Thanks to all the forum members who have taken time out to read through and share your views here.
@sathishtherich: Yes, Mr. Ashish Kacholia has been buying aggressively and I am pretty sure that this is not the last that we have seen of him in this counter. Besides him, Dolly Khanna also has a significant chunk of it and he came in before Ashish Kacholia. There has been been some frenetic institutional action also in last 15 days with Sundaram Mutual Fund, IDFC Mutual Fund and Standard Chartered taking significant positions.
While we should not concern ourselves or base our investment decisions on what these superstar investors are doing, it certainly gives some assurance that they would have done the requisite due diligence (specially on the management part) before aggressively increasing their stake. The point is that it is rare to get attractively priced consumer stories with super long runways in this market and hence I except some more fund action over the next 30 days before the results start to become evident.
@zygo23554: Yes, Advertising expense as a percentage of Revenue is very high (relatively) and this will continue to remain so as they keep penetrating the Western and Northern regions. I am quite happy to see this continue as the valuation of a consumer story is often proportionate to the strength of your brand, assuming off course that you are growing in a capital efficient way and not going bonkers with your advertising to kill your your balance sheet. Yes, the long term debt will be completely wiped off in the next 18 months. The effect of rapidly shrinking working capital cycle will be offset by the fact that they will need to give higher credit periods in the new geographies till they establish themselves and hence I expect the WC debt to remain at these levels.
Also, regarding the certainty of government business being reduced to zero, would request you to refer to Slide 10 of the Investor Presentation as attached in my opening post. The government order contract was till 2016 and then it was discontinued. FY17 and FY18 are purely branded sales in their terminology (which means free market sales). You can trust me here buddy. I have interacted with the management and I know their bankers. I would not have put a single penny if they had even 1 percent government sales.
@manoopatil: Sir, I believe this will be passed on and won’t be an issue as such as this call will taken at an industry level and the players will increase their prices.
@asvasanra and @shreys: Theirs is large family, but is a very closely knit family and the role of each one is demarcated. Moreover, after the appointment of Mr. Iyer as CEO, he has been given a free hand. I have enough comfort with the management team now and as I write, there are multiple hirings happening at multiple levels to increase their management bandwidth for the PAN India growth. Earlier also, my problem with the management team was not that they were unethical or there will be infighting or anything like that. My only issue was that they did not have enough fire in the belly to take the attack to their rivals in their home turf and fight it out. They were blissfully comfortable in Tamil Nadu where they are literally the Emperors (with more than 50% market share) in their key segments.
Regarding the key question of whether they can meaningfully penetrate the western and Southern markets, well that’s open to debate. We can actually keep debating this for the next 20 days and both pros and cons will sound convincing and we will still not come to a conclusion. It’s a call that an individual investor has to take. I have taken a bet that they have the financial resources, operational bandwidth and the willingness to be among the top 2 players PAN India in their key segments and hence I have put my money where my mouth is. The second question is, If they are able to pull this off over the next 2 years, what should be their valuation? Also, can TTK or Hawkins grow their turnover at 25-30% CAGR for the next 2 years. Is that Plausible? In Indian markets, I have learnt that highest valuation multiple is given to growth stories once the quality of business is established.
For all you know, I may be completely wrong and they may not be able to achieve what they have set out to do. But that’s just a bet we take from time to time on every investment, isn’t it?
As the founders of this great forum often say, we can use this opportunity to do some serious collaborative scuttlebutt work. I am based at Hyderabad and I can clearly see the increasing shelf space being occupied being occupied by them (relatively speaking, Hyderabadis mere upar chad jao nakko !! ) If our friends from North, West and East India can update us once in a quarter regarding what they see in the shelf spaces in their cities or talk to distributors and give us a sense of where the company is moving, then it will help us to increasing our conviction. I am always a great believer in going out and talking to folks on the ground rather than do excel sheet analysis.
P.S: I would urge all investors who are thinking about a potential investment to again re-look at their investor presentation very closely. The key segments in which they are market leaders has a large segment of unorganized segment. Post GST, there is rapid trade adjustment happening underground and you may be in a for a few surprises in their Q3 and Q4 results. The market share gains may be higher than imagined.