I rest the Bear Case from my side. (as updated in stock story)
- Over-dependence on a few suppliers to meet raw material requirements. APLlargely depends on a few suppliers to meet its raw material requirements. CPVC is the primaryraw material for manufacturing operations. 60-65% of raw materials are sourced from Lubrizol, USA. Any disruptions or changes in supply terms may adversely affect itsoperations and profitability of business.
- Foreign currency fluctuations - APLimports raw materials, finished products and machinery. It also has FCNR loans. Both these involve risks associated with foreign exchange fluctuations, and in extreme situations as in FY09 have drastically affected the revenues and profitability of operations. Despite an excellent 42% sales growth, APL had registered degrowth in profitability for FY09.The US$ had increased from Rs. 40 to Rs. 52level which resulted in a loss to the tune of Rs.7.34 Cr in foreign currency loan liability and Rs. 6.10 Cr on account of cost of import of raw material. In aggregate, APL had incurred a loss of Rs.13.44 Cr due to foreign exchange fluctuation. In FY10, the FCNR loan stood at 23.5 Cr and RM imports at 104 Cr.
- Aggressive expansion plans carry execution risks - The only way APL can keep growing is continuous expansion. So far APL has managed this judiciously. However any slippages in execution or reversal in demand situation, can pose serious risks.
- Stronger Competition - Its a matter of time before the growing Indian market for plumbing & fittings solutions attract the attention of other global players. Other CPVC compound suppliers could start focusing on India and license bigger players/suitors from PVC or GI segments. Even Lubrizol could license other new players setting up huge capacities.
- Recent performance on margins front needs watching - Operating profit margins have been coming down sequentially since last 4 Qrs. APL had registered OPM of 16.19% in Q4 FY10. Since then OPMs have sequentially been 14.49%, 12.40%, and down to 11% in Q3 FY11. Thats a significant drop of over 5% in the last 4 quarters. RM as a percentage of Sales meanwhile has gone up but only by 2.5% or so. This may need watching over next few quarters to see if things revert to normalised levels.
I think we have done a good job so far. I rest the bear case for now. Q4 results will be good to watch. Meanwhile thanks everyone for a another big collaborative effort!
I have requested many veterans to help us pick more holes in the story. Lets see:)
Meanwhile my call is taken. I am slowly entering and looking to accummulate at every dip.