Some Promising Stocks: Meditating for the Unknown

Meditation is not a word for “Dhayana”. Meditation is a relationship of Subject and Object where one is practicing or contemplating something…but subject remains always there. But in Indian consciousness (again “Chetna” or “Minisha” are better) “Dhayana” is a state where subject dissolve into Unknown…subject just vanishes…it becomes one with whole or we can better say it realizes the illusion of separateness…fragmentation is a state of Mind while oneness is the reality…when one experience this…it is Dhayana…it is not a process but a state. And because there is no subject; so every Dhayani (Say Meditator) faces the problem of explaining his experience in our worldly language and when they try they appear out of Subject and Lunatic. It is just like trying to make a child understand the meaning of love…not understanding is not the issue but the child can relate his love for Chocolate with our love for our better half. The whole chaos we are seeing for ages is because children are trying to understand Love from their “State” and some says Love is Chocolate, for some it is Toys and for some it is ice cream.

Stock analysis is also just like Meditation…very deep, enjoyable and engaging but as subject remains (unmelt) so he can explain it. Business is even deeper meditation…contemplating the Unknown…dragging the future into present…business contemplates the oneness of worldly forces better than our religions and tries to gasp the future trend. But biggest risk factor is not the subject-matter but only the Subject….the businessman. I call it the Management Risk. I take management risk as the biggest threat to a business venture. External factors are always isolated and beyond control but business is never about controlling them but being in the harmony of these. Harmony is about the meditators. So there can be chances when external factors are out of favor but a true meditator will eventually resonate with these.

So capability of management is the biggest factor in the success or failure of a business. All the measurement variables of success like cash, market share, profitability etc. are just derivatives of the management. When I bought stocks like NIIT, jain irrigation in their tough times….it was just because of the management which is top class. Then, if external factors are affecting any business too frequently like in commodity business like Steel where too many external factors become alive time and again….like global over supply, low global demand…these can kill anyone without any of their fault…I call it Frequency Risk. So I generally avoid these types of companies.

So in today’s post, I am going to share some companies which are meditating quietly for a long time. So no wonder, they remain unnoticed. But the scale of success is enormous and if they succeed they will be giants. Another thing about these stocks is that almost all have already been shared with the readers of this blog who have subscribed to the email of this blog. Actually the reason for not sharing at this blog was because I was still to complete the final analysis and sometimes the lack of time. However I am feeling somewhat down as some of these stocks have already run up quite a bit. But the good thing is that most of email subscribers are having it so they might find this post just a copy of my emails. But today I am just posting basic introductions to these stocks due to lack of time and length of the post .

JM Financial and Edelweiss: Two of the best NBFC’s available at cheap rates. With great return over equity but still available at PE ratios of 10. JM Financial’s ROE is around 25%, Dividend yield is 3-4% but still running at a pe ratio of just 8! Both are having some Niche businesses like JM is the biggest indian in Investment Banking business which is a fee based business so margins are very high. Edelweiss is very strong in Equity broking and Insurance. Edelweiss is going to be one of the biggest beneficiaries of growth in equity broking business as more indians will come to the market due to high cost of real estate and sluggishness in Gold. Indians invest just 1% in equity, chinese at 15-20%...USA may be around 30% or so...so just see the scale.

But the surprise package will be their ARC (Assets reconstruction companies) business. Indian banks are estimated to have NPA’s of around 3 lac crore. Mr. Raghuram is focusing on cleaning the mess in the books of banks so banks are selling these NPA’s to ARC’s like never before. Both Edelweiss and JM are already the biggest players in this. Edelweiss bought around 20000 cr of NPA in recent times (it bought the NPA of Arshiya international while JM is curing Hotel Leela). I think that ARC’s are a good remedy to the businesses facing the systematic risks and can be saved by these ARC’s as they can provide these businesses with working capital and with their expertise they can enable them pass the difficult time. Like Arshiya expanded into FTWZ business too fast too soon but it was a novel business idea and can be saved. But there is no remedy for bad business decision and fraud and in those situations only remedy is to dispose of the assets and save as much as you can.

JM is at 45 and Edelweiss at 68. Both have already run up quite a bit especially Edelweiss from 50 to 70 but still long way to go.

Zydus wellness:  This is one stock where scale of operation is too big to ignore. It is into the wellness sector offering unique products like zero calorie sugar derivatives (Sugar Free Brand, with 93% market share), Nutralite brand providing low chelostrol substitute for butter, Everyuth brand in peel and scrub category with biggest market share. it is at a pe ratio of 33 and almost doubled...but this is nothing...peanut. Its main product Sugar free is having 90% market share and it is essential for diabetic patients. i am ignoring other health conscious persons using it. Its sugar free turnover is just 300 cr.

Now we do some calculations...india has 7 cr diabetics. Now take that in future only 3 cr will use sugar free. They will use 3-4 sugar drops per day, i am taking 4. Zydus charges around 60/- for 100 drops of sugar free and it has not raised the prices for last 3-4 years. Also its sugar free Natura and Herbivia are natural products and should command 50% more prices, i am ignoring this also. So taking 4 drops, the yearly possible turnover is 2600 cr...that too at old prices!!!. You can add health conscious person using the same and add price raises plus costly Natura and Herbivia and raise the usage to 6-8 drops.....it will become almost 5000 cr...add to it export growth...it will rise further. it is a concept stock and risk reward ratio is highly favorable. Sugar free now is generic name...but still people take it as chemical sugar when in fact some of its brands are natural sugars...so it just need to up the ante for Branding.

It is planning big for herbal zero calorie sugar Stevia...it has been finally approved by FSSAI around Nov-15...so now cola companies can use it and directions can be issued for its use.

Zydus has again started branding and awareness drive for its natural sugars like Natura which are not chemicals like earlier Sugar Free Gold. So once people understand this the demand will be huge. It has ignored Everyuth in the past although it is a great product, so due to no sales promotion people forget it. But now it is back on the TV and company is focusing on growing it again.

For Margarine (Butter substitute) Nutralite; it doesn’t taste that good like butter. So I think it would be great if Zydus focus more on enhancing the taste or it can add some percentage of butter to enhance the taste.

It was showing flat results for many quarters,  but finally in Mar-16 quarter it has shown good growth...turnover 109 cr vs 97 cr...operating  profit at 22 cr from 12 cr, NP at 25 cr vs 20 cr due to other income and taxation effect. I think it has raised the price of its products which was due for long. At CMP of around 770…it is a great buy.

Dr. Agarwal’s Eye Hospital: I picked it up when it was around 70 few years back. It is one of the biggest Eye care chain in india with 60 hospitals with around 44 in India and 16 abroad. 

This hospital was promoted by late Dr. J agarwal who came to Mumbai around 1955 with just Rs. 250/- in his pocket with his wife and from a very humble beginning from small clinic with borrowed money for essential tools his vision and passion has created a eye care behemoth with annual turnover of around 100 cr and number of hospitals under its domain has increased to around 60 in all over india.

His son Dr amar agarwal MS, FRCS, FRCOphth, who is a stalwart in the field of Eye care and invented some new eye treatment techniques (like Performing pain-free, no-anesthesia cataract surgery) and written many books in the field of eye care is now leading the team towards a global growth path. They are a good management team doing almost 1000 eye operation in a year free of cost for poor people.

Its turnover is around 130 cr with negligible profits this year which may surprise many as eye care is a very profitable business. However this is due to rising competition where some eye care chains expanded too much in overcrowded southern market where Dr Agarwal has significant presence. The main culprit was Vasan Eye care who on its disastrous expansion spree expanded to almost 200 eye hospitals in around 3-4 years…but its growth (Weight) was fuelled by Debt (Fat) not equity (Muscles). So when it could no longer bear its weight, it just collapsed and its private equity partners like GIC and Sequoia took big losses. Players like Vasan brought down the prices of eye care. That’s why Dr agarwal sees its operating margins falling in last 1-2 years.

But it has big plans for investing around 600 cr for expansion. It is too strong in R&D and cutting edge technology in fact Vasan established its first hospital with the technological assistance from Dr Agarwal. Recent equity investments in Dr Agarwal is valuing it around 500 cr while its Current market value is just under 100 cr. CMP is 150. I am adding more at CMP.

Piramal Enterprises: This is my all-time favorite and invested in it at 500, then at 800 and 950. But I couldn’t post my study as it was expanding too fast and new businesses required deep study like its investment in pharma Information management company Decision Resource PLC in USA. It is into NBFC, Pharma, Information management. I just kept on adding it only on the basis of one man…and that is Mr. Ajay Piramal…the promoter of the group. I see him as one of the best value investor in india. It is now around 1350…a big rise but there is no doubt that it is just the beginning. It will become bigger and bigger. There are so many catalysts pending like demerger of its various businesses, Merger with Shriram group, Merger with IL&FS group etc. so it still can be picked at CMP and at every fall.

Forbes Gokak: Already posted a study about it when it was around 500 click here. But it is still unknown to many. It is the owner of Eureka forbes, the biggest water and home equipment company in india with unmatched R&D skills. It manufactures its product on its own and been the pioneer in bringing many new water treatment technologies. Turnover of Eureka Forbes alone is around 1800 cr with NP of 40-50 cr….while market valuation is just 1700 cr so it is at PE ratio of just 35-40 which is cheap…although we have not priced its other businesses like tools and payment solutions etc. I have invested quite early in it around 500, then at 700 and now at 1300. It is still a good buy at CMP of 1300/-.

Narayana Healthcare: Dr Devi Shetty is revolutionizing the healthcare industry with unimaginable low cost healthcare model. Earlier they were more like Good Company with the main objective of serving the poor. But you can’t grow with non-profit model. So they were having different models for rich and poor but with same high quality services. But they need more profit to grow bigger and provide cheaper services to all. Earlier actually i was a bit apprehensive whether Narayana would be able to show the kind of growth to justify the high valuation. And it just did the same in Dec-15 qtr result with its operating profit rising almost 5 times from 5 cr to 25 cr...also finance cost fell to 3 cr from 11 cr.

As it is following wholesale type of business model; so any incremental revenue will add significantly to the bottom. Also as it is now listed so it will also focus on more profits as compared to earlier past.

I am a big fan of Dr Devi shetty so i am a bit biased for it due to this. I also have a great respect for Dr. Venkatawamy (Dr V as he is called) of Arvind Eye care...these men are just awesome. I have read somewhere that doctors of Aravind Eye care perform around 2000 eye surgeries as compared to 400 global avg and 200 asian avg!!!

But players like NH are the next big opportunity for india to shine at global scale and bring in the huge foreign exchange even bigger than IT industry. NH is providing even better services than its global counterparts in USA at fraction of their costs. So huge number of people will visit india for cheaper and quality treatment in the near future. NH market value is just 6000 (No need to compare it with their revenue, just compare with the future scale) with turnover of around 1200 cr. This will grow much bigger from here. A great buy at 310 and at every fall.

BASF and Clariant Chemicals: Global Chemicals giants with great R&D and technologies. Some of the very few MNC’s who have invested big in india. They were incurring losses as it takes time for new capacities to churn profits as big depreciation in the beginning also squeeze the margins. Chinese cheap chemicals were also the factor but these are old horses. BASF and Clariant has already shown huge improvements in this Mar-16 quarter. BASF is at 950 and Clariant is at 690.

(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)

Parag Milk Foods IPO: Milk is for Babies not Cheese-2nd Part

This is the 2^nd part in the series of Parag Milk Foods IPO(Click here for 1st part). Although I wanted to write something about the peculiar features of dairy business in india but recent negative views given by some of the top analysts have forced me to write this post. I have explained in the IPO note of Thyrocare that listing gains are an outcome of so many variables like market view, short term hype, analysts’ views, any pumping news etc. So if top analysts are negative about the stock then the chances of listing gains are remote although these so called analysts were wrong in their assessments so many times like the IPO of Indigo airlines.

In the case of Parag, they are comparing the same with the likes of Kwality and Hatsun and giving their final verdict on the basis of low pe ratio of these as compared to Parag. Like kwality is at pe ratio of 18. But first of all lets churn their business model. The players like kwality, Hatsun are basically into the sale of milk which they do not even produce. They collect the same from producer farmers and then sell the same after minimum processing. It is not production at all…in my view it is just retailing or we can better say LOGISTICS. They are speeding up the supply chain; acting as intermediaries between sellers and buyers who are scattered. I am terming it Logistics as they are not earning from the “Production of Milk” but from the distribution of the same in much better packaging. 

Just like the case of textiles; Raymond collects the cotton from farmers and sell the same to us in the form of a shirt which is the result of some definitive value addition just like what Parag is doing when it is processing the milk into cheese…it is value addition which requires sophisticated machines and know how to get the end product. Sale of Milk is just Logistics…Curd is also not far away as most of the Indian households make their own curd daily and that too very easily with minimum of processing at their end as most of the processing is done by humble bacteria. Yoghurt requires some specialization although it is also a curd but more standardized. Can we say that Hatsun and Kwality are in the same business with the likes of Vadilal which produces specialty Ice Creams? Cheese requires longer maturation just like a wine and continuous testing and checking. This Milk and curd business has very low entry barriers and we can see so many small local dairies doing the same business producing almost identical products.

Now let’s see beneath the cream of low pe ratio of these players. Kwality is having a turnover of 5200 cr in 2015 and earned a NP of 140 cr (I have taken standalone numbers, not much difference though). 140 cr (6 EPS) is good amount of profit. But they are paying just 10 paisa as dividends for so many years!! Again Mystery with Milk. But here mystery is not related to Milk but to the usage of money. Kwality has earned around 500s cr NP in last 5 years and if add depreciation of 60 cr (Assets base is 180 cr) then cash profit 560 cr for last 5 years. It has taken fresh loans of 680 cr during this period. So total inflow is 560+680=1240 cr. And you know where all this money has gone?? No...not in creation of assets and capacities as their assets base has grown from just 60 cr to just 180 cr. This low assets base is an indication that they are into distribution not into production.

The money has actually gone into working capital!! Debtors has increased from 414 cr to 1150 cr, Inventory from 63 to 264 cr…so 736 cr for debtors + 200 cr for inventory + 120 cr for new assets= 1056 cr where 936 cr is stuck into working capital. Balance has gone into other advances etc. So nothing has been created for shareholders nor returned to them in the form of dividends. Low inventory levels of just 5% of turnover appear strange especially when they are just into retailing. Can we take these figures of high turnover and profits as real…whether this low pe ratio has some credibility or this is good enough for this doubtful business model.

Things are same for Hatsun also which is also strange figures although it is very expensive at 60 PE. It has big assets base of 1000 cr (Kwality 180 Cr) but very low turnover ratio with turnover of 3000 cr…NP is also low at 40-50 cr. It has also stuck most of the growth in working capital and unused assets. It has created funds of around 900 cr from debt and profits in last 5 years out of which around 250 cr stuck in working capital but used 500 cr for new assets/capacity which is largely unused. Strangely its turnover has been increased from 1300 cr to 3000 cr in last year but debtors have been changed from just 10 cr to 13 cr…this is just unbelievable. But with such a great business their dividend is way too low just like Kwality. Kwality has used the funds for Debtors whereas Hatsun has created unnecessary assets….so I do not think this high dose of Lactose is digestible…to digest it and enjoy the low pe ratio of these we need mutation of intellect.

Heritage foods is surely worth investing but it has big investments into retail business which is loss making at present, so can’t be compared with these two…although at some point in near time I will post a detail study on it.

I can’t say what market is really thinking about Parag and there are high chances that market may follow these analysts. However I am very clear in my view that if it falls on listing day, I will be a happy buyer. I have no doubt about the business model. But you can take your chance as per your risk taking capability…Although the battle still is between Milk and Cheese.

(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 applied for the shares discussed in this Post)
 

Parag Milk Foods IPO: Milk is for Babies not Cheese.

Milk is a mystery; for some it is the most pious food but for some it is something which makes the life of milk producing animals a Hell and some wonders why this magical food is getting so costly. However the real magic is how humans can digest it at all. No other offspring of any other mammal except human consumes milk after a certain age or infancy…but human beings are consuming the milk of other mammals even in old age let alone the infancy. Well the secret is not that we are smarter and doing this with our choice. In reality, our bodies were not designed to digest lactose after infancy period (up to 5 years, period when we can’t create our own food). This happens because during infancy our bodies have the service of a bacteria Lactase which helps us in digesting lactose in milk which is a sugar. But after we crossed the infancy period and can eat other foods there is no need for Lactase Bacteria and so our bodies are designed to shut off the gene producing the Lactase bacteria. 

Mother Nature has made this law in order to save the mother otherwise the infant will go on Eating the mother like a parasite and one day both will be dead. This rule was also inbuilt into us, the humans, and it is still within us as around 60% of humans can’t digest milk as their bodies do not produce Lactase bacteria to digest the lactose. We call these people Lactose intolerants however they are more natural than us. Our ancestors were also Lactose intolerants as adults just like other mammals. But something happened to us around 20000 years ago when a genetic mutation switch on the Lactase producing gene in some humans which those humans passed on to their children.

But why that happened is still a mystery. However there are some explanations. But one which I feel as most likely is the failure of agriculture or during the periods of famine; our ancestors had no option but to survive on milk. Agriculture in those days was not a culture but a vulture which could hit us anytime. So farmers had to change something in them in order to survive that period of famine and they had milk. There are high chances that some humans might have the mutated gene and they passed it to following generations. Also there are high chances that most of Lactose intolerant humans died during those famines.

But mystery does not end here. To consume milk we need Lactase Bacteria but not for consuming processed milk products like Curd and cheese. Curd does not have lactose and our ancestors knew this and they were making curd and cheese for thousands of years. So what made them to consume milk instead of cheese is quite a mystery as they could have consumed curd/cheese even during the periods of agriculture failure. Can we say that it is because of the need to consume the fresh produce out of the cow as they might be dying due to famine or some aliens or angels did some genetic experiment on us. So life was and is not something which is defined by the path we humans have travelled. Even the path, we think we have travelled, is a mystery and only we might have crossed it but not the LIFE.

However one thing about which I am not in mystery is that Parag Milk Foods is not about milk. It is about processed milk. Although market is comparing it with commodity milk players. Parag is the second largest Cheese producer in india with 34% market share. It has the largest cheese producing facility in asia at a single place. Some studies keep Amul at first with 40% share but this may be due to high share of Paneer which is a desi and lighter form of Cheese. Promoters of Parag very wisely anticipated the coming demand of cheese in india due to rising consumption of Pizza etc. in india. When they were conceptualizing their cheese plans in 2008, Domino’s was having around 70 outlets in India which are now around 600-700. Now they are the biggest supplier of quality cheese to the biggies like Domino’s, Pizza hut, five star hotels etc. in India and the demand for these will further grow like anything. Cheese is yet to create its place in the refrigerators of indian kitchen although it has more versatile uses and tastes. Cheese has around 4000 varieties across the globe with india having only 30-40. 

Parag Milk foods were always very sure about their business plan which was about premium processed milk products rather than generic commodity products like milk and curd. Their margins reflect this. On a likely turnover of around 1700 cr their operating profit will be around 110-115 cr while much bigger player Hatsun agro is having op profit of around 180 cr on turnover of 3300 cr. I could not analyze the financials of Hatsun fully but something looks very strange like their abysmally low figures of debtors (around 12 cr) and inventory (250 cr) which are not comparable with other industry players. Also on a gross asset base of 1000 cr their turnover is 3000 cr while Parag is having a turnover of 1700 cr on assets base of 300 cr!! There may another face of it as where there is Milk there is Mystery :).

Moreover Parag is on the starting phase of its high growth period. It has brands like Gowardhan for traditional dairy products like milk, Curd, GO for new age products like Cheese, UHT milk and Topp up etc. It has superior margins, more brand power, bigger clients, high technological expertise, niche products…all these are more than enough for it to command premium valuations as compared to commodity players like Hatsun, Prabhat. Unlike other dairy companies, which see 25-30 percent of their top line coming from value-added products, Parag generates 75 percent of revenues from cheese, flavoured yoghurt and ghee, all of which are value-added products. Even our old Horse Heritage food is focusing big on value added products like Ice cream than milk and Curd. At the upper end of 227/- Parag is commanding a pe ratio of around 45 which some analysts are describing as very high. But commodity player like Hatsun is having a pe ratio of 60 and smaller one like prabhat is around 100 pe.

India is the biggest producer of milk globally but our share of value added products is just 35%of our total dairy production; it will be even smaller if we remove paneer from this list. So scope of scale is way too big as unorganized sector control the most of our dairy sector. It is all about regional small players barring Amul which is the only national player. Parag is asking a valuation of 2000 cr, Hatsun is at 4700 cr, Heritage foods is at 1200 cr….this is too small for a big country like india. I still remember when I picked up branded rice players KRBL and LT Foods in their infancy (at 18 and 50); as the scale was huge they are still growing at fast pace (CMP 240 and 230) and still a long way to go for these.

Even Milk is not a commodity for Parag

Parag has created a premium milk brand “Pride of cows “which is priced around Rs. 80 per litre and their customers include the likes of Mukesh Ambani, Sachin Tendulkar, Hrithik Roshan etc. Parag has developed the most hygienic and advanced dairy in india with the breeding of 2000 Holstein Friesians cows. In cowsheds spread over 15 acres, the cows listen to soothing music of Lata mangeshkar, lie on soft mattresses, are kept cool with water sprays and have scrubbers to clean themselves. At a rotating platform, cows are trained to enter an electronic and automated milking station. All it takes is six workers to complete the milking process. These cows, on an average, yield 14 litres of milk a day compared to 7 litres for the average Indian cow. No other company except Parag and Schreiber Dynamix is having its own dairy farm of a some size in india. All the players like Amul source the milk from farmers so they have not full control over the quality of milk. Western dairy business is different in this regard as most of players have their own dairy farms. Parag is also following sourcing route for 90% of its business but their attempt in establishing their own dairy farm and brand shows their acumen and thrust for quality. 

The demand for this pride of cows brand is rising fast and Parag is planning to launch the same in other cities also. No doubt this is another potential cash cow for the company due to top quality milk. It is also venturing into whey protein powder production which is a byproduct of cheese production. Whey protein has high demand from sportsmen and Bodybuilders and company has already started the production and supply of the same to pharma companies.

Company is looking to garner around 750 cr from the IPO while 450cr will go to the investors, 300 cr will be used for the expansion, debt reduction which is good. Promoters are not selling big chunk of their shares.

Most of the readers of this Blog are also holding Heritage foods which was shared via email around 360. Heritage is still cheap at pe ratio of 23 and can be added further at CMP of 510. But for value added and branded play on indian milk story, Parag looks like a best play and should be added at every fall. I'll post more details about indian dairy industry and some dairy stocks like Heritage, Godrej Industries in another post as today night i am already very late. But as Parag milk is an IPO stock with promoters who credentials are not proven as of now with regard to ethics and corporate governance so please consider this as RISKY stock and put only risky capital.

Mystery of Milk is still unsolved but even Lactose Intolerants can taste and like Parag as it is not about Milk but cheese.

 

.(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 applied for the shares discussed in this Post)