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)

Some Promising Stocks: Meditating for the Unknown

Meditation is not a word for “Dhayana”. Meditation is a relationship of Subject and Object where one is practicing or contemplating something…but subject remains always there. But in Indian consciousness (again “Chetna” or “Minisha” are better) “Dhayana” is a state where subject dissolve into Unknown…subject just vanishes…it becomes one with whole or we can better say it realizes the illusion of separateness…fragmentation is a state of Mind while oneness is the reality…when one experience this…it is Dhayana…it is not a process but a state. And because there is no subject; so every Dhayani (Say Meditator) faces the problem of explaining his experience in our worldly language and when they try they appear out of Subject and Lunatic. It is just like trying to make a child understand the meaning of love…not understanding is not the issue but the child can relate his love for Chocolate with our love for our better half. The whole chaos we are seeing for ages is because children are trying to understand Love from their “State” and some says Love is Chocolate, for some it is Toys and for some it is ice cream.

Stock analysis is also just like Meditation…very deep, enjoyable and engaging but as subject remains (unmelt) so he can explain it. Business is even deeper meditation…contemplating the Unknown…dragging the future into present…business contemplates the oneness of worldly forces better than our religions and tries to gasp the future trend. But biggest risk factor is not the subject-matter but only the Subject….the businessman. I call it the Management Risk. I take management risk as the biggest threat to a business venture. External factors are always isolated and beyond control but business is never about controlling them but being in the harmony of these. Harmony is about the meditators. So there can be chances when external factors are out of favor but a true meditator will eventually resonate with these.

So capability of management is the biggest factor in the success or failure of a business. All the measurement variables of success like cash, market share, profitability etc. are just derivatives of the management. When I bought stocks like NIIT, jain irrigation in their tough times….it was just because of the management which is top class. Then, if external factors are affecting any business too frequently like in commodity business like Steel where too many external factors become alive time and again….like global over supply, low global demand…these can kill anyone without any of their fault…I call it Frequency Risk. So I generally avoid these types of companies.

So in today’s post, I am going to share some companies which are meditating quietly for a long time. So no wonder, they remain unnoticed. But the scale of success is enormous and if they succeed they will be giants. Another thing about these stocks is that almost all have already been shared with the readers of this blog who have subscribed to the email of this blog. Actually the reason for not sharing at this blog was because I was still to complete the final analysis and sometimes the lack of time. However I am feeling somewhat down as some of these stocks have already run up quite a bit. But the good thing is that most of email subscribers are having it so they might find this post just a copy of my emails. But today I am just posting basic introductions to these stocks due to lack of time and length of the post .

JM Financial and Edelweiss: Two of the best NBFC’s available at cheap rates. With great return over equity but still available at PE ratios of 10. JM Financial’s ROE is around 25%, Dividend yield is 3-4% but still running at a pe ratio of just 8! Both are having some Niche businesses like JM is the biggest indian in Investment Banking business which is a fee based business so margins are very high. Edelweiss is very strong in Equity broking and Insurance. Edelweiss is going to be one of the biggest beneficiaries of growth in equity broking business as more indians will come to the market due to high cost of real estate and sluggishness in Gold. Indians invest just 1% in equity, chinese at 15-20%...USA may be around 30% or so...so just see the scale.

But the surprise package will be their ARC (Assets reconstruction companies) business. Indian banks are estimated to have NPA’s of around 3 lac crore. Mr. Raghuram is focusing on cleaning the mess in the books of banks so banks are selling these NPA’s to ARC’s like never before. Both Edelweiss and JM are already the biggest players in this. Edelweiss bought around 20000 cr of NPA in recent times (it bought the NPA of Arshiya international while JM is curing Hotel Leela). I think that ARC’s are a good remedy to the businesses facing the systematic risks and can be saved by these ARC’s as they can provide these businesses with working capital and with their expertise they can enable them pass the difficult time. Like Arshiya expanded into FTWZ business too fast too soon but it was a novel business idea and can be saved. But there is no remedy for bad business decision and fraud and in those situations only remedy is to dispose of the assets and save as much as you can.

JM is at 45 and Edelweiss at 68. Both have already run up quite a bit especially Edelweiss from 50 to 70 but still long way to go.

Zydus wellness:  This is one stock where scale of operation is too big to ignore. It is into the wellness sector offering unique products like zero calorie sugar derivatives (Sugar Free Brand, with 93% market share), Nutralite brand providing low chelostrol substitute for butter, Everyuth brand in peel and scrub category with biggest market share. it is at a pe ratio of 33 and almost doubled...but this is nothing...peanut. Its main product Sugar free is having 90% market share and it is essential for diabetic patients. i am ignoring other health conscious persons using it. Its sugar free turnover is just 300 cr.

Now we do some calculations...india has 7 cr diabetics. Now take that in future only 3 cr will use sugar free. They will use 3-4 sugar drops per day, i am taking 4. Zydus charges around 60/- for 100 drops of sugar free and it has not raised the prices for last 3-4 years. Also its sugar free Natura and Herbivia are natural products and should command 50% more prices, i am ignoring this also. So taking 4 drops, the yearly possible turnover is 2600 cr...that too at old prices!!!. You can add health conscious person using the same and add price raises plus costly Natura and Herbivia and raise the usage to 6-8 drops.....it will become almost 5000 cr...add to it export growth...it will rise further. it is a concept stock and risk reward ratio is highly favorable. Sugar free now is generic name...but still people take it as chemical sugar when in fact some of its brands are natural sugars...so it just need to up the ante for Branding.

It is planning big for herbal zero calorie sugar Stevia...it has been finally approved by FSSAI around Nov-15...so now cola companies can use it and directions can be issued for its use.

Zydus has again started branding and awareness drive for its natural sugars like Natura which are not chemicals like earlier Sugar Free Gold. So once people understand this the demand will be huge. It has ignored Everyuth in the past although it is a great product, so due to no sales promotion people forget it. But now it is back on the TV and company is focusing on growing it again.

For Margarine (Butter substitute) Nutralite; it doesn’t taste that good like butter. So I think it would be great if Zydus focus more on enhancing the taste or it can add some percentage of butter to enhance the taste.

It was showing flat results for many quarters,  but finally in Mar-16 quarter it has shown good growth...turnover 109 cr vs 97 cr...operating  profit at 22 cr from 12 cr, NP at 25 cr vs 20 cr due to other income and taxation effect. I think it has raised the price of its products which was due for long. At CMP of around 770…it is a great buy.

Dr. Agarwal’s Eye Hospital: I picked it up when it was around 70 few years back. It is one of the biggest Eye care chain in india with 60 hospitals with around 44 in India and 16 abroad. 

This hospital was promoted by late Dr. J agarwal who came to Mumbai around 1955 with just Rs. 250/- in his pocket with his wife and from a very humble beginning from small clinic with borrowed money for essential tools his vision and passion has created a eye care behemoth with annual turnover of around 100 cr and number of hospitals under its domain has increased to around 60 in all over india.

His son Dr amar agarwal MS, FRCS, FRCOphth, who is a stalwart in the field of Eye care and invented some new eye treatment techniques (like Performing pain-free, no-anesthesia cataract surgery) and written many books in the field of eye care is now leading the team towards a global growth path. They are a good management team doing almost 1000 eye operation in a year free of cost for poor people.

Its turnover is around 130 cr with negligible profits this year which may surprise many as eye care is a very profitable business. However this is due to rising competition where some eye care chains expanded too much in overcrowded southern market where Dr Agarwal has significant presence. The main culprit was Vasan Eye care who on its disastrous expansion spree expanded to almost 200 eye hospitals in around 3-4 years…but its growth (Weight) was fuelled by Debt (Fat) not equity (Muscles). So when it could no longer bear its weight, it just collapsed and its private equity partners like GIC and Sequoia took big losses. Players like Vasan brought down the prices of eye care. That’s why Dr agarwal sees its operating margins falling in last 1-2 years.

But it has big plans for investing around 600 cr for expansion. It is too strong in R&D and cutting edge technology in fact Vasan established its first hospital with the technological assistance from Dr Agarwal. Recent equity investments in Dr Agarwal is valuing it around 500 cr while its Current market value is just under 100 cr. CMP is 150. I am adding more at CMP.

Piramal Enterprises: This is my all-time favorite and invested in it at 500, then at 800 and 950. But I couldn’t post my study as it was expanding too fast and new businesses required deep study like its investment in pharma Information management company Decision Resource PLC in USA. It is into NBFC, Pharma, Information management. I just kept on adding it only on the basis of one man…and that is Mr. Ajay Piramal…the promoter of the group. I see him as one of the best value investor in india. It is now around 1350…a big rise but there is no doubt that it is just the beginning. It will become bigger and bigger. There are so many catalysts pending like demerger of its various businesses, Merger with Shriram group, Merger with IL&FS group etc. so it still can be picked at CMP and at every fall.

Forbes Gokak: Already posted a study about it when it was around 500 click here. But it is still unknown to many. It is the owner of Eureka forbes, the biggest water and home equipment company in india with unmatched R&D skills. It manufactures its product on its own and been the pioneer in bringing many new water treatment technologies. Turnover of Eureka Forbes alone is around 1800 cr with NP of 40-50 cr….while market valuation is just 1700 cr so it is at PE ratio of just 35-40 which is cheap…although we have not priced its other businesses like tools and payment solutions etc. I have invested quite early in it around 500, then at 700 and now at 1300. It is still a good buy at CMP of 1300/-.

Narayana Healthcare: Dr Devi Shetty is revolutionizing the healthcare industry with unimaginable low cost healthcare model. Earlier they were more like Good Company with the main objective of serving the poor. But you can’t grow with non-profit model. So they were having different models for rich and poor but with same high quality services. But they need more profit to grow bigger and provide cheaper services to all. Earlier actually i was a bit apprehensive whether Narayana would be able to show the kind of growth to justify the high valuation. And it just did the same in Dec-15 qtr result with its operating profit rising almost 5 times from 5 cr to 25 cr...also finance cost fell to 3 cr from 11 cr.

As it is following wholesale type of business model; so any incremental revenue will add significantly to the bottom. Also as it is now listed so it will also focus on more profits as compared to earlier past.

I am a big fan of Dr Devi shetty so i am a bit biased for it due to this. I also have a great respect for Dr. Venkatawamy (Dr V as he is called) of Arvind Eye care...these men are just awesome. I have read somewhere that doctors of Aravind Eye care perform around 2000 eye surgeries as compared to 400 global avg and 200 asian avg!!!

But players like NH are the next big opportunity for india to shine at global scale and bring in the huge foreign exchange even bigger than IT industry. NH is providing even better services than its global counterparts in USA at fraction of their costs. So huge number of people will visit india for cheaper and quality treatment in the near future. NH market value is just 6000 (No need to compare it with their revenue, just compare with the future scale) with turnover of around 1200 cr. This will grow much bigger from here. A great buy at 310 and at every fall.

BASF and Clariant Chemicals: Global Chemicals giants with great R&D and technologies. Some of the very few MNC’s who have invested big in india. They were incurring losses as it takes time for new capacities to churn profits as big depreciation in the beginning also squeeze the margins. Chinese cheap chemicals were also the factor but these are old horses. BASF and Clariant has already shown huge improvements in this Mar-16 quarter. BASF is at 950 and Clariant is at 690.

(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)

Parag Milk Foods IPO: Milk is for Babies not Cheese-2nd Part

This is the 2^nd part in the series of Parag Milk Foods IPO(Click here for 1st part). Although I wanted to write something about the peculiar features of dairy business in india but recent negative views given by some of the top analysts have forced me to write this post. I have explained in the IPO note of Thyrocare that listing gains are an outcome of so many variables like market view, short term hype, analysts’ views, any pumping news etc. So if top analysts are negative about the stock then the chances of listing gains are remote although these so called analysts were wrong in their assessments so many times like the IPO of Indigo airlines.

In the case of Parag, they are comparing the same with the likes of Kwality and Hatsun and giving their final verdict on the basis of low pe ratio of these as compared to Parag. Like kwality is at pe ratio of 18. But first of all lets churn their business model. The players like kwality, Hatsun are basically into the sale of milk which they do not even produce. They collect the same from producer farmers and then sell the same after minimum processing. It is not production at all…in my view it is just retailing or we can better say LOGISTICS. They are speeding up the supply chain; acting as intermediaries between sellers and buyers who are scattered. I am terming it Logistics as they are not earning from the “Production of Milk” but from the distribution of the same in much better packaging. 

Just like the case of textiles; Raymond collects the cotton from farmers and sell the same to us in the form of a shirt which is the result of some definitive value addition just like what Parag is doing when it is processing the milk into cheese…it is value addition which requires sophisticated machines and know how to get the end product. Sale of Milk is just Logistics…Curd is also not far away as most of the Indian households make their own curd daily and that too very easily with minimum of processing at their end as most of the processing is done by humble bacteria. Yoghurt requires some specialization although it is also a curd but more standardized. Can we say that Hatsun and Kwality are in the same business with the likes of Vadilal which produces specialty Ice Creams? Cheese requires longer maturation just like a wine and continuous testing and checking. This Milk and curd business has very low entry barriers and we can see so many small local dairies doing the same business producing almost identical products.

Now let’s see beneath the cream of low pe ratio of these players. Kwality is having a turnover of 5200 cr in 2015 and earned a NP of 140 cr (I have taken standalone numbers, not much difference though). 140 cr (6 EPS) is good amount of profit. But they are paying just 10 paisa as dividends for so many years!! Again Mystery with Milk. But here mystery is not related to Milk but to the usage of money. Kwality has earned around 500s cr NP in last 5 years and if add depreciation of 60 cr (Assets base is 180 cr) then cash profit 560 cr for last 5 years. It has taken fresh loans of 680 cr during this period. So total inflow is 560+680=1240 cr. And you know where all this money has gone?? No...not in creation of assets and capacities as their assets base has grown from just 60 cr to just 180 cr. This low assets base is an indication that they are into distribution not into production.

The money has actually gone into working capital!! Debtors has increased from 414 cr to 1150 cr, Inventory from 63 to 264 cr…so 736 cr for debtors + 200 cr for inventory + 120 cr for new assets= 1056 cr where 936 cr is stuck into working capital. Balance has gone into other advances etc. So nothing has been created for shareholders nor returned to them in the form of dividends. Low inventory levels of just 5% of turnover appear strange especially when they are just into retailing. Can we take these figures of high turnover and profits as real…whether this low pe ratio has some credibility or this is good enough for this doubtful business model.

Things are same for Hatsun also which is also strange figures although it is very expensive at 60 PE. It has big assets base of 1000 cr (Kwality 180 Cr) but very low turnover ratio with turnover of 3000 cr…NP is also low at 40-50 cr. It has also stuck most of the growth in working capital and unused assets. It has created funds of around 900 cr from debt and profits in last 5 years out of which around 250 cr stuck in working capital but used 500 cr for new assets/capacity which is largely unused. Strangely its turnover has been increased from 1300 cr to 3000 cr in last year but debtors have been changed from just 10 cr to 13 cr…this is just unbelievable. But with such a great business their dividend is way too low just like Kwality. Kwality has used the funds for Debtors whereas Hatsun has created unnecessary assets….so I do not think this high dose of Lactose is digestible…to digest it and enjoy the low pe ratio of these we need mutation of intellect.

Heritage foods is surely worth investing but it has big investments into retail business which is loss making at present, so can’t be compared with these two…although at some point in near time I will post a detail study on it.

I can’t say what market is really thinking about Parag and there are high chances that market may follow these analysts. However I am very clear in my view that if it falls on listing day, I will be a happy buyer. I have no doubt about the business model. But you can take your chance as per your risk taking capability…Although the battle still is between Milk and Cheese.

(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 shares discussed in this Post)