Thursday, 17 May 2018

EID Parry (India) Ltd: All Sugars are not Same-3rd Part

Click here , here and here for earlier posts on EID Parry and Sugar Sector.

Sugar sector again is in the mess. The reason-as i have pointed out many times earlier is the flawed govt policies. They raise the FRP of the cane and every farmer is growing cane due to assured returns and we have excess (Unnecessary) production. Global sugar production is already in surplus. So Sugar producers need to pay higher FRP but sale price is lower inflicting double damage and our Govt is again trying to throw hard earned tax payer money for keeping the prices a bit higher just to make it a zero sum game.

Maharashtra faced severe drought for 2 years with lower sugar production but this year better rain has resulted in every farmer growing cane. The result-Sugarcane production is up by 25% but the production of pulses and oilseeds is down 46% and 15% and we'll see India importing more and more pulses and oilseeds again this year. India imports around 70% of its refined oil requirements valued around some 60000 cr!!! Now Maharashtra Govt is working to promote crop diversification policy.

I am always of the view that major task of the govt is administration not the control and unnecessary interference like for example, as we are dependent upon oil imports for meeting 80% of our demand so Govt should have focused on developing most efficient public transport system so as to discourage the use of private vehicles. So Govt needs to focus on making strong policy backed by precise data and efforts to equip the farmers with cropping pattern information for better and sustained prices. But here Govt has always failed miserably. I am surprised why they can't think something rather than wasting taxpayer’s money and wealth in pouring unnecessary subsidies after the accident when they could have avoided the accident itself.

So EID is also 250. But it is still better than the other sugar stocks (part reason-it never rose like them). But my reason for investing in it was never the occasional upswing in the sugar prices...i never invest looking at short term forces. I see Govt doing the much needed repair work (like in Maharashtra) for the sugar sector and then EID parry due to its way superior credentials will reap the maximum benefits. 
Moreover, the expected global glut in the sugar supply may turn out be an overestimate because Brazil has already started to plan diversion of excess sugar production to Ethanol production in order to support the local prices. Similar action is also expected from Indian Govt rather than subsidies.

But as shared in earlier blog posts related to EID, apart from sugar sector alignment the main reason behind the investment in EID parry was its diversified portfolio of Nutraceutical products (Turnover 215 cr) which is growing fast and EID is still focusing on investing more in it, its focus on developing branded sugar in India and Ethanol and Distillery business (Turnover 300 cr). Ethanol is a big strategic fit for India's oil issues and this will also realize the long wished aim of raising farmer's income.

Brazil is a global success in Ethanol with around 90% of its new cars fitted with dual-fuel engines which can be powered by petrol or ethanol or any mix of the two. Brazil produces around 27-30 billion litres of ethanol while Indian production is around 1 billion liters. Indian Govt is taking concrete steps for growing Ethanol production in India especially the production of 2nd generation Ethanol from agro residue like rice husk, wheat straw, corn straw, cotton straw, Bamboo etc. (Investment in Praj Industries was also due to this reason Click here for study on Praj Ind).

EID parry holds 60% in Coromandel International valued around 8000 cr (Although Coromandel has fallen from 600 levels to 450 levels) and even if we give the 50% holding company discount the value of the holding is around 4000 cr which is the current market cap of EID Parry!!! So we are getting its sugar business, Nutraceutical, Ethanol and Distillery businesses having turnover of 4500 cr almost free!!! EID gets around 100 cr as dividend from Coromandel every year which provides the support to its bottom line.

I see this company doing great and ready for the long haul. I am looking to invest more and more at every significant development in its branded sugar, Nutraceutical and Ethanol businesses.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)

Thursday, 8 February 2018

Monte Carlo Fashions: Results Update Dec-17 Quarter

Monte has given great set of numbers for Dec-17 quarter. Top line 355 cr vs 290 cr. PBT at 73 cr from 53 cr but if we exclude other income of last year then the same are 72 cr vs 44 cr. Great show. So far in this year for 3 quarters it has given a Topline of 560 cr vs 490 cr and PBT (Excluding other income) at 91 cr Vs 60 cr which ,for me, shows that its losses from summer-wear business are falling and it is growing fast. Not to forget that for past one year it has weathered the shock of Demonetization and GST otherwise the growth could have been even higher.

This is one stock where market is failed to recognize the underlying strong business strength and relatively very cheap valuations. Market is apprehensive of its success in summer clothing business and wants to play the waiting game but in my view due to its inherent distribution and marketing strength of very strong (Best in India) winter wear business it will find success in summer business. It doesn’t need to build its distribution and marketing from scratch for summer business. Second, it has very strong balance sheet with nil debt, good inventory and debtor management, good and consistent dividend policy (yield 2%) which will grow in the future. So I think market has managed to somehow ignore these factors and it is trading at cheaper valuation of 20 PE. Good buy at present levels of 560.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the stock discussed in this Post).

Saturday, 3 February 2018

Aditya Birla Fashion and Retail Ltd: Results Update

Aditya Birla fashion and retail Ltd: As shared many times earlier, this one is my favourite and best pick in Indian fashion retail. For dec-17 quarter, it has posted great results; top line at 1862 cr from a715 cr but the real factor is that it has posted net profit of 35 cr from loss of 12 cr last year Q3. The main factor behind this is the performance of Pantaloons which has operating profits of 29 cr against loss of 6 cr last year. I am waiting for this transformation for long and it has happened now although i feel it has been delayed only due to demoney and GST melodrama. Its underlying main business of men's fashion brands was always doing was only the restructuring and losses of pantaloons which were eating all the profits. But i have seen Indian markets having problems in evaluating a company having two separate businesses one which is legacy and doing well and the other which is under transformation and having losses but still significant business. But i have seen Indian market does the valuation on "net" profits of both businesses although both should be valued separately because loss incurring business is also having valuation, it has assets.

Pantaloons is a big fact it has net capital employed of around 1600 cr compared with 1300 cr of Madurai fashion but still its turnover is around half of Madurai. Turnover of 2500 cr on assets base of 1600 cr is still there will be high growth in the future. Birlas are very shrewd businessmen. I have always find Birlas and Bajajs having much better business sense than the likes of Tatas and others even Reliance. Tatas were caught off guard as 15 years back there was no competition to them but now they are doing their best to erase all that lethargy so i am buying all the legacy businesses of Tatas like Tata Chem, Tata power, Tata Global, Indian Hotels. Tata global i am done with long time back so as Tata Chem but Tata power has great value still.

Out of total debt of ABFRL at around 2000 cr, some 1300-1400 cr is for Pantaloons. But Pantaloons with its value fashion and women apparel business as Madurai is mainly a men’s branded apparel business. Most significantly, as compared to value business of other retailers like Arvind which are still under infancy, Pantaloons is a much matured business and very soon will be a major profit contributor. Aditya birla is trying to restructure its business model since acquisition and has introduced major steps like more focus on private labels and much better inventory control. Due to these Pantaloons is on the cusp of strong growth in future.

In earlier posts and emails, I have already explained the undervaluation of ABFRL compared to players like Arvind despite having much superior branded apparel business. Arvind sold 10% stake in its retail arm at 740 cr valuing the same at 7400 cr. Its EBITDA was around 180 cr so it has been valued at 40 times of EBITDA. ABFRL has EBITDA of its Branded fashion (Madurai Fashion) business at around 400-450 cr (although the same has been impacted due to demoney and GST issues). But ABFRL’s brands Van Heusen, Allen Solley, Peter England and Louis Philippe earn revenues of 1000 cr each which were the first to achieve the same in India; as compared to this Arvind’s brands like Arrow/US Polo has revenues around 500 cr each. Also, the brand positioning of ABFRL’s brand is way higher than Arvind and has much better retail footprint,  margin and maturity profile. Arvind is just a beginner so I feel ABFRL should get much higher value than Arvind…around 50-60 times taking valuation of ABFRL at 20000-25000 cr. Pantaloons with EBITDA of 200 cr should fetch valuation of 20 times taking its valuation at 4000 cr (but it is minimum). So ABFRL  should get the valuation of some 30000 cr even with moderate valuation multiples; its current market value is 12000 cr!

Moreover I still feel that ABFRL could not perform up to its potential in last two years mainly due to online discount war by e-tailers like Amazon and Flipkart as ABFRL chose to avoid the discounting path in order to retain its premium standing in the market. I have seen the likes of Raymond, Arrow etc. offering big discounts at these portals but never the brands of ABFRL. That’s the reason I have always seen people choosing ABFRL’s brands for special occasions like marriages, parties etc. due to premium positioning of its brands. The quality of its products is top notch, in fact much better than the other as far as my experience is concerned. ABFRL has introduced innerwear products under Van Heusen brand and the same is witnessing high growth and this will be one of the highest growth area.

Now the discounting war among the E-tailers is getting over as it was a war meant to destroy both badly with no clear winner in the long term as people would choose the physical stores for shopping when there are no discounts. So I think the business it lost due to this will return in the future and the top line and margins we are seeing today do not reflect the real picture of their strength and standing in the market.

Retail business is very difficult in India and there is severe competition as everybody wants to garner maximum share in this vast high growth market. But when I hear people talking about retail, I hear the names like Reliance, Big bazaar, D-mart. But very few know that the real winner of Indian retail is not from these ones- it is the humble CSD of Indian defence. In 2014-15 they were the highest net profit earners with NP at 236 cr on revenue of 13000 cr. Last year their turnover was 17000 cr but I don’t have the figure of NP. Although it has some advantages due to low prices and people always talk about the misuse of these canteens. But my aim is to highlight something very significant. CSD canteens operate on wafer thin margins of 1%-2% against 10%-20% of private sector retailers which I think even out any advantage of low prices. But CSD canteens earn better because they save two biggest costs of private retailers- Real estate and advertising.

Real estate and advertising-I think private retailers like ABFRL will show much better margins once they tackle these two. Real estate costs in retail are highest in India when retail is just in its infancy…so I think this is big anomaly and requires urgent attention. In fact, ABFRL has already started working in this direction and closed around 200 loss making stores last year. Indian retail market is overcrowded which resulted in the heating up of the rentals due to high demands but now consolidation is under way as stores are being shut down due to lack of profits as real estate alone accounts for some 20-30% of the costs. Moreover GST will enable these players to get the input of GST paid on lease rentals as earlier they were not getting any input for service tax paid on lease rentals as they were paying sales tax (VAT) on their products so input of centre level service tax was not allowed against state level sales tax. So this will save the cost for them. Like, in this qtr their lease rent costs have come down to 267 cr from 278 cr...i think this may have some impact of GST input. Waiting for the comments from the management. I also expect cooling down of Indian real estate market and this will have positive impact on the margins. Advertising cost will also come down as at present the focus is on brand positioning and making people aware of these brands. But over time due to consolidation and lower competition this will come down. In fact, in 2016-17 the advertising and sales promotion costs of ABFRL have come down to 287cr from 395 cr in 2015-16. So I’ll be tracking these two factors as both account for major part of their costs (1100 cr lease rent in 2016-17) and can be a target area for reduction.

Re-rating candidate at 156…must buy.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the stock discussed in this Post).

Sunday, 28 January 2018

Sanwaria Consumer Ltd: Read the offer Document carefully

Sanwaria Consumer Ltd: This one, once again, is getting the attention. In the past (2010-11) also, it grabbed huge interest and run up from 8 to some 60-70 but only to witness a sharp fall to Rs. 10, then to 4 and then to 2 last year. Now it is at 30 again and I am getting regular queries on this one as most of people want to invest big in this citing it being the next big story in Indian FMCG. I don’t track this company but I am always having the doubts on this one. So I am just sharing my views on the basis of third party sources like annual reports, news etc. Please remember that these are just my views and if anyone has some data, information which is relevant and will result in me changing my views then they are most welcome to share the same otherwise you can simply ignore my views.

Actually the story of Sanwaria began when the company decided to choose the difficult path of entering branded staple food products as they couldn’t see any future in their earlier domain expertise of soybean processing business. And since then company is throwing branded goods one after the other…their products incudes (although nothing excluded)- Rice, soyabean oil, Chakki Atta, maida, suji, besan, daliya, Dal, Soya chunks, Poultry and aqua feed!!!

Now there are legends how sanwaria has shown great growth after the Brand saga. But in spite of outsourcing almost all of its products, it just earns 115 cr PBT on turnover of 3500 cr. LT Foods (Dawat rice fame) earns 313 cr PBT from 3300 cr topline. LT has employee cost of 116 cr while that of Sanwaria is just at 4 cr!!
I mean, well, we are still quite some time away from the age of superman at the earth. LT depreciation is at 54 cr and Sanwaria’s at 7 cr, LT Interest cost is 150 cr but Sanwaria is at 65 cr!! LT has assets base of 700 cr with Sanwaria at 160 cr!! I am comparing it with LT foods because LT foods is also in a transition phase (Just as claimed by SCL), against the mighty KRBL it'll just blow away. Lt Foods is a rice player and SCL claims a turnover of some 2000 cr from Basmati Rice, 700 cr from Food grains. So 2700 cr out of 3500 cr means that it is not a soy processor and 2700 cr is not a startup type of turnover, it belongs to mature players.Its Rice turnover was just 68 cr in 2015 but rose to 1650 cr in 2016. Its old domain Soy processing, went down to 400 cr in 2016 form 2200 cr in 2015!!! I wonder what happened to the resources/plant/machinery etc. which were being used for soy business!! or simply turnover of Soy is now being shown as Basmati Rice??  In 2015 AR, there was a Misc item turnover figure of 388 cr but in next year AR, the same has been shown at 35 cr with balance added to other items like Rice, soy!! I am surprised (Shocked actually) at just 4 cr employee cost (may be some 50-100 employees) because how on the basis of this paltry human capital, it manages to do the most complex functions of marketing and distribution of a branded product company that too when it has its own “Retail chain” (LT has none). I think the retail chain is outsourced to Amazon!!

Can anybody think that this is because of Sanwaria’s outsourcing model as it outsources all the production and only does the marketing/distribution. Then why it has high figures of Inventory at 500 cr and debtors at 727 cr, where is the working capital management? With just 4 cr employee cost I wonder how many employees take care of the inventory and debtor management! Sanwaria’s ROE is just 10% but LT has 20% although due to low investments into assets, working capital etc. (courtesy outsourcing model) sanwaria should have much higher ROE. Where is the discipline of a branded FMCG Giant? Our another pick, Bajaj Electricals, has the similar outsourcing model and it has ROE of more than 100% !!!

With the great growth it has achieved in last 3-4 years (as is claimed) it has been able to “reduce” cash in the books from 45 cr in 2013 to 16 cr in 2017. It earned net profit of 165 cr during the period. So where has it gone? Let’s see…Its assets base is stagnant at 160 cr! But Debtors have been increased from 500 cr to 700 cr, inventory from 200 cr to 500 cr. Surprisingly, debtors have been increased but Creditors have been decreased from 300 cr to 160 cr!! What a working capital management by a branded company with low employee base?? Its debt has been increased from 370 cr to 900 cr…another sign of visionary management. So in all these 5 years its funds flows from Debt 530 cr+ NP 165 cr+ Depreciation 30 cr = 725 cr which are utilized in Inventory 280 cr, Debtors 250 cr, creditors 135 cr and Investments some 30-35 cr, totalling 700 cr!!! And here we have the grand schema of brand. Nothing real has been created in actual.

Another aspect which appears dubious is the tax outgo. Tax outgo percentage is around 30%- 35% of NP for players like LT Foods and KRBL and most of the other companies across sectors. Like LT has paid a tax of 64 cr on NP figure of 195 cr in 2017, same for KRBL is at 138 cr on 538 cr but Sanwaria has managed to keep its tax outgo around 10%-15% like it has paid 6 cr on NP of 50 cr in 2017!! I wonder how greatly they are planning their tax outgo?

Another mysterious figure is Deferred tax liability (DTL) of 16.28 cr. This figure is around this level since 2009 (I couldn’t check before 2009) and as per the annual reports it is mainly on account of timing difference for depreciation rates as per company law and tax laws. However in my view this figure should have been started to decline after initial period of 5-6 years i.e. around 2014 or 2015 because its assets figure is fairly consistent since 2009 mainly its Plant and machinery figure which accounts for majority of gross assets (100 cr out of 160 cr). Its gross assets were around 150 cr in 2008 so nothing much has changed since then. So in my view timing difference of depreciation rates should have been over by initial 5-6 years but this figure of DTL is consistent around 16-17 cr. At present due to lack of time (I am not that much interested either) and non-availability of old annual reports, I couldn’t dig deeper but I think it needs explanation. 

Ohh…I think I have found the reason. It is its wind power plant. I found a separate line item for the same in 2010 annual report which shows Rs. 42 cr against wind power generator. The same has been transferred to the subsidiary in 2012. I don’t know the year of capitalization of this wind plant but accelerated depreciation rate was 80% for wind power plants since 2002. So this DTL looks like due to accelerated depreciation impact of wind power plant. After this wind plant point discovery, I thought to leave this DTL issue but then decided to keep it for academic purpose especially for the readers. Also, I feel with the transfer of asset to the subsidiary the corresponding DTL liability in the books should also have been transferred to subsidiary otherwise holding company won’t be able to utilize the balance in DTL because it (Holding company, sanwaria consumer) won’t have any tax liability related to profits of wind business as the same has been transferred (But need to check further). But i still wonder what this fund trapped company was doing with investment of 42 cr in Wind power when their plant and machinery base was just 60-70 cr!! To save taxes?? But they never were a big profit making company...always shortage of funds due to high working capital and saddled with debt. They should have, first of all, invested in creating and expanding the capacity of underlying business to take care of the future profits.

Another dubious entry was the write off of 18.41 cr in 2016 due to fire. I wonder why there wasn’t any insurance claim although they have incurred insurance expenditure of Rs. 60 lac in 2016. Also, even surprisingly it appears that this 18.41 cr was adjusted against capital work in progress in the books as in 2016 beginning they have some 38 cr of capital work in progress and only some 20-21 cr was capitalized!!! I even doubt over the genuineness of this work in progress.

Some people tell me that high inventory may be due to storing of rice for ageing but this is what the likes of KRBL and LT Foods do; they are the real rice processors but Sanwaria has outsourced all its branded staple food requirements so I see no need for it to accumulate rice as raw material as the same is to be done by the suppliers of Sanwaria. Out of 500 cr inventory 285 cr is the raw material and there is no break up of type of raw material whether it is soy or other, it is not there in the annual report.

Company says that they have opened some 25 exclusive retail outlets under “Sanwaria Kirana” and will be opening 10-15 this year but I do not find any new asset created for these outlets as no assets has been added this year. Yes, there is one entry against lease rent (1.68 cr against last year figure of 50 lac) but employee cost has declined from 4 cr last year to 3.76 cr this year so who is running these stores. In the company website, they are showing the names of places in MP having Sanwaria outlets but when you click on the links nothing happens and it leads to nowhere. So I doubt whether there are any such retail outlets as I couldn’t find any on the google search. I could only find local “saawaria” Kirana shops and general stores at google and you tube. If anyone has seen and visited these then please clear my doubts. Also, Retail business means high working capital investment for inventory that too for finished goods. But here its inventory has been reduced to 500 cr this year from 534 cr last year. Also, its raw material inventory is at 284 cr out of total inventory of 500 cr with finished goods inventory just at 148 cr (30% of the total)...a bit difficult to understand!!

As I have shared earlier many times, the biggest challenge for an FMCG brand is the marketing and distribution not the product (As is evidenced from the outsourcing model of Sanwaria). No retailer and wholesaler is going to push/keep/sell my product just because I have decided to launch a brand. Doing business and establishing brands is not that easy. There are Hundreds of big established brands with established consumers. It is very difficult to break the consumer loyalties especially in staple foods as nobody is going to leave their trust and use a new branded product just like that. And Sanwaria claims easy victory here…just like that!!!   Huge investment, time and thought are required for Distribution and marketing function. I see people investing madly in those stocks when they declare that they are going to launch their own brands. People think that this is end of the game and the brand will see the success. But it is never so and 90% of the times new brand will be a failure. But most of the dubious companies try to take advantages of investors’ over enthusiasm by declaring paper plans of retail and brand play.

I always liked Tata chemicals’ foray into new consumer brands ( Tata Sampann) for Pulses and Spices because it already has big established distribution and marketing chain due to Tata salt and Tata tea. So it is very easy for Tata to push its new consumer products especially because people trust it. I have invested big in Tata chemicals (Shared at this blog also) and it is already a double but i think this will be the stock of Tata group in next 5 years. On the same lines, i am expecting Parag milk to do well in its pursuit to establish new FMCG products as it already has big distribution clout.

Sanwaria promoter Anil agarwal has dubious past. He has been fined by SEBI earlier. It has issued generous bonus and splits in the past just to increase the trading volume to rig the stock prices  ( They have even declared another bonus in july-17). Due to these bonuses it was reduced to just a penny stock. IT raids have been conducted and it is during these raids that its links with Baba Ramdev have come into public domain. What was in it to hide for? As now they are talking about the same in annual reports…it all seems fishy. IT raids reveals tax evasion of 200 cr! This figure of 200 cr may balance out the low profit margins.

These are enough reasons for me to avoid this one and these are serious issues requiring serious explanations and one Baba Ramdev alone may not be able to do the same.

(Views are personal and are only for Information and Education purpose only and should not be construed as a recommendation for Investing or trading. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified SEBI Analyst and not holding the stock discussed in this Post).