Emmbi Industries - Boring name. boring business


(rkothuri) #61

(Saravanan B) #62

Amtek Auto was once an amazing small cap. There were lots of such small caps that did not survive market cycles. I have other better opportunities in the market. I would advise investors to use their own conviction.


(shreys) #63

@saravananb1994
I have a straightforward question.
By market cycles, are you referring to bull and bear markets? If so, how does a bear market affect the viability, sustainability of their core business activity. Their stock price may suffer but why do you think the business would cease to exist?
I’m unable to comprehend why you feel so.
Please guide if there’s some flaw in my understanding.


(Saravanan B) #64

Go through their financials. You will understand. Have an intensive review. I do not have to convince somebody. I had shared all the information. Please feel free to go with your conviction. :slight_smile:


(Saravanan B) #65

I am talking about the fundamentals of a business, not the stock price. I am not speculating the stock price. Proceed with caution. See what happened in the past for similar stories. I would recommend users to do their groundwork than expecting direct answers. :slight_smile:


(shreys) #66

@saravananb1994
Many thanks for replying. I’ll study it and seek your help when required.


(Saravanan B) #67

I could give the answers. I would recommend you to give your opinion so that I will give my feedback. I had also studied pond liners closely. :slight_smile:


(shreys) #68

@saravananb1994,
I’ll need some time. It’s the first time I’ll be studying this industry. I’m not invested in Emmbi. Spare me some time and I’d be happy to share my thoughts.


(Cshar) #69

Having free cash flow positive is not only creteria for any business, companies generating good cash flow & investing that cash flow in expansion will have little FCF. Hence don’t agree with logic given above on FCF basis. Secondly coming to business part pond liner business is recession free & will grow worldwide as water conservation will be theme going forward. Good stock to buy & attractive valuations.


(Saravanan B) #70

If you look at their last 10 years financials, we find that their capex is twice of their operating cash flows. Secondly, the company is paying dividends when it has no free cash flow after doing Capex. It shows inefficient capital allocation. Most experience “Confirmation Bias” when they start owning a stock.

Leave the cash flow, the company does not have a good sustainable rate due to which it has to rely on external borrowings often.

Let us forget the cash flow, sustainable rate, and return rations.

Give me a breakdown of how this company will improve its margins and return rations without increasing its debt going forward. I would need an explanation by linking that with the existing capacity. Could someone break it down for me?

Currently, their opm is around 8 - 10% range, how will they increase it above 15% without increase in debt?

Do not justify any business without proper data points. This company has not seen multiple market cycles. My point is not to be critical at someone but make people aware of the hidden dangers.


(shreys) #71

After my interaction with @saravananb1994 yesterday, I tried to study the company in detail. To begin, their website is very impressive. It elucidates their products well. Their annual report is one of the most aesthetically pleasing I’ve ever come across. It seems they’ve focused on making the optics impressive, appealing. And,it also makes sense. When potential customers in foreign countries scout for products the first point of contact is the website. Their products also seem to be of top quality.
However, I must say that there are some discomforting features.
The high remuneration of the leadership makes me a bit uncomfortable.
I’m sure that the promoters are very smart , capable leaders but justifying such salaries by citing their academics doesn’t seem appropriate to me. Just my opinion.
Now, coming to the exports. In the year ending March,2017 they had exports amounting to around 104 crores. A major portion of the exports was to Europe and North America. In my limited understanding, it’s a completely commoditized industry. Low price point could be a major motivating factor for importers in foreign countries. I find it hard to believe that there’s brand recognition and recall. The ability to produce at low prices is the moat here. If tomorrow some other producer can do that, orders will shift to that producers. And, 5-6 percent margins corroborate the hypothesis.
So, here, instead of margin expansion we’ll have to focus on volume expansion.
With an increased focus on protectionism in the US, exports could face problems.
It seems they’ve been focusing their energy on growing their pondliner sales. As I mentioned above, their products seem to top notch. But, there’s quite a lot of competition.
A quick search revealed multiple companies producing it. There’s no dearth of geomembrane producers. Hence, customers wield a lot of power here. Pricing is the deal clincher, in my limited understanding.
It’s a business that can be replicated.
Also, I came across a 9 million rupees expense on travelling. I wonder why the company representatives would need to travel so much.
Over the long term, I don’t possess the ability to project earnings.
There are many competitors within India as well as the world over.
So, I personally wouldn’t be very comfortable investing at current valuations.
But, my tip of the hat to the entire Emmbi team for growing their business so well over the years. It’s such enterprises that help an economy grow.


(Saravanan B) #72

Thanks for your analysis. I appreciate your efforts put in helping you other fellow investors. I would recommend you to study more about their financials, cash conversion cycle, receivable days, asset turnover, etc which gives a clear cut view about their moat.

In the long run, leverage will kill us. Markets crave for earnings in the long run. When the interest rate hike cycle kicks in, that’s when the companies will start to feel the pinch. Bull markets bring in new leaders and people become biased that the same story will continue to the future.

From my understanding about water conservation, there are lots of innovative businesses that are offering novel products. Last but not least, I would to quote Warren Buffet, “Change is the enemy of an investor.”

Do not be lured by FII taking a substantial stake in a company. History tells that there are cases where a promoter had paid a marquee investor / Marquee institution to buy some stake in the company due to which the company will get a better valuation in the market. Read history!

Exercise caution!


(shreys) #73

@saravananb1994
Agreed. Quite a few of our decisions are influenced by actions of an authority. Here the FII presence is playing an important role.
The fund seems to have deployed almost 15 percent of their AUM in this company. The fund was launched in October, 2015 and their returns have been around 27 percent. Their assets under management are around 165-170 crores. It surprises me a bit that they found this to be the only company worthy of investment in India.
The fund is similar to a portfolio management service in India. The fund is a recent establishment and doesn’t have much to show for their past performance.
Hence, if fellow members like the company’s fundamentals then please invest. But, if the sole motivator is the fund’s presence, I’d say exercise caution. They are also prone to error.


(shreys) #74

Sure, I’ll study the company per the pointers provided by you. I’m not as adept at analysing these areas. Hence, I use a checklist/ formula based approach to minimise the role of intuition in my decision making. I can’t trust my intuition since I haven’t had the opportunity to check if it works and the environment to improve.
Therefore, I employ cognition instead of intuition due to my inexperience.


(harjotsingh87) #75

I have been invested from lower levels and following this company since last few years. And I agree, management compensation and increasing debt level have been my concern since last one year but I like the honesty and focus of promoters on business and innovation. I agree its a commodity business, but promoters have been trying to establish a brand for themselves which if they succeed will justify the premium. Irrespective of these concerns, I plan to hold the stock for few more quarters as in the last conference call, management mentioned that they are not expecting any major capex till 2020 or revenue of 400cr (approx 40% from current levels). I will wait for next couple of quarters to see if they start repaying their debt or if they continue to borrow more.

http://www.wovensackindia.com/Codeofconduct/KRChoksey-Emmbi-Feb08-2018.pdf


(shreys) #76

Dear @harjotsingh87,
I’m in complete agreement with your assessment that the leadership team of this business is not resting on its laurels. They are willing to work hard and innovate. Also, I must laud them for their website which is very impressively done. Regarding brand creation, I feel only time will tell us if they’ve been successful. Powerful brands are those where price hikes don’t hamper sales, where there’s pricing power. If their current customers would be willing to pay a premium for their products on replacement will go a long way in deciding their likelihood of success in brand creation.


(Saravanan B) #77

I have gone through all the conference call transcripts. I am sure people haven’t understood the point my trying to make. Emmbi will have to rely on external borrowings to funds its growth. In other words, the growth is funded by debt. I will not be surprised if they increase their debt because their internal accruals are not enough to manage their growth. In this regard, to sustain their business they will require external funding / equity dilution.

There is no validation for how they will improve their margins nor reduce the capital intensive nature of the business. The business also incurs a significant amount of depreciation which will also harm the financials in the long run.


(Saravanan B) #78

Moreover, even in the optimistic scenario by repaying their debt, they will need to borrow to fund their operations to sustain their growth. Because they do not have a stable sustainable growth.

Confirmation bias is harmful to financial health.


(shreys) #79

Agreed. There hasn’t been much clarity on how they plan to expand their margins.
Also, agree with your hypothesis that their future growth may have to be funded by debt. But, it’s also pertinent to note that Emmbi is a fairly small sized enterprise. It’s a business that’s growing. We can’t expect it to possess characteristics of a blue chip behemoth. It’s a tradeoff microcap investors have to be willing to make. A sacrifice on quality for the opportunity of participating early in the story. It’s possible that we’re victims of affective forecasting. The ugly truth is that few businesses can make it big. And, it’s impossible to know which business will be successful in doing so. We can study financial statements, balance sheets the entire day and still have no idea of who’ll make it big. We are often, victims of the illusion of control.
And, I may garner criticism from purists but luck will play a massive role in deciding the future of any company.


(Saravanan B) #80

When a stock price rises more than 5% without any reason, be cautious. I am aware of the tradeoff that microcap investor should take. I am also a microcap investor. I cannot compromise on sustainable growth and operations funded mainly by debt. History has shown that those companies have ended in a disastrous manner.

I am just skeptical about how these things are addressed. It is a worry that investors are just focusing on what the management is saying but not looking at their financials. In my view, most investors are worried about missing out a big idea. It is also known as “Fear of missing out” syndrome. My back of the envelope calculation shows that valuation might not sustain at this level for a long time. Though bull markets might make a stock price move to irrational levels, I am a fundamental investor and want to stick with what might sustain for a long time.

Disclaimer: I am fine with no regrets if I miss out on a big idea because there are lots of attractive ideas available in the market right now with a margin of safety.