Radico Khaitan Ltd: On a High

I am writing this in a hurry but definitely not on a High for I don’t drink. But I don’t mind the intoxication of buying a great liquor stock like Radico Khaitan (I also have USL and United Breweries). I am advising it for last 2-3 years at our Blog. Links here and here. It is still hovering around the same price which I don’t mind at all as I have accumulated a good chunk of it during the period (My Avg is 90). As explained earlier also that I prefer investing in a particular stock over a period of time (2-3 years) absorbing all the positives and negatives as period of 2-3 years is sufficient for any company to have a start base. I don’t mind if the price of the stock remains stressed during this period like I wish for distressed prices for stocks like Narayana Healthcare and CARE Ltd as I want to invest big amount in these. I want to write a detailed post on Radico for past 2 months but only for time although time has come for it to not to remain cheap for too long.

I’ll post a detailed study on it within 2-3 days. I am writing this as I feel it can have a fast and unprecedented run from here on. It is a perfect stock based on domestic consumption based theme. It badly deserves a re-rating.

It is the cheapest liquor stock in India earning around 80 cr NP yearly but available at PE ratio of just 15 when players like USL are commanding a PE of 70-80. Radico is second largest liquor company in India after USL. Liquor business has strong entry barriers due to various state laws which are very difficult to command. Radico is focusing on premium liquor for past few years and its operating margins are rising in spite of dullness in the overall market. It has recently launched single malt whisky which is the third Indian made after Amrut and Paul John.

Radico has given great set of numbers this quarter again. For last 1-2 years as it is focusing big on premium products with high margins which is yielding results as its margins are increasing with every quarter. Earlier Indian liquor sector was a "Daaru Adda" as most of the liquor sold was of cheap quality. But as Indians are growing mature and rich they are learning the real art of drinking which is responsible drinking which is drink less but drink good premium quality products.

This June-16 quarter, Radico's operating profits are at 46 cr vs 36 cr YoY. Turnover is at 430 cr vs 417 cr...so a clear sign of rise in operating margins. I like this company, its management as they had the guts to venture into premium segment and they built some of the marquee Indian brands of last decade like 8 PM, After Dark, Morpheus Brandy, Contessa rum, Verve Vodka, Magic Moments vodka. Last day it was up at 9% to 101...but it is still a buy...still very cheap.

I am pasting below the verbatim of one of my earlier post on Radico Khaitan:

(Posted In Nov-2014-Radico Khaitan: Liquor…this is one sector which is going to witness huge activity going forward. First…we Indians don’t yet know what is really a whisky? What we drink in the name of whisky is nothing but neutral spirit extracted from molasses (By product of sugar) which is then blended with imported malt and grain scotch whiskies to get the flavor and colour of whisky. In india, they have given it a very funny name; Indian Made foreign Liquor (IMFL) which comprises Whisky, Beer, Vodka, Brandy, Rum etc. In foreign countries, Indian whisky gets the tag of rum as it is made from molasses and most of them find its taste terrible. Single malt or grain whiskies are like silk and these are enjoyed best neat without adding any soda/water/ice.

At present india has imposed huge import duties on imported scotch whiskies which inflated the cost of BIO (Bottled in Origin) whiskies by almost 3 to 4 times and BII (Bottled in india) by twice. This has protected the inefficient Indian liquor industry from high quality competitors. However there are some like Amrut distilleries from india whose single Malt whisky has been awarded as the world’s best twice which shocked the entire world. This prominently export oriented company has now started offering 1000 bottles in india also. Amrut is always in short supply globally. This shows with dedication and efforts Indian companies can give global brands a run for their money.

Scotch Whisky unions of Europe are eagerly waiting for india to sign the FTA agreement with European union which will force india to lower the high import duties on scotch whisky. Sooner or later india is going to sign the treaty. Whenever this will happen will prompt foreign companies to look for acquisitions in india to get hold of complex liquor distribution system of india where every state has its own set of rules with regard to wholesale and retail of liquor. Central and state level taxes are very high and these are stretched to the fullest by state governments to increase their revenues. Diageo has already done the same by acquiring USL. Secondly this will also make bulk imported whiskies cheaper for Indian companies for blending purpose which will raise their margins. It will also prompt them to focus on high quality grain based products in order to be competitive.

One more thing, in spite of global demand for whisky almost doubled in last 20 years or so, area under Barley (to make malt for scotch whisky) production has actually decreased during the period which is made up by rising production of barley per acre. Although barley produced in Scotland is best suited for scotch whisky but india can be a huge global supplier of Malt.

With this background, I feel it is worth risk taking to buy the Indian liquor stocks like Radico Khaitan/USL which are trading at multiyear lows. Radico CMP is around 88/-)

(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)

Credit Analysis & Research ltd: Its Bond James Bond

CARE Ltd: There is one happy person and then there is another happy person; so, theoretically, if we combine these two happy fellows then the result should be more happiness and more happy persons. But still, married persons aren’t the happiest persons on the earth. Theoretically, equilibrium interest rate is the rate where demand for loanable funds equals the supply of loanable funds (say, Banks). But again in real life, interest rates aren’t decided in this way. As in the hunt for higher interest rates banks may end at providing loans to risky ventures like they can find out someone like Mallaya offering high rates with cheap whisky in other hand which can wipe out even the base amount; and they can refuse one genuine customer with credible business plan but offering low interest rates like one of my fellow Punjabi having the patent for making world’s first authentic “Somras”.  So banks don’t allocate their funds to customers as defined in the books. They took the help of specialized agencies which guide them about the creditworthiness of the prospective client.

Welcome to the world of credit Rating.

So credit Rating agencies like Crisil, ICRA and Care provide the services of evaluating the credit worthiness of the customer seeking loans/Bonds; it is all about the judging the strength of business model, cash flows, whether the business will be able to service the debt. Banks/Financial institutions take their interest rates decisions on the basis of credit worthiness of the client; interest equilibrium is basically for conceptual and academic framework.

India need huge investments in infrastructure to support or provide a base for high economic growth because without adequate infrastructure like cheap power we can’t manufacture cheap goods, without roads, warehouses and cold chains we continue to waste 30% of our agricultural produce. India need investments of around 6 lakh crores every year upto 2020 to achieve the minimum base of supportive infrastructure; this is 30 lakh crores for 5 years. A huge amount by any standards.

The question here is; how India is going to finance this. India tried banking route to finance big infrastructure projects which only resulted in huge piling of NPA’s in the books of banks. I have always felt Banks are not best suited for long tenure Infrastructure projects spanning 20-25 years where Banks are best suited for loans for periods of 10-15 years as this matches with their inflow-outflow of funds. But some of the big Indian corporate houses in most of the cases mismanaged the funds by inflating the cost of projects and then diverting the funds somewhere else; in other cases project was ultimately a bad business decision where corporates misjudged the future demand supply scenario miserably and Banks too were guilty of not doing their due diligence before allocating funds for these projects- poor state of real estate projects all over India is a perfect example.

Actually, Bonds are better suited for financing long term Infrastructure projects. Bonds are the best medium for getting the long term funds for infrastructure growth; they are traded on the exchanges so they have secondary liquidity market. Bonds ensure pricing on the basis of fundamentals and financials of the issuer. Just for putting things into perspective, had Mallaya Sahib had gone for Bond market instead of Debts from banks for Kingfisher Airlines, he would have scrapped most of his plans because market forces would have asked for higher rate of interest considering his weak balance sheet and riskiness of the business and he would have been happy selling cheap blends of Scotch whiskies.

But Indian Bond market is way underutilized and underdeveloped. Share of Bonds in corporate debt is just 4% in india wherein it is around 17% in China…it is high in most of the developing and developed countries like in Spain it is around 40%, South Korea 30%. So we are way down the line. However now is the time for the growth of Bond market in India as Banks are stressed and don’t have the funds and capital to finance much of the needs of infrastructure.

Last year, We bought NBFC's like Edelweiss, JM Financial, Piramal when everybody was banking on Banks; this time I think Corporate Bond sector can be the crucial factor. With the growth in corporate Bond market, need for Bond Rating will rise significantly and so I am investing in CARE Ltd continuously.

CARE Ltd is the cheapest rating agency trading at a PE of just 25 when others like CRISIL and ICRA are trading at 60 and 50. It has one subsidiary, Kalypto Risk Technologies, in the field of providing technical products (softwares) for enterprise risk management to the banking vertical. It is now eyeing global markets to fight the might of global rating giants Moody’s, S&P and Fitch having around 90% share of global rating business.

This is just an introductory post on the subject just to share the concept behind my latest investment. Bonds and Banking are my favorite subjects and I hope to provide much detailed study shortly. Reviews are welcome. I have entered at 1040 and it is just an entry...will continue to buy at every fall and at every significant event.

(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)

Revisit SKM Egg Products: Egg Powder has very long Shelf Life

I am again into Eggs. So many of our friends are raising queries about the future of SKM Egg as they are invested at higher levels of around 200. SKM Egg is a perfect example of over reaction of the market. When I bought it few years back around 10 my main growth catalyst was growth in Indian market which had near zero usage of its products. However it came back to life thanks to price rise in global markets but making the most of the fertile times it did a good job in wiping out the costly debt from its books and now it is ready to expand further particularly in Indian markets. When it was at 200, I was expecting it to fall as its growth was constrained by full capacity utilization levels. It is a commodity business and should not be getting high PE ratio which was when it was at 200.

Actually as I have explained earlier also that commodity businesses like Advanced Enzyme can deserve high PE ratio as entry barriers are strong and scope of scale is big. But in case of SKM, its strong entry barriers are only for Indian markets where demand is low and it doesn’t enjoy any such premium in global market where it is just another player. But it can survive in the global markets if it can keep its cost low. Scope of scale was also low due to full capacity utilization and low focus on Indian markets.

As its capacity utilization levels were full, so it was ready for a fall with stable results which it did and so fell. But its recent golden period from 2012 to 2015 was never going to last as price rise was stimulated by fall in supply from USA and Mexico due to flu attack and most of the countries banning import of USA poultry. USA egg prices rose to never seen prices due to shortages as millions of birds were killed. So countries earlier using USA imports were then looking for other avenues for supply and price of eggs skyrocketed in the global markets and so as the price of SKM Egg. But as I have shared a number of times earlier that I never invest in commodity stocks as most of the things are never in the control of these commodity producers. The more common the thing is; more price takers they are. Hence unless a commodity player has some compelling advantages like strong entry barrier, huge scale, low cost as compared to others etc. I never invest in them. The recent spike in the performance of SKM Egg wasn’t due to any of the above strong factors but due to global spike in prices on which it had no control. So this superlative performance wasn’t going to sustain anyways.

SKM Egg was a commodity player in the global market but a special player in Indian market where demand is low. But it has one thing in its favor and that is low cost which is negated by the recent fall in the egg prices. Actually Eggs are not suitable for transporting to long distances as they require more space, temperature control etc. which inflate their costs and dent the unit economy. So India is mainly exporting bulk table eggs to Middle East countries due to lesser distance and lesser quality control rules. But when we process the raw shell eggs to powder its weight reduces greatly and its shelf life increases considerably. Egg powder can easily last for over 18 months and if properly sealed it can have a shelf life of 5 to 10 years. All these things make Egg powder fitting for global trade at fraction of cost.

This Egg Powder can be used to make Omelet etc. just like shell eggs and they taste almost same. But Egg powder finds their major use in food industry for variety of purposes. Protein supplements are another area where their demand is big and growing continuously. Egg powder process also kills Bird flu and other virus due to high temperatures. Liquid Eggs also do the same work but with lesser efficiency as they require refrigeration and cold storage but still far better than table eggs. So I think Egg powder is something which can help in eradicating the nutrition problems in poor countries. Transporting table eggs to these countries is a waste of money and resources. These countries have enough demand to absorb all the excess supply; their only problem is price.

So things were going fine for SKM Egg unless USA found its feet again on the ground earlier this year. After the Bird Flu wean away, USA producers increased their production very fast and within months they were producing Eggs at the pre Flu scale. But demand wasn’t there as most of the Egg/Egg powder using food industry had either gone for plant based substitutes for Eggs or started using eggs at low scale in their products. This replaced demand hasn’t come back yet. Also the countries, which banned USA import haven’t still started it fully. This created a glut in USA market and this time prices fell to lowest levels. As USA was importing eggs last year, which it stopped later also resulted in the fall in global Egg prices. So currently there is over supply in the global markets and it will take some more time to fully absorb this. So we can see more pressure on SKM Egg for some more time.

But I am invested in it mainly for demand for its products in India. That will be the real golden time for it. As I have explained in earlier posts it has created world class facilities in India which is indeed a great feat. India is following the developed countries in the use of Cheese and Egg products so it is just about time that the demand for Egg powder will rise in India. We are still importing Egg based protein supplements; and still importing Whey protein based supplements. Whey protein is produced during cheese making process and a great value added products for dairy producers like our Parag milk which has big plans for entering into this segment in B2C market.

SKM Egg has wisely scaled down its expansion plans due to current global glut but India always has low price advantage and this will be back in near time. Average Egg prices in USA hovers around $ 2 for a dozen which are more than double the prices in India; even if we add costs related to superior quality India still is at half. So SKM Egg is surely going to acquire Ovobel (One of the biggest Egg Powder Producer in India) to expand its capacity and to have ready customers.

So those who have bought SKM Egg at the higher price should just wait for the tough time to pass. But SKM Egg is not a bad investment decision. Actually things can go tough in the stock markets as so many favorable and unfavorable variables always exist together and you can never know when unfavorable ones would take the command. Just like Life, we need to pass the tough time absorbing all the pain. This is the way in our Life when through hardships and pains we enrich and mature. But some of our decisions can turn out to be failures.

 We take our decisions from the narrow range of our consciousness but outcomes are decided by vast forces of life which we can’t measure at the time of taking decision. And we find Lord Krishna again relevant in stock market when he says to Arjuna that he can only do “Karma” (Act) not thinking about the “Phal” (Results). Actually Lord says taking decision is in my hands but results are an outcome of so many vast and various forces on which i have least control. But life and growth is always personal and individual; we grow when we venture into the unknown; this is the way to live life, meaning of life. We can’t follow the predefined and traveled path and hope to grow….this is just Re-acting not ACT. Our consciousness expands and solidify when we put ourselves into unknown. So if we want to accumulate great wealth in stock markets (not Normal Re-acting wealth) then we need to venture into stocks where maximum growth is into the future (current prices are just the beginning)...we can at the most care about the "Sarathi" ( Promoters just like Lord Krishna was the Sarathi of Arjuna who ventured into unknown on the persuasion of Lord and get the real essence of Life). Everything else after this is in the hands of Grand forces of life/Business. We shouldn't feel bad if somethings don't turn the way we like...we did our job perfectly...this is it.

So for my friends, who have entered into it at high prices of 200/150 , it is not a bad investment decision but a wrongly timed one. I remember my time, I entered in it at 20 and it was at 5-6 after 1-2 years…so I kept on adding in small. But I waited until Egg powder prices rebound in the markets and capacity utilization improved…then I made my major purchase at 7. So I made my bulk purchases around 1/3^rd of my initial purchase price. At CMP of 70, it is just around 1/3rd of 200. so no need to worry just wait for the next phase of growth. If it delivers that then it is worthy of further investment even at 70-80...but not before that.

Its results will be out today; however I am not seeing any major setbacks this time in its results. Earlier around 2010 it was incurring heavy losses due to stressed global prices but quantum of loss was mainly attributed to the factors like low capacity utilization levels and high cost debt in the books. At present it is running at full capacity with almost nil debt….so only muscles and no fat this time. I think it is now better suited to withstand the tough market situations. Also Egg powder producers generally have long term relationships with their customers as customers want to ensure uninterrupted supply of raw material. So I am not seeing it drifting down to 50 where I’ll be happy to put more money into it.

We need to just remember that Egg Powder has long shelf life…it doesn’t get rotten that early.

(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)