Sumit,
Their annual cash flow should be closer to 100 cr (80 PAT + 20cr depreciation) taking December quarter figure run rate, as that quarter did not had any exceptional items. So they will be having a cash of 200 Cr in 2 years. So even if they start the process of setting up the plant now, they will be easily able to set up the plant without taking any additional debt and the WC for the production of new plant can be freed up if they close their Apparel business. They can even take a term loan and with the cash flows of the 3rd year that term loan can be easily repaid back.
So I donāt see that debt should be a concern for them. As for competition, they donāt see any competition from China and their colors are superior to Brazil. Products from Israel and USA are expensive so they also have cost benefits.
Hi, I think they are running nearly full capacity on Quartz. Their top line of Quartz is more or less same for last 4-5 quarters. And I heard their main Granite distributor IGM is closing down many stores. US housing construction and demand is hitting record every month in last 6 months and their top line hasnt moved up , rather moving down. They failed to capitalize the trouble CaesarStone had. There is lot of demand and they have so many advantages on cost, yet they are struggling. Its a serious concern. On top of it, very very reluctant to discuss capacity and expansion plan. About 6 or 7 quarters back, I predicted that Quartz revenues can easily be doubled/tripled, when I asked them how will they plan to meet the demand, they hadnt even thought or they mis represented. I will move on, after a long wait. I could eventually be proved wrong.
I listened to the conf call fully. This was their first ever exposure - so will cut them some slack. Whatās worrying is
a. mgmt still getting hung up on the apparel business. I still do not think they understand return on invested capital very well. Changing ebit to pbt by repaying debt is not a great one for the long term and infact, leaves share holders worse as it is money that would have been dividended out or deployed into a higher roce biz.
b. worry about growth - even with 5- 10 % where will topline growth come from ? May be if their product mix changes for better, they can claw up margins further with jumbo slabs as they had mentioned earlier.
This sounds very similar to the oriental carbon story (which I hold too) where the real trigger is in FY 19. That said, all these are in the price at 6 x FY 16 with hopefully tailwinds of granite also helping. The stock might be range bound before they clear our these capital allocation issues - apparel division and quartz expansion.
Its a tough call - at this price, all negatives are priced on but this may not go anywhere for another 2 years.
I know I am putting you on the spot here. Do you think it is worth sticking around for two years or look for greener pastures given the management issues (or ignorance if you may )?
Purely oneās own call roy - also, committing publicly to a position makes you adopt an ostrich like approach when facts change. I am not wedded to any idea or any company. At this point of time, I hold shares and have not sold. When facts change, I change my mind
caeserās stoneās FA turn over is almost 4x whereas pokarnas is still only 1 x. I do know that caeser stone sells at about $ 10- $ 12 per sq.ft and pokarna sells at $ 6/sqft.
So discounting for the above, with a 200 cr. FA, they ought to be doing Rs. 300-350 Cr. I think there is a 20% slack still left plus the 5-10% that they can get from rebalancing. I could be wrong here.
Anyone from the USA - if they can verify the yield - viz., price/sq.ft numbers for quantra and caeser stone will be helpful
I had bought Pokarna as a long term investment bet. But because of the unknowables and certain amount of guess work involved it more or less panned out as a trading bet for me as I kept entering and selling etc.,.
I had a decent allocation and then first sold at 1050+ in the later half of last calendar year as unknowables didnāt justify me giving the allocation that I had (matter of personal comfort ofcourse). But around Feb-March entered again due to correction but after March result again sold out around 960+ as from Marchā16 results my assumption of them operating full or near full capacity was becoming stronger (1 important unknowable was becoming knowable) and I had no clue about future capacity additions (2nd important unknowable). Never sold out fully and always had some allocation.
As stated in earlier posts, QUANTUM of capacity addition (along with time taken for new capacity to come on stream) was the most important factor for me to be able to decide if I should hold on and/or buy more.
The concall made it pretty clear on personal front that I should sell out whatever I have.
@varadharajanr Mgmt. had said that they are operating around 80-85% capacity and if I heard correctly then they also said that they are doing 3 shifts. Mgmt. also said that in this business 80-85% capacity is the maximum that they can do. Even if we take into account the 5-10% additions to EBITDA due to efficiency improvements as a result of rebalancing (which gets completed in Decemberā2016) and add another 15-20% as per your assumptions still would it be worthwhile to buy or hold it at cmp is the question that one needs to answer for himself. I personally discounted any uptick due to increased utilisation going by the results of last 3 qtrs and mgmt. commentary. Also discounted any price rise on its quartz slabs as I felt if they could then they would have done it and it should have reflected in last couple of quarterās results.
Any new capacity addition can only add to the numbers fully by FY20 and partially (for 3 months) by FY19 assuming that they start the capex work in Decemberā2016 and given that it takes 2 years to set up new lines etc.,. (although I am not sure on this 2 year part as wondering if they ever said that fresh set up takes 2 years and incremental capacity addition may take less than 2 years).
None the less above information was enough for me to exit fully as I was interested only in Quartz business and didnāt want to justify my holding by basing it on any improvements in Granite biz or exiting apparel biz.
Towards the end of the concall the management did confirm that from the date of decision taken for any incremental CAPEX will take approx. 2 years for the new capacity to be operational. (It would be exactly like initial setup, wherein Breton takes almost 1 year to deliver machine and the subsequent setup takes another 6 months or so.)
Basically, we can only expect moderate growth in quartz which will be driven by the balancing activity (in the range of 4-5%) or a similar efficiency in production.
Also, one point that I would like to highlight from the concall is the capacity expansion happening in the granite segment (13.34 cr as per Mar16 B/S)
How likely is this to bring in any difference in the numbers of coming quarters? (As per management this CWIP will increase the capacity in granite segment and you canāt see immediate result when investing.)
What is the difference between Quarrying Revenues and Finished Product Revenues? What percentage of revenues are from Quarrying? How does the rainy season affect the Quarrying? What does he mean by āthis should be made up more or less in the whole year?ā
What is the difference between Quarrying Revenues and Finished Product Revenues?
-There are no Revenues from Quarrying operations as such. They are the source raw material for making Graniteā¦
Finished products are the revenues earned by the business which installs the granite slabs in US homesā¦this is done by a diff biz (not pokarna) per mgmtā¦the final leg team ( pokarnaās customers ) who install them. Ultimately the purchase of granite by this team was lower due to brazil counterparts flooding the market.
What percentage of revenues are from Quarrying?
As stated above i donāt think there is revenue hereā¦just sourcing raw material from Pokarna owned quarries.
How does the rainy season affect the Quarrying?
You cant mine the quarry when its raining right ? Its open are Hence the impactā¦
if you want a visual, check out videos on youtubeā¦here is one just for referenceā¦https://www.youtube.com/watch?v=R2xM6lJY3Z8
-What does he mean by "this should be made up more or less in the whole year?"
My assumption is what ever qty of granite quarrying was missed due to the rainy season, it is compensated by additional work during regular seasons and thus the raw materials are quarried and stored in the factoryā¦
Hi Ganesh: Thank-You for the video. Very helpful in visualising the operations. However, I do not know why the management are booking Revenue from Quarrying? I think we do not understand the Granite Business as well as we should.
Agreed Abhimanyu.
Neither do I see a line item in either the financial statements or notes to the fin. statement nor do i see a segment wise break up of; here is the revenue from generating the raw material, here is the expense for quarrying and here is the net profit earnedā¦etcā¦in the last few Annual reports. Let me know if you do come across this one.
But if you do search in AR, you would see what the fixed assets are viz. to Quarrying and the small royalty paid to other quarries, where they might source it from. But again the cost of raw materials ( which will be the revenue of quarrying operations ) rolls in to the ācost of goods soldā line item for Pokarna limited.
Booking revenue from quarrying means selling the granite blocks directly from the quarry without processing it into slabs for which they need to get the blocks to the factory for processing on a gangsaw.
Disc: not invested
@Manojag to Abhimanyuās earlier question - do you see the #'s for these Quarrying operations. I understand the process behind quarrying but are they recording sales, cogs and profit from quarrying operations for Granite ?
Thanks,
Ganesh
Some notes I got from Pokarna AGM. Management didnāt really give details about important issues like capex & apparel division. If anyone had side conversations with Pokarna team, please let us know. But they said shareholders can visit the plants in Hyderabad, Vijayawada & Vizag.
Notes:
Hedging
80-85% sales are usually in foreign currency. Pokarna doesnāt hedge any sales and the company is exposed to foreign currency.
Apparel
Currently division is in losses due to depreciation. Management didnāt indicate probable action. But I got a feel that they will try to maintain and open more stores to make the business profitable.
Quartz capex - Management is yet to decide on this.
Competition in Granite business - Granite is an established business & competition has been there for a while. Competitive edge for Pokarna is relationship with distributors.
Debt - Coversion to $ debt will reduce interest rate. This is good as it hedges $ revenues up to some extent.
Indian market - Currently chinese companies service Indian Granite market. Indian market is not willing to pay premium for high quality product. But Pokarna serves Corporate segment like IT companies, Hotels etc.
sharing a presentation I had made a few weeks back purely for discussion purposes - this is not a recommendation. Just a presentation of my research and learnings. I hold the stock but might sell out in case I change my interpretation of facts or new facts come to light.
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