Tuesday, 20 September 2016

Stock Market Warriors: Bravery is the only Virtue Covering: Agro Tech Foods Ltd, Kaya Ltd, BASF, Clariant Chemicals, Nelco Ltd, Navneet Education, Kokuyo Camlin, Atlas Cycle

A warrior is always calm; this is quite contrary to the common belief which pictures a warrior as an angry and violent fighter. But a warrior isn’t easily angered as he has no fear for he understands the grand schema of life forces. Our life here is always dictated by Fear…we are just a shiver most of the times in our life…we select our path only out of fear…we make our choices only out of fear…we are Fear. For us, Fear always leaves us with two choices growth or survival. This is what we think about fear; by following it we can survive. But survival in fact is the biggest delusion…it is the biggest lie we are telling ourselves. We can’t survive…we are dying every second…something is ending all the time…and in the end this game of fear will lead us to the ultimate…we’ll be no more…no survival…only death. Growth is the only possibility and can be the only reason for ours being here-in the realm of dead. Whatever we may think or try or evade out of fear…we can’t survive from fear…growth is the only survival.

Bravery is the only virtue which one can have…this is the attitude which results in our growth and fear becomes worthless in our life. Bravery is the fight in the face of adversity and fear. All other attributes like honesty, kindness, truthfulness are just variants of bravery. Only a brave can have the strength to leave money for honesty…only a brave can stand for truth and justice. Fearlessness is not bravery but when we have the will power to counter our fears…there may be some doubts…we don’t know the unknown…something inside us may be shivering but this is bravery; the will to face the unknown. And when we face our fears with straight eyes…we grow…we feel the working of forces of life. Fearlessness is the final stage of bravery; when we understand the phenomenon called life where we do not exist to GET something but to BE something. Then we become calm…a strange stillness descend onto us…we have still half closed eyes…stimuli don’t affect us…we have the strength to absorb all the pains of life.

The brave and fearless at last welcomes the biggest quest of his life with calmness and eagerness…after living a great life full of actions (not reactions out of fear) and energy he is ready for the biggest fight with the unknown; Death. He never trembles while facing death for he knows death is the door to ultimate reality...this is the way of a warrior…warrior path.

Our consciousness is our true self; when I say consciousness it is the “me who decide the course of action” not someone who is aware. We always behave as we are whatever may be the situation; whether saving a girl from rapists, while giving interviews, while giving food to a hungry, while not taking bribe for doing something wrong…every action of ours is just a loud pronouncement of our real self. We do what we are…it is never we are what we do. Our warrior is still calm when he is doing business, when he is in stock market. He understands that fear is not an enemy but FEARING from fear is…fear from taking risks, accepting challenges. Fear makes us aware of the danger and we become alive. Business and stock markets are not for those who fear from the fear…it is for those who are ready to take the challenge in their quest for growth. It is not for those who tremble at the slight adverse moment.

A person who is fearful in his normal life, he’ll behave the same way in stock market. The moment he sees stock price falling, he’ll quiver out of fear and will move out due to panic. But stock market is about staying calm when there is a fall in the stock prices as most of the times it is time to buy more.

So today, we’ll focus on those companies who have the guts to face the challenge in their path to growth. They have taken the biggest risks as they yearn for growth…jumping out of their comforts zones they have tried something novel to find their growth path. These stocks are strictly not for those who seek survival but for those who yearns for growth.

Agro Tech Foods Ltd: This one is from the house of 20 billion USD global food giant Conagra Foods. It is the owner of Sundrop brand which is into Edible oil (premium brand) and peanut butter. Peanut butter is the staple food in western world just like our dairy butter but peanut butter is remarkably healthy with great amount of protein and essential vitamin E, bone-building magnesium, muscle-friendly potassium, immunity-boosting vitamin B6 and heart-healthy monounsaturated fat. Peanut butter can decrease your risk of heart disease, diabetes, and other chronic health conditions. But Indians are yet to develop the taste for peanut butter…the product, even after 8-10 years, is still in promotion state. The domestic consumption of peanut butter in India is very low at around 1,000 tons per annum while production is around 13000 tons out of which around 12000 tons is produced in Gujarat which offers, availability of quality groundnuts, excellent roads, rail and port infrastructure. So India is exporting the Peanut butter of around 12000 tons.

It is also the owner of ACT II popcorn brand which is biggest and growing fast as it is healthy and new age snack. One can munch it in large as it is high in protein with no fat quite opposite to other unhealthy snacks which has feeling of guilt as the outcome every time we eat these. No doubt, demand for popcorns is rising fast in India…in fact companies like Agro tech are importing popcorn grade corn from USA after paying 50-60% import duty. Indian corn is mainly suitable for poultry and starch industry. But now even Indian farmers are getting aware of the demand of high grade corn and a high acreage has been shifted to grow American corn.

Agro tech was doing fine in its edible oil business with Sundrop as a premium brand and Crystal as mass oil brand. But then they decided to invest big in setting up manufacturing units for Peanut butter and Popcorn business in India in their drive for growth. Initially they were sourcing peanut butter from their other Asian units from Malaysia but then they invested for a new plant in Bharuch, Gujarat. Earlier it was having two manufacturing facilities at Kashipur (Uttarakhand) and Hyderabad (Andhra Pradesh) in the country for producing Sundrop and Crystal brand of edible oils and Act II popcorn. But now with recent expansions, total number of production units has been increased to 5 and another one is near completion in Chittur (AP). Oil business is contributing around 77% of turnover with food business 23% (which was 15% 2-3 years back). Company has plans to move out from the league of commodity business and to be a branded FMCG player with turnover from food business at 50% in future. It has ventured into other branded snacks like tortillas, Nachos and peanuts.

Taking the challenging route for growth they have invested around 150 cr in recent times for the expansion. The investments are sourced entirely from internal sources. The debt of around 100 cr in its books is mainly for working capital requirements for sourcing corn and peanuts. Its parent, Conagra foods is the global giant in the trading of corn worldwide.They stock the corn for around two years. Agro tech has turnover of around 800 cr with around 600 cr coming from oil and 200 cr from food business. ACT II is a 170 cr brand at present and the company intends to make it a 500 cr brand in the future.

Why Valuation looks stretched at PE of 50 but they aren’t.

So now they have an assets base of 225 cr but majority of these newly created assets are still to contribute to the top line. Another 35 cr is in work in progress for its new plant in AP which should be completed this year. But these new units have just started production and it will take time for these to work at full swing. But depreciation impact of these units is affecting the net profits along with other associated costs in running a new plant like interest, overheads and employee cost. Its depreciation is increased to 16 cr in 2016 from 6 cr in 2012. Interest costs are at 6 cr from nil in 2012. These interest costs are due to the fact that now they are buying their own raw material as earlier they were just trading the imported products from their Asian units. Its working capital requirement for inventory has been increased to 146 cr in 2016 from 64 cr in 2012. Due to these its net profits have fallen to 23 cr in 2016 from 40 cr earlier.

Also, earlier its tax outgo was lower due to 10 year tax holiday for its old plant which is ended now...so tax outgo is affecting the NP also. As it is trying to establish Peanut butter business in india, so margins are low due to low pricing, high dealer margins and brand promotion expenditure. I am using its peanut butter for last 9 years. Also in order to promote the brand and let Indians to acquire the taste for Peanut butter, it has reduced the prices of peanut butter….if I can remember from Rs. 200 (300 gm) to Rs. 150. All these factors further pushed down the Net profits. Hence as we can see, it has been transferred from stable growing firm to high growth investment grade firm.

So for it for now, historical performance is not of much importance as it is in transitional phase. Its PE is irrelevant as it is yet to achieve the scale relevant to its recent investments and strong brand power. Now ACT II popcorn are available in small towns and villages also. Indian customers are getting aware of healthy snacks and foods.

It has recently launched a new product – the ACTII Popcorn Pop ‘n’ Serve Tub, which is a large tub, which, when placed in a microwave for three minutes will produce hot, ready to eat popcorn. Consumers can then eat from the tub itself, recreating a cinema like experience. It is available in Pan India from Aug-16 with two flavors-Natural and Movie Theatre Butter. It is priced at Rs. 92…much lower than Rs. 300 we forced to pay at multiplexes these days. So we’ll see more such innovations and high quality products in the near future.

Brand Promotion is the last Catalyst

This is the thing which is missing from the armory of Agro Tech foods; focus on media brand promotion. Stock market may think otherwise but I think there was a reason for this and that was justified and I think we’ll see Agro tech upping the ante for media brand promotion of its strong brands of sundrop and Act II. It was in Investment mode for last few years…as majority of expansion was funded with internal sources hence funds were limited for branding. Moreover as the production lines were not started, new products launches were pending, supply and distribution channels were being established…hence there was no point in spending money for media brand promotion when there was no product in pipeline and supply and distribution lines were not established. That’s why I think it will start spending on media advertisement very soon in the near future.

I am a firm believer of Branding…in today’s competitive world good brand image is the vital factor in establishing the loyalties otherwise customer today has way too many options. Media advertisements are never the Brand builder…media advertisements just create the Buzz about the product. They just create the noise about the product so that the customer becomes aware of the product. But it is only great products and service, customer focus and preference, promptness/awareness to customer’s needs etc. which really create the strong Brand image. Media advertisements work much better for positive products which are good for our health. But as most of times consumer is unaware of the benefits hence communicating the same to the consumers is more vital than any other strategy. Agro tech’s products fall into this positive category. Hence I am waiting for the day when we see them investing into branding more aggressively and that will be the most important and last catalyst for its phenomenal growth.

A good buy at current market price of 528. With turnover of 800 cr but market cap of just 1200 cr…it has huge scope of building large scale in its food business which is at just 200 cr.

I was expecting the same strategy for brand promotion from Zydus wellness for its Sugar free and Everyuth brand…which it started doing since last year and results are visible in strong growth in margins and top line…but these will be even better in future.

I am also listing some more stocks with minor details as I’ll post more details about them in the near future. But I think these stocks can run away fast if market gets to understand the story behind them. I have seen this happening with our stocks most of the times. Recent causalities are Delta corp and Shirpur Gold…both were advised via email id of this blog to the email subscribers. Delta has run from 60 to 160 and Shirpur from 110 to 170 in very short span of time. Actually due to shortage of time, most of the times I can’t post the full study about a stock at our blog but I generally shared small details about the rationale about them via emails. Hence I request to all my readers to subscribe to the email ID (oscillationss@yahoo.com) of this blog by sending a request email.

Kaya Ltd CMP 795: It is from the house of Marico and it is into skin care segment with offerings for Hair removal, Anti-ageing, Botox and other skin care products. Again it is a stock which is looking expensive but good things are always expensive especially in stock market. This is another domestic story linked with growth in income levels and growing awareness about the wellness and appearance in india. Company has done all the hard work in the past and is ready to reap the benefits now. It is a difficult business to build reputation and demand as we are a poor country...but future demand will be awesome. NH is trading at 4 times of turnover...Kaya is at 2 times although it has big scarcity premium attached...one of its kind in India. So at 2 times it is very reasonably priced at market cap of 1000 cr.

BASF India and Clariant Chemicals: Earlier advised both ( BASF at  Rs. 850, Clariant at Rs. 690) and both are showing great improvements in their operation. BASF is a great story unfolding. BASF will lead the revolution in Indian building construction industry which will leap forward from cement to specialty chemicals ,admixtures. BASF is a chemical giant operating in diverse fields like agriculture, leather, energy, chemicals etc. Clariant is also into specialty chemicals like dyes and pigments. China is slowing down due to reckless expansions and pollution which will further benefit Indian chemical companies…these both are better placed. BASF has faced tough time in the past mainly due to its expansion of around 1200-1500 cr in india to cater to rising chemical demand at lower cost. But due to this expansion, its depreciation costs climbed to 175 cr in 2016 from 50 cr in 2012, interest costs at 90 cr in 2016 vs 10-20 cr in 2012. Overheads and employee costs of new plants were also the issue. But now it is working at full swing and it is now big into profits in last 2 quarters which will be even better in the future. It was advised earlier at 850 but it is still worthy of buying at CMP of 1145. Clariant chemicals also faced the similar challenges due to expansions and it is a good buy at CMP of 740.

Thomas cook CMP 198: I made my first entry in it at 100 last year and recently bought even more at 195-200. This  now belongs to Prem Watsa which is regarded as Buffet of Canada. Thomas cook has lion’s share of indian money exchange, transfer industry which has strong entry barriers. Thomas cook has some payment transfer related approvals from RBI which no other have in India. It has bought Quess corp and sterling resort also. Tourism and foreign travel will be the big themes in the future and Thomas cook will be the stock of this year.

NELCO: It is Tata Group Company dealing in VSAT (Satellite communication/Internet) business...among top 3 in india. Amid all the hue and cry about telecom with the entry of JIO...i think VSAT will surprise everybody. It is still the preferred mode of communication for Banking/ATM, secured systems like Defence, OIL rigs etc. spaced in far seas. Market cap is 190 cr. I studied it last year around 55-60 but it touched 140 after that. At 86 it is a good buy...but very risky.

Navneet education and Kokuyo Camlin: Both have stunning business models with great brand power...primed to benefit immensely from growth in Indian education sector. Kokuyo has just opened a 100 cr factory in Maharashtra to get the benefit of large scale and lower cost of production. Raw material costs of Kokuyo should decline in future with new contracts for raw material as Oil prices are low. These are great managements...compelling buys…Navneet at 104, Kokuyo Camlin at 82.

Atlas Cycles (Haryana) Ltd CMP 252: it was under my watch for a very long time...almost 3-4 years but as there were some issues pending like closure of MP unit, family fight...but now they have sorted out both and are on verge of selling their sonipat unit and perhaps they will manage from their biggest plant at Ghaziabad.

This qtr was a great turnaround, turnover from 130 to 168 cr...Op profit at 3 cr vs loss of 50 lac. They are turning over. It is a 64 years group but their market cap is just 88 cr...just like as i mentioned during our buying of NIIT; brand power of NIIT was much more than the market capital at that time. Brand value of Atlas will be much more than 88 cr. They have cash in the books of around 15 cr...some advances around 30-40 cr. They are a great dividend paying unit. China is slowing down and will be even slower as china is now realizing that their cost advantages is weaning away and they need to take care of massive corporate debt and high pollution.

As i always buy a risky stock belonging to a sound and good management...so it is covering both. Our Tube Investment (BSA cycle) is at 600 now...50% jump from our buying around 400.

(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)


  1. Dear Sir, a new follower of your blog; i really liked your report on Parag Milk. It is already crossed 300. Can it be considered at the cmp?

    1. Hi Dear, welcome to the Blog.

      Parag is a good buy anywhere near 300. I am continuously buying it after listing. When it touched 350 I was a little worried but it has given good entry point near 300. I have already advised all of our Blog readers for buying it more but couldn’t update the status itself at the Blog. Market will take some more time to comprehend the rationality of high PE ratio when Parag was clearly in investment mode for last few years and their Pride of Cow’s milk business was making losses as it was just started...the benefit of investments will be coming now. The growth of high value products like Whey Protein based health supplements where Parag is focusing on making it a branded direct consumer play shifting from its sale to industry (B2B) model.

      It has fallen to 300 levels due to not so high growth in revenues in 1st quarter which can be taken as one off event but growth in operating margins was a good positive. But I have no doubt that it deserves much better valuations than other commoditized milk selling dairy stocks. Indian dairy is valueless as we only consume Doodh/Dahi. Milk processing is nowhere in India...that's why our farmers are poor.

      Yes, current pie is very small for value added milk products like cheese...but pie was small also for Smart phones when entire market/Pie was of Nokia's feature phones....but Nokia couldn't see that Pie is shifting towards smart phones. Pie here too is shifting towards value added products. It is good that market is taking its time in realizing this shift…just buy now and at every fall.

    2. Thank you sir for such a prompt and detailed response. Actually I am badly trapped in MIC Electronics, Tanla Solutions and BSL.. the current prices are down by 30% from purchase price. shall I book loss and shift to Parag?

    3. MIC and Tanla are not credible...these type of stories become alive only in Boom times. What is this BSL?

      No need to commit all the money to Parag. If you are following the Blog regularly then you can invest the money into some High quality stocks like Tube, Sundaram Fin, Max India, MCX, Thomas Cook, VIP, Agro tech foods etc...Buy only quality stocks. I always follow the strategy to buy a stock over a period of time absorbing all the negatives and positives...like I am buying Speciality Restaurants in Small qty...but it is risky.

      Even when i buy a risky stock, i try to cover the management risk...buy only a reputed one like i took the risk in buyng risky stocks like Atlas cycle, HCL Infosys, Nelco, Shirpur Gold...all have given me great returns so far with Atlas rising to 420 from 250 within a month.

      So always try to stick the quality. Just remember it is not easy to make money in the stock market...so just buy a high quality one...stick to it even when it falls...it'll deliver surely.


    4. thanks a lot sir.. i found tube investment a little difficult to comprehend. It is having a negative working capital, the sales have fallen compared to last financial year as well as quarter.. also the only saving grace was income from other sources.. so building conviction is tough.. could you please help me understand what I am probably failing to read.. also I could not subscribe to your blog as the mail bounced.. could you please verify the email address again..

    5. You are not getting the complete picture here. Tube submitted June-16 results only on standalone basis pursuant to implementation of INDAS (New Accounting Standards) wherein it has opted to publish only standalone results because its Subsidiaries Cholamandalam Finance (listed NBFC) and Cholamandalam MS General Insurance are still preparing their accounts on the basis of old standards/GAAP as NBFC/General Ins companies are required to prepare their accounts on the basis of INDAS only from FY-2018-19. So standalone numbers (INDAS) can’t be clubbed with accounts of these subsidiaries (GAAP) as accounts of both are prepared under different standards. But Tube has informed that these two will also resort to INDAS by Mar-2017.

      So its Jun-16 quarter results were fine and apart from top line growth, NP has grown to 42 cr from 18 cr. Apart from growing and stable businesses in the form of Cholamandalam Finance and Cholamandalam MS General Insurance, its Bicycle business will be one of the greatest wealth creator in the future. So everything is fine here. Just go ahead and Buy.