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Jatin
Markets are going good and next 2-3 years we will be going to see many IPOs coming. I would like to dedicate this post to one such probable opportunity that might come our way soon. As a disclaimer, as of now I know little about this company (as it is a private company) and this post is an outcome of my thought process on the opportunity and my personal experience with the company.
I probably first got to know about Thyrocare Technologies Limited (a company into Healthcare Diagnostic) through this 2010 ET Article ‘PE firm buys 30% in Thryocare as comapany seeks to tap radiology segment‘ and later in 2012 when Thyrocare had second round of funding ‘Norwest Venture Partners invests Rs 120 cr in Thyrocare‘
As I read more about the company I found some very interesting pointers:
Thyrocare has a solid vision statement:
Thyrocare should serve to 50% of world’s population, 50% of their diagnostic needs, at 50% of the costs. Thyrocare should be the biggest client for top 20 diagnostic manufacturing companies in the globe.
After the overwhelming response to our workshops in Mumbai and Bangalore, we are happy to announce next workshop scheduled on 30-31st May in New Delhi.
Here is what one of the participants has to say about the workshop:
“The information shared in this workshop is invaluable. Even if someone has a background in Finance and has been into fundamental evaluation of companies the course acts as a refresher as every aspect is covered step by step and in total details. The commitment to share and teach was commendable as webinars were held before and after the workshop to ensure every bit is passed on to the attendees. The best part according to me was the chit-chat part in between the concepts where the actual happenings in markets got related to the concepts and I felt this is where you can gain most out of the experienced veterans Jatin Ji, Puneet Ji and Nooresh Ji. Thank you for taking us through the investing journey”- Mr. Soumya Malani, an alumni of London School of Economics and a budding entrepreneur from Kolkata
March 2015 Bangalore Batch
Feb 2015 Mumbai Batch
After the overwhelming response to our pilot workshop held in Mumbai on 14-15 February, we are happy to announce next workshop scheduled on 28-29th March in Bangalore.
Here is what one of the participants has to say about the workshop:
“The information shared in this workshop is invaluable. Even if someone has a background in Finance and has been into fundamental evaluation of companies the course acts as a refresher as every aspect is covered step by step and in total details. The commitment to share and teach was commendable as webinars were held before and after the workshop to ensure every bit is passed on to the attendees. The best part according to me was the chit-chat part in between the concepts where the actual happenings in markets got related to the concepts and I felt this is where you can gain most out of the experienced veterans Jatin Ji, Puneet Ji and Nooresh Ji. Thank you for taking us through the investing journey”- Mr. Soumya Malani, an alumni of London School of Economics and a budding entrepreneur from Kolkata
Since a long time, I have been a loyal customer of Meru Cabs whether I am in Dehi, Mumbai or Bangalore. Being a value investor and somebody who strongly practices scuttlebutt, I generally find it hard to resist interacting with the driver. In fact most of these guys turn out to be pretty interesting and knowledgeable. Over these years, I generally found that barring the usual small complaints every employee has, Meru drivers have largely been happy with the company on all crucial parameters like getting consistent bookings, monthly earnings and overall experience.
I was in Mumbai recently when I booked a Meru from Thane to the airport using their android mobile application. (If you haven’t tried the app yet, please have a look. It is amazing as it shows you cabs around you on a map with details of cab driver and you can book instantly and then track the car real-time coming towards you.)
However, I see things changing now. My hour long chat with this driver regarding some strategic moves by Meru shocked me a bit…Read More
I first looked at Nesco around 18 months ago when it was ~700 and had love at first sight. They have an annuity business(rentals); the company owns and runs Bombay Exhibition Center, Commercial towers built on adjacent land and some pretty valuable surplus land around it (overall ~70 acres) in Goregaon, Mumbai. If one does the math, the market value of these assets put together is north of INR 4,000 Cr. The underlying business itself is fantastic with a sustainable moat. To understand the business quality and potential, all one needs to read is Prof. Sanjay Bakshi’s note on NESCO.
In the recent rally the stock has run up to 1100. What should you do now? Should you hold? or if one doesn’t have a position yet, can one enter now?
I believe even at price of 1,100 Nesco makes an interesting case for investment for two reasons:
Rising earnings: I understand that the absorption of latest tower (3rd) has picked up and full year effect will be visible in FY15 numbers. Once its fully absorbed it could fetch well over 50 Cr annually. The company is ready with their plans for the 4th IT building (model image below).
Value Unlocking: There are many companies out there with valuable assets but unless you see a trigger for value unlocking, the wait could be very long and that of course has opportunity costs involved. In Nesco’s case, recently two big and smart institutional investors have taken sizable position- ICICI Pru Div. Yield has taken 3.4% stake and Pari Washington 1.3%. So, the entry of such smart and big institutional investors gives some confidence that management would sooner than later start unlocking value OR at least be more liberal in dividends, which could be a great trigger for this stock (a recent case in point-Noida Toll Bridge). As on Mar 2014, it is holding 372 Cr in cash and cash equivalents. Secondly, the current chairman Sr. Patel is in his late 70s, his son Mr. Kirshna Patel has been part of board for some time now and it is reasonable to expect him to lead the company going forward. One can hope him to be somewhat aggressive compared to his father.
Most of the mid & small caps have gone up 3-5 times in last year including our top picks VST Tillers, PTC Finance, Ashiana Housing, Relaxo etc… making it real difficult for value investors to add to existing ideas or identify fresh bargains. Amidst this you have NESCO still available at decent valuation and offering a huge margin of safety(downside protection).Hence, one may ADD/BUY NESCO at current levels.
PS: Goes without saying, invest only if you have a 2-3 years horizon and you don’t panic with 15-20% volatility.
Happy Investing!
Thanks to a great and powerful mandate to Modi sarkar – markets are making newer highs and sentiment has turned bullish after a very long time.
All our top picks have been multi-baggers and they continue to do well. Here is an update on how FY14 panned out for them along with what future might hold-
Relaxo Footwear – The company posted 20% sales growth in FY14 with significant margin expansion that led to profits going up 46% to 65 Cr. It shared its first investor presentation in Q4 see here. This has been a classic case of having identified an emerging moat at reasonable valuations run by an ethical and competent management. Over the last 12 months, the stock has seen a decent re-rating and a bridging gap in valuations compared with leader Bata. They sold 10.8 mn pairs of footwear in FY14 and increased production capacity to 160 mn pairs, which should take care of next 2-3 years.
I remain very bullish on the prospects for Relaxo and expect 18-20% CAGR in topline and a higher growth in profits due to rising margins.
VST Tillers – As expected VST posted exceptional results with 30% rise in revenues and 80% jump in profits. The stock has seen massive institutional interest and hence the run up from 400 to 1850 in last 8-9 months. It posted an EPS of 96 in FY14 so its trading at a trailing P/E of 19+ which might have run ahead of its fundamentals, but lets not forget the story has just started playing out – They have setup a new tractor plant with a capacity of 36,000 and company is likely to sell 15,000 tractors in FY15 (100% jump over FY14) . Their product is way superior compared to rivals like Mahindra’s Arjun. The surplus land worth 500 Cr. when monetized will be the bonus here. However, as a caution one might book partial profits.
Ashiana Housing – Ashiana closed FY14 with booking of 22 lac sqft (18% growth) See Q4 Investor Presentation. Since I continue to be bearish on real estate as an asset class, my bullishness on Ashiana Housing might sound ironical. This is owing to my opinion that this company stands out from the crowd – be it the balance sheet, the operational strategy, execution or the management style. The management is very smart and treat land as raw material and do not speculate by stretching the balance sheet. Their execution is not only great but pretty fast too, the reason why it has earned such a good name among home buyers. Further, the effect of moving to completion method of accounting should be over in current financial year and the P&L will start reflecting a fair picture.
Honda Power – Here the exports story continues to play out. In Q4 exports figure trebled to 75 Cr vs 20 Cr. last year. Even QoQ it was up 50% (Vs 50 Cr. in Q3). There were some exceptional losses- closure of Poducherry Unit(consolidating operations@Noida), Inventory write-offs(due to change in emission standards)- all totalling to 9 odd Cr, otherwise PAT would have been higher. Exports to EU are expected to start this quarter. The company might do a turnover of 850-900 Cr. in FY15. Stock has doubled since the new year address by the president (see here) confirming our initial hypothesis that Honda wants to make India its export hub. Given the tremendous export potential and a strong cash-rich balance sheet, this should continue to be a core holding.
EPC Industrie – I shared my research on this scrip recently (see here) when the price was 100 and thanks to a strong mandate to Modi Sarkar and their loud and clear focus on Food Security and Irrigation, the stock has more than doubled in no time. EPC, being one of the largest micro irrigation companies in India, would be a big beneficiary of this. And the likely synergies with other Mahindra companies will only make things easier for EPC.
“A rising tide lifts all boats. It’s not until the tide goes out that you realize who’s swimming naked”
Lot of good companies have seen significant re-ratings in their P/E multiple however there are whole host of dud companies which have doubled and trebled in this rally. Lot of these companies have such stretched balance sheet that they will not be able to turnaround in a hurry, some may not turnaround at all. I would suggest this is a great time to get rid of such companies and move to quality stocks.
But you might ask in such markets is there any quality stock still available at decent valuations? A small company operating in an area where size of the market opportunity is enormous, has some competitive advantage, a strong balance sheet and run by competent and ethical management? Well there is one such stock and it has not participated in this rally at all.
At Current prices, V-Mart is worthy of entering ones core portfolio. Given the population of our country and aspiration levels of countrymen, retail is one of the most lucrative businesses in India. At the same time, it continues to be one of the most difficult businesses due to – low entry barriers, absence of customer loyalty, sizable overheads in terms of rentals & staff costs, and the last but not the least inventory management (dead stock). The list of failures is endless – Koutons, Subhiksha, Vishal….. The ones who seem to be doing it fine aren’t making any crazy money either – ShoppersStop 3-5 % operating margins & Trent has operational losses from last 5 years.
If you dig deeper into the story, you realize the overheads in this business are just too high Why? The rentals are exorbitant. Decent location on high streets and malls costs 150-250 per square feet per month, in places like Delhi’s CP/Khan market its even as high as 400-500 psf. Even if you are an anchor tenant, rentals are still very high in Metros.
High rentals is a huge problem, because your gross margin is fixed, generally in the range of 30-35% in fashion and in case of Kirana its even lower at 12-17%, as you cant sell over MRP.
So whats the way out? Be like Radhakishan Damani’s Dmart and buy all the real estate? 😉
A relatively new company setup only in 2003 seems to have figured this out and the mantra is:
“SKIP THE METROS; ITS SIMPLY NOT VIABLE THERE”
V-Mart is focusing only on Tier II & III Cities where it pays average rent of just Rs 25 psf. The first problem of keeping costs low is addressed here. But what about the demand? Are people buying stuff from V-Mart in these regions?
If you haven’t been to one of the V-Mart stores near you, please take a day out, travel and experience it.
People in these regions have never experienced something like this before – they call it a mall 🙂 These guys are used to shop from either local markets or road side. Entering into an Air Conditioned store, getting served a glass of cold water, having trial rooms (means a lot specially for ladies) and having washrooms is something they have never experienced before.
One might think that the market size in such towns would be limited but that would be a wrong notion. Take for example, Gorakhpur in UP where V-Mart has opened not one, not two but THREE stores and all three continue to be in the best performing stores despite entry of competitors like Max and Big Bazaar .
V-Mart is first organised store in most of the towns it enters, which gives it the first mover advantage. Company is riding on the high aspirational levels of Indian middle class from these towns – It surprised me when I learnt that they have a store in Srinagar. Though the store has to be closed for various reasons throughout the year, its still one of the best performing store.
Its a pure retailer with 100% manufacturing outsourced through 1500 vendors across the country. They sell decent quality stuff at dirt cheap prices – T-Shirts starting 99, Shirts 299 and Jeans 449 and still manage to make above average money (10% OPM) as the overheads like rentals, staff costs and marketing expenses are minimal. They follow a cluster based approach in expanding stores; keep new one within 150 km of an existing store. Walmart followed a similar strategy and see here how Walmart grew from its first store in 1963 to 4400 in 2010.
Management has guided for a topline growth of 30% CAGR for the coming years i.e. opening of 20-25 stores annually. My analysis gives me confidence that 8-10% same-store-sales growth and remaining from new stores is achievable given the size of the opportunity and the zeal in the promoters.
Balance sheet is in great shape; they have net cash of 55 Cr. I don’t see a strong case of margin expansion here, but maintaining 10% should not be difficult.
This is the one of the few stocks that hasn’t participated in this rally and is still available at 300 implying a forward P/E of 15-16 and sales multiple of less than 1. A 20-25% earnings growth and some re-rating with scale and entry of institutional investors are likely to make this a multi-bagger. An esteemed fund manager Keneth Angrade, CIO of IDFC MF, known as Mid-Cap Mogul has 4.3% of the equity in IDFC Premier Equity. Other institutional investors include Westrbidge and Aditya Birla.
PS: Its in no way related to Vishal Retail, except that the promoter was heading Vishal Retail till 2002.
Some Reading material for you –
Visit Note_Mgt Q&A
V-Mart’s Investor Presentation Q4 FY14
V-Mart’s FY13 Annual Report
1974 Walmart Annual Report
An interview of Harvard Prof. on Indian Retail in Forbes
If you still have more time – Read an interesting report written by a friend – Has case studies on Walmart and Target here
Happy Investing!
I was speaking to a fellow value investor when he mentioned how frustrating it is to look at the shrinking universe of value stocks with which I couldn’t agree more. Most of the good small & mid caps have doubled and trebled over last 3-4 months. Its a great thing to see your portfolio go up in value everyday but the issue starts when you don’t find new value stocks, or good entry point for own portfolio stocks, for deploying your incremental funds.
As I look at the stocks in our portfolio and coverage universe, there are a very few which haven’t moved in past 6 months. One such stock is EPC Irrigation, a micro-irrigation company owned by Mahindra’s. Its into similar business like Jain Irrigation.
The following link will take you to a detailed presentation on this space, open when you have nothing else to do for next 60 minutes:
https://www.dropbox.com/s/a8h0qsf5mv8wqvx/Micro%20Irrigation_A%20Macro%20View_March2014.pdf
Hope Modi sarkar comes and this rally continues to become a full-fledged bull market.
The unanswered part of KILLER PUZZLE (Kewal Kiran Clothing)
https://www.dropbox.com/s/szc79zqfgnbl187/KKC_Unanswered_part_of_killer_puzzle_20131119.pdf
Background:
On Sep 25th 13 Prof. Sanjay Bakshi wrote on Kewal Kiran Clothing (Killer Puzzle) http://fundooprofessor.wordpress.com/2013/09/25/a-killer-puzzle/
I have tried to dig deeper into the story.
I will be sharing the probable answers for the questions raised in my next post on KKC.
Views invited
It is hard to find somebody in north India who hasn’t had Crax as a kid; many even have it today after growing up just like I do 🙂
Crax brand is owned by a listed company called DFM Foods Limited. DFM stands for Delhi Flour Mills which was their original business and later got demerged into a private company of the promoter group.
Without getting into too much detail; I’ll give an overview of the company and then straight come to the point.
DFM now owns three brands: Crax (corn rings) being the flagship brand accounts for 76% of the topline, Natkhat (wheat puffs) 5%, Krunchoids which is the latest addition 5% and remaining from Namkeens.
Three decades old Crax corn rings are available at Rs 5 SKU (95% of sales) and Rs 10 SKU. Natkhat is available at Rs 2 SKU and Krunchoids at Rs 5 SKU. Overall DFM Foods has a retail reach of 2.07 lac stores.
83% sales come from North India, 7% and 8% from east & west respectively. Company last year moved its production facilities to Greater Noida.
So to cut it short, DFM is largely a one product company (Crax corn rings) with one plant (Greater Noida, operating@80% capacity) and operations concentrated in North India (83% of sales).
For any FMCG company aiming a pan India presence, it is very crucial to have multiple plants to cater to different regions. Its helps you save a lot on freight cost and also improve availability through an efficient distribution network. In DFM’s case it is all the more important as Crax corn rings have a very short shelf life (~3months)
Now the key question is ‘Does DFM has a strong balance sheet to be a pan-India brand backed by regional manufacturing and an efficient distribution’?
The answer most likely is NO because debt-equity ratio is already at 1.45 times.
I think instead of taking more debt to have a plant in east or west India, management would most likely spend 18-20 crores and increase capacity by 30-35% at the existing plant in Greater Noida (sufficient land is available)
Then what could be the trigger for this stock?
There is only one trigger: A sell-off.
DFM last year clocked a topline of 243 crores whereas its market cap currently is 200 crores i.e. 0.8 times sales. It is such a well established brand with a decent franchise value, I think biggies like PepsiCo could be interested in such a regional brand which they can take pan-India using their financial and distribution muscle. Though majority of the sales come from North India, the product is well known across the length and breadth of our country and is very famous among kids (you can ask any kid). Credit goes to those age old tempting TV commercials, with rings in each finger, shown on Cartoon Network and association with movies like Ice Age.
If someone buys this, as per industry standard it could be anywhere in the range of 3-5 times sales. Assume it is at the lower end of the range at 3 times sales, the transaction would happen at valuation of ~750 crores, after settling the ~50 crore debt , one is still left with 3.5 times the current market cap making it a probable multi-bagger opportunity.
What if we forget the deal, would it still be a good addition to the portfolio? At less than one time sales I find the valuation attractive. Though it’s a great business with a strong brand/franchise value, as of now they don’t seem to have financial strength to expand manufacturing facilities and distribution network across India. Once ICD of 30 crore is settled with parent, the apparent corporate governance issues would go away and it could get re-rated. Either ways, it can clock 20% compounding in sales & earnings and even without any re-rating, the stock should at least mimic the earnings growth.
To summarize, I don’t see any major downside in the stock so one might consider allocating a portion of long-term portfolio in expectation of such a sale ultimately going through. When could something like this be announced is anybody’s guess.
Some info about the company:
 | Kalaga sunil on What my neighbourhood jockey d… |
 | PINTU KUMAR RAY on DFM Foods_Crax going pan … |
 | Rohan K on Why one should not get into ti… |
 | Sajid Vishal on Why one should not get into ti… |
 | Prabeen Kumar Patra on What my neighbourhood jockey d… |
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