The presentation throws some (but not clear) light on the expansion plans:
Greenfield Project – Expanding Quartz Surface capacity by 130%
I am trying to estimate a fair value for Pokarna.
Replacement cost method: 325 cr for 1.3 x expansion of Quartz capacity implies current quartz capacity has a replacement cost of INR 250 cr. Valuing granite segment at 50% of quartz segment based on EBITDA contribution = INR 125 cr. Another 70 cr for net current assets. This takes the total replacement cost of Pokarna to ~ INR 450 cr. Decreasing debt of 220 cr for pokarna, equity value = INR 230 cr
Earnings power method: Assuming that H1FY18 was an aberration, I am going to use FY 17 numbers for calculation. FCF to equity holders in FY17 was INR 48 cr. Assuming discount rate of 12% and terminal long term growth of 3%, Equity value is INR 533 cr.
Current Market cap of Pokarna is INR 627 cr.
Earnings power - replacement cost = INR 300 cr - the value ascribed to Pokarna’s “moat”, which I presume is the exclusivity with Breton and the Quantra brand.
Market cap - replacement cost = INR 100 cr - growth premium ascribed by market. Given that capacities are saturated , this may not be justified.
Is there a margin of safety here?
In DCF model, slight changes to growth projections or discount rate changes the valuation drastically. I won’t read too much into it.
I would rather like to value Pokarna based on its ability to generate high CFO. In 2016, 2017 they generated CFO close to 105 and 110 cr respectively. Means it is trading at 6 times is CFO at 620 cr market cap, which is quite cheap in my opinion in such raging bull markets.
These sort of companies usually do not get high valuation multiples. It would keep trading at 12-15 p/e in bull markets. Valuation will follow performance rather than p/e re-rating here.
FCF is more accurate measure than CFO due to high amounts spent on maintenance capex ( 50 cr in the last year) without which the firm cannot continue to operate.
FCF to firm last year was 80 cr with EV of 850 cr. 11x EV to FCF for a zero growth company looks fairly valued, not cheap.
Vivek - Yes, I understand the difference between FCF and CFO. My point is more on the usefulness and ambiguity of DCF model.
A good business which is investing on the business expansion regularly will have little FCFs but high CFOs. If one analyzes just FCFs, you would miss a lot of companies that are in expansion mode.
Currently, Equity + Reserves is 164 Crores. This plus the PV of all future cash flows should give us the Intrinsic value. Based on their capital structure, the WACC is , roughly, 14%. The tough one is the starting FCF , as always. Till 2014, FCF has been extremely inconsistent. If one uses the average FCF of last three years, it comes to 69.5 Crores. Again, the CROIC up until 2014, is very inconsistent. If one takes the CAGR of CROIC from 14 up until 17, it is 9%. Now, for the growth rate of FCF I like to plug a toned down version of the CAGR of CROIC. In this case, I use 5%. For the steady state growth, I have used 3% CAGR for FCF. Using this in the DCF, I arrive at an intrinsice value of INR 818 for Pokarna. The cash yield of Pokarna ( FCF / Market cap ) is at an okayish 9%. It is also quoting around 10 times PBT, which is on the higher side.
But the key questions are :
I have no idea what the answers to these questions are. While my interest in Pokarna is piqued by the theoretical calculations, unless we answer the three questions sufficiently in detail, it becomes hard to invest money; especially since the business sector they are in is not really the most transparent one.
My notes from the Q2 FY17/18 concall. I have covered more from the overall business perspective rather than putting numbers, which we all know.
US Market -
USA’s construction market is buoyant. Shift is happening there from Granite/Laminates to Quartz. New growth that is happening is all in Quartz is in double digits, whereas Granite’s is in lower single digit. Everybody (all stone dealers who didn’t want to deal in Quartz earlier) now want to sell Quartz. But still US continues to be a very big market for Granite. US stone market isn’t matured (good runway). Granite business facing stiff competition from Brazil.
Players in US are trying to grab the lower end of the Quartz market as well (Chinese dominance currently). Will have to figure out right product mix across price spectrum. Price increases at will isn’t possible after product launching. So, despite higher RM prices (crude), they are unable to pass on the higher costs.
Caesarstone EBIT margins are close to 18-20%, while that of Pokarna is 35%+. Can this be a threat? Management answered that Caesarstone’s pricing points are even higher than that of Pokarna, but still if they are unable to make higher profits may be due to efficiency, lower labor costs, RM pricing, higher overheads, etc.
Quartz business -
Higher input price (crude) for Quartz and adverse currency movement impacts them. This is why Q2 was low on EBITDA despite full Quartz ramp up vis a vis last year.
At peak utilization (Quartz), they posted 58-60 cr revenue (last year), while in this qtr it is close to 51 cr at almost peak utilization due to the issues mentioned above. Throughput wouldn’t be higher in Quartz despite removing bottlenecks. What they are trying to achieve is increased realizations due to improved aesthetics (close to natural stone). They have pushed around 21 new products in the market. Takes 3-6 months for the verdict to be out. They expect results from this endeavor starting Q1 next year. These new products will replace some of the older products with lower realizations. These new products tend to attain 10-15% higher price, but mgmt wants to wait till q4 concall to give any concrete details.
Employee cost has been rising as they have already hired staff for the new plant. There is a big learning curve and takes time as employees are very critical for managing the operations of Quartz business. They want staff to be trained and ready for the new plant on time. They said employee expenses will be more or less the same going forward.
Increased sales and advertising expenses to improve visibility is one of the factors for lower PAT yoy in Quartz division. Will continue to advertise aggressively going forward.
Guidance for 35%+ EBITDA in any case.
New Quartz plant -
Selected the location for new quartz facility. Legal due diligence underway. Plant will commence production post 18 months of the date of land finalization. Breton machine has been ordered but put on hold till land issue is resolved. Asset turns at peak utilization would be 1-1.25. Optimum utilization/stabilization from this new plant in itself will take 3-4 years from commencement. Ramp-up takes time.
Incremental 250 cr debt they will take for the new facility will not show up on the Balance Sheet even until next year. Moratorium period is 3 years.
On capital structure - debt vs equity for the new plant, they wanted to take the financial closure asap (route that was quicker). They can decide if equity route is needed later as well.
Granite vertical -
Improved performance in Granite vertical in Q2 comes from improved production from new quarry as well as value addition (cut to size i believe). Market remains extremely competitive. Mgmt hopes the market remains like this (doesn’t deteriorate further) in order for continued improvement in this vertical.
Miscellaneous -
Interest outgo is continuously improving. 7 cr for this qtr vis a vis 9 cr last year. This will further reduce due to credit rating improvement in this qtr for the company and its subsidiary. Also, regarding transfer of all debt to dollar denomination, management has given a deadline (Dec 31st) to the bank consortium to give a final answer. Mgmt expects 4-5% (on absolute basis) rate reduction from the current rates. This would be big savings.
Geographical expansion is on the cards. Have been looking at markets where they have not been traditionally present in a large way or not present at all. Europe, India, Australia (very small market).
GST reduced from 28% to 18% is good for the industry.
Total debt is 217 cr. Planning to pay 35 cr of outside debt (total outside debt is 117 cr) this year.
Revenue breakup - 99% of quartz revenue from exports. 61% of granite revenue from exports.
Breton gives them upper-hand vis a vis Chinese manufacturers. In India, it is a challenging task to educate users regarding difference between Breton and Chinese. Take for instance IKEA. IKEA has selected us as it doesn’t use Quartz from Chinese players worldover. Be it composition, technology involved, polishing, installation, staining, cracking…Breton is much better.
IKEA’s projections for India are very big. Though, can’t put a number on to it at the moment. Things are underway.
very nicely captured ,thanks for the update
Brazilian exporters have a natural edge in terms of a weaker currency and lower transport costs, in exporting to the U.S. How does the company plan to counter that ?
Could you please share companies that operate from Brazil who might take advantage of depreciated currency and lower transportation costs ?
The stock surged more than 10% today. Any new developments in the company of which I’m unaware of?
could be because ICICI came with a buy recommendation with huge upside
Any update on sale of Apparel Business??
I have ICICIDirect account. Where can I find this report on ICICIDirect portal?
For all company reports follow the following links icicidirect.com>research>investment recommendation>All company reports&updates
I was scrolling back the posts and i am so disappointed with investors today!
A single bad news destroyes the sentiments so easily today, there is so less visibility now, no topline growth, expansion will take time , oppertunity cost amd what not!
I am not mocking any fellow memebers…
I feel there is nothing wrong with the company, infact there are good visions already…
I loved the attempt at minimizing geographical concentration risk even at the cost of competition in other mature markets rather than markets of demand…
On this point i will be very much interested to know what kind of margin affect we can encounter if we diversify in other markets than u.s…
Yes the capex does take time to come online, and we maybe left with a fluctuating topline, but this is not a 1 to 2 years story at all, do an sip in this scrip you diversify risk , domestic oppertunity has not yet come up, and i feel if once the indian market is activated there can be considerable demand…
Brazilian granite is a risk , and everyone should be aware of that, still as of now they are maintaining good margines of 25 to 30percent on ebita front in granite, seems no downward effect in last 6 quarters…
And this comment that if capex comes late, they will have more compitition! I feel this is the most retarded though i can see… Firstly, only few breton compitiors exist , kreda is the majority technology used by others, the american quartz market is too huge to oversupply the demand…
And the management outlook to nudge the untapped markets of east africa and india is excellent…
I dont eant to go in numbers here, as this is a very long term story, but a 130percent increase in topline means a lot, leaves oppertunity for atleast 300percent increase in bottomline in 5 years…But these are peanut numbers and i basically laugh when people pin their hopes on a single capex…
But what i dont feel comfortable in this business is they cannot pass through input cost directly!!
The returm on capital is roughly 26percent this year and was 30percent last year, and i am very impressed!
Crude will not stay at this level for long and i am sure on that front margines will get relief…
But i am also disapointed with 34acr land instead of 50! Wonder how much space is there for further capex, otherwise they have to set up a new line totally with new land in future…
Again, lets see how their 22 new quartz products fare in coming 2 quarters, as it seems no significant margin contribution tthere…
All in all a very long term story, but lot of potential oppertunity floods possible, if us is using quartz so much , i hv a hunch emerging markets like india will want it badly in future…
And european markets have changed and are changing now, they are differentiating chinese products now… Even with emerhging markets being the holy grain of chinese products, these are such high margin business, even a small proportion of demand can be tremendous for a small company like pokarna…
Its sad that a bull market is paying 684cr for a patent technology! If nothing else, 2000cr is minimum what pokarna deserves…
Disclosure… Not invested… Researching still… will start sip soon…
Pokarna q3 concall notes…
Granite…The business outcomes are going to be stable and flattish going forward…
Although the gst tax cut is good for the organized sector in india in this portion of the business but since the company is mainly export oriented, this change in tax will not have a significant effect or it is too early to comment on this fact… No capex in granite in future in on the cards…
Quartz and General aspects…
The topline can grow by 10percent based on sales but the focus in presently on the sustainability of the margins in quartz as the crude prices are expected to go up in the recent future …
I got a sense that the margins will be difficult to maintain going forward in the input consts continues to give pressure…
2.The inflation expected in US, impact of which on this natural stone business is unclear but expected not to aid margins or have any other effect on the business outcomes as the business is not momentum driven by inflation.
3.US tax cut effect…
The management believes that the tax cut is not going to gift a pricing power to the us based production lines and dismisses to have any effect on the nonUS producers competitiveness
No US based subsidiaries are being planned to be acquired to take advantage of this tax cut…
4.While decreasing the geographical concentration risk is being planned by penetrating in other countries, but the management is committed to safeguard the margins in what ever activities they conduct.Also there are pockets within this market where the companies believe they can capture the market with pricing power…
Even in india, while collaborating with IKEA the margin safegaurd is going to be the priority and the management believes that the partnership wont be detrimental in that aspect
5.The quartz demand in US is likely to grow at 20-25percent cagr for many years!
6.The company is now focusing to promote itself as a band while maintaining the previous busniess model…
7.The capex is going to start as expected and as per the previous guidance on 18months from acquisition
8.The topline is also dependant on the product mix and the type of orderbook, if color and pattern and thickness changes happen in the orders then the production volume decreases in a quarter, if not it improves…
the company is adding new distributors to promote their brand and will continue to advance on this with future focus.
The quartz market in the us is the most happening market in the recent times , even laminates are giving away shares to quartz…
11.Breton and unorganized play from chinese quartz are increasing according to demand and this is expected… (Building a successful brand now i feel is very important to survive in the compitition and the company is in the correct like of progress, quite impressive)
12.The chinese quartz products have started to visually look much better but in terms of technically quality it is pretty much same ans inferior as it used to be…But the premium consumption still demands breton
14.the change of debt structure on the foreign currency loan is under process and confirmation has been received from union bank and indian overseas bank and a third bank confirmation (BOI) is under process, the effects will be seen from fy19…
15.No effect of capex in fy19 is expected
16.The company is focusing on products which have better aesthetics rather than plain vanilla topline growth… (kind of repetitive point )
17.Although the gross export from india to us in quartz has been increasing there is a technical difference in the fact that most of the indian exports are focusing on basic quartz and which is different from pokarna which deals with a premium variety of quartz in technology of breton, quality and aesthetics… So that is not a concern or a effect…
18.The management boasts of having a competitive advantage in the designing acumen which has been their profession in different segment since inception as a designer for raymond in earlier times… So they believe this is a competitive and intangible aspect of the business edge apart from breton as a technological advantage in both indian export competition and in the US market as a whole…
This is excepts and views from the conference…
No personal views have been added… except on one point mentioned as ()
Please enrich if i have missed out any points , which is highly unlikely…
Disclaimer…Not invested, researching…
Thank you @Capsule91 for sharing the notes.
Clarification regarding item #7: they are yet to acquire a land for building new quartz line - right? My understanding is that they are still looking for right land. Once they get it - then the 18 month clock would start. Please correct me if I am wrong.
Re: item #10 - I personally got a two level counter-top done in my basement (in US) and went with laminate for bottom level and quartz for top level. Putting quartz on bottom level would have cost me three times of what I paid. In most cases cost between laminate and quartz is huge and price conscious consumers would still go with laminate wherever they can.
Disc: holding Pokarna since early 2016
@rupaniamit on #7… they have done the purchase…take a look at q3 inv ppt …
#10…my view is limited to management comment…
But as far as my understanding they cater to big realty interior designers , no offense please…I too raised eye brows how laminates are going to lose share, may be they meant a certain portion of laminate customers…
Disc… not invested, researching still…
