Monday 15 December 2014

Fall of Oil-Only Fear Can Make us Slip

There was great noise regarding environmental pollution and we were made to think that our earth is going to die unless we reduce our excessive consumption pattern. Parallel ly there were growing concern regarding whether we had reached “Peak oil” and whether looming oil shortage would distort the rhythm of our life at earth.  To counter these fears…Sun and Wind came to our rescue…USA started the fight with Shale boom…efficiency of our vehicles were improved…we were making serious dedicated efforts to reduce our carbon emissions by being more responsible in energy consumption.  These were just the steps that should have been put forward and we did just that and these were actually working to the very best of our luck.

The most important factor responsible for driving the growth of material economy is the intangible one and that is…confidence, confidence of producers and Consumers that things will be under control. It is this confidence that will prompt producers to make investments for new productions and consumers to spend. At macro level, it becomes a Chicken-Egg riddle where consumer will be able to spend only if they have money and income due to rising employment levels prompted by new investments by producers and producers will invest when they are optimistic about consumer demand. And this is where this economic growth equation becomes very complex…everybody has his own version of economic theory. Some puts weight on making efforts to increase the consumption levels by giving incentives to consumers like cheap money and credit (Quantitative easing by US Fed)  thus raising production and employment but it backfires when consumption rise beyond optimal levels and future consumption is dragged into present…and any minor shock or fear ( Like Housing sector in USA, which fell like a pack of cards out of fear) can create ripple effects by pulling economy quickly down when people stop excessive consumption and demise of one particular sector spreads to other sectors of economy.

And some vote for Governments to tax the enablers of the economy to the brink and distribute the same to laggards so as to raise the demand. Some brilliant Governments plan to build Pyramids which they think will provide employment, create demand for cement and steel but these type of brilliant plans will only raise inflation levels as we witnessed here in india as Government can better use the resources to build warehouses to reduce agriculture wastage and this not only provides employment but also raises production (by reducing wastage).

Recession always is a phenomenon of misallocation of resources and basically a stage where economic forces correct that misallocation by directing the flow of investments to sectors which were undercapitalized and more fundamental.

Oil prices have fallen below $60 and this should have been welcomed at least by consuming economies but again we are being made to fear that falling oil is an indicator of falling demand due to slowdown in the global economies. First oil is not falling due to slowing down of global economies…it is the result of whole gamut of forces from shale oil, renewable energy growth, fuel efficient vehicles to political and economic forces fighting for market share.

OPEC has decided to not to cut the production to maintain its market share and is ready for more decline in oil prices as this would mean death knell for USA Shale Gas explorers as their cost of production is around $ 70-75 and many deep oil field around the globe can’t maintain their production at such a low prices. So shutting down of them will again raise the prices for OPEC. This may be a smart move but global energy sector is now much more complex as energy now covers more comprehensive resources like Solar, wind, Bio etc. solar can still compete with Oil even at $60 as we can plan input costs (which are bare minimum as Graceful Sun is free) with greatest surety and enter into long term contracts as there is mandate all over the globe to reduce carbon footprints.

USA can, at a certain level, in order to save its shale sector put sanctions on oil import by controlling the quantity of oil import or by levying import duties. Also this fall in oil prices may be a ploy to sideline Russia (oil exports are major revenue source of Russia) and ISIS.

Renewable sources are going to further dent the might of conventional fossil fuels with the advent of more powerful and cheap batteries. Huge research is underway on batteries which is going to change the game for Sun and wind.
Era of high oil prices were mainly due to misalignment of production resources in few hands and that balance is now going to settle in more equitable way. It is true that some of big investment plans for oil sector will now be shelved but that is very natural and that money will now flow into more productive use may be into Water preservation or batteries.

If Governments pass on the fall in oil prices to consumers then that will save much of their money and will leave them with more money…which is more consumption power or more savings. Unlike Indian Government which used the opportunity in raising the excise duty and thus aggregated around 10000 cr to make up for huge budgeted deficit. But at least we hope that they won’t use this money for building Pyramids.

So I don’t see any negative in this fall in oil prices unless fear grapples us and we plan to stop buying that beautiful Rose for our wives from that little girl at the corner of our street.

Friday 12 December 2014

Transcorp International Ltd- Exchange your Money with It...

Transcorp international ltd belongs to TCI group (Transport corporation of india) which is one of india’s largest logistics company, transporting almost 2.5% of Indian GDP. Transcorp is into Money exchange, inward remittance, tour and travel, real estate and taxi hire business. Money exchange and inward remittance forms the major chunk of the business.  I am also holding Thomas cook from 100/- which is also into same business but with much larger scale.

Tourism sector is going to witness huge growth in india due to inherent geographical and cultural dividend. Development of infrastructure will provide the necessary nutrition for the growth. Same is the case for inward remittance business which deals with remittance of money into india from our NRI brothers. Both these are under the strict control of Govt and RBI and the company has to follow strict compliances and audits. Hence entry barriers to this business are fairly high.

At CMP of 42/- Transcorp is available at a market cap of around 20 cr. But in 2010 it revalued its land holdings to 26 crore which were acquired at the cost of 3 crore and then it transfer this real estate holdings into a separate subsidiary company created for this purpose named Transcorp estate private ltd. I cant get much information regarding its real estate business at present, but we can assume that the same land will be valued around 30 cr now.

It is also having a cash holding of around 8 cr as per latest results. It is also having shares of leading companies like TCS, RIL, Axis bank, Biocon etc at a cost of Rs. 26 lac but I have done the calculations and market value of these is around 1.5 cr at today’s prices of these shares. We add all these and we get 30+8+1.5=39.5 around 40 cr which is double of current market price.

Company currently earns around 3 cr yearly net profit, its net worth is around 40 cr which makes return on equity of only 7.5%. The same point was mentioned in one study also but there is one catch-its networth of 40 cr is inclusive of revaluation reserve of around 23 cr which leaves real equity of around 17 cr and that makes ROE to 20% which is good. Even if I give this 3 cr a PE valuation of 10…it will make total valuation of the company to 40+30=70 cr which is more than thrice the current market valuation.

Although I feel the scope for EPS growth is huge due to scalability of its business which can grow exponentially with the growth of Indian economy. It has also created another subsidiary with the name of Ritco tours and Travels which caters to tour and travel sector. It was created by it to focus on this growing sector…although it currently derives turnover of around 8-10 cr but It is profitable. I can’t get much details about its real estate and travel business but creation of subsidiaries points towards something big on the part of management.

It is a consistent dividend player and yield at current market price is 2%. Corporate governance standards are fairly high as company has given detailed information regarding its subsidiaries in its annual reports.


Good buy at Cmp of 42/- 

Update 13/05/2016: Transcorp has approved the splitting of shares from FV of 10 to FV of 2. So with this, the recommended price as on 12/12/14 becomes 8/-


(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Thursday 11 December 2014

E commerce-Beyond Portals and Logistics ...Companies Covered--Rupa & Co., Borosil Glass works Ltd, Redington India, Future Retail

I am always of the view that sometimes user of a product or service derives more profits/business than producer of that product or service-just like pharma sector where many companies invest huge sums of money and time for developing a new medicine or product. Only one or two of those will succeed. But a hospital can harness their success for its benefit much better and longer than them. It doesn’t matter for a hospital, who invented the medicine…it can simply use the same irrespective of the producer. The risk of production is only for the producer.

I can see the same thing happening with Indian E-commerce sector. Biggest beneficiaries of e commerce in india will not be retail portles like flipkart or logistics companies-as is perceived by the market these days. Entry barriers to ecommerce portal and logistics business are low. Portals or logistics companies aren’t offering something different from others …everyone is offering the same. There is no product differentiation…we can and will see more such online portals and logistic companies.  We picked Gati when it was at 30/-…now it is around 300/- . But I still feel market-in its mad run for logistic companies-is ignoring those who can turn out to be bigger beneficiaries of e commerce evolution in india. These are those  consumer product based companies who are unable to reach the every possible consumer due to high cost of distribution in india.

There are many local or regional consumer product brands in india which are offering products of quality on par with global or Indian multinationals…but they are unable to reach scale due to massive distribution clout of these big corporate houses which these small companies can’t afford. Also sometimes it is not competition but sheer cost of distribution that keeps some companies to stay away from some markets. I think these companies can enjoy huge success if they can focus on transforming their business and marketing model. Cost of real estate and dedicated transportation are the biggest hurdles in formulating a viable distribution path. Like cost of real estate in organized retail is around 15% in india as compared to around 7% of western countries. In india a truck normally covers a distance of around 250 km per day at the rate of 20 km per hour which is 500-600 km per day and 60 km per hour in developed world. E commerce with no need of high cost prime location real estate and scattered transportation can eliminate both these.

We’ll study some companies within this framework, however these are not selected purely on e commerce viability model but mainly on their inherent business strength...which will be further sharpened by e commerce.

Rupa & Co. it is one of biggest innerwear company of india competing with Jockey who has taught Indian that not everything is for showing, comfort and personal style is equally relevant when it comes to innerwears. Although Rupa (company is not named after a girl’s name, but “Rupa” is “silver” in Bengali) is larger than Jockey in terms of volume but falls behind when it comes to brand recall and high operating margins. It is visible in their stock prices where Page industries (authorized manufacturer/distributor of Jockey in india for last 50 year or so) is available at a PE ratio of 65 where Rupa is at 25. But I feel there is another side of the story. First of all Rupa doesn’t manufacture its products, it gets it done from third party manufacturers or job workers, it just does bleaching and dyeing on its own. It eats away margins.

In 2013-14 Rupa posted 900 cr of turnover and around 70 cr as net profit, whereas Page industries posted turnover of 1173 cr and net profit of 154 cr. But there is one catch. Rupa spent 73 cr for advertising while Page used only 33 cr. Add this 40 cr extra advertising spend to the net profit of the company and difference of net profits of two companies will become smaller-to 110 cr for Rupa and 154 cr for Page. But this ad spend will come down as with establishment of strong brand recall, the need for high ad spend will be lower.

Also Rupa is a mass market player whereas Page is mainly a premium player where margins are better. But Rupa is focusing and investing big on premium portfolio like Macroman, Euro etc and also endorsed Hrithik Roshan as its brand ambassador. But one thing which I feel it has to take care now is the quality of premium brands, so it should focus on in house manufacturing of these brands to better control quality.
Ecommerce will provide another vertical to increase its reach further although Rupa is having almost 100000 retail points as compared to 23000 of Page.

My another convention that brand loyalty for life style products like staple foods like rice is much stronger than sensory products like Cold drinks, Pizza, noodles etc. People normally are more than willing to change their taste and hence product. Like Maggi is the biggest instant noodle brand in india not due to consumer brand loyalty but because consumers are not able to find out better substitute or some new unique taste. This convention holds true for Rupa due to its high brand loyalty which will become stronger with the focus on new premium products.

Rupa appears cheap when compared with Page industries and keeping in view of the strong demand for branded innerwear in india due to huge young population. Also Lovable lingerie which is a much smaller player as compared to Rupa and with lower brand recall is trading at a PE ratio of 40.
Good buy at current price of 225/-

Borosil Glass, Redington India, Future Retail---will be updated soon

(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)