Question to all the longs here -
Somebody has mentioned that they have pricing power (25-30% more than competition). They have been delivering good results/operating margins which is a reflection of this strong moat. My question is how sustainable is this moat?
Stripping cash of ~ 72 cr (Mar17), stock trades at ~25x Mar17 FCF or ~22x last 5 years average FCF (~11 cr). Mar17 was a record year. Assuming 15% growth in FY18 (in line with 9M results), the multiples still looks high for a small sized company. i.e. there is not much margin of safety in the price here. Does anything else provide margin of safety here? i.e. Any other moats to justify this high valuation?
Disc - Have a small tracking position.
ICICI Management meet update(Bit outdated- Mar 18)
I’m never really impressed with Shashank Kanodia’s reports, but I was surprised to learn about the diversification possibility. I wonder what the time line and opportunity set looks like.
I’m sure the company will be able to find something to make in the specialty chemical space but their lack of R&D might limit any kind of long term growth.
This report if true is not something that I would look at kindly. Per the company presentation the estimated market size is ~2,25,000 MTPA and their capacity is 3600 MTPA. At this capacity, they believe that its better to diversify instead of investing their core. If a company truly has a moat, it will find it profitable to keep on investing in their core and not to incur the risk of venturing into new areas.
This report is truly bearish from my point of view. Ofcourse, there are more experienced investors in this forum, and I have but limited experience.
There is no moat in this business. In fact I barely believe it qualifies as a specialty chemical company. From my understanding the company has been able to exploit a tiny space in the market that larger players do not find worthwhile. The key driver of the company’s growth will come from market expansion and not market share expansion.
I have not been able to find definitive industry statistics, but I suspect that the figure on the company’s presentation is the market size of the toner industry in general and not specifically the after-market toner industry.
The diversification will most likely be in color toners and not other specialty chemicals.
If the management is not able to invest in the existing business they should return back the reserve to their shareholders in the form of dividends, reinvest to increase markets or buy back their own share to create value. Or else toner business is high return business supposed to command higher valuation.
FY19 Q2 Results: