 2018, well before sustainability became a trend. Not only is this something they’ve perfected, but they’re passionate about this if you listen to the management speak. They recently acquired a majority stake in a company known as Yellow Octopus in the UK. What Yellow Octopus does:

• Yellow Octopus management is incredibly passionate about sustainability.
• Partnered with ASDA and George in the UK.
• If you think of Paypal for payment solutions within one ecosystem, Yellow Octopus offers the same function in sustainability.

1. Stock exits - assist retailers with excess inventory, customer returns.
2. Take back - We created the first digital take back app in the world https://regain-app.com/
3. Re-commerce - Most advanced recycling right now is re-using. Prolonging life cycle of products.
4. Impact investing - We invest in new innovations in circular fashion. Connect the dots

PDS Venture Capital Fund

The third business vertical is investing in a plethora of early pre seed sustainability startups.

Investment Thesis, Peers, and Valuations

The summary so far is that we have an end to end solutions provider, working at global scale with several marquee clients. They’re investing heavily on forward looking ideas that may pan out in the next few years to arrive at ever improving return ratios.

Today, they’re trading at a P/Sales of about 0.5x, and an EV/EBITDA of 10. (This is including a loss making component in the earnings!)

Risks

1. They have 100 subsidiaries. A lot of these have to do with the many ventures in the fund, manufacturing facilities, land deals, etc. Complex structure of subsidiaries would leave a bad taste for many investors. (Was a sticking point in the SIS thread, many similarities as some subsidiaries haven’t been audited by the main auditors.)

2. Low operating margins could wipe them out if there’s an even tighter run ship.

3. Risk from labour reforms in Sri Lanka / Bangladesh that could impact profitability.

4. Retail risk is seasonal, forecasting demand is crucial during holiday season to prevent overstacking inventory / loss of revenue from underestimating demand.

5. The largest revenue share comes from UK and EU customers, even though top 10 clients only account for 6-7% of the revenue each.

6. The stock is fairly illiquid with a 50 day average volume of 9000 shares, or about 1 Cr. daily turnover.

7. There is no analyst coverage from what I can tell. Investors are currently in this alone, and will have no external help on predicting revenues and working out pricing / valuations.

This is a work in progress thread.

To come:

1. Management discussion - Lots of recent senior hiring, will be addressed in the next post.
2. Venture fund composition - Many companies in this venture fund which include global e-commerce marketplaces, and sustainable companies that have partnered up with Nike / Adidas. These deserve their own post. This will underscore just how much attention they give to sustainability.
3. Summary from annual reports

Disclosure: Invested.

Inviting @Investor_No_1, @sahil_vi, @Lynch, @Malkd and regulars for comments. Thought you may find this interesting as we’ve had discussions on similar spaces to what PDS operates in.

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Our coverage of the midcap IT stories here at Valuepickr has missed Birlasoft, and I thought it’s time we keep a record of the investment thesis, and it’s development for posterity.

What’s the play?

Giant IT services companies like TCS and Infosys are the middlemen between customers that want to adopt modern solutions to cut costs, and pure tech companies such as Microsoft, Google, etc. that form their backbone.

We’ve seen the following trends in the last few years:

1. Having modern digital solutions to legacy problems are often an avenue to improve productivity and improve margins for companies. Covid has accelerated this spend, and will be a key driver of growth going forward.

2. Smaller IT companies have realised they can’t compete with giant incumbents and have healthy margins at the same time. The emerging solution seen across the pack is that they pick a few verticals and become the best solutions provider in their own niche.

Goal is to carve a niche in our verticals where we are better than the big players. We can’t solve every problem, but what we choose to solve, we can do much better than anyone else. - Dharmender Kapoor, interview with BQ, June 2021.

Okay, what are their verticals?

They have four main verticals. From the 2021 annual report:

Birlasoft helps customers in manufacturing to accelerate their Industry 4.0 adoption.

1. BFSI - to leverage open APIs and automate both front-office and back-office transformation;
2. Energy and Utilities - to enhance field collaboration and real-time service excellence, optimize operations and improve asset performance;
3. Life Sciences - to automate drug discovery and pharmacovigilance processes.

Here’s how the revenue mix has changed over the years:

Why now? What has the journey been in the last few years?

The story becomes interesting after 2015, when Birlasoft brought in Anjan Lahiri, and he worked on the company until 2019 when two things happened. They merged with KPIT Technologies and became the digital enterprise company of today, and Anjan Lahiri stepped down due to urgent personal reasons.

After this, they revamped the board, with Mr. Dharmender Kapoor taking over as MD, and in the last two years have onboarded senior talent. Their current CFO has been on the IBM senior management for 20 years, and this trend has continued if one looks at their hiring on Linkedin.

How has their business model evolved?

1. They’ve started focusing on their top clients and have trimmed tail accounts. Furthermore, they’ve started selling more to their top clients across their verticals. This is seen through three data points in FY21:

• Lower $1 million deal wins, more $5 million deal wins.
• 97% of new deals are from existing clients.
• Increasing TCV trend in deal wins, FY21 was their best year.
• Annuity has improved from 60% in FY20 to 70% in FY21.
• Deals are now multi service rather than single service. New deals don’t necessarily fall into one vertical.

2. They are constantly working on internal efficiency to improve operational metrics. The key metric management mentions repeatedly is the Days Sales Outstanding, and Utilisation rate:

Revenue per headcount across the quarters:

This has been steadily improving, with a drop in the latest quarter. Management commentary on the same:

We lost $1 million of bottomline due to covid. Employees in India took leave when the second wave hit, and we didn’t dock their pay. Without this, the quarter would have been even stronger.

Accounting for this, the profit/employee for this quarter would be 1.52 as well.

The last data point is important while considering the difference in wage costs between India and the US.

From the latest earnings call on the onshore/offshore mix (paraphrased):

We usually hire locals (onshore) if there is a crunch, as the hiring lead time is a lot quicker than in India where there is a 3 month lead time. When we hire offshore, we replace onshore subcontractors. Clients are also on the same page with starting projects on site and finishing it offshore. We improve our margins, they get comfortable with deal structure.

Okay, numbers are improving. Do they have ambition?

Paraphrasing what Mr. Kapoor said in June’s interview with BloombergQuint:

By 2025, we want to have 7500 Cr. of revenues (3500 Cr. today, implies ~18% CAGR). We will do this by:

• Growing top 30 accounts by > 20%;
• Platform strategy: partnership with Azure / AWS to offer solutions across the value chain;
• New channel for sales; good partnerships already in place.

Expecting profit CAGR to be much higher than revenue CAGR in the next 4 years. Profitability will grow. 3-4 quarters ago, this target of billion dollars was a dream. 2 quarters ago it became aspirational. Today, I’m far more optimistic and it’s looking like it can be a reality.

Absolutely no doubt that I and other top management will continue to work at Birlasoft until this goal is met. They’re motivated, excited, and handsomely incentivised to stay. We have our plans set in place for the next 3/4 years.

Financials and Cash Flows

• Are currently debt free and have 1100 Cr. of cash in hand.

Risks

1. The vision is entirely dependent on Mr. Kapoor and his close circle. If they leave in the next few years, big questions to ask.

2. Dependent on their partnerships with SAP, Microsoft, AWS. Currently a Microsoft gold partner, which gives them benefits to companies searching for solutions providers.

3. Execution - Reliant on better deal wins and client mining to meet their 7500Cr. target.

When we acquired KPIT, used to think 75 million dollar deal wins were a great target for a quarter. Today, 200 million dollars should be the average every quarter.

However, Q1FY22’s deal wins have fallen short of their own metrics.

4. Their target of 1 billion dollars is a nice headline, but it implies a mid teen CAGR going forward. This is something we have heard from other midcap IT companies like FirstSource. Hence, is their target super normal?

Disclosure: Invested from lower levels, no recent transactions.

With current valuations, it’s becoming increasingly difficult to find low hanging value fruit. This post isn’t necessarily to offer a slam dunk investment opportunity, but to track a company here that may become more attractive/unattractive going forward.

Two amazing sources of information on the company:

From our very own board member:

https://www.youtube.com/embed/0LeQR5R1Zas

https://www.youtube.com/embed/gG6F8tuwo0U

Finally, to those with a BQ Blue membership, the BQ Edge series with White Oak is a lovely window into the smaller IT companies.

Will write further posts on management commentary, and takeaways from the earnings call.

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