@sumi00
since the devaluation started INR down 4%, Yuan 2.8%
so no worries.
The whole game of competitive edge is shifting slowly but definitely in favor of India.
Lots of Multi year themes similar to textile will evolve in future.
so be ready to play them .
I know but the devaluations donāt end in few % here and there. India had 50% devaluation in 2 yrs and if China crisis escalates which it will, they have only one thing to do allow devaluation to release some stress in the system. In short, not worried about volatility but structural movements.
I had a conversation with a representative of the company. Below is a summary
- For the new quartz plant, the average utilization rate in the previous year was about 40-50% and for granite it was 70-80%. Quartz utilization will improve going forward as sales pickup
- For the recent quarter, the quartz plant was shut down for ~20 days. Without this, their production and utilization would have been higher. (Possibly sales also would have been higher but this is my assumption)
- No immediate plans to add capacity and therefore they dont expect any additional funding for another 2 years. This is the status as of now but may change.
- Cash generated would go to service the debt and bring it down. That is the near term plan.
- Vizag plant has provision for adding lines so any expansion will use lesser capital as it will be a brownfield expansion
- Quartz uses a polymer and is not a straight extraction like granite. Polymer is driven by Crude prices. This is a positive as Crude price falls. (Not a big positive in my view as I read somewhere that polymer is a small component. Will need to check)
- Branding is through Quantra and it is doing well. Pokarna will have step up efforts to improve this.
- Primary competition is other companies having access to Breton technology (5-6 companies). Market is very large in US and Canada to accomodate all.
- Chinese quartz is of inferior quality and is not direct competition to them (not sure if this is correct. need someone from US to confirm this)
- Recent data on housing starts a positive. Company expects demand to grow (very generic on this so not much insight)
All in all, most of the data was a reconfirmation of what we know with 1-2 additional insights. Will have to watch the sales growth and debt reduction closely.
Disc - Invested. Please do your own due diligence
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Thanks Sam for your effort! looks promising
Disc: invested and added in the current dip
Hi @shyamiy,thanks for the update.I wrote to them 2 weeks back with a long list of questions and did not get any response.I too called their investor relations and quizzed them with my set of questions today.What a coincidence.
Some of them may be repeated of what you have already said*
1.GRANITE:
a.Raw materials:
For granite,70% of the raw materials are being sourced from their captive quarries and 30% are imported,their current quarry would last for decades as estimated by the geologists.Have a total of 15 quarries. And getting new license for a granite quarry is really tough for a new entrant but if you are an established player with a good track record it is a bit easier.
Company has to pay royalty to the government (As per AR 2015,there is a mention of Royalty on quarry land of Rs.7.45 lakhs and Government royalty and dead rent of Rs.7.15 crores) on a total granite sales of around Rs.193 crores.)
(Unprocessed granite is currently under import restricted list and if you own a quarry abroad only then you are allowed to import unprocessed granite,not sure how the company is able to import 30% of their raw materials without owning any quarry outside India).
b.Capacity:
Current total capacity for granite is 5 lakhs sq meter,located in Hyderabad.There are 2 units one with 1.5 lakhs sq.meter and another with 3.5 lakhs sq.meter.
And the current capacity utilization is around 70% on both units.
c.Clients:
In India,Shobha is one of their clients which uses granite countertop in their high-end residential projects.But most of the sales are coming in from exports through B2B sales.
d.Price realization:
It is around $6 per sq.foot and it does not vary much with slab sizes.
2.QUARTZ:
a.Raw materials:
Currently compay has applied for quart license and does not have any captive quarries.All of the quartz is sourced from a quarry owned by chettinad group(from Tamil Nadu) in Vizag.No risks with raw materials even if the quarries are not approved.
Company calls this quarry as strategically located because of the proximity to the port and its manufacturing facility.This reduces transportation costs as well.
7% of polymer resin is added to the quartz slabs during processing.Generally,ploymer is expensive however Prices of polymer is directly linked to crude and falling crude will help in improving margins this year.
b.Capacity:
Total installed capacity is six lakhs sq.feet and the current utilization is around 50%.Until last year they used to run it 5 days a week and this year it is running 24*7 because of the demand in US and other markets.
It is fully automated unit and in case if the pattern/color or something needs to be changed,the downtime is only 4 hours.
c.Breton
Breton has a policy of one company in one country for its exclusive license,they dont want to dilute their exclusivity by offering it to multiple payers.He also mentioned Pokarna had an exclusive relationship with Breton before and now it is lapsed (not sure what it means).
To set up a new line with Breton,it needs atleast 2 years.Currently the company has only one line established,its competitors like Caesarstone has 8 lines running.It has provision to add second line within the current facility(brownfield expansion).Even if a new company tries to get Breton tech,it takes 2 years to establish the line.Hence,threat of other companies getting in quickly is low.
Globally 12-14 sizeable manufacturers are producing quartz with Breton technology.Bretonās chairman flew to Vizag once to see pokarnaās facilities.
Running this line 100% is realistically not possible,they are aiming for 80% utilization.
d.Price Realizations
Higher the slab size,better the price realizations.3 major sizes they produce (12 mm,20 mm and 30 mm).
Avg.price realization is $10.
e.Client Base:
Pure B2B ,there are plans to sell directly to end customers like Caesarstone through their branding(B2C).
One of the large customers cancelled their tie up with Caesarstone and selected Pokarna as preferred supplier in EU last year.
f.Debt:
Promoters have injected their own money to the tune of Rs.70 crores and bank loans of around Rs.160 crores which is availed at 14%.There are plans to get foreign currency loans to reduce the interest costs.Current strong cash flow generation would be enough to service the debt and slowly retire it.
Future:
Upside is huge with uptick in demand for housing in US and other markets.US is still underpenetrated with quartz compared to other developed countries.No CAPEX for the next 2 years.
Operating margins are around 30% for quartz and 20% in granite.
Please feel free to add any other questions if you have,I will try to get the answers.
Disclosure: Invested.
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Great work Sambath
Thanks for offering to have another conversation with them.
If you could get clarity on a) Not having an exclusive relationship with Breton anymoreā¦ what that meansā¦
b) Price difference vs Caesarstoneā¦ how much lower is itā¦ and is that a big driver for converting a caesarstone customer to a pokarna customer ?
Sambath - great effort. looks like you uncovered more insights. Did the promoters lend 70 crores to the company instead of adding it as equity ?
You are right promoters lent money to the company which was interest free. Pls check Q1 FY16 ppt they have mentioned that interest is payable @14% from Q1 as things have improved. This fact alone is a major comfort factor regarding promoters.
@varun_kejriwal I think what they mean is that Bretton can supply other equipments like granite cutting and polishing machines to other players in India. Quartz remains exclusive though.
Guys,Forgot to add a couple of points.
1.Daltile used to have Caesarstone as their quartz supplier ,now they do it with Pokarna under the brand name of One Quartz.
2.They also mentioned about the sprecupoint capital managementās findings about the caesarstoneās misleading facts about their business.This is the link for that post if you want to take a look,i will post those points in the next post.
http://www.sprucepointcap.com/cste-ltd/
Hi @varun_kejriwal ,sure I will wait for few more days for others to post in their questions if there are any.I will collate all the questions and talk to the company again.Whatever i did was a pure journalistic work,jut gathering the information and publishing them as is.need to wear a real analytical hat and analyse,dissect the story in every angle like the seniors of this forum if we want to take a significant position.
On your question of finding the price difference,i think we can do by comparing the prices in Caesarstone and daltile website,we might get an idea.But Caesarstone is marketing their product as a premium one and hence,there may be some premium price than others.
After talking to the company, following questions came upto my mind:
1.If Breton technology is considered to be superior technology,then we need to find if Pokarna the low cost producer among the quartz players who uses Breton technology?
2.Is there any chinese player using Breton ?Here is the list of companies uses Breton:
http://www.breton.it/engineeredstone/en/product/Plants_for_manufacturing_compound_stone/WEB_LINKS_TO_THE_MAIN_BRETON_COMPOUND_STONE_MANUFACTURERS
3.Have written to the Breton,Italy to confirm if they offer their technology one player one country or multiple players could get their technology.
4.Warranty Information:
We need to find the warranty policy of various players like Caesarstone,cambria,Siletone alongside Pokarna? Current AR of pokarna has no mention about contingent liabilities related to warranty claims.
5.@Maheshcm has been doing some work in US talking to the industry people and doing some scuttlebutt. I spoke to him couple of times,he said he will update us his findings soon.I will try my best to talk to some distributors as well and gather the information.
End Customers:
1.How much is the total cost of buying and installing quartz compared to granite?
2.Percentage of cost the customer is spending for kitchen countertop in the overall cost of house? If it is under 5%,then shift to quartz from other stones could happen faster considering the merits of engineered stone.
3.Quartz is relatively a new one in the countertop industry,need to know from the early adopters how do they feel about it after few years of use?Are these adavantages of quartz (Scratch resistant,non porous,no chipping,no sealing needed,durability,heat and chemical resistant) really true?
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Spruce Point capital managementās report about Caesarstone on why they are shorting this stock:
1.They collected quartz from multiple companies and did a lab test to find the amount of quartz in each one.As per Caesarstone,Pokarna and others,it should be 93% quartz and 7% polymer resin.Lab results of Caesarstone indicated less than 90% of quartz.
2.Less than 93% of quartz may be because of the 20% increase quartz raw material in the last 2 years.(Need to find out what is pokarnaās agreement with Chettinad group for quartz on pricing).
3.Quartz is no longer a premium stone,there is a new stone called Dekton from a Spanish company called Cosentino is the new premium stone in the kitchen countertop.
4.Market Share gains by Caesarstone in US is not true.They looked at the import data for quartz into US and found that many other players were gaining market share from Caesarstone.Can be verified using this link:
http://www.stoneupdate.com/us-stone-imports/analysis-mid-yearannual/920-test-of-tables
This link shows imports from Indian increased 200% from Q1 of 2015 to Q2 of 2015.
5.Gross Margins of 42% in US is overstated because they included their FX gains,their margins in Singapore and Australia are 32% and 25% respectively.This is despite being a B2C player.Now,if we look at Pokarnaās margins it is more than 70% gross and 25% Operating margins.
6.I have seen some reports using Freedonaisā research report to identify market share gains of stone players.Spruce points mentions that Freedonia made those reports on behalf of Caesarstone and not completely unbiased.
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Seems, Pokarnaās sq ft realization is around $10 vs, Cesarstoneās retail market ranging from $30 to $100.
Hi @sumi00, 2015 Annual Report (page no 114) states about the loans and advances from the related parties under Unsecured:
2015 2014
Loans from Directors 3548.21 3810.27 - -
Inter Corporate Deposits 4250.40 4250.40
So out of Rs.200 crores long term borrowings,Rs.78 crores are from the promoters.
I donāt know the financial impact of this news item but sharing it for other members:
Pokarna Ltd has informed BSE regarding a Press Release dated September 01, 2015, titled āPESLās Quartz Surfaces receives Kosher Certificationā.
PDF here.
Hello all,
I am new to this forum, so apologies for any amateur comments. Thank you all for making this forum so insightful and especially this thread. I have been studying Pokarna for the past few days and really think the intrinsic business of the company is quite robust. This is further supported by me reading of all your posts. Inspite of the 2 year run up of the stock, the company appears to be trading at compelling valuations. Two things however are keeping me from investing into the stock as per my reading of the 2015 AR:
-
As soon as the company posted a decent set of results, the promoters have immediately raised their remuneration limits to the maximum possible (10+1%). Remuneration to directors increased from 68 lakhs to 288 lakhs. I am not saying that the management does not deserve this (even though I donāt understand the rationale of hiring Mr. Apurva Jain and directly making him a director) but I guess it still warrants some attention
-
Pokarna has dues worth > 60 crores to Pokarna Fashion, Pokarna Fabrics and Pokarna Marketing (all are associates of Pokarna). These have accumulated owing to past losses in the apparel business I guess. These are currently shown as currently liabilities but optically they appear to be cookie jar reserves kept in the company by the promoters. So whenever the company makes good cash flows these liabilities will ideally be paid off first.
All in all - my biggest doubt in the investment thesis is whether the management is shareholder friendly and whether they will try to take a big slice before any returns trickle down to the shareholders
I do understand that the management owns ca. 56% in the company so my concerns are alleviated to some extent. But if anyone can offer some more insights into this it would be extremely helpful.
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Hi @sachit, Thanks for bringing those points.Admire your attention to every single detail in AR.Those are valid concerns but dont have an answer.These are circumstantial evidence and one needs to take a judgmental call. However if we look at even well run companies in India,there are lots of examples of promoters paying themselves hefty salary.
Some recent examples are given below:
1.Sun TV ( Rs. 60 crores for Maran and another Rs.60 crores for his wife Kaveri on a profit of Rs.700 crores.
2.Apollo Tyres ( Rs.30 crores on a profit of Rs.300 crores for Onkar S Kanwar)
3.Amararaja Batteries: (Rs.30 crores for Jaydev Galla on a profit of Rs.420 crores)
Your second point is most important and am stumped by your close attention to the balance sheet notes.I was looking into receivables to sales and Inventories to Sales and never paid attention to current Liabilites closer.Thanks again for bringing those here:
AR 2015 page 128 mentiosn about this:
15. Payables include to Pokarna Fabrics Limited Rs. 5085.48 Lakhs (previous year Rs. 4768.88 Lakhs),
Pokarna Marketing Limited Rs. 1213.32 Lakhs (previous year Rs. 1138.05 Lakhs),
Pokarna Fashions Limited Rs 35.00 Lakhs (previous year Rs. 35.00 Lakhs),
Southend Extension Rs. 3.66 Lakhs (previous year Rs. 14.40 Lakhs),
Gautam Chand Jain Rs. 1587.68 Lakhs (previous year Rs. 1949.45 Lakhs),
Rahul Jain Rs. 1022.28 Lakhs (previous year Rs. 918.25 Lakhs),
Prakash Chand Jain Rs. 1260.95 Lakhs (previous year Rs. 987.50 Lakhs),
Rekha Jain Rs. Nil Lakhs (previous year Rs. 14.37 Lakhs),
Nidhi Jain Rs. Nil Lakhs (previous year Rs. 5.43 Lakhs),
Apurva Jain Rs. Nil Lakhs (previous year Rs. 5.43 Lakhs),
Arrush CreationsRs. 6.78 Lakhs (previous year Rs. 32.58 Lakhs),
Southend Rs. 0.03 Lakhs (previous year Rs. Nil Lakhs),
Karvy Computer Share Private Limited Rs. 0.25 Lakhs (previous year Rs. Nil Lakhs)
I was thinking the management will reduce the long-term bank loans using the cash flows of the next few years given that there is no CAPEX needed.
Now,this payables are concerning me as well.When i call their Investor relations,I will ask them about this.
Please bring in more such blind spots that we obviously miss.Do you see any other loopholes in the story?
-Sambath.
Hi @Sambath
Thank you for the kind words 
To your question, donāt see any other loopholes for now. Really like the business otherwise and feel it has a lot of potential.
Sachit
Guys, payables include losses and loan outstanding to related parties. Regarding compensation, it is ok since his compensation was pathetically low previously when it was not making money.
@sumi00, Just a layman question.I am not very savvy in accounting,would be great if could explain it.
How does losses and loans outstanding to related parties become payables?
well, the nos. quoted above are from the section under related party transactions. Now related parties had extended loan to the company which remains outstanding even as on 31st march 2015. BTW I am no expert in accounting either.
Alpesh, the Caesarstone price that you are suggesting includes Fabrication and Installation also. $10 per sqrft is the plain raw material cost of the Quartz stone out of factory to a dealer. I saw $10 /sqrft for a plain exporter is on the higher side, it averages anywhere between $7-$9.
Now, the nature of business model between CaesarStone and Quantra is different. CaesarStone has built a retail brand, they have their own fabricators, their margins are high. Its an opportunity for Quantra. If the management is capable, gradually they could develop similar business model and expand margins and market.
Right now they sell it a dealer, dealer sells it to fabricators. And some dealers have their own fabricators and few sell it to retailers directly. Most dont even quote a price to retailer. I did some market research, a dealer of Quantra sells it at $25/Sqrft in west coast USA. Ofcourse different color and different quality costs different.
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