Companies at Crossroads: Tube Investments of india ltd, Jagran Prakshan Ltd, EID Parry Ltd, Hinduja Ventures ltd, VIP Industries Ltd, Future consumer enterprise Ltd

Off late I am planning to post a study on some companies who are at a crucial juncture in their lifeline; one right step and they will belong to another league. But I am not being able to post the study as i am very busy these days due to shifting to Nagpur. But in just a week Future Consumer Enterprise has been zoomed from 14 to 20. I have been sharing my views about this via personal emails to some readers of this blog but couldn’t post a study on this. So I am writing this post on some of these stocks which really can become a big force in the future…due to time constraint I am just writing small snapshots of the details about them. I will post the full study in the future.

Tube Investment of india: This is the maker of BSA, Montra and Hercules bicycle brands in india apart from distributing foreign luxury bicycle brands in india. It is getting around 1200 cr from bicycle sales and is profitable. I think cycle will see a big transformation in the near future from being a transportation vehicle to sports and leisure equipment. ROE of cycle division is around 60% which is great. Apart from it, it is a market leader in auto ancillary products like precision tubes, door frame and chains with turnover of around 2500 cr. It is also holding company of Cholamandalam finance and investment (50.45% stake and listed) and Cholamandalam MS general insurance ( around 70% and unlisted). Total valuation of these two is much bigger than given by the market. Few days back Gurgaon tried car free day and response was good as most used bicycle. It just need one Salman Khan to promote and and we will see this bicycle maker turning into a rocket. I have invested around 400/- CMP is 413/-

Jagran Prakashan: newspaper will not become a news of the past. I do not think that they will ever die. Online newspapers are no doubt growing but still no comparison with a morning tea with fresh newspaper. They are very important for getting regional and local news and advertisements. Print advertisements are most peaceful, they do not interfere…they just sit quietly…but they are very effective if planned in a creative way. TV ads are an interruptive phenomenon, they are attacking, forced on us…we never like them but they work on the notion of familiarness;   we have seen something so we feel attached to it and will prefer it if given an option. But most of the time, for most of the brands and products TV ads are not suitable…they are just huge wastage of money.

Jagran has a very interesting brand activation division which promotes brands in a very creative and interactive way with consumers. It is also having Out of the Home advertisement unit. I like these very much but very sad to hear that management is planning to sell these as these are not as profitable. Although I feel that management should focus more on it as very soon we will see marketing managers of a new brand will understand the weakness of TV ads and look out for something more engaging and unique.

Apart from hindi newspaper, it is also having an English paper, Mid Day media,  which is very popular in Mumbai and Gujarat. However most interesting is its Radio business for which it is investing very big. Highly profitable group and dividend is also good. My investment at 135/- CMP 145.

EID Parry: Sugar company but with great visionary management. I am a fan of them just because of their deep understanding of creating value for the company by making their suppliers more valuable. Poor farmers are their suppliers but this company cares for them like a mother. In 2011 cyclone Thane hit their factory and sugar farms in tamil nadu and badly damaged the factory and crop. Farmers were fearing for the unknown but the management took a great step and bought the damaged crop at full price and incurred loss of around 4.5 cr. But those farmers are now their biggest friend. Company provides loans to them for everything by giving guarantees to banks, guides farmers with everything.

EID is the first asian sugar company to get the certificate from Bonsucro, a global multi-stakeholder organisation for sustainable sugar growth.The farmers, who serve EID Parry’s 4,500 TCD sugar plant at Pugalur in Tamil Nadu, have undergone 53 different  tests over the last 3 years to see that they not only achieved 10-20% more sugarcane yield per acre but also saved power and water substantially through drip irrigation.

But most importantly, they have launched a branded sugar “Amrit” which is made 100% from cane with preserving all the natural minerals (potassium, calcium, magnesium, phosphorous and iron), the sugar retains the original brown colour. Normal sugar gets its white colour due to refining process. The product would be initially launched in Chennai and Bengaluru in the initial stage and would look at launching across South India by January, 2016. The initial product is a 500 gram, at a maximum retail price of Rs 30 per pack. 

We have seen branded salt (tata chemicals), Flour (Aashirwad, ITC), Dal (I-shakti, tata chemicals)…but so far nobody has tried sugar but I was waiting for the one. EID is the parent of Coromandel international (62% share) and receives heavy dividends from it, around 60-70 cr (need to check). I think as there is no shortage of funds to the group, so they can spend big on the brand promotion of Amrit sugar and it really can become a big success. CMP is 163/- around its multiyear lows.

Hinduja Ventures ltd: It is one of the biggest player in digital cable tv (Incable) and invested huge amount in next generation cable tv via satellite, HITS via name NXT Digital. MSO like Siti, Den, Hathway, Incable are still far away from realizing the full benefit of digital cable tv. People are thinking that with digitization now they are getting full revenue from Local cable operators, but it is not the case, LCO are still paying them Rs. 60-80-100 per connection (earlier it was around 30-40) and retaining the balance. Fight is still on to decide who will bill the customer and the revenue sharing. So just hold your stocks of these MSO’s as we will see the real benefit coming in the future when a more logical deal will be stuck between both.

Hinduja has launched HITS via NXT digital for catering to phase 3 of digitization covering around 5 cr subscribers by Dec-2015. Phase 3 is related to small cities (phase 4 will cover most of rural india by Dec-16) where small Local cable operators work and they lack funds to move towards digital cable from analogues. They would need huge money for digital move for having digital access system, conditional access system and subscriber management system apart from expensive hardware. HITS can save all these costs for them…so chances are big that HITS can give DTH a run for its money as DTH falters in rain, DTH can’t show local channels which are a must in small cities. Even small Goa has 13 local Konkani channels.

Actually in TV broadcasting what happens is that a TV channel like Colors uplinks its signals to a satellite. An MSO like Den downlinks the channels signals from different broadcasters from different satellites at a place in a geography (take Bhopal in MP) which is called Headend ( huge cluster of dishes, a single dish for every channel) where they are bundled together and transmitted to LCO via cables who then distributes the same to our homes. But a single Headend cannot serve entire country due to cable costs, hardware limitations, signal weakness etc so MSO have to install Headends in the entire country ( Hinduja has around 40 Headends) which is very costly.

However in HITS things are done in a different manner, here HITS operator downlinks the channels from all broadcasters at a single earth station from where signals are uplinked to a satellite used by HITS operator, so it is called Headend in the Sky, HITS. The HITS satellite further downlinks the signals directly to LCO or MSO, who will need just one Dish type transmodulator to transmit the signal directly to consumer via cables. So need for costly Headends will be reduced greatly which will benefit both the LCO/MSO and customers. HITS operator will also handle the Conditional access system and subscriber management system on their behalf which are also very costly and there is no need to install them at every Headend as in the case of a normal MSO. I am sure this HITS can compete with DTH in phase 3 & 4 of the digitization in india.

I will cover more details on HITS later on but just today read that Hinduja has already acquired 10 lac customers in first 3 weeks of the launch.

It is also having a treasury arm which earns big from investing, trading; it holds around 3.5% in indusind bank and around 5 acre in prime location in Bengaluru which is being developed by the group company. My average is around 320 as I am holding it for long and buying currently around 390. Dividend is 15/- per share! CMP is 396.

VIP Industries:  I like this stock for long. Radhika Piramal, the daughter of Dilip Piramal (promoter) is doing some really good things to VIP. I am a big supporter of doing innovative things for branding of a good high quality product. Radhika brought Alia bhatt for Caprese, which i think will be a great product. I have seen girls here in india wearing very expensive jewelry and apparel but holding very cheap hand bag as they have not still covered the hand bag in their style quotient while in western countries it is one of the sought after style.

In fact we only follow them in hand bag styles.But time is changing fast here in indi also and costly hand bags are becoming a regular. Caprese deals in mid and high range. 

Radhika has also brought back Skybags brand of luggages which are trendy, colorful by endorsing Dhawan as the face. Introduction of Alia and Dhawan is a master step as people were taking VIP as old age thing. But Alia/Dhawan are the faces of young stylish india.

VIP has started their manufacturing facility in Bangladesh in place of imports from china, which will aid into margins...more on this later. CMP is 84/-

If anybody has money and looking for a good high quality stock...this is just the place to unpack your luggage.

Future Consumer Enterprise: I have been positive on Future group companies for a long time. I think Biyani will create his real magic this time as now he understands the nitty gritty of retail and FMCG branding. FCEL has invested big in creating big fmcg product manufacturing. It has started a 110 acre food parks in Telangana. It can sell all these FMCG products in its own and other group retail chains along with other reputed brands at lower rates. My average cost is just 9 as I am accumulating it from 5 to 14 in Aug-15. It is now around 19 and it is not cheap as its market value is above 3000 cr on a sale of around 1500 cr. But scope of growth is still huge and now with Baba Ramdev with it, both can together create big brands in Indian FMCG sector due to high technological capacity of FCEL in its food park. Buy at every fall, CMP is 19.65/-

(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)

Query on Pioneer Embroideries Ltd

Our friends Sanjeev and Darshan have posted queries about Pioneer Embroideries Ltd. Earlier also I am getting queries on this. So let' have a small look.

Que: Can you share your thoughts on pioneer embrioderies,godavari drugs and bambino agro. These are in my list of less than 100cr mcap and some risk.
Also would like to know about investing in GATI at current market price after correction in logistics space.

 I am not tracking these. Gati, picked at 30 and already sold around 150 as i was not comfortable with valuations, these low entry barrier firms were getting. For logistic play i am investing heavily in concor, balmer, Redington, Future retail, gateway etc as these are true logistic players with all round and complex logistics solutions like ports, warehousing, ICD, containers etc. But i am holding these from very lower levels although i am adding these at current market prices also but my avg cost is still very low as compared to CMP. So i am neutral on Gati. Trucks and stores are not high tech logistics; anybody can enter in it.

Pioneer, well, I have never studied it either but just now made a 10-15 minute round. Textile is a very difficult business in india as we are near China and Bangladesh. Garden silk is dead for a long time. Even classic Raymond is struggling for a long time. It is still looking for a COMPLETE business model. There are hundreds of sarees brands in india. Fashion retail is most difficult business in india just like running an airline and you will be surprised that the reason is not linked much to demand and products but too high real estate prices and lease rentals.

Ask any girl about Hakoba and most may not be knowing it or you can’t differentiate it from the other hundred generic saree and fashion brands. Raymond will one day be complete because it has great technology and gigantic brand name. even still, it is burdened with losses in retail business. You can count very few branded success in india in retail. I also think the reason for this is unreasonable high investments in fashion business in india. You can see hundreds of branded apparel show rooms in every city because people think it is an easy business. So the total possible business is divided among too many players and so everybody is in loss. Few players will make it profitable and demand for real estate will also fall.

On total assets of around 200 cr turnover is very low at 270 cr. But its turnover is rising continuously for last 10 years so I wonder what was the need for making huge capacity expansions when much of it was and is still unused. From 2007 to 2010, it borrowed around 160 cr but added only 80 cr of assets and then it went to CDR cell?? Its turnover has increased to 265 cr from 100 cr in last 10 years but its inventory and debtors are always in the range of 35-45-50 cr!!! It has never earned good high margins even when it was in its so called good times. Just see the margins of good medium level brands like Kewal kiran.

There is also some strange advances, one 9.75 cr to a BIFR company Arcot textile and now they are trying to get it back as the same is not getting itself out of BIFR (recieved so far 1.3 cr ); 6.5 cr for some properties which are not taking place ; so they are trying to get these back and hence they are considered good!!!

Some useless investments in dubious companies like padmini tech which are not getting listed and hence these are written off, amount involved is small, around 18 lac..but what is happening here?? They are in difficult times and yet these unrelated and useless advances and investments!!!

It is in very difficult business with large unorganized players having same products with matching quality. It is too risky for me. Although I am having Titan Biotech which belongs to same high risk category. But Titan has some unique products with medium to high entry barriers, good clean balance sheet and it is paying dividends remarkably regularly. 

I do not want to devote any further time to Pioneer. I cannot claim that with these 10-15 minutes I have covered everything. There may be something which I may be missing but I do not like its products, very small scale of operations in a commodity type business.I normally stay away from these types of risky stocks. We have taken risks with stocks like SKM, Avanti, MPS, NIIT, Jubilant industries, Eveready, Venky's etc. But one can see the difference, all these stocks are dealing in niche business areas with some having great brand power like NIIT and Eveready. These are risky stocks where risk is only about future performance; all other things are nicely at their place.

I think we can better go for Raymond as apart from branded textiles business it is also having park avenue FMCG brand and huge land bank.

(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)

E-commerce Startups Faltering in India Now

In my earlier posts on E-commerce valuation Click here and here, I have explained the power of network effect enjoyed by e-commerce companies and the threats to these. As I have mentioned that from the current flood of e-commerce startups in india, very few will survive because most of the times these startups are not adding any value to the service they are offering. Most of the times they are just an ordering platform; one can use them to order something. There is not any differentiation, no value addition.

I have explained earlier also that a business must add some value to a product or a service if it wants to be relevant. Only then it can squeeze some profits on its own. Substitution effect is not always that strong. We are seeing a flood of online startups, better to say them ordering startups like grocery, food delivery, hotel room, restaurant reservation etc. But whether just processing orders is enough to attract crores of venture capital and mostly this free venture capital is burnt on delivering the order as delivery is free. I mean it is ridiculous, you have a business plan like to deliver grocery at people homes and common sense says that people would not mind paying a fee for savings in time, uneasiness and fuel costs, but you are offering this as free just to be competitive. But people will take it as a right.

I mean, if you want to give free it is ok as you are dealing with two parties; suppliers and consumers, but in this two tier platform model, one can only afford to subsidize only one party. You need to have a viable business model. It must be something valuable especially if it is a service. Delivery is too common and very low entry barrier business; you can’t rest assured that by offering free you can hammer your competition. The moment you will try to monetize your platform, others will jump into the race. Kishore Biyani and Reliance is doing the same by waiting on the sidelines of online retail. When Amazon and likes of Flipkarts will try to monetize their services, they will jump in with much better products and logistics.

I am always in a hurry, so I am ordering most of my things over phone only. I normally calls the shop keeper to pack the chicken etc as it can save my time. Then I go to shop and pick everything…I can pay him some money if he can deliver the same at my house. In fact we are paying our Gas cylinder wala for a long time for delivering gas cylinders at our home…so what’s the big deal in it. Local Kirana wala is doing the same for long that too at free of cost.

You wonder how our Kirana wala is doing the same for free always, because he is not subsidizing the both platforms. He is earning money from the “Sale” of kirana items so in order to earn more money from more customers he can afford to offer free.

Our Zomato can also do the same since it has multiple revenue streams; so it can switch to subsidize anyone. Its strength is unique set of huge data and already a large base. Domino’s is getting its 40% business from online and it is doing it for long; delivery is free because it is “earning” from the sale of pizza itself. So by offering free delivery, they are just adding the “value” to its product and they will get their reward in the form of increased sale because last time when I was in Nagpur, I ordered from Domino’s only because of free home delivery otherwise I would not have gone to eat/get pizza at their place. This is Value addition.

Why I am writing all this? Actually just last day I saw some news regarding troubles faced by food delivery startups like Localbanya and these at once reminded me all this. I am just pasting the small bits from the news. Just for sharing.

Source: Economic Times Dtd 09^th Oct 2015:

Localbanya is ‘temporarily’ out of business 

Online grocery startup Localbanya has temporarily halted operations, citing the upgradation of its back end. "We are temporarily suspending services due to maintenance and upgrade purposes," the company said on its website. "No orders will be processed at this time." 

The company rejected speculation that it was strapped for cash and maintained that staff attrition was not unique to it.  Two suppliers of Localbanya said they had been told that there was a shortage of funds. 

"The company is also trying to change the model of sourcing merchandise from large retailers or cash-and-carry players to consumer goods companies directly," said another supplier.

Founders Mehrotra, Rashi Choudhary and Amit Naik have been seeking to raise $15-20 million for the past few months and had plans to raise another $35-40 million by the end of this fiscal. 

Industry executives said several Localbanya employees are looking for jobs with salaries not having been paid for the past two months. Nayan Choudhury is said to have quit as vice president, trading, commercial and operations. This could not be independently verified. 

"Localbanya has been faltering on deliveries in the past few weeks due to paucity of funds. The company is trying to revive with fresh funds," said an executive. The company's Facebook page had several consumer complaints posted recently about orders not delivered. 

Given the low margins in food and grocery retailing, online companies need a constant flow of funds. "Logistics and consumer promotion alone would account for 20 per cent of the total cost for the online grocers. With huge competition in online grocery retailing space, the companies should now look at how to make the business sustainable and generate profit," an industry official said. 

Source: Times of India Dtd 09^th Oct 2015:

Food delivery startups feel the heat

On Monday, when customers tried to access food delivery startup Dazo's app, they were greeted by a message from the company's co-founder and CEO, Shashaank Shekhar Singhal: "We are discontinuing Dazo's curated food ordering platform and thus won't be taking new orders. As a team, we've decided to move over this business and we'll be working on a new product."

This came as a surprise to many, particularly because the company was backed by bigwigs like Google India chief Ranjan Anandan, TaxiForSure co-founder Aprameya Radhakrishna, and former Freecharge chief executive Alok Goel.

But Dazo is not the only food delivery startup that has taken a hit in recent times. The space, which has seen a host of players enter in the past few years, is now witnessing plenty of casualties. SpoonJoy, Bengaluru-based online food service venture that raised $1 million in May, shut down its Delhi operations last week and has started scaling back their operations in Bengaluru. Delhi-based Langhar, an online platform selling home-cooked food, shut operations in February, just two years after it started. Chennai-based OrderSnack closed even before raising their first round of funding.

Investors say the food-tech space is a tricky business. K Ganesh, a promoter at Freshmenu, which delivers fresh food, said that the online food sector is mirroring the offline trend. "While the barriers are low, it is a tough business as people's opinions are whimsical. In food, people get bored easily even if it is good," he said. He added that the execution challenges are high in the business, and aggregator models will always struggle to make enough money.

DSG Consumer Partners, which has invested in ventures like Oyo Rooms, ZipDial and EazyDiner, says it does not invest in startups whose core model is delivery of food. "Very few teams we saw had the full set of skills we think it takes to succeed. Some had a good balance of tech and food but did not understand the details of food related licensing, safety, and traceability issues," said Deepak Shahdadpuri, MD and founder of DSG.

Startup analytics firm Tracxn finds that 31 food-tech startups have so far raised $161.5 million in investments this year, as compared to $66.8 million last year. However, the aggregate funding in both years was hugely influenced by restaurant listing and food delivery venture Zomato, which raised $60 million in 2014 and $110 million in 2015.


Gurgaon-based Bueno, an online food delivery startup offering global cuisines, says it will survive the race because it has a differentiated positioning in the market. Founder Rohan Arora said most food delivery startups do not factor in delivery charges into their business model. "If you're working on a Rs 100 price point for a meal, you have to also factor in Rs 50-60 delivery charges. But many startups don't do it in order to acquire customers," he said.

Shahdadpuri said only two categories of businesses will survive in the end. One, where the startups have a viable business model and understanding of all areas of the value chain. And second, where startups are lucky enough to be funded by VCs with very large pockets so that they are able to fine tune their model despite cash losses.

In this market fall, our E-commerce picks Info Edge and Network 18 are still doing good…they are still around the same levels. So I think we can add more.

(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)

Future Retail Ltd: New Deal with Baba Ramdev's Patanjali

For old postings about Future Retail Click Here and Here

Future retail has inked a deal with Baba Ramdev’s Patanjali for selling their products in the retail chains of entire Future group. Just pasting the news from Moneycontrol.com:

Kishore Biyani's Future Group is all set to announce a tie-up with Baba Ramdev’s Patanjali. The former will get exclusively right to see the latter’s products in Future outlets like Nilgiris, Food Bazaar, Food Hall and Big Bazaar. Fast moving consumer goods (FMCG) major Patanjali is no small fish in the market.

The company has surpassed listed companies like Proctor and Gamble, Emami  and Jyothy Labs  in terms of annual revenue. With revenue of Rs 2,500 crore, its valuation goes up to a whopping Rs 14,000 crore. Patanjali Group is targeting revenues of about Rs 5,000-10,000 crore in the next few years. It also plans to launch new products including instant noodles, malted food and oral care.

Sources say that Future Retail  is also eyeing close to Rs 1,500 crore revenue from this deal and is expected to expands its customer base by one crore people. One interesting fact about Patanjali is that though all its products have Baba Ramdev’s face on it, the yoga guru does not own any stake in the company.

Baba Ramdev is a prime example of direct/personal branding and I like the way he has created his empire from the scratch. He has interacted with people through his yoga and health awareness for a very long time and thus created a huge feel good factor in the public, people feel themselves attached to brand Ramdev…they take it as their brand because so many of them have directly communicated with the creator; Baba Ramdev.

So I think this deal is a big one for future group. Although my positivity for Future Retail comes from the fact that they have their own in house FMCG production capacity in the form of Future consumer and Future lifestyle fashions; Future retail can sell these products at par with other branded FMCG products in its retail chains with better margins. Also I am waiting for them to enter into online retail with full strength as this is the right time because people have accepted online retail in their routine life. I think we may get something from Biyani for online retail this festive season.

Most of us are having FRL from the levels of 85-90. So just continue to hold it. Fresh investments can be made at this level also but one has to keep enough cash ready for more buying at lower levels in case of any 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)

Gloster Jute Ltd and Cheviot company Ltd: Golden Fibre From The Ganga

Shahrukh Khan played the role of the great King Asoka in Asoka Movie in 2001. Although he nearly killed the soul of the King with his soulless acting because he could not gasp the soul of King Asoka.  King Asoka was a great warrior who felt the uselessness of the material things after the bloody fight of Kalinga. After the war, the great King transformed into a Buddhist and there is a legend that he created a society of Nine Unknown to preserve the most crtitical and sacred knowledge of his time so that wrong minds could not misuse it. Those Nine unknown men produced precious Nine books related to different fields of knowledge like Alchemy, Physiology, microbiology etc. One account says that Judo is leaked from the book related to physiology. There are also talks that these books are still hidden in some unknown place and Nine Unknown are kept changing from time to time. Don’t get excited as there is no book related to STOCK MARKET :).

Another account related to microbiology book says that the water from Great River The Ganga was purified by special microbes by these nine at secret base of Himalayas. Indeed Ganga is a special river. It has bewildered scientist since ages with its unique bacterial properties. Ganga has unique anti bacterial properties and no bacteria can survive in its water. In fact the word Bacteriophage was created during study of this anti bacterial properties of Ganga in 1896.

Bacteriophage are those microbes which kill bacteria. What a cat is to a mouse, the bacteriophage is to a bacterium. The bacterium Vibrio Cholerae which causes the deadly Cholera disease, when put into the waters of Ganga died within three hours! The same bacteria continued to thrive in distilled water even after 48 hours!

Water from Ganga remains fresh for a very long time sometimes for years while ordinary water will rot in few days. It happens due to very high levels of oxygen in Ganga which is around 25 times more than the normal water. The waters of Ganga when added to other water resources in adequate amount, causes the bacteriophage in it to quickly multiply cleaning the new water resource of any bacteria present in it. Which is why the ancient Indians used to take Ganga jal back home to clean their local water resources! People practice it even today, except that most of them don’t know the actual reason!

Scientists were amazed when they saw that only a few feet below the bodies of persons floating in the Ganga who had died of dysentery and cholera, where one would expect millions of germs, there were no germs at all.

So I have no doubt that something very unique is going on with Ganga since ages. And we Indians just Love Ganga, it is in our life all the time from birth to end.

Moving forward; a mother cannot feed rotten or stale food to her child. If she does the same, we are certain of one thing that she does not love her child. These two things can’t coexist. But we are doing the same to Ganga everyday for years. We are putting the maximum possible garbage in Ganga and yet we claim that Ganga is our mother, we love it, we adore it. But this garbage and our respect just can’t coexist. Garbage is real so we can say our love is only at the surface. I don’t think that we are doing this to Ganga because we know its uniqueness but because we can’t see beyond our selfishness.

And we are doing the same to our mother earth at a much grand scale. Our earth is dying. I am limiting this macro level damage to usage of plastic bags. These bags are a disaster as they take almost hundreds of years to degrade. Also there are yet no Unknown Nine who can design a way for speedy degrading of these plastic bags. But there is no need for the same as we already have a remedy existing and that is Biodegradable bags which can be made of paper or JUTE.

Paper is not a solution as it requires cutting of trees etc and it is not that strong. Jute fulfills all these. It is a tough crop requiring minimum of care and inputs like fertilizers and pesticides, has very high acreage per acre. It just needs warm weather, tropical rainfall and high humidity; so fertile delta of Ganga is most suitable for it. So we find Ganga here again.

Jute is also a textile but most of textile like cotton has cellulose fibers but jute is part cellulose and part lignin. Cellulose is a plant fibre but liglin is a wood fibre. That’s why jute has flexibility of cellulose with strength of wood.

We think that plastic bags are cheaper because they are produced cheap but we never add the environmental costs. I have always found the current methods of calculation of GDP inaccurate because they do not deduct the depreciation caused by us to “Natural Capital”. Natural capital is also a part of our manufacturing and living process and it comprises of our environment, forests, water bodies, soil etc. All these are vital for our existence, so if I destroy a forest and extracts iron ore from it we add this iron ore to GDP but we never deduct the damage caused to Natural capital by this activity which is as real as iron ore. So all our GDP figures are overstated. And unless we design a way to calculate this damage we will never understand the value of Natural capital.

In fact I think, every industry should be charged with this cost of natural capital and should be rewarded if they add into it. You will see that most of our industries will become loss making.

So bags, mats and geo textiles made from jute can really save our earth. Geo textiles are used in construction of roads, dams, river slopes, soil savers etc to stabilize loose soil and reduce soil erosion. Geo textiles made from jute were used in village road projects in Kerala, Tamilnadu and Karnatka and they shown good results. Government has written to all the states to use these as they are very environment friendly and require less maintenance with greater durability. Center has asked states to use at least 15% geo textiles made from jute or coir in making these roads under Pradhan mantri Gram Sadak Yojna.

I studied Gloster jute last year but I was waiting for some positive work from Government in promoting jute bags for daily use and for storing wheat and rice in the godowns of FCI. In fact government has mandated the use of jute bags for wheat and rice storage but these govt agencies prefer plastic bags as they are cheap. So stern steps are required from government in directing these agencies to use jute. Plastic bags are made from petrochemicals which are produced from imported crude oil so using jute can save foreign exchange apart from providing employment.

Gloster Jute is the largest jute product manufacturer from india and it manufacture all type of jute products from bags, mattress to geo textiles. It is having a turnover of around 320 cr with net profit of 13 cr last year. It is getting around 90 cr from exports which I think can be a huge market in the future as Jute is only grown in india and Bangladesh so world is not aware of it yet. It can really took off with a bang if world bodies decide to use jute for storage purposes only. Jute mills in india are living in very tough times due to reduced demand for storage bags from government agencies and they are working around 50% of their capacity. Gloster is liberal in dividends even in this difficult times and giving dividends of 6/- every year. It is having very low debt of around 47 cr. Its modernization project for its plants is about to complete at a cost of 22 cr.

But just today I have read the news that Government is likely to make the use of technical and geo-textiles mandatory in construction of infrastructure like roads, ports and dams, as well as in sectors like defense and railways. So I think good time for this sector is just near. I also feel that government is also going to announce something big and serious in banning plastic bags just like its swatch bharat abhiyaan. Anything like this will pave the golden path for jute. There are many countries where plastic ban is enforced very seriously with huge fines; even a small country like Rwanda is free of this mess due to huge fines on plastic bags. Jute is even now being used in clothes also apart from making high quality mattress. 

Last time I studied Gloster it was around 215 and today it is at 275/- but I think it can be bought at every fall without caring much for the current price because even a small ruling can open the gates of heaven. One can study its annual report for more details about its products.

Another company which is related to the jute is Cheviot  with turnover of 263 cr and net profit of 34 cr , dividend payout and yield is 17/- and 3%, cash and investments in the books is 200 cr while its market cap is just 240 cr. Current market price is 537. All this look too good to be true. I have not studied it fully just had a small look due to a query posted by one of our reader. But it also looks like worth investing.

I want to write more on this subject but it has already gone very lengthy. So some other time.

Update Gloster: Gloster has given a bonus of 1:1 on 20th May 2016, hence adjusted price on the day of this Blogpost is around 137/-

(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Tata Communications Ltd: A Treasure Under Sea

One of our reader Sh Yugandar Reddy has posted a query on Tata communications; which I feel is worthy to have a relook at the stock.

Query: As you have already gone through the Balance sheet i have few doubts on consolidated BS and how they are calculated. i see the net worth of the company is just 321 crs(it decreased from 3600crs to 321 crs in last five years) out of which equity itself is 285 and the reserves are only 36crs. The debt on the books are -9331crs which is very high .the book value in just 11 . Net current assets are -7450crs. Adding one more point to the above query, in their PL account, I see PBT as 373.41 cr and Tax paid is 370.46 cr, why they are paying this much tax to the government. Also in 2014 PBT was 444.41 cr and tax paid was 343.28 cr. Why this company is paying high tax?

Hi Dear, I was thinking of adding another post on Tata Comm as earlier post (click here)was just a small introduction to it. But yes you are right in your findings about its very low net worth of 321 cr. Actually its net worth was around 5500 cr in 2007, then continuous losses took it to 321 cr.

Apart from so many other issues, its main problem was low revenue as compared to huge assets. Like in 2011, it was having a turnover of 12000 cr on assets base of 16000 cr!!! In 2015 turnover is 20000 cr with assets of 28000 cr. This is very low and an indication of potential ahead. The main reason of this low turnover was low prices of voice and data due to global excess capacity of submarine cables just like we are seeing the global excess capacity in shipping and rig market which has led to a crash in the rental prices. Same thing happened with Tata communications when global data prices fell to just 20% of 2003 prices in 2010. So its expensive assets were giving low returns due to low prices and low demand. On an average, cable systems across globe have used less than 20 percent of their ultimate capacity. But now scene is changing fast.

Demand for fast internet is rising fast and it is being driven by skyrocketing Internet video traffic, Cloud computing, requests from the financial sector for ever-faster trading connections, and soaring mobile phone use. Cloud computing is going to create huge demand for internet bandwidth due to its cost saving model mainly for small and medium enterprises. Cloud is just like outsourcing of back end process which has contributed much to the growth of countries like india. People are still not aware of the future demand strength of cloud but sooner the time will come when even we as individual will use cloud for saving our most critical data which can be accessed from anywhere in the world.

Companies like Netflix, Apple, Hulu and Amazon deliver movies and TV shows to consumers over the Web. In fact there are fears that widespread adoption of such services would stress the existing Internet infrastructure. In 2005 in UK, broadband internet had a maximum speed of 2 Megabits per second. Today 100Mb-per-second download speeds are available in many parts of the country.

Usage is increasing at such a rate that by 2035 analysts predicts the internet will use all of Britain's power supply - making it impossible to meet demands.  

Optical fibres are flexible, transparent strands the thickness of a piece of a human hair. Information is transformed into light, sent down the fibre, and then transformed back into information. These cables will have reached their limit within eight years, experts say.

The internet companies could always put down additional cables - but that will mean higher bills. Marginal costs of laying additional cables will be very high and so as the prices of internet usage.

So I think that if things goes on as they are now, Tata will witness a surge in its turnover and operating margins due to optimal squeezing of its assets. The losses it has incurred was mainly due to high depreciation and interest costs. Its depreciation in last 5 year was 9500 cr!!! So deep down the sea its financial health is much better than it appears on the surface. Its high debt is mainly due to its inability to raise equity capital due to 26% shareholding of Government of india in it. It has not raised any equity capital since it acquired the VSNL from Govt of india.

Its debt has been increased by 3000 cr in last 5 years but its assets have been increased by 13000 cr!!! This is due to depreciation impact and other non cash cost/loss elements. Apart from this it is still having around 3400 cr in cash and other investments.

Regarding your query on high taxes even on low profits; it is only due to taxes on profits in its standalone business which is earning good profits and so taxes are payable in india and it can not claim the benefits of losses in other countries just like nestle is paying taxes in india for its india business and it can not adjust the income of india with loss of Pakistan business.

Tata comm is also looking to sell its Neotel business in Africa and data center business in India. These will further reduce its debt. Its case for settlement of land assets acquired from VSNL is pending with court and any favorable outcome will be a great news for it as although TCL will not get much from the land sale (pursuant to agreement with Govt in this regard wherein Govt and Minority shareholders will get the share in land sale) but this will pave the way for equity infusion in place of high cost debt.

I am still studying it as it is a very difficult business to study and without understanding the main factors affecting the future growth, any investment in it will be more like a guess. But it is still worthy of taking this guess. So I am investing in it at every fall.

I am hopeful that soon I will complete the study and post a final post on it.

(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Quantitative Easing: FED Keeps the policy rates unchanged

As expected in my earlier post on QE(Click here), today FED has kept policy rates unchanged. I was really expecting this as USA growth rate is still far away from any stability, Global economic turmoil especially China pose a serious risk to the growth stability in USA. Falling oil prices can seriously take the gas out of huge USA shale investments. Inflation rate is also very low; so there is no fear of high inflation due to easy money. Although I have explained earlier also that 80% of this easy money has not left FED (it is with FED as Bank reserves), much of the balance has left USA in search of better investment options not only in stock markets but also as FDI in countries like India and China. I am having no data with me at present, but I would like to see gross investments made in USA during this period. I think these may not be very high relative to QE money released except for Shale Gas investments.

Most importantly as detailed earlier I have serious doubts on the impact of QE on USA growth. QE was meant to encourage the demand and investment equation in USA but now they are watching global scenario to revisit it. If USA has corrected their local equation then why they need to look out of USA for symptoms? Because now global lower demand can hit their exports.

Actually problem of USA is not their investments and consumption level, but cleaning the mess of Real estate Bubble and looking for growth avenues beyond consumption. There is a continuous fight among economists regarding limits to growth. As our earth is a “Finite” sphere with Finite sources (like oil, iron etc) so humanity can not  grow forever. Finite sources will make them stand still one day and after that they will fall out of their own weight. So there are talks of sustainability. Although I agree to it but only partially. New technical innovations can open new avenues of growth. Like Aeroplanes opened the new revenue source by making intercontinental travel very fast. Now in future, high tech Rockets can make space travel very easy and so a new growth avenue will emerge. Same thing happened with the emergence of faster internet and smartphones.

But it is always a bad idea to drag “Future Consumption” into present that too with debt. So USA is going through a phase of Finite source growth limitation. Here sources are people and consumption articles. Instead of promoting people to over consume, USA can supply this excess to third world countries where animals and humans eat and drink from the same source. USA can do this by developing infrastructure, mining and agriculture in these countries by giving employment to locals. This will benefit both. Shale gas investments are an example for new technological innovation promoting new growth variable. Most of the World has entered into the 2^nd generation of innovation. 1^st stage was about bringing the speed and ease to our work life. But this 2^nd generation is about changing the world and universe as per our requirements. USA as always is the leader in this transition and we can see new openings soon.

Although I wanted the FED to raise the rates and stop this prolonged guess work and volatility in global markets. I also think that most of the markets are already ready for any hike. A recovered and growing USA is a darling for the world. Growing USA can provide relief to exporting countries like China and India which can spur growth in these countries. Fed rate hike is only a testimony to the growing USA. Stocks markets can fall due to the plight of FII’s but with growth coming back or faster growth will ultimately force local investor or genuine FII’s to invest the money back.

So markets may enjoy the ride again. There are so many ifs and buts in this post because I am not a big supporter of current practice of consumption led economic growth. Our problem is only of misallocation of resources and we need to absorb the pain of realignment of this misallocation; because pain is not always bad. You can ask a Mother about pain; she will only smile while looking at her baby.

Praj Industries Ltd: One of the few Biotech Experts in India

I am watching this one for last 5-6 years with only one thing forcing me to remain as a watcher and that was its business model which at that time mainly was about complete equipment design and erection of Ethanol producing plants. At that time Ethanol production was about producing the same from Corn, Sugarcane etc. which was forcing us to choose between food or feed-stock thus raising the pricing of these foods. Although it’s technical expertise even at that time was undeniable but my concern was scalability of its business of Ethanol.

I was negative on oil prices since long as I could see the coming storm of Shale, sand oil, Solar and wind power coupled with emergence of new sources of oil mainly from big oil importers like Brazil, india. So oil was bound to be burnt with only question of when and it is happening now and I do not see any near term revival in fact for very long term or never even if big oil producers cut their supply because their disruptive power is slipping down. We are sure to see new innovative power sources in the future also.

Low oil prices can negatively impact the prices and demand for Ethanol. Although demand for Ethanol is mainly due to blending mandate due to environment concerns but low oil prices act as a disincentive for using ethanol and oil retailers can avoid using it. But this food or feedstock equation was a big negative for Ethanol players as any surge in the prices of Corn/Sugar could easily force governments to slow their Ethanol plans. So only thing that could have saved Praj was meaningful diversification and it just did that. I had just forgotten about Praj but that day while studying United Breweries I came to know that Praj is now one of the biggest brewery plant providers in india and growing fast globally.

Praj’s inherent strength was always high quality research capabilities in Biotech arena. Everything we know about life is biotechnology. Everything which comprises us, the humans, physically (Leave consciousness if you feel it) is biotechnology where various microorganisms and Enzymes act as manufacturing units to produce the building blocks of life in various forms at the earth. So if we can understand this we can create a new world where even death will be a passé but this is the most daunting task; decoding the creature’s plan.

Curd and alcohol was our introduction to Biotech process although milk itself is biotechnology. Biotechnology is about microorganisms transforming something into something very different; sometime it is very simple and most of the times very complex. First generation ethanol is simple as it is made from easy sugars like corn and sugarcane. But Praj has invested huge amount of efforts in developing second generation cellulose based ethanol production technology which uses bio waste materials like agri waste like, wood chips etc which are not competing with our food. For this Praj is collaborating with global experts like Gevo and Qteros.

Actually the starches in Corn etc are easily converted into sugars by simple enzymes and sugars are then fermented into alcohol. But this is competing with our food and not viable. Other option was celluloid, the fiber that forms plant structure and is found in virtually every plant, flower, tree, grass, and bush is by its very nature evolved to withstand decay. But the enzymes needed to release sugars from cellulose to be fermented into ethanol were inefficient and expensive as starches of celluloid’s are very hard to be converted into sugars.  But using cellulosic materials don’t create a food-versus-fuel scenario.

So huge research is being undertaken to engineer Enzymes with synthetic DNA (or DNA taken from other species) into microbes that are being developed in labs and are being designed to break down certain types of biomass, such as woodchips, corn stalks, or other cellulosic biomass and also to increase the rate at which they are broken down into sugars that can then be fermented into ethanol or other types of fuels. These microbes would become “living chemical factories” that can be engineered to pump out almost any type of fuel or industrial chemical.

Praj Industries began construction of second generation cellulosic ethanol demo plant at Sangli (Maharashtra) in August 2013. The plant, which is South Asia's first cellulosic ethanol demo plant, will operate on different varieties of biomass with a capacity of 100 dry tonnes of biomass per day, which includes agricultural wastes such as corn stover, cobs and bagasse. Praj has core expertise and experience is in process and integration engineering, as well as equipment and system manufacturing.

Today, the cellulosic ethanol technology has become a reality with the first commercial plant already operational in Northern Italy by Beta Renewables. This plant primarily produces bioethanol from agricultural residues like wheat straw, rice straw and energy crop using enzymatic conversion. These plants are working like refineries and they are producing a variety of bio products which can cater to a variety of industries.

But I am not counting my cells on this ethanol story. Ethanol is more about environment concerns and self independence in oil particularly in the current and coming era of low oil prices. This technology may or may not be a commercial success although the chances are very high for a success. But it just shows the technical prowess of the Praj which counts Rakesh jhunjhunwala and Vinod khosla (Former Sun Micro-systems co founder turned venture capitalist) as promoters.

Praj is using its core competence; Biotechnology, to venturing into areas of water and waste water treatment and other bioproducts related to animal health and nutrition. Earlier it was getting all of its revenues from ethanol business but now it is getting around 70% from ethanol and breweries business with 30% from water and critical process equipment business. Its turnover is 1011 crores with operations in 60 countries getting 50% of its turnover with net profit around 76 crores.

I am very optimistic about water business. Industries are finding very hard to get fresh water approvals for their plants as water is already scarce to meet the human requirements. We are very careless in using water wisely and situation is getting grave globally. Senseless usage of water in Punjab and Haryana is a prime example of this and sometimes I fear that mass extinction due to water scarcity will be the waking call for us because we are unable to be wise now. So apart from using water diligently another way is to stopping of industrial pollutants into water resources. So industries are required to be Zero discharge which requires high technological treatment of used water. Praj is having great expertise in this and in fact it has revived dead textile units of Tirupur for not meeting pollution norms by equipping their plants with its Zero Liquid Discharge (ZLD) systems.

Praj is also expected to get huge orders from Ganga Action Plan.

So I think its Breweries and water business will see huge future growth. It is having its own R&D centre, Praj Matrix, which has got around 11 patents. It is still debt free in spite of intensive investments in research and plants. It is paying regular dividends for last 12 years and dividend yield at current market price is 2%. It is now adequately diversified to withstand any shock in any of its business areas.

India is still poor in valuing research based companies. Biocon is the prime example of this. We still focus on end product success which is wrong and do not suit to a value investor. By the time, research efforts are succeeded, we will not be there to enjoy the success as valuations will touch skyrocket by then. Sooner or later a research focus company will find success in any of its ventures.

I am yet to study its products and business model fully as these require very detailed study but I think it is still worthy of investment.

Current market price is 82/-

(Views are personal and should not be taken as a recommendation for buy or sell a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)