POKARNA LTD ( Stock opportunities )

Stock Opportunities Untested - but worth a good look
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Hi
can anybody look and review at POKARNA LTD
It is one of the largest exporter of finished granite from India, dealing in over 70 premium colours.
Besides finished granite company also exports natural quartz based engineered stone under the brand name ‘QUANTRA’ .
Pokarna is the exclusive licensee and the only producer of natural quartz surfaces in India using the exclusively patented technology from Bretonstone system of Breton,Italy with capacity of app 900000 sq mtr.
Company is consistently reporting positive cash flow from operations.
Consistenly reducing debt which it incurred to setting up engineered quartz surfaces.

Underpenetrated segment and scalable segment,increase in discretionary spending, large exports to developed countries ( 70% exports )

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Hi @chiragjain1976,

Pokarna is really interesting company.
The company was profitable before they were in engineered stone business and had 16% margins. But they fall apart because new business had low volumes and high fixed costs.
But now they have turnaround and are enjoying exceptional margins 70% gross margins and 25% EBIDTA mostly because of operating leverage.
I feel there is still room for further margin expansion as engineered stone business is running at 50% capacity utilization.
They have started repaying debt, fully paid back FCCB in Dec 14.

I feel there is good enrty barriers in this industry as getting querries is tough and time consuming.
From an interview

We have around 24 quarries. Twelve of them are in operation all the time. The remaining twelve remain operational on rotation… . Getting mining lease is a long-drawn-out process. If it is a large quarry, then one has to go to Delhi to get the ‘environmental’ clearance. And all that takes years together. It’s not easy to do quarrying in the country. It doesn’t matter whether it is ownership land or lease land; it’s always difficult. The process is rather time-consuming.

In same interview Mr.Gautam Jain says

*Daltile, a company based in the US, happens to be one of our biggest customers. It has also been my biggest distributor for the last twelve years. One of its representatives, who visited us a few days ago, said, “Mr. Jain, you need not be so perfect; even if sometimes you give us not-so-good materials, we will accept them. In the last twelve years, you have not given us a reason to complain.

Disc : Hold > 5%

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Although I dont like its apparel business and convicted SEBI barred person in Board.

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Hi @jatin… who’s the convicted SEBI person on the board ?

I did a little research on the company… the biggest competitor out there is caesarstone (12% vol share globally in Quartz countertops)… with others like Cambria existing as well in the USA. Bretten is a fairly strong differentiator from a technology perspective (reminds me a lot of Astral with Lubrizol) however there are a dozen players in the US who have that tie up as well.

The industry itself is doing well… Caesarstone has grown at 30% + over the last few years and all reports point to strong growth in that space (caesarstone results coming tomorrow … so should give a good idea about the industry).

Also- Caesar doesnt do any mining activity but buys most of its ‘raw material’ from eastern europe and Asia for Quartz… and hence makes me believe that the Mining bit isnt a differentiator at the global level…

Given the number of players in the space with Bretten tech and greenguard certifications… its really coming down to how well Pokarna can market its product and ensure good customer service (just like a Kajaria et all back here). This aspect is the hardest part to figure as there is very little information on the company. I’ve written to the company sec as well… lets see if there’s a good response. @chiragjain1976 @jatin any information you have here will be useful…

Disclosure- taken a position for tracking perspective

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I didn’t know there was a thread on Pokarna. I doubled my holding in the last 6 months or so on relative small %. I think engineered stone business has good competitive advantage. The NASDAQ listed Caesarstone is real good company but lack supply of raw matl. They are facing 4% annual inflation in raw quartz supply from Turkey while Pokarna has unlimited supply from its own mines. The market is huge and very true that it comes down to their marketing and distribution abilities. Caesar has done exclusive deals with IKEA US and Canada so their advantage is branding, distribution and reach.They are bullish and adding capacities in North America despite raw matl shortage. Pokarna thrives on cost and may be quality as they mention in their latest AR. Last year they benefited hugely due to operating leverage and cost reduction due to supply of granite from captive mines. IMO, they can easily scale their quartz biz by 4-5x from here.

BTW who is this SEBI convicted person on board?

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@sumi00 think the operating leverage and financial deleverage will play out for some more time… Lets see how the results are tomorrow…

Is there any info at all that u have found on Pokarna’s marketshare/key customers etc. Trying to figure the front end of the business vs Caesar and Cambria but its been a challenge…

Anyone from Hyderabad going for the AGM ?

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Suggest one reading of Caesar’s AR for info on the market and opportunities. I started but lost interest will give it a try later. One more thing Crisil has upgraded their long term debt rating expecting leverage to fall to 3X in Fy16 from 5x in FY15. They report Q1 result tomm.

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Good results… turnaround story seems intact

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fantastic results but stock ended on soft note perhaps due to one news item I saw on Lycos internet thread. Granite cos electricity account/fraud being exposed in AP. Looks like EPS of rs 80/- is quite achievable.

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Good results delivered…
Eyeing growth for future & better FY16 comitted by management.

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Screener shows the d/e ratio of 4.9, this may be a point of concern for anyone looking to hold the stock over a long term horizon.

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True but it can’t be looked in isolation. Equity was eroded due to accumulated losses arising out of plant start up. CRISIL has maintained that it will fall to 3x by FY16 end which should be a comfortable number.

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Like an oil well, how long can these quarries lost and what are the rights for pokarna on those ? how did they get them ? do they pay any royalty on these ? can these get exhausted ?

who are their competitros apart from caeser stone ?

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Better to read AR for the info you are looking for. They faced equity erosion in their quartz plant just like any other plant does before reaching scale or desired capacity utilisation…

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@varadharajanr … trying to answer these questions below (will help me test my logic/conviction for flaws if any :smile: post ur follow up questions )

Personally, Im not a great fan of these guys holding on to the mining business. They ‘claim’ that it gives them access to high quality and regular supplies of quartz but I personally dont think that its really a competitive advantage …If I remember correctly, these were acquired by them a few years ago and like any finite resource which needs to be mined, this needs to be too.

Competitors besides caesar stone are cambria. I think these 2 are the top two players in the country. Others are much smaller.

Pokarna is, I guess, very similar to a tile/laminate player… the tech from Bretten additionally puts them in the top 10 list as far as product quality is concerned. The margins are better than caesarstone despite lower pricing (probably from lower cogs and in house mining benefit)

The big unknown for me is clearly the marketing ability… requires a scuttlebutt in USA for the same…if you have any way to help there, it would be terrific :smile:

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For Granite business mining is real differentiation since natural rock can’t be altered whereas good quality quartz is essential for engineered stone. There is no shortage of these things in India but having control over your raw material give competitive advantage which very few players have globally.

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Some other sizeble competitors are Cosentino from Spain, Hanwa L&C, & Dupont

Quartz import in USA up 280% in May from India.

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Hi Jatin… where do u get the data on Quartz import from India ?

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Hi @varun_kejriwal,
I live in US,I can help you out on the scuttlebutt. From whatever little i know,housing is in good demand again but definitely not to the levels of 2004-2007.Most of my friends have bought houses recently and all of them have granite as the kitchen countertop.Flooring is mostly wood(No tiles/marbles like in India) or carpets/rugs here.

But I rememeber one of my friends asking his builder to install Quartz for his kitchen when he bought the house.

So,clearly there are advantages with quartz over granite and some of them are:
1.Granite being a natural stone needs to be sealed properly because of porosity (I guess the sealing has to be done every 10 years). With Quartz you dont have such headaches given the process of making quartz is by taking a rock,crushing it and adding a polymer resin to it and running it through a diamond polishing machine will permanently seal that product.Hence it does not promote growth of germs,bacteria.

2.Since it is a man made stone,Quartz comes in variety of colors and size compared to Granite.It is very consistent in size and shape as well compared to natural stones.

Market share of Granite in US is 27% and Quartz is around 8%.In other developed countries like canada,Australia quartz share is more than 30%.

Given that pokarna markets both granite and quartz which are in high demand for kitchen countertops and its presence in US,it is very well placed to take advantage of this boom.

There are many unknown facts around its business:
1.Pokarna has 2 manufacturing units with a total capacity of 6 lakhs sq.feet per annum.How much is this utilized? Given 50% of revenues coming from this segment it is better to understand if there is any planned CAPEX on this?

2.Quartz has a total capacity of over 8 lakhs sq. feet per annum ,reports suggest that capacity utilized is less than 50% and no need of any investment in the next 3 years.Is that correct?

3.For both segments,how much raw materials are being sourced from their captive mines and how much they are getting it from outside?In this business getting quality raw materials consistently is the key.

4.Breton technology - How big of a deal is this? Any other similar technology that is similar or better than this?

5.Marketing - I know they are in this business since 1991 and they might have got hold of decent client base.But still not sure how strong their marketing is?

6.Competitive landscape:As of now 10-12 sizeable manufacturers use Breton technology.But how do we know if Breton’s license is restricted to only these players?In case,if more players gain this license or if better technology gets introduced,they will flood the market and reduce its competitive ability.

Regardless of all these,those numbers are off the charts (that is the big pull factor on this stock).

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Esteemed Pokarna boarders

Will someone highlight how does this stock fare in terms of moats and valuations vis-a-vis Associated Stone Industries or for that matter Aro Granites which is also into quarrying of natural stones?

Regards
Sreekanth
Disc: Not invested