Manjushree Technopak

Background

Manjushree Technopack Limited is a rigid plastic packaging solution provider which specialises in the packaging of consumer goods. 


Main Products/Segments

Plastic Containers for packaging, PET/PP Jars & bottles, PET Preforms, Multilayer Containers, Hot fillable PET bottles, Injection Moulded Products


Main Markets/Customers

FMCG, Pharma, F&B, AgroChemicals


Bullish Viewpoints

  • Best Margins & Returns in the business – Operating Profit Margin (OPM) stands at 16% vs industry median at~10%; (global majors like Rexam Plc and Amcor operate at less than 9% OPM); both returns and margins have been trending up over the years in a very competitive industry
  • More than tripled its sales in last 5 years while earnings per share (EPS) has gone up 8x (on an adjusted basis) in the same period
  • Top marquee MNC clients in FMCG & Pharma space – Coke, Pepsico, Bisleri, Nestle, P&G, GlaxoSmithkline, Pfizer, Britannia, Kraft
  • Capacity expansion up from ~9000 metric tonnes per annum (MTPA) to ~22000 MTPA in FY09 and further upto ~29000 MTPA in FY10 on the back of strong long term job work contracts
  • Nice clean balance sheet – strengthened progressively over the years with adequate liquidity, very decent inventory and debtors management, and low debt to equity (<0.5). However FY10 D/E is slated to go up (> 1) due to fresh Term Loans for ongoing Capex .

Bearish Viewpoints

  • At 150 Cr Sales Turnover in FY10 Manjushree is still a pretty small company. Execution risks are probably significant as the company tries to attain scale.
  • Highly competitive and fragmented industry – the unorganised sector also plays a significant hand
  • Raw material price volatility – PET resin the key raw material is linked to crude prices
  • Environmental Regulations & Compliance stipulations of Regulatory bodies on Plastics remains a concern
  • Entry of MNC Plastics Packaging companies in the domestic market can be a threat

Barriers to entry

  • While Investments in Capex may seem low; of the order of 5-10 Cr per machine, passing stringent business and quality requirements and forming successful relationships with MNC clients usually takes upwards of 2 years

Interesting Viewpoints

  • Signed long term 3 year contracts with Coke
  • Management is confident of maintaining a 30% YoY growth record for next 5 years
  • Designs and Customer Acceptance trials ongoing for catering to Liquor Industry. Beer Consumption is 50 lakh bottles a day in India!

Disclosure(s)

Donald Francis: No Holdings in the Company;


Balkrishna Industries

Background

Balkrishna Industries is one of the world’s leading manufacturers of “OFF-HIGHWAY tires”. BKT has the widest product range with more than 2000 SKU’s (Stock Keeping Units) and is “One Stop Shop” for all off-highway tyre solutions.

The success story of BKT begun in 1995, when it entered into production of cross ply off-highway tires. Product received instant acceptance in European & North American market. With the help of persistent & intensive market research coupled with ever expanding production capabilities, today BKT has made its mark in the specialty segments like Agricultural, Construction, Industrial, Earthmover, Port, ATV (All Terrain Vehicle) and Turf care applications in both cross ply & radial construction.

More than 90% of tyre production is exported to more than 120 countries across all five continents, in all the major markets of Europe, North & South America, Africa, Asia & Middle East.


Main Products/Segments

Balkrishna Industries operates in the specialty tyres segment – Off-Highway Tyres. Pneumatic tyres for special applications for agriculture, construction, earthmoving industry, material handling, forestry, lawn and garden, and All-Terrain-Vehicles (ATV).


Main Markets/Customers

  • Agriculture sector is the mainstay, contributing ~65% of the Sales. Industrial and Mining sector are other key sectors
  • Exports contribute ~90% of Sales. Europe contributes ~55%, US ~16-18%, and Rest of the World (ROW) 15-17%; Domestic sales contribute ~9-10%
  • OEM Sales contribute ~12%, rest comes from Replacement market sales: Replacement market margins tend to be higher

Bullish Viewpoints

  • Impressive Track record – Balkrishna Industries has significantly expanded its presence in the niche off-highway tyres segment in the last 9 years. From about Rs. 166 Cr in FY 2001, Balkrishna Industries Revenues crossed Rs.1386 Cr in FY10. The focus being on export-led growth, Balkrishna Industries now derives over 90% of its revenues from exports –primarily to Europe and other countries.
  • Industry leading margins & returns – Balkrishna boasts of industry leading margins (FY10 OPM ~21%) and returns besting bigger international competition like Mitas (FY09 OPM 14%), and Michelin (FY09 OPM 8%). It has concentrated on increasing its presence in the replacement market, which tends to be somewhat less cyclical than the OEM market. The replacement market also offers the potential for higher profit margins and is larger in most markets.
  • Aggressive Capex Plans – Already operating at 100% of achievable capacity, it has announced big capacity expansion plans. Rs. 120 Cr capacity expansion at Aurangabad facility , 25 Cr for mould shop expansion and another 10 Cr for warehouse expansion for FY11. Another Rs. 1000 Cr is planned over the next 2 years for a new factory at Bhuj. 275 acres of land has already been acquired and ground levelling is being done. This will add another ~90,000 MTPA to existing capacity of 132000 MTPA. As per the company, the demand for BKT brand is strong and it is only supply constraints that’s holding back further growth.
  • Strong Balance Sheet – Current debt-equity stands at 0.25. There is enough headroom for leveraging the balance sheet for funding expansion plans through debt and internal accruals. The company has announced plans of taking a $175 Mn debt to fund this and the balance from internal accruals.
  • Valuation – the stock is valued at general tyre industry valuations despite having much better operating margins and ROCE as compared to the industry. Balkrishna has margins & ROCE almost double the industry average yet stock is available currently at a PE of less than 7.

Bearish Viewpoints

  • Depreciation of the Euro – Since exports to Europe constitute 55% of Sales, depreciation of the Euro can pose a serious drag on the margins and ability to compete. Major competition like Michelin and Bridgestone continue to manufacture in Europe, US & Japan and they need to import the raw material (35% natural rubber, 15% synthetic rubber) in dollars; for them raw material imports neutralises the benefit of Euro depreciation. As per the company, there hasn’t been a major impact. The company has hedged the Euro at Rs. 63/64
  • The tyre industry is raw material intensive. The main raw materials for tyre are rubber (natural or synthetic or mixture of both), carbon black, nylon tyre cord and rubber chemicals. Except natural rubber, the costs of all the other raw materials in tyre production are related to crude oil prices. Natural rubber has seen huge price-volatility in recent times.
  • There is an outstanding 4.5% FCCB aggregating to US$ 22 million with premium of 1.5% p.a. payable on cumulative basis on redemption date (Dec 31st, 2010). The bonds are convertible at a price of Rs. 1,375 at a pre-determined exchange rate of Rs. 45.66 per US$. The current stock price situation suggests the FCCBs may not convert on the maturity date and redemptions will have to be met through internal accruals. That may pose an additional burden.
  • Huge Capex plans – The 150 Cr Capex plan for FY11 and another Rs. 1000 Cr for the Bhuj factory will be funded out of $175 Mn debt and rest from internal accruals. While operational leverage takes time to kick in, there is a possibility of increased interest and depreciation costs, and lower capacity utilisations having a negative impact on bottomline. Execution risks remain significant as the company looks to almost double capacity in the next 2 years. To be fair it must be mentioned, the track record so far has been impeccable.

Barriers to entry

  • The off-highway tyre business is fragmented, with low-volumes, and is labor-intensive. In India, employee cost is around 3%-5% of net sales, whereas in overseas countries it accounts for 12%-15%, pressurising operating margins. Some tyre majors including Continental and Goodyear exited the OTR and farm-tyre market in the US in 2005-06 as labour costs began eating into profitability.
  • The specialty tyres segment in which Balkrishna Industries operates is predominantly represented by large varieties and low volumes. It is geared up to take advantage of the peculiarities of this segment and has developed more than 1800 Stock Keeping Units (SKU) to meet the diverse needs and applications. For any new competitor to match up, this is a huge and complex task. The wide product range covering nearly all segments of off-highway tyres is the company’s main strength.

Interesting Viewpoints

  • BKT Tyres are currently priced 30-35% lower from that of international tyre brands like Michelin and Bridgestone. Earlier this was about 45% lower. This indicates two things. One, that BKT brand is slowly finding more acceptance; Two, there is headroom to pass on price increases in case of raw material price rise. In the current year, Balkrishna has passed on price increases of 10% in two trenches, while the majors have hiked price by 3-5%.
  • As per the company, demand for BKT brand is very high. People have come to appreciate that BKT Tyres match performance of the higher-priced international brands. The current sales contribution from US is 16-18%, it can easily go over 25% if the company did not face capacity constraints.
  • In order to minimize raw material price-volatility risks, the Company not only enters into medium-term contracts but also adopts the policy of “Buy and Stock” large quantities during lean periods. The company plans on increasing warehouse capacity with an additional investment of 10 Cr in FY11.

Disclosure(s)

Donald Francis: No Holdings in the Company;


Manjushree Technopack

Company Background

Founded in 1977 by technocrats, Manjushree started as a small umbrella manufacturing unit in Guwahati, Assam. In 1984 it forayed into manufacturing of Plastic Flexible packaging and came up with its IPO in 1995 to diversify into PET bottles manufacturing with a unit in Bangalore.

Today it has carved out its own niche in the PET bottling industry. It boasts of a marquee client list the likes of Coca Cola, Pepsico, Bisleri, P&G, GSK, Nestle, Cadbury and Unilever and has emerged as the supplier of choice. With two manufacturing units in Bangalore, installed capacity in FY10 is ~30,000 metric tonnes.

Main product lines include PET jars and bottles, PET preforms, PP and Multilayer containers.


Growth Snapshot

We can’t just look at a series of past growth rates and assume that they will predict the future – if investing were that easy, money managers would be paid much less, and this stock analysis would be much shorter. It’s critical to investigate the Sources of a company’s growth.
Variable FY06 FY07 FY08 FY09 FY10
Sales Turnover (Rs. Cr.) 65.32 79.97 85.18 118.79 160.05
Sales Growth Year on Year 25.55 4.80 43.21 41.13
3yr Average Sales Growth 24.52 29.71
3yr Sales CAGR 14.71 22.51 42.16
5yr Average Sales growth 28.67
5yr Sales CAGR 27.70
Profit After Tax (PAT) (Rs. Cr.) 1.37 2.83 4.40 7.49 10.57
Adjusted EPS 1.01 2.09 3.25 5.53 7.80
EPS Growth Year on Year 106.57 55.48 70.23 41.12
3yr Average EPS growth 77.42 55.61
3yr EPS CAGR 79.21 62.69 54.99
5yr Average EPS growth 68.35
5yr EPS CAGR 66.66

Manjushree Technopack has made steady progress over last 5 years. Sales have grown at ~25 percent CAGR while EPS on an adjusted basis has grown at over 60 percent CAGR.

Sources of Growth

1. Carbonated Soft Drinks (CSD) market is growing at over 30 percent CAGR. For Coke and Pepsi India has emerged as the fastest growing market in FY09 with both announcing huge investment plans. Coca Cola says its $250 Mn India investment plan is on track while Pepsico India had announced a Rs 1,000-crore investment for 2009.

2. Product Mix has shifted in favour of PET Pre-forms which bring in enormous efficiencies in storage and transportation (1/5x fully blown shapes) and benefit both the packaging company and the beverage manufacturer. All major beverage manufacturers have installed Pre-form blowing machines at their bottling plants.

Manjushree was early to spot this trend and has now emerged as the largest organised player in PET Pre-forms. Huge capacity expansion from ~9000 MT in FY2008 to ~21000 MT in FY09 to ~30000 MT in FY10. For a company of its size, this is pretty aggressive expansion but seems to have paid off, as it has quietly become a dominant player in its niche, becoming Coke’s largest PET supplier.


Profitability Snapshot

Profitability is the second, and in many ways, the most crucial, part of our Analysis framework. How much profit is the company generating relative to the amount of money invested in the business – the returns? This is the real key to separating a great company from average ones -the higher that return, the more attractive that business. Net profit Margins and comparing cash flow from operations to reported earnings per share are good ways to get a rough idea of the company’s profitability (because cash flow from Operations represents real profits!). But neither account for the amount of capital that’s tied up in the business, and that’s something we cant ignore. We need to know how much economic profit the company is able to generate per dollar/rupee of capital employed because it will have more excess profits to re-invest which will give it an advantage over less-efficient competitors.
Variable FY06 FY07 FY08 FY09 FY10
Operating Profit Margin 12.28 12.48 16.08 16.43 18.94
Net Profit Margin 2.44 4.02 5.97 7.09 7.09
Fixed Asset Turnover 3.10 3.43 2.33 1.82 1.62
Asset Turnover 1.71 2.29 1.10 1.19 1.07
Return on Assets 4.19 9.20 6.59 8.43 7.58
Financial Leverage 2.82 2.21 1.25 1.49 2.04
Return on Equity 11.82 20.30 8.22 12.60 15.44
Return on Capital Employed 10.89 19.79 13.11 14.51 13.60
Debtor Days 57.58 48.50 69.79 54.82 65.93
Inventory Days 58.21 45.63 80.58 76.77 64.42
Cash from Operating Activities (Rs. Cr.)
Operating Cash Flow to Sales
Capital Expenditure 5.19 14.46 31.22 43.83
Free Cash Flow
Free Cash Flow to Sales
Equity Dividend (Rs. Cr.) 0.48 0.48 0.49 1.35 1.36
Dividend per share 1.14 1.14 0.36 1.00 1.00
Adjusted DPS 0.35 0.35 0.36 1.00 1.00
Dividend Growth Year on Year 0.00 2.08 175.51 0.74
3yr DPS CAGR 1.04 67.71 66.60
5yr DPS CAGR 29.74
Dividend Payout 35.04 16.96 11.14 18.02 12.87

 

Over the last few years Manjushree has shown steady improvements on Net Margin front going upto over 7 percent in FY09. Operating margins have similarly climbed upto over 16 percent. These are pretty decent numbers for the highly competitive Plastics Packaging industry.

The record on Return on Equity and Return on Capital Employed at ~13 percent and 15 percent may seem nothing to write home about. But compare these over the industry and one can see these are again industry-beating returns and margins.

The company’s performance on Debtor days and Inventory days over the years has shown a gradual improvement and speaks well of management focus on operational efficiency.

Manjushree has a good track record on Dividend payment. It has been regularly paying dividends and current Dividend Payout ratio stands at ~21 percent. The company has been increasing dividends in tune with profitability and 5 year dividend CAGR is at a healthy ~35 percent.

Overall Manjushree appears to be a well-run company in a highly competitive industry.

 


Common size P&L Statement

Can we dig deeper to see what else we can understand about how this company makes money? A good way is to look at the common size profit and loss statement. Common size statements are great tools for evaluating companies because they put every line item in context by looking at each of them as a percentage of Sales.
Variable FY06 FY07 FY08 FY09 FY10
Common Size Sales 100.00 100.00 100.00 100.00 100.00
Common Size Raw Material 54.34 57.76 54.31 53.93 54.84
Common Size Power & Fuel 6.66 5.26 5.83 5.73 8.10
Common Size Employee Cost 3.96 4.43 6.08 5.86 5.60
Common Size COGS 77.09 77.08 72.92 72.89 76.37
Gross Profit Margin 22.91 22.92 27.08 27.11 23.63
Common Size Depreciation 6.03 3.91 4.56 4.68 6.54
Common Size Interest Cost 2.55 2.46 2.70 1.36 2.27
Common Size SG&A 11.42 9.68 13.52 11.43 11.02
Operating Profit Margin 12.28 12.48 16.08 16.43 18.94

While on most parameters there is gradual improvement, Cost of Goods Sold (COGS) shows good improvement coming down to to about 74 percent from 77 percent in FY05. Operating margins are sustaining at over 16 percent for last 2 years showing a big uptick from ~12 percent levels 3 years back.

Manjushree Technopack seems to be getting better at managing its operations as it scales up.


Financial Health Snapshot

Once we have figured out how fast (and why) a company has grown and how profitable it is, we need to look at its financial health. Even the most beautiful home needs a solid foundation, after all.
Variable FY06 FY07 FY08 FY09 FY10
Financial Leverage 2.82 2.21 1.25 1.49 2.04
Debt to Assets 0.65 0.55 0.20 0.33 0.51
Debt to Equity 1.82 1.21 0.25 0.49 1.04
Interest Coverage 2.49 3.52 4.40 8.96 5.59
Interest Cost to Total Debt 6.78 10.28 15.02 4.89 4.78
Current Ratio 4.29 1.84 5.60 4.80 3.68
Quick Ratio 2.82 1.36 4.07 2.89 2.63
Cash to Assets 1.96 8.71 13.86 0.50 5.69

In its bid for growth Manjushree seems to have used Financial Leverage judiciously to its advantage, in the last 5 years or so. From a relatively high financial leverage (Assets/Equity) of 2.79 in FY05, Manjushree has brought this down to more conservative levels of 1.49 in FY09. It is when we see financial leverage ratios of 4, 5, or more that companies start to get really risky.

Manjushree has maintained comfortable levels of Interest Coverage. FY09 figure stands at a comfortable ~9x Interest expense. In fact Interest Coverage figures have grown 3 times in the last 5 years, steadily climbing year on year from about 2.5x levels in FY05. This points to a steadily improving financial health condition. Debt to Equity at 0.49 in FY09, is also at comfortable levels after hovering on the higher side in FY05 and FY06.

Manjushree has been maintaining healthy liquidity levels more or less consistently. FY09 Current Ratio at 4.8x and Quick Ratio at ~3x, indicate that Manjushree can always raise enough cash, if it had to say, pay off its liabilities all at once. However such high levels of Current Ratio might also suggest Manjushree Management is retaining too much cash on hand and is not perhaps putting that to the best use.

Ashiana Housing

Background

Ashiana Housing Ltd is  a leading real estate developer.


Main Products/Segments

Ashiana Housing Ltd is basically a real estate developer. The main ‘products’ of the company are:

  • Residential housing and Group housing schemes
  • Retirement resorts
  • Hotels (a very small part)

The company concentrates on Tier II and III towns.


Main Markets/Customers

Retail customers


Bullish Viewpoints

  • Unlike most other real estate players, Ashiana does not go bonkers over land bank. It keeps on maintaining land bank which would give it project visibility for the next 5-6 years, at any point of time. Further, it enters into agreements with existing land owners, thereby reducing initial capital requirement. As a result, the company is debt-free and yet has excellent revenue visibility.
  • Ashiana commences a project only after detailed study and after getting visibility of customer advances. The management states that “we won’t start a project where we feel we won’t get customer advances”. This reduces the working capital requirement too.
  • Ashiana concentrates on Tier 2 and 3 towns. It enters any area only after proper study and also by establishing partnerships with local developers. As a result, it has built up excellent reputation and goodwill in towns like Bhiwadi, Jaipur and Jamshedpur, where it mainly operates. Better to be a biggish fish in a small pond huh?
  • Ashiana has created a niche in the form of developing ‘old age retirement homes’ under the brand name ‘Utsav’. It currently has two such schemes, one at Jaipur and the other one at Lavasa, Pune.
  • Ashiana also maintains the projects that it develops, through its subsidiary Vatika Marketing. This ensures that the quality of its projects stays high even after completion/handing over.
  • Ashiana’s accounting policy also appears to be very conservative. The company accounts for sales on a percentage of completion method. (For more details, please refer to the annual report.)
  • The company has ongoing projects involving saleable area of about 68 lakh sq ft. The company has about 50 lakh sq ft additional land bank.

Bearish Viewpoints

  • The risks are more macro in nature, particularly rise in interest rates.
  • No proper dividend policy.
  • Management may seem too conservative and lacking aggression to some.

Barriers to entry

  • Ashiana’s expertise in the towns it operates in, is a big moat it has.
  • Since the company has no presence in metros, it has no competition from the larger players, hence, is high on reputation and goodwill.

Interesting Viewpoints

Medium to near term triggers
Bonus factors (not considered in main investment hypothesis
Industry data – showing the Size of Opportunity, etc


Disclosure(s)

Neeraj Marathe: No Holdings in the Company;


Jai Hind Projects

Background

Jaihind has been the pioneer in Engineering, Procurement and Construction (EPC), with focus on hydrocarbon, water and other prime sectors in infrastructure industry.

Jaihind has executed some of the most complex projects, which includes its achievement of laying 14,000 km of pipeline, the highest in India. Jaihind is currently nurturing projects that span across various segments such as oil, gas & water pipeline and associated facilities, city gas distribution, horizontal directional drilling, water transmission & distribution projects, water supply and sewerage systems, petrochemical complex, process plants, cathodic protection, tankages and civil infrastructure.

Jaihind boasts of second largest fleet of equipment in India which includes pipe layers, hydraulic excavators, dozers, heavy-du cranes, earth-moving heavy machineries, horizontal drilling machines, horizontal boring machines, trenchers and pipe-bending machines amongst others.


Main Products/Segments

  • Engineering Procurement and Construction (EPC) Company focussed on hydrocarbons, water & infrastructure sectors
  • Expertise includes laying nation-wide oil & gas pipelines and setting up storage tanks

Main Markets/Customers

  • Oil & Gas, Water and Infrastructure sectors
  • GSPL, Gail, IOCL, Adani Energy, Cairn, Mahanager Gas Ltd., Essar Group, L&T are major customers

Bullish Viewpoints

  • Huge scope for EPC Pipeline business in India, as per this Analyst Meet/Industry Update. Total proposed investments of more than Rs 200 billion in developing and expanding the existing pipeline network in India over next 3 to 4 years, adding up to more than 10000 km of additional cross-country natural gas pipeline across the country. Further more than 60 cities are earmarked to get CGD (city gas distribution) networks by FY’12, along with proposed implementation of National Gas Grid by GAIL and capacity expansion of the LNG terminals, the demand for natural gas pipelines is slated to grow. Pipeline projects are also expected to come up for crude oil and refined products linked to the development of new refineries GGRSL, Bhatinda, Bina refinery, Paradip refinery and new oil discoveries such as Cairn’s in Rajasthan, all provide sizable scope for the EPC pipeline business in India
  • JPL is one of the few national EPC companies to have laid more than 30″ diameter oil and gas pipelines, and other onshore pipelines for large oil and gas majors. The Company’s expertise also lies in handling complicated horizontal directional drilling projects
  • JPL has the second largest fleet of equipment in the Oil & Gas pipeline construction sector in India
  • JPL has been growing @ CAGR of 60%+ for last 5 years i.e.. from a turnover of just 62 Cr in 2006 to turnover of 410 Cr in 2010
  • JPL has a robust order book to the tune of 1000 Cr+
  • The company has been trying to expand overseas. They have opened an office in Abu Dhabi. JPL had won a 1100 Cr contract in Saudi Arabia under a JV in which their share would be 300 Cr
  • The stock is trading at less than 8 times FY 2010 earnings

Bearish Viewpoints

  • The company is highly leveraged with FY10 debt equity ratio of 2.5:1. While such leverage levels are not unusual in the infrastructure industry for funding aggressive growth, execution risks and delays associated with such infrastructure projects can pose serious threats
  • Promoters have pledged more than 31.83 lakh shares representing 43.86% of the equity capital of the company. The total promoter shareholding in the company is 47.74% (as on 31 December 2009)
  • The promoters have been diluting equity on a regular basis (2007, 2008 & 2009) by way of preferential allotments to themselves. From 5.11 Cr in FY07 to 7.26 Cr in FY10 or a dilution of over 42%
  • The business is very capital intensive and cash flow record has been unimpressive
  • One should note Auditors N K Aswani & Co had resigned in April 2008 and Deloitte Haskins & Sells appointed in their place. By Aug 2008 Deloitte Haskins & Sells had resigned and N K Aswani & Co re-appointed. Intringuingly the story repeated in Dec 2009 with resignation by N K Aswani & Co and re-appointment of Deloitte Haskins & Sells

Barriers to entry

  • It takes years to develop relationship with clients and build a track record
  • Being a capital intensive industry, its not easy for a new player to start operations
  • JPL has the second highest fleet of machinery and equipment in this sector

Interesting Viewpoints

  • Only 9% energy needs are met by Gas in India against a world average of 24%
  • With the domestic discovery of Gas reserves by companies like Reliance, Cairns etc., lot of investment is lined up for expanding the pipeline network over the next 3-5 yrs
  • JPL also cater to the city gas distribution industry. There is massive expansion lined up in this sector

Disclosure(s)

Ayush Mittal: No Holdings in the Company;


Supreme Industries

Background

Supreme Industries Limited is india’s leading plastic processing company with seven business divisions. The company has forayed into different types of plastic processing in Injection Moulding, Rotational Moulding (ROTO), Extrusion, Compression Moulding, Blow Moulding etc.
Supreme Industries limited offers wide range of plastic products with a variety of applications in Mulded Furniture, Storage & Material Handling Products, XF Films & Products, Performance Films, Industrial Moulded Products, Protective Packaging Products, Plastic Piping System & Petrochemicals

Main Products/Segments

Supreme Industries operates in 4 major product segments as below. The segment contribution in terms of value are as follows:

  1. Plastics Piping System [~44%]
  2. Consumer products (furniture, mats) [~12%]
  3. Industrial products [~20%]
  4. Packaging products [~24%]

Main Markets/Customers

  • Plastics Piping Systems – Farming Sector for water supply, irrigation and borewell applications; Real Estate Housing sector mainly for plumping applications, Telecom sector for Cable ducting applications, Urban Infrastructure sector for water supply and sanitation applications. The specialty products division has developed complete solutions for water supply, plumbing, sanitation, rain water harvesting with some 17 system solutions for different applications.
  • Furniture & Mats – 168 exclusive Franchise showrooms for “Supreme” brand all over India to cater to the retail sector. For Mats exports contribute majorly
  • Industrial Products – Automobile sector, Appliances & Entertainment Electronics sector. Material Handling products like Crates and pallets are supplied to diverse set of industries
  • Packaging Products -packaging films, protective packaging products, and cross laminated films find application Food, Electronics, textiles, healthcare, sports and construction sectors.

Bullish Viewpoints

  • Established market leader and pioneer in the Plastics Industry known for quality products and innovation, constantly introducing new technology and products to suit market requirements. It is the largest plastic processor in India handling more than 1,70,000 tonnes of polymers annually.
  • In the last three years, Supreme Industries has made a capital expenditure in excess of Rs. 400 crores across all product segments. With the investment already in place and economic activity picking up, the company should witness good volume growth.
  • Reduction in Excise Duty from 14% to 8% has made plastic products more cheaper and affordable (e.g. plastic pipes) than conventional and recycled materials.
  • Supreme has a strong established network of distributors spread all over India. It also has 168 exclusive Franchised showrooms for its Furniture Products
  • The budget for the year 2009-2010 also announced that the outlay for Jawaharlal Nehru National Urban Renewal Mission (JNNURM) for improving infrastructure in 63 urban cities has been stepped up by 87% i.e. to Rs. 12887 crores. The Government has further announced it’s intention to spend Rs. 100,000 crores over a period of 7 years to improve the infrastructure in these 63 urban cities. A large portion of this amount will be spent on improving the drinking water supply and sanitation facilities. Plastics pipes are increasingly used in these applications in urban areas.
  • The 2009-10 Union Budget also announced plan outlay of Rs 3,973 crores to construct more than 500,000 houses to make India slum free. Supreme Industries enjoys the reputation of supplying complete piping system solutions under one roof for housing and should see significant business growth from these schemes.
  • Supreme Industries has a good dividend paying track record. Dividends have grown at a CAGR of over 26% in last 5 years
  • Construction of Supreme Industries ultra modern 10‐storied commercial complex at its Andheri, Mumbai land has been completed (ready for fit out possession). In Q2FY10, SIL has realized Rs. 20.45 Cr from sale of 13,106 square feet out of total saleable area. Additional Sales during the year will add to botomline.

Bearish Viewpoints

  • Any volatility in crude oil prices can lead to volatility in polymer prices affecting margins
  • Any variation in tax structures and excise rates can also affect profits and margins
  • Delay in initiation of government projects could affect growth
  • Competition from local manufacturers who use recycled plastic as raw material

Barriers to entry

Over the years Supreme has carved a niche for itself in the business and achieved a large size and consequent economies of scale. Although, there are no major entry barriers for the industry as such, it will not be easy for new players to establish industrial relationships and retail brand easily.


Interesting Viewpoints

Supreme is a consistent dividend payer and also has land in various parts on India (Andheri, Kolkata) where the plan is to develop and sell commercial real estate.


Disclosure(s)

Abhishek Basumallick: Less than 5% of Portfolio in the Company; Holding for more than 2 years


Swaraj Engines

Background

Swaraj Engines Limited (SEL) is a Mohali based company originally established to manufacture engines for the erstwhile Punjab Tractors Ltd(PTL). The Company was a joint venture between PTL and Kirloskar Oil Engines Ltd(KOEL).

However  last year PTL was taken over by Mahindra & Mahindra (M&M) which is the market leader in Tractors having over 40% market share (PTL was 3rd).


Main Products/Segments

  • SEL manufactures diesel engines, diesel engine components and spare parts. It supplies 5 types of Engines from 20HP range to 50HP range.
  • It also manufactures high-tech engine components for Swaraj Mazda.

The Company’s engine business constitutes approximately 93% of its product revenue. The remaining 7% represents value of hi-tech engine components being supplied to SML for assembly of commercial vehicle engines.


Main Markets/Customers

  • More than 90% of Engines are sold to M&M’s tractor division
  • Remaining Sales comes from Swaraj Mazda through the sale of high-tech engine components

Bullish Viewpoints

  • India is still largely an Agrarian Economy and will continue to be so for a long time so the long term demand looks good.
  • Low Penetration of Tractors in India compared to the global average
  • Majority stake owned by M&M which is the leading tractor Manufacturer in the country for 26 years and now commands above 40% market share.
  • Though growth had been flat till FY2008 since the Mahindra stake, Swaraj engines have been growing Sales and Net Profits for the last 3 years at a CAGR of ~45% and ~60% respectively
  • Pristine Debt Free balance sheet, good cash flows with a decent amount of cash on books and negative cash conversion cycle. Further Capital Expenditure will probably get funded from internal accruals
  • Sustained Return on Equity averaging around 25% over the past 11 years. Good amount of free cash flows. Free Cash flows over the years has usually been between 10-20% of Sales which is rare to see in a manufacturing company. Free Cash Flow is higher than Net Profits by a significant margin for the 3rd year in a row. A company with a high RoE and high Free Cash Flow combination is said to be in a sweet spot.
  • Capacity Utilization was 100%+ first time last year. Worked in 2 shifts.
  • Swaraj Engines Cash Reserves stand at  ~114 Crs (Cash & short term Investments) in FY 2010. That’s over 20% of the company’s market capitalisation at Aug 2010.
  • Consistently improving debtors and inventory levels over last 3 years. Overall Swaraj Engines looks to be improving its operating efficiencies on all fronts. Mahindra Management stewardship can take it to greater heights

Bearish Viewpoints

  • As Most of SEL’s revenue comes from Tractor engines its fortunes are tied to Tractor sales .The tractor industry has a certain cyclical nature and depends heavily upon the general rural economy – investments by the Government, monsoons and availability of credit at affordable rate.
  • The main raw material used is steel which is a commodity whose prices are cyclical which directly impacts the margins of the company
  • SEL also gets a part of its revenue from engine components of light commercial vehicles(LCV) which is a again a cyclical industry
  • Only 1 major consumer(captive) constituting  more than 90% of sales. Conflict of interest could arise and put pressure on margins. The last 2 years, however, has seen margin expansions and other operational efficiencies kicking in from this captive customer relationship.

Barriers to entry

  • One of the lowest cost Engine makers mainly due to low Employee/Labor cost averaging at 6% of sales.
  • Assured customer in M&M the Largest tractor maker in the country also holding 33.2% of SEL and hence its in its interest to take Engines from SEL. This also helps in lower inventory,receivables & cash conversion cycle resulting in a stronger balance sheet and strong cash flows.

Interesting Viewpoints

  • India has about 11 crore farmers in the country and  roughly 4.5 lakh tractors are sold every year and Tractor population is about 45 lakh. That means for every 22 farmers there is one tractor whereas the world average is 1 tractor for every 5.5 farmers. So  there is a good chance  that over the next few years the demand for tractors is going to be very buoyant.
  • A lot of High Profile officials of M&M including Mr Pawan Goenka have joined the board of SEL indicating the importance of SEL for M&M’s Farm Equipment sector

Disclosure(s)

Siddharth Shukla: No Holdings in the Company;


Shriram Transport Finance Company

Background

Shriram Transport Finance Company Ltd (STFC) is India’s largest asset financing NBFC. It primarily provides loans to small truck owners and buyers of used commercial vehicles. This segment is grossly under-served by the traditional banks and lending institutions. STFC has created a niche for itself by catering to this neglected segment. Pre-owned (used) CVs account for about 70% of total CV sales every year in India.

STFC has in 2009-2010, started working on the concept of “automalls”-one stop shops for buying and selling pre-owned CVs. This would further enhance the reach and brand value of the company. Also, as their customers are moving into construction business and the proximity and the relationship the company has with them has enabled them to look into the financing of construction equipment business.


Main Products/Segments

Shriram Transport Finance provides loans to small truck owners and buyers of used commercial vehicles. 


Main Markets/Customers

The company provides finance for

  • Small truck operators
  • Construction equipment suppliers like forklifts, cranes, loaders etc.
  • Automalls

Bullish Viewpoints

  • STFC is in a niche business segment. They provide loans to small truck operators who are otherwise not served by traditional banks as they do not have banking habits and have no credit history.
  • With the improvement in road infrastructure and with increase in GDP, it is expected that freight capacity to increase substantially.
  • The legal ban on truck overloading and phasing out of trucks older than 15 years is sure to increase volumes

Bearish Viewpoints

  • As STFC is involved in providing loans to un-banked or under-banked customers, credit risk is great.
  • The business is purely relationship based and as such is highly dependent on retaining the critical employees in branches over years of operations. Attrition may pose a great risk to the knowledge about the customer base of the company.
  • As the loan installments are typically paid in cash, very strong cash management is required with strong audit and verification mechanisms. Cash loss, even of significant amounts, cannot be ruled out.
  • The business is completely dependent of the development of the CV market and the GDP growth as a whole.

Barriers to entry

Creating the relationship with the customer and providing finance to them all the while maintaining the asset quality is a very difficult challenge. It will take a lot of work and money to compete with STFC in this market segment.


Interesting Viewpoints

  • Market leader in a segment where there is no corporate competition
  • Bought the commercial vehicle lending business of GE Capital Services and GE Capital Financial Services in 2009-2010.
  • The company is a consistent dividend payer
  • EPS has grown from 9.36 in 2005-2006 to 41.09 in 2009-2010 ( a CAGR of 44.75%)

Disclosure(s)

Abhishek Basumallick: Less than 5% of Portfolio in the Company; Holding for more than 2 years


Shilpa Medicare

Background

Description of the main business of the company and brief history of its journey since incorporation.


Main Products/Segments

Oncology APIs, Custom Synthesis, Bulk Drugs, Nutritional Supplements, Drug Intermediates.


Main Markets/Customers

The company is currently exporting the APIs to European countries.

Customer List – Actavis, Ratio Pharma, Sandoz, Intaas Pharma, Dr Reddy, Cipla etc


Bullish Viewpoints

  • Shilpa has created a niche area for itself by taking a lead into manufacturing to high quality Oncology APIs and Custom Synthesis.
  • The Oncology space is the fastest growing segment in the Pharma industry worldwide. Domestically the sector is expected to grow at CAGR of 25-30%+ for next few years.
  • The entry barriers are high as this segment needs a lot of expertise and years of research. Therefore the margins are very lucrative – as high as 40-45%.
  • Shilpa Medicare has an excellent past track record. The company has grown at a CAGR of 53% over last 5 years. From a turnover of 49 Cr in 2006 to 260 Cr in 2010.
  • Shilpa is the largest Oncology API manufacturer in India
  • The company has excellent margins of 30% and nice Balance Sheet.
  • The company keeps debts under control. The company is expected to have reduced debt from 115 Cr in 2009 to under 60 Cr in 2010.
  • The company keeps a tight check over inventory and debtors. Historically both these items remain less than 15% of turnover.
  • Oncology drugs worth $ 9 bn will loose market exclusivity between 2009-13. Many of these products are on Shilpa’s product list.
  • In Custom Synthesis, the company has entered into a JV with its long time customer, ICE Italy. ICE Italy is one the largest manufacturer of Bile Acid derivatives.

Bearish Viewpoints

  • Going ahead competition should increase as more players are entering the lucrative Oncology segment.
  • Being major turnover coming from exports, Exchange fluctuations are major risk.
  • Delay in off-take from European Customers

Barriers to entry

  • Barriers to entry are high as this space needs lot of knowledge and involves complex chemistry.
  • It took Shilpa 8 years to get hold of Oncology API space.

Interesting Viewpoints

  • Fast growing companies in Sunrise Sectors usually get very steep valuations – generally more than 25-30 times PE multiples.
  • Shilpa Medicare is still available at about 15 times earnings.
  • The company is expected to again double its Net Profits (from current 45 Cr to 90 Cr) in next 2 years backed by ongoing expansions and JV.

Disclosure(s)

Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 2 years