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)

GDP: More is not Growth

Here we go again; the news about Fed rate hike and immediately global stock markets crumble…again the debate is alive whether USA is on growth path or in fact if it’ll ever be on growth path again. There is always a noise about economic growth, every other day policies are getting drafted for growth, there are all types of wars (Currency, military, political) to secure the growth….but still the equation doesn’t look like in our hands which are still empty. Sometimes I wonder whether we understand what really is growth most importantly economic growth.

We measure growth by adding all the measurable and measured goods and services produced (GDP) in an economy for a given period. But whether growth is that simple?? Just a summation of things produced…we go on adding and think that we have figured out what we have “Added” afresh into the economy. Is it really that simple!! Even our calculation methodology is faulty and primitive. We add the turnover (Value) of a company dealing in providing “Fresh Air” but we never add the massive fresh air produced by Mother Nature every moment; we add the production of a company producing mineral water but we never add the free flowing mineral water belonging to Mother Nature; We measure and add the value of products produced by entertainment industry like music, movies etc. but we can’t measure the heavenly beauty of mother nature (although we enjoy it); We add the value of work done by working mothers when they leave their babies with baby sitters (and Baby sitters’ work also gets counted) but we never Value the 24 hour hard work by homemaker mothers. We at once realizes that we don’t (may be don’t want to or just can’t) measure all the goods and services produced. Our GDP work is just gross and I sometimes surprise why we value this incomprehensive thing so much.

GDP is not Growth

Just to give you an example; suppose with all the hard work we measure and calculate the value of fresh water of our mighty rivers like Ganga, Yamuna and this value is 100000 cr…great work done indeed. And then the great sons of Mother Ganga start putting all types of Industrial wastes in it, destroying the majority of fresh water. We proudly value the goods produced by these industries to 10000 cr. But when we again value the fresh water of our rivers; the value is dismal 70000 cr…and we’ll realize the pain of Mother Ganga as her sons only understand everything in money. But as we can see this small working can reveal that we haven’t added any industrial value of 10000 cr; in fact we have lost 30000 cr of fresh water due to this production and the net loss is 20000 cr. We can see here that all the figures of GDP are distorted and incorrect.

Pain of Mother Ganga isn’t getting evaluated at any stage but to her surprise Indians are now trying to clean her with massive funds…and you’ll see that this cleaning activity will be measured and added into GDP for which every fool will take the credit. You can see and may be shocked that most of our value addition is just repairing work for the nasty treatment of Never Measured Mother Nature and rarely we are adding any real value to the natural equation. In my previous blog posts I have used the word “Natural capital” for the vital support system of Mother Nature. I am of the firm view that any loss inflicted to this Natural capital (In accounting jargon we call it Impairment loss) should be subtracted from GDP and we’ll see that most of our growth stories will turn into nightmares. So Assets comprising Natural Capital should be treated like Balance sheet items and any diminution in the value of these should be adjusted against National Income account to present the true state of our economic activities.

Now we understand the fallacy and incompleteness of our growth parameter. We are having a National Income account without any balance sheet. So let’s see if we can make something out of it. Economic growth is just like a normal thin frame individual wanting to grow his body. So in order to grow, he starts adding into himself all sorts of foods; he is just eating all the time. Overtime, his size will surely grow; he’ll gain weight. But in his pursuit for growth via over eating spree, he might have wreak havoc with his body as he has grown big but fatty and lacks power and strength. So he is vulnerable to all types of diseases now; any outsider can beat him as he isn’t strong but heavy. We can see the weak points in his being in spite of the fact that he is big; he lacks Resilience and Immunity. These are the most important factors affecting our longevity.

Growth entails being Resilient and Immune

So realizing his weakness, he joins a gym and does heavy workouts….he runs, sprints. After some time, he has shed the excess weight, now he is powerful, sharp, and agile. He has rhythm and balance which can ensure his long journey. Thus we can see Resilience and Immunity are the two most important factors of growth. The same is true for an economy also. Size of an economy doesn’t mean that it is healthy but resilience and immunity do. Just take the case of China which has big economy but it depends upon exports…China has created massive infrastructure just to promote export based economy. But now it has realized its economy lacks resilience and any global slowdown can create havoc in its economy, so now it is trying to build much comprehensive indigenous growth based economy. We can see now that although Oil Exporting countries had big economies but they were not resilient and immune as apart from the fact that they were based on single product, oil, but they were also dependent only on exports. Now the plunge in the oil price has exposed their vulnerability.  Our current growth model wants everybody  over-eating all the time (which adds into GDP) then fall ill; goes to Doctor paying hefty fees (adds into GDP) and consumes heavy dosages of medicines (again adds into GDP). There is no place for a society where people eat wisely, they are healthy and so consumes even lesser medicines. In our current schema, healthy people can   de-grow an economy.

GDP is just about calculation of production of New Goods and Services which is not Growth

Again we can see that working population is also a part of the Economic Balance sheet and any damage occurred to the health of these working homo sapiens should again be adjusted into National Income Account and so here too this adjustment will even out any addition made to the GDP due to overeating and medicines. Our GDP activity is just about the calculation of “Production of New Goods and Services” in an economy. But this summation has not anything to do with Growth. Growth is never a Quantitative phenomenon but a Qualitative one. It is not just about the size but about the longevity (sustainability). Our current GDP calculation is just an exercise to measure the production of goods which is not a proxy for calculation of Growth. It is just like if Mr. X has sold one of his kidneys for Rupees Ten lakh and thinks that he has “earned” ten lakh. But this Ten lakh is just the value of one Kidney and it looks like an earning because Mr. X hasn’t provided any value to his kidneys (just like Air, Water) otherwise he has just sold an “Asset” which can impact his longevity. Mr. X can understand better if he has to sell his family Gold for Rupees Ten Lakh; here he won’t regard this as an income. The same mistake is done by us in taking more goods produced as Growth.

The Limits to Growth

Here I remember one interesting book “The Limits to Growth” which was published in 1972 by a group of thinkers called “The club of Rome”. The book was an attempt to forecast the outcome of massive scale consumption of earth’s resources by humanity and the capacity of Earth to withstand such consumption as our Earth is a “Finite sphere” with a limited supply of resources like minerals. The club worked out a model based on five basic variables affecting the resources of Mother Earth industrialization, population, food, use of resources, and pollution. They modeled data up to 1970, then developed a range of scenarios out to 2100, depending on whether humanity took serious action on environmental and resource issues. If that didn’t happen, the model predicted “overshoot and collapse” – in the economy, environment and population – before 2070.

Their main point was Earth being Finite has limited capacity to provide resources for huge growing population. Hence our quest for unlimited growth by over-production and over-consumption of resources will eventually lead to a crash. Although their point was debatable as we never grow only by over-consumption as it is the emergence of new innovative technologies which bring more growth. As we can see much of our growth in last century was mainly related to “Invention of New and Substitute technologies” like the invention of Aircrafts, first telephone and then Mobile phones, Computers and then software. Their theory was largely criticized by eminent names of the economics as being lacking credible data, methodology and conclusions. Their model was not well accepted as it was claimed that Population, capital and pollution grow exponentially in all their models, but technologies for expanding resources and controlling pollution are permitted to grow very marginally.

But in my view, their model has one very valid statement which is-unless we create and discover newer, innovative and efficient technologies we can’t afford to grow by consuming the finite resources of the earth as one day they will be obsolete. So if we aspire to grow then we need to look for new technologies. Like take the case of Oil; Peak Oil is the global fear for decades as end of oil means end of industries. So along with looking for new oil resources, it’ll be more logical to look out for newer technologies which can reduce oil consumption, creating substitutes for oil like solar and wind power. Hence the moment we discover a cheap, long lasting battery to store solar and wind power-there will be a quantum jump in growth as this new technology will shift the balance of resources and consumption will divert from finite to better technology.

USA growth problem is not of growing consumption but newer technologies

USA is facing the same quest of growth; it needs to grow but this can’t be by over-consumption of resources. USA has already consumed much more. They were guzzling resources like anything for past 50-60 years; they used gigantic polluting thermal power resources, agriculture over-exploited the land to feed the over-eating, minerals were exploited uselessly just to make more cars, machines and people were seduced to have more cars with cheap loans, people are living on credit all the time just to be worthy of over-consumption. But this madness can’t go for ever as predicted by Club of Rome. USA is trying to replicate the over-consumption model for last 10-15 years but now people are realizing their chronic indebtedness and in spite of free money offerings from the Banks they are more focused on deleveraging then getting more debt for more consumption. USA needs to find new technologies which can promote more efficient use of finite resources. Although I feel we are at the cusp of a great technological revolution as we have great technologies at our disposal to create even greater technologies. With our current deep understanding of nature of matter, communication technologies, powerful space technology, Enzyme technologies for healthcare, agriculture we can create even better solutions. We can’t claim that we have advanced so much that scope of further advancement is remote. We are still at earth when whole universe is still unexplored.

So we’ll see next wave of growth in USA will be of great technologies like Industrial Internet of things, stellar agricultural technologies to produce big from small farmland, unimaginable healthcare technologies, space exploration etc. Just imagine the impact of billions of dollars if the cure for AIDS is found.

GDP growth model is not credible and primitive

Our current GDP calculation based growth model doesn’t evaluate efficiency while computing the growth. Just take the example of Uber which promotes “sharing economy” wherein we derive maximum value from our productive resources. Uber is clearly providing efficiency and productivity gains. Yet many of the benefits of these new activities are not accounted for in the calculation of GDP, in the same way that private housework and childcare are neglected. In other words, we are increasingly producing and consuming much more value than our economic indicators measure. This indicates that we need a new way of measuring output and productivity, since our current economic models aren’t sufficiently taking into account the value that is being produced in the economy.

Hence our GDP measures are simply not sufficient for measuring the real social, ecological and economic progress. This requires urgent revision in our current productivity growth indicators as most of our future productivity will be derived from more efficient use of our finite resources thus making our planet more environmentally sustainable. We are moving towards a phase where we make better use of existing products rather than merely producing more “stuff”, which while good for the GDP statistics, is not necessarily so for the planet.

So we are not going to see any catastrophic de-growth. We can experience small jitters which are necessary for correcting the past mis-allocation of productive resources like closure of some iron and coal mines due to lower than earlier projected over enthusiastic demand. Past big fierce recessions happened as at that time global supply forces weren’t interconnected. Due to lack of development of communication mediums like satellite and internet, it wasn’t possible to gather and evaluate the date regarding demand supply mismatch so as to press the alarm button to do the corrective action. But today, we are better connected and equipped to foresee these jitters well in advance. Earlier global trade was restricted but today entire globe is like a village where we can shift resources to deficient easily and at the earliest. In fact we are at an inflection point from where, if we can execute well, we’ll see and experience the true meaning of growth.

But growth and development will have different implications for a young man who is faced with a critical situation in a street wherein a girl is being harassed by some street bullies. By choosing to not to fight out of fear he can still contribute towards GDP growth by using his cell for calling police and buying medicines when girl is left wounded or he can leave all his fears and give the fight of his life to save the girl, he will feel a different type of growth when he sees himself in the mirror next morning feeling a strange feeling of bravery and proud and this growth is permanent...within him and around him ALWAYS. 

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)

Results Update: Redington India

Redington India: It has given great set of numbers in spite of the Volatility  prevailing everywhere. Although it is not an exception for Redinton as it is showing steady growth in all recent quarters when market conditions were tough. Apart from market volatility, there is another danger that cloud computing may prohibit large IT spending of organizations…but it is still growing by diversifying into new horizons. Distribution business is very tough as they have to establish their relevancy in the present era of cost cutting where some product channels see them as not adding any value to the product chain. But it is not….distribution is a very complex function, needing huge resources for keeping inventory, giving credit to resellers, market knowledge, providing after sales servicing and training etc. Just imagine how big resources Producers would need to block in these activities if not for distributors like Redington. 

Distributors earn their bits by achieving efficiency in the supply chain and economy of scale. Distributors like Ingram Micro and Redington, in order to fight another war of relevancy, have entered into the distribution of Cloud computing business. Earlier some suppliers were doubtful but then they see the value addition and now most of the cloud computing suppliers are having distributors. Redington is distributing the cloud products of Microsoft in india.

Anyhow, in this quarter, turnover of Redington has grown from 7570 cr to 9633 cr, operating margins are at 161 cr vs 145 cr while NP is at 93 cr vs 82 cr. But still it was down after the results. I don’t understand what market wants from it without giving it anything as it is trading at a PE ratio of just 8. Some analysts were worrying for the slight decline in the margins which I think is normal as Redington is venturing into new products and geographies. But it is not trading at a PE of 30-40 which can make us feel worried of these slight declines. Like Ingram Micro, the global Giant in the business ( although Chinese giant HNA bought it for 6 billion USD), is trading at a PE of 30 with market cap of $ 5 Billion. Ingram and Redington are the leaders in india with Ingram slight ahead of Redington. Ingram is earning around 1400 Cr NP on turnover of around 3 lac cr. While NP of Redington is around 500 cr.

Also the fact, Redington is working in the Indian market which is going to see huge growth in IT product usage whereas Ingram’s most of the markets are matured so Ingram is also looking for growth opportunities in Asia. Redington is the biggest in Middle east.

Redington’s third party logistic business “proconnect” is growing very fast, around 50-60% growth. It has another arm “Ensure” which is into multi brand warranty and after sales service business. This is the area where I feel it can achieve huge growth. India needs these branded after sales service centers as now we have crores of costly IT products and smartphones with huge data storage. we can't afford to throw them at a slight wear and tear. So we need to move beyond street repairing shops. HCL Infosys is also into this business big time and they are having around 300 centers in india with brand “Touch”. Warranty outsourcing will also be a big business as these smartphone and IT product manufacturers can’t afford to spend big in opening warranty centers in india and this crucial service will also be outsourced to players like Redington, HCL and TVS-E. TVS-E has already given great returns as it is at 105 from 45, for earlier study on TVS-E Click here (Touched 150 in between).

So I feel market isn’t recognizing the strength of business model of Redington. Redington will gain big with the approval of GST all over India as the same will reduce the logistics cost and Redington will need to invest lesser for inventory and warehousing leading to big savings in working capital etc. CMP is 103. Just stay here to witness the re-rating.

(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)

Advanced Enzyme Technologies Ltd IPO: This Enzyme has Life!!

Enzymes are not alive. This is quite contrary to what most people believe…Living Enzymes never lived at all. My first contact with Advanced Enzyme Technologies Ltd was when I was trying to prove “Non-living Enzymes” to one of my aspiring doctor friend some years back. Like so many others, he was also doctoring his mind with this fascination that enzymes are living beings...fascination which was and still is the strongest pillar of Vegetarianism (with much emphasis on raw food for getting living enzymes). However, as explained in following paragraphs, most of plant Enzymes can't survive in the "Foreign environment" of human stomach and so they are not available to us. Raw food is not the panacea as there are some foods which are most beneficial when eaten after cooking like Spinach and Tomatoes as cooking enhance the absorption rate of some of the minerals and vitamins of these.

Enzymes: Nature, Working and Role in the growth of Humanity

Enzymes actually are the Nano machines of Mother Nature, created, to accomplish what our bodies are not capable of doing on their own. Enzymes are basically proteins, made of amino acids, wherein amino acids (in 100’s or 1000’s) string together in unique ways to form 3D structure. These are produced by the cells of all living beings (Humans, plants, bacteria, fungi) to accomplish basic tasks which are critical for their survival. Living beings have characteristics like they eat, excrete and reproduce…and Enzymes don’t do these. They are Organic biochemicals and just act as Catalysts to increase the rate of chemical reactions which can’t take place otherwise in our low body temperatures. At the most basic level, a cell is really a little bag full of chemical reactions that are made possible by enzymes!

If we really want to make sense of the business of Advanced Enzyme Technologies Ltd (AETL) than we have no other option but to understand this complex thing “Enzymes”. Only by this we can comprehend the strength of the AETL and premium that it should enjoy.

Our body does so many things to keep us conscious…it is working all the time without stop. But we have never thought about the actual working of our body. Like how it digests the food we eat. We are thinking that some living Bacteria and Chemicals do the game for us. But this is not the full picture…almost all the basic tasks of our bodies are done by Enzymes. Enzymes are making us breathe, think…some Enzymes are for our immune system. They are everywhere in our body. Like when we eat rice, the starch in the rice is the main sugar which our body needs for energy. But starch is a long chain (Hard) sugar, So the moment, you eat rice, body starts it work in the mouth itself. First of all, Enzyme Amylase (it is always in our saliva) breaks down the starch in rice in our mouth itself into smaller sugars. Then after reaching the intestine, other digestive Enzymes take the work load.

Every Enzyme has distinct shape (3D) and actually it is this shape that makes every Enzyme individual and capable to do only the assigned task. As they are made of proteins arranged in strings, so they have one “Active side” and this “Active Side” is responsible for breaking the molecules for releasing sugar etc. For example Enzyme Amylase breaks down the starch into simple sugars like Maltose. Although maltose is a small sugar, it is actually made of two smaller glucose sugars. Maltose is a bit too big for people to absorb, so your body must break it down into glucose in order to transport it to other parts of the body for use as fuel and for storing energy. So now our Body needs to break the bond between two glucose molecules and to do the same it has Enzyme Maltase. The working of Maltase is shown in the picture below:

 Maltose is made of two glucose molecules bonded together (1). The maltase enzyme is a protein that is perfectly shaped to accept a maltose molecule and break the bond (2). The two glucose molecules are released (3). A single maltase enzyme can break in excess of 1,000 maltose bonds per second, and will only accept maltose molecules.

So our body has Enzymes for every type of food; it has Protease for protein, Lipases for Fat, Lactase for lactose etc. Every Enzyme has distinct active side to perform only the specific task assigned to it. I have explained the mystery regarding Lactose from Milk in our body in the post related to Parag Milk Foods (link: Click here). In order to break the Lactose sugar in milk, Lactase Enzyme is required…Maltase Enzyme is not required here as Lactose has different molecules bonded together. But the cells of some human beings don’t produce Lactase; so if they consume milk they will be in big trouble. For these people, lactase fortified milk is produced.

Think of this like if I ask you to unfasten a nut of the wheel of your punctured car with your hands only. You can think of the energy required to do the same. But you can do the same with a tool effortlessly. Same is the thing with our bodily functions, without Enzymes the energy requirements will be tremendous. Just think if we need to boil the starch to break it…the boiling temperature inside you will kill you. So our body has to function within the boundaries of body like temperature, Acid or alkaline environment (ph). But chemical bonding of most of things we eat can’t be broken by this environment…hence we have Enzymes. They are Nano machines.

I was reading one scientist Dr. Richard Wolfenden, who has invested great deal in understanding the working of Enzymes in our body. He has found that some functions inside our bodies may take years to complete if not for Enzymes. His workings shows the catalytic power of phosphatase enzymes which help regulate the molecular cross-talk within human cells, the cell signalling pathways and biochemical switches involved in health and disease. If not for these phosphatase enzymes, these harmonic level reactions could have taken 1 trillion years, 100 times longer than the lifetime of the universe. Enzymes can make this reaction happen in 10 milliseconds. His research also has influenced rational drug design; findings from his laboratory helped spur development of ACE inhibitor drugs, now widely used to treat hypertension and stroke.

Critical factor for Humanity: Commercial and Industry Scale production of Enzymes 

We can see the power of Enzymes…without them nothing can survive here. Even a single cell Bacteria has 1000’s of Enzymes to carry out the reactions in bacteria. But humanity hasn’t been benefitted from the knowledge of working of these enzymes alone. They have gone far ahead with this knowledge and designed their own Enzyme powered Nano machines.

Human beings are using Enzymes for thousands of years….in the making of Cheese and wine…although earlier they weren’t aware that these products were due to the services of Enzymes. Like as we know, Lactase Enzyme is required for milk sugar but milk has protein (Casein) also which is dissolved in the water. So if a calf needs to digest that protein it needs to bind this otherwise it will flow out of stomach. So stomach of calves has Rennet which has some enzymes like Protease which helps in the digestion of milk in calves. This enzyme coagulates the milk into curd which can be digested by calves. As humans understood the working of these Enzymes, they extracted the rennet from the stomach of Calves and use the same for making Cheese. Production of Wine, Beer, Whisky etc is done by different types of yeast on different types of materials like Barley, rice, Hops, fruits etc. This is called fermentation which is used for the industry level production of Enzymes in the factories of Enzyme producers.

Overtime humans began to isolate the Enzymes from living cells which led to their commercial scale production and then wider use of Enzymes into various industries like Food, Detergents, textiles, leather , Agriculture, animal feeds etc. Detergents are treated with Enzymes Protease/Lipase/Amylase to break out the food (protein/carbs/fat) particles on our clothes. Just think about the need of hot water, chemicals required otherwise. But Enzymes in detergents do the job even in cold water.

Industrial Enzymes are Everywhere in Our Life

So Enzymes are taking the place of chemicals albeit much faster in western countries where awareness about the environmental damage is more than India. As Enzymes are organic chemicals, so they degrade much faster than synthetic chemicals. Also Enzymes, when used in food and health products, don’t have side effects like chemicals because Enzymes work only on their specific substrata (base material). If their substrata is not available then they will just stay neutral and don’t inflict any damage to us and environment and slowly they degrade when they are kept in unfriendly environment (remember their specific working temperature, acidity). They result in the huge savings of energy and resources. Like for the production of Ammonia from Nitrogen; if Iron (Chemical) is used as catalyst then it needs a temperature of 500°C and pressure of 300 N2. However the same work can be done by enzymes at 25°C and at a pressure of just 1N2. In textile, by using Enzymes, we can save around 90000 litre of water for every tonne of Knitwear produced.

In animal feed; stomach of animals can’t break down the hard feeds like corn, soybean…hence Enzymes are added into feed to get the full benefit of feeds and it results in early weight gain by animal with lesser feed. In the field of medical diagnostic, medicine, nutrition, the benefits of Enzymes are unmatched. Ethanol from corn and Sugar is produced by Enzymes. But these days, hunt is there for 2^nd generation Ethanol which can break the hard Cellulose of wood etc. Breaking of starch from Cellulose is much difficult as it is very long chained and hard. Enzyme Cellulase (which was discovered in WW2 when it attacked the tents and uniform of soldiers) which can do the same for us but the same is not commercially viable at present. But the success can come in the near future. Our Praj Industries is also doing big research for the same.

Enzymes Production: Current and Future scenario

So today, we are producing Enzymes at large commercial scale in our Laboratories by using Micro-organisms, plants Fungi etc. But we are still only in the beginning with regard to technological prowess for producing Enzymes. As at present around 4000 Enzymes are known to us, but only 200 are used commercially and only 20 are produced at industrial scale.so just see the scale for the future. Novazymes (Denmark), Dupont (USA) and BASF (Germany) are the giants in Enzymes; producing around 75% of global production. BASF India is one of my favourite due to its unmatched prowess in chemical world. USA is the largest market in the world with around 15000 cr business, while China and Japan has markets of around 4000-5000 cr.

But in India, Enzymes industry is just 700-800 cr. So just see the scope of scale in India itself. India is now focusing on environment and Industries like Textiles are turning towards greener materials. I think, Nutrition and Diagnostic Enzymes are the biggest market for Enzymes in india and this is going to change in the near future when Indians will demand quality foods treated with Enzymes than harmful chemicals, Animal feed is another big area along with Textiles.

Advanced Enzymes Technologies Ltd: Growth Catalyst is yet to Happen

AETL is just doing a business of 200 cr (just 100 cr in India ) which is just a peanut as compared to the possible scale in India alone. It has strong R&D focus with 13 patents while 4 are under approval. It spends around 7% of its turnover for R&D….has manufacturing facilities in USA also. It derives around 65% of turnover from exports which points toward the big vacuum in India.

Enzymes industry has strong entry barrier as it requires sophisticated technology along with high capital costs, quality controls are very strict, reputation takes long to come, and customer loyalty is very strong. AETL is one of the few in the world to manufacture Enzymes from all sources like Bacteria, Plant, Fungi, Animal etc.

Cash flows are strong and company was very wise in bringing down the debt from 175 cr in 2012 to the levels of just 67 cr in 2016. From a turnover of 294 cr in 2016 its NP is 78 cr; indicating strong Operating and net profit margins. Return over Net Worth is high at 28%. So these factors like high margins, high RONW, strong entry barriers, huge scope of scale in the future should enable AETL to command high PE ratio of 35-40. At the upper price band of 896, it is trading at a PE ratio of 25 (EPS is 36) which is low. Global giant Novozymes is trading at a PE of 35, although it is much bigger. However another listed specialty chemicals company SH Kelker, which is into fragrance, is trading at a PE ratio of 45 which shows the valuation gap for AETL. Most of it, its capacity utilization levels are just 40-45% due to recent capacity additions; so future growth will come without any need for capital investments and growth will come surely especially from India.

Strong entry barriers and future scope of scale are the factors which I look for while valuing a stock (assigning PE ratio) as these are the factors which provide the certainty to the future earnings and PE ratio is always about future earnings. So some times, a stock can be expensive at a PE ratio of 6 while other may be cheap at PE ratio of 40…it’s all about future. There is not any fixed interpretation of fixation of PE ratio. In fact it is the most liquid thing in stock markets.

I am not saying that at the time of listing, it will gain to take its PE ratio to 40. As explained earlier posts also that listing gains are an outcome of so many variable forces which most of the times have no link with the underlying strength of the business like in the case of Quick Heal which is languishing at PE ratio of 25 although it should command at least 40.

But AETL is something which I am more than willing to buy at every fall (the fall which mayn’t come). I think it will get good response and we mayn’t get any allocation at all, so in that case getting the same at 30% higher can also be considered.Good thing about Enzymes is that they never change their behavior and always do the task assigned to them, they are perfect; and good thing about stock markets is that they are never perfect and this imperfection is the biggest CATALYST in finding the quantum stocks.

(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 IPO of the share discussed in this Post)