Acrysil Ltd: Solving 'How" of the Path to Growth

As a professional finance person I have been involved in a number of debates about the relevancy of finance especially in an objective world. In one such lengthy discussion some of my friends related to science field gave their verdict that Science is relevant as it provides the answers for explaining the life and universe. They were of the view that Science explains “why” this world is like this. However I was of the view (still I am) that science never explains the “Why” but “How” of the life. Science knows “How” electricity works, how hydrocarbons provide energy, how cow gives milk, how gravitation affects the phenomenon. But we don’t know “Why” atom has charged particles, why there is gravitation and electricity, why our bodies die etc.

Only the Supreme creator knows the answer of this why. Only the creator knows the motivation behind his creation. But the most important why is “Why this life”….why we are here although we think (quite ironic) that we know “how” to live life. But there may not be any why over the realization that understanding the purpose of our existence is much bigger than getting the composition of variables of life support system (ecosystem) and Universe. Our life support system mayn’t be the best among other levels of life. I feel there are more levels of life (like of Devtas) and we may be at the lower end of hierarchy. Why I feel this is because at our present level of consciousness we can’t comprehend “Something out of Nothing” but our universe seems the one like this only. So there may be levels who understand this better than us. And thus our science may be of little significance in the context of life.

Various engineering branches describe how things operate and behave under controlled or natural circumstances. But there is also Financial engineering which creates the innovative financial systems. Derivatives, Futures and options, Taxes etc are all the inventions of Financial engineers…most recent one we hear is GST.

But in stock market, how is more important than why. We need to comprehend how industries grow, how economies progress, how brands are born, how products evolve. We understand this and stock market becomes a place of creativity. So many people think that stock picking is about understanding financial ratios like operating margins, inventory turnover ratio, ROE, ROA etc. But in most of the cases (Especially for quantum returns) these ratios are useless as they point towards history and can’t draw a line towards uncertain future.

Future is never linear...especially in stock market...only historical figures are linear. All the great stories of stock market could have provided superlative returns as they beat their historical performance by big margins and so re-rating happened. I am leaving aside the big guns like Pidilite and Page...but would like to mention KRBL (The maker of India Gate rice)...when i picked it at 16/- 3  years back...it was just another company. But then rice demand structure changed to Branded rice and its NP went from 70 cr to 330 cr...i am still holding it at 400 as it is still way undervalued compared to its brand strength. All the troubled metrics like Inventory and working capital improved during the period...same happened with LT foods (Daawat Rice)...i am having it from 5 to 60 now. I think Eveready Industries is an even better example...the way it improved all the ratios in last 3-4 years. It went from 16 to 320.

So stock market is all about understanding the forces responsible for transforming a normal business to something superlative and then selecting the company who is trying to execute the same. So today we’ll try to analyse one such company which I feel is doing something big to change the face of the company forever.

Acrysil Ltd: Selected its Path to Growth

The company is Acrysil Ltd. This was advised at this blog (Click here) in 2013 around 80-90. I bought it at 80 but I had to sell it at 430 in 2014 due to some personal reason. But today I have made another entry in it at 530. It is the maker of Quartz based kitchen sinks under the brand name “Carysil”. It is the only company doing this in Asia and among the four biggest globally. These sinks require high technical expertise and are quite unique in quality and aesthetic touch. These sinks are made up of 75 – 80% natural special color treated natural quartz minerals and gives the look of Granite and feel of Stone. Quartz physical properties are next hardest to Diamond. It makes these sinks so tough that one cannot scratch the surface even with sharpest of tools…virtually making it an indestructible surface and dent-proof. It’s homogeneous, heavy duty material where every inch of the material consists of quartz particles, making it lifelong. The granite sinks are very hygienic, they look smooth too, and are a style statement as well. Normally when we visit a home, we would start appreciating the modular kitchen wardrobe, the chimney or the hob. But we seldom go and see what sink someone uses because we know that there is nothing royal to see. But the products like these are changing this notion and people are opting these in India now. Worldwide there is huge market for this:

Acrysil is a very small company...it was export based earlier but then 2-3 years back it chose the challenging path to growth and decided to enter Indian market which was a huge potential market. And this is the most vital decision which may transform this small company into a big force. We need to take these tough decisions in our journey towards growth. So it is still early time...and it had to put in some material resources in the form of Fixed assets, Inventory and Working capital. In Branded product business, the biggest success factor is Distribution and marketing and this alone consumes the major resources. Huge investment, time and thought is required for Distribution and marketing function...and this is the most critical function for an FMCG company. High quality Product is only the starting point. But market acceptance is the most difficult part of the game because i am not a special...i am one among so many. We have seen Baba Ramdev turning into Baba Brand-dev!!

Its assets base has grown from 46 cr to 100 cr in last 5 years. It is expanding in small cities so Inventory requirement is getting larger so as is promotional discounts. Also it is importing some of its new products like Kitchen appliances and Bathroom Interiors...being trading activity it has low margins...but Acrysil is doing this to get the market feedback...better than investing front hand in capacity.

So after taking this tough challenge and investing substiantly in building capacities, assets and taking 80 cr loan its turnover has grown from 60 cr in 2012 to 173 cr in 2016. But operating margins are way higher at 15% from 5%...its net profit is at 12 cr from 1 cr!! Although it is a small company but still it hasn't missed dividends since 2006!! Earlier it was getting almost its entire 80 cr turnover from exports. But now its Quartz sink business is earning around 100 cr with around 30 cr is coming from Indian market which is a big positive. It has also ventured into steel sinks for Indian market. Apart from this, it is covering entire kitchen portfolio with products like Kitchen tops, chimneys, built-in Ovens, faucets and kitchen appliances like Ice makers, coffee makers, dish washers etc.

Sani-Q Wash Basin: New product with Awe Inspiring design

But I think apart from quartz sinks, its another block buster product line will be premium quality wash basins. Recently it has launched Sternhagen wash basin brand in India. These premium washbasins offer design innovation and engineering excellence in a bid to redefine the luxury bathroom segment in India. The Sternhagen range has already earned accolades from the industry for its awe inspiring designs and amazing quality and finish. While the designs are set to revolutionise the premium bathroom market, what’s beneath the surface is the real marvel.  Sternhagen wash basins are made from Sanitary Quartz (Sani-Q) discovered and perfected after years of intensive R&D. Born  in  2012,  the  fast  growing Sternhagen  brand  is  designed in  Germany  and  made  in  India at its plant  in  Bhavnagar,  Gujarat. Sani-Q has properties of being harder than ceramic; it is heat,  stain  and scratch resistant. Its mineral stone properties create a silky satin finish and highly durable products. Unique manufacturing technologies result in creating new forms and shapes which are unseen in bathrooms. Here are some samples (www.sternhagen.com):

It has also launched 3-D Tiles which are one of its kind in India:

They have recently launched a store in Ahmedabad. There is no doubt about the uniqueness, premium quality and royal touch of its products. These products are suitable for individuals looking for something unique for their home. So Acrysil will address this niche market. The only issue is Indians aren't aware of Quartz/Granite sinks and unique Sani-Q wash basins. We use only steel sinks. Quartz sink will cost around 5 times but it is just one time cost and in a costly house of 1-2 cr (Even 50-70 lakh also) the incremental cost of 4-5 sinks will be just around 1 lakh...not that big deal when we are building our dream home but it'll add uniqueness and royal touch.

Its market value is just 270 cr so if it can execute well the same will witness a transformation. The most important thing in the picking a stock is to pick it young...around 500 cr valuation especially for a new product category which can grow and create its demand quite fast. Indian sink market is around 2000 cr and will touch 3000 cr in 2-3 years but the share of Acrysil in it is just 30-40 cr!!! So huge scope of scale is possible...but as it is always with a small cap it deserves risky portion of portfolio allocation....but in Stock market ignorance is risk...unknown is risk...beyond control is risk...but taking risk is not risk...it is path to growth.

Good buy at CMP of 530 and an add at every fall.

(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)