POKARNA LTD ( Stock opportunities )

@bigvig @Maheshcm and @varadharajanr : thanks for the detailed discussions here.very delighted to see your thoughtful/logical questions and reponses.
@varadharajanr: I am glad someone like you asking all the right kind of questions.Indeed ,I was really happy when you found the loopholes in the story.We all put our hard-earned money into the market,it is better if we are well-informed about the companies that we invest it.

Please bear with me if my post is lengthy.

Coming back to your questions:
1.Raw materials for quartz:
a.Need to find out their agreement with Quartz supplier,terms,how long the agreement is valid, pricing,is chettinad group the only supplier or any other supplier they have,environmental clearances.
b.Need to find out if they have any competitive advantage in terms of raw material costs compared to Caesarstone and others.
For granite,do you have any questions? Those mines were acquired a period of decades when no one was interested in exporting granites.
c.Processing capacity for quartz and granite:
Check the installed capacity and the utilized capacity.As per AR 2010,it is 8.89 lakhs sq meter for quartz.In my last call they mentioned it is around 6 lakhs sq.meter.

2.Why sales went up only in 2014?
Primary reason was Quartz sales.I think you should look at the quartz numbers from 2010.
2010 - Rs.8.89 crores
2011 - Rs.31.4 crores
2012 - Rs.40.98 crores
2013 - Rs.47.54 crores
2014 - Rs.61.49 crores
2015 - Rs.135.73 crores
Quartz which was contributing 10% of the total sales in 2010 ,is now contributing to more than 40% of the total sales.
Only during last 3 years,they have ramped up their sales through several marketing initiatives and the results of which are being reflected in their numbers.It is tough to answer why their sales was not good in 2010 because it takes time to build your sales channels.Good evidence is their tie-up with Dal-tiles and Dekker Zevenhuizen B.V.Daltile is selling under One Quartz and Dekker will be selling it under the brand EQ by quantra.
Currently they are striving towards creating a healthy mix of owned and third party distributors across key regions to help develop its business.

3.FCCB:
This was issued in 2007 to fund quartz project.My take on this is since pokarna is already an operating company they decided to issue FCCB under pokarna rather than pokarna engineered stone ltd which was not fully operational at that time.
Though they defaulted in 2012,last year they redeemed all of FCCB.
Look at their Cash flow from operations:Not a single year with negative cash flows.

4.Borrowing profile:
Let us look at their borrowing profile from the consolidated financials:

So,the total borrowing as of 2015 is Rs.260 crores and if we exclude the working capital loan and unsecured loans,term loans of Rs.110 crores is the big obligation.Directors did not charge any interest until last year for their loans to the company.From this year,they are charging 14% interest for this loan.

Looking at the strong cash flow and no CAPEX for another 3 years,they are likely going to pay back a significant amount of outstanding loans.Not sure they pay off banks loans first or the director’s/inter corporate loans first.

This brings up some more points:
1.Company never diluted their equity even when they had tough years.
2.Company redeemed its FCCB though after a default.
3.Directors pumped in interest free money for the company to stay afloat during tough times.
Why would they do it?

Below is their working capital since 2003-2004:

4.Price realizations:
Varadha,it is tough to compare the price realizations of Caesarstone and Pokarna because of their business models.Pokarna is B2B wherein they sell it to dealers and dealers will in turn sell it to fabricators,distributors etc.However,Caesarstone is a B2C company which directly sells it though its own distribution network.So,the prices are incomparable.But the company mentioned their avg.price realization is around $8.

5.Interesting part about their cash flow is there has never been a year with negative cash flow from operations:

6.Recently i wrote to Breton with the following 2 questions: Please see the answer below:

-----Messaggio originale-----
Da: Simonetto Alessandra
Inviato: lunedì 31 agosto 2015 12:08
A: Zamperin Pietro
Cc: Crestani Giancarlo; Caon Damiano
Oggetto: I: Sambath - Small Investor

Dear Sir
See my answer in UPPERCASE

Hello Team,
I am small investor, doing some research on Stone Industry and quartz manufacturing companies.I know Breton is the leader in quartz technology and more than 10 sizeable players are using Breton across the world for quartz.

It would be great if you could answer the following questions:
1.Does Breton offer their technology to only one company per country ? or there is no such limitation? NO, THERE IS NOT SUCH LIMITATION

2.To set up a new line of Breton,how long does it take from the time of ordering the equipment? ABOUT 10 MONTHS DELIVERY + 6 MONTHS INSTALLATION

Please add your questions if you have any.I will reach out to them or if you want i can send you their investor relations contact.You can contact them as well(They might ask your DP id).

Thanks,Sambath.
Disclosure: Invested.

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@Sambath
I find your work outstanding and detailed. And unlike a lot, you do not seem to have a lot of endowment bias and make a balance case for it.

the key will be to find out details of this arrangement with chettinad group for quartz mines. And for the record, chettinad group is very close to AIADMK in tamil nadu. infact, her foster son’s marriage took place in theri schools and offices bringing the entire city to a stand still.

and recently there was a mega raid in their offices

http://economictimes.indiatimes.com/news/politics-and-nation/income-tax-raid-on-chettinad-group-documents-jewellery-seized/articleshow/47690386.cms

why would someone like that would sell to pokarna at what seems like prima facie, lower than market price is not something I have an answer to.

Meanwhile, latest US mothly import (for July).
http://www.stoneupdate.com/us-stone-imports/statwatch-monthly-report/934-statwatch-stone-july2015

Few other thoughts…

  1. Why would Ashish Kachalia increase his holding since last 3 Q’s? Last purchase was at 700 - Open Market.
  2. Based on his investment pattern. This is the first company so far where he increased investment 3 QtoQ.
  3. He do invest heavy where he gets longer term growth. Everyday, Shaily, Navin

@varadharajanr: I am here to learn ,not to get sentimental or biased towards my stock ideas.I would be more happy if people like you find the blind spots in the ideas we discuss here.We all work hard to make our living and save our money.It is better to have our theory be challenged constantly by others so that we become very thorough on our ideas.This way we can learn as well as sleep peacefully with our stocks.

Tonight,I will try call them and find the answers.If not,next week i will try to get the answers.

@alpeshp72: As per the link,the total quartz import from India in July 2015 is 176,905 sq.feet. If we convert that into metres,it comes to 16434 sq.metres.If we do a back of the envelope calculation for 12 months,it comes around 200,000 sq.metres.

Pokarna’s total capacity is 8.89 lakhs sq.metres annually. I have few questions here:
1.Is my calculation right?
2.Does this indicate Pokarna is the only quartz player from India?
3.Even if we assume 2 lakhs to 2.5 lakhs sq meter of annual exports from India for this year,it does not even come close to 1/3 rd of pokarna’s capacity.

Have to look at competition as well,

In Granite, Canada stunned by growing 10times last year
while in Quartz Turkey and Czech Reb have gained huge scale.
I guess they have eaten market share from Spain

@Sambath

Pokarna’s Quartz exports to US were 98cr. Assuming $10 persqft realization, the volume must be 1.6 lsqm (15.6 lsqft). Extrapolating monthly US imports to annual (potential error), imports from India were 21 lsqft. Its quite possible that majority if not all of India Quartz exports are from Pokarna, especially since it is the only company with Breton technology in India.

But extending the same logic further, they sold 37 cr of Quartz to ex-US destinations. Considering the production of 3 lsqm, the volume of ex-US Quartz sold was 1.4 lsqm. This means a price realization of $3.9 per sq ft which seems too low. Why would they sell at such low prices elsewhere?

Similar issues crop up when tying up the granite story. Maybe I’m missing something, so would love to hear from you all.

Latest report on US Countertop market expects fastest growth of Engineered stone amongst the regular options
http://www.investorideas.com/news/2015/homebuilder/09173.asp

Thanks - can someone figure out how many sq. ft pokarna has sold last year - I am trying to triangulate the entire thing by looking at yield per sq.ft and RM cost per sq.ft and compare it with caeser stone and hopefully the results will give me more conviction either way.

Hello all,
don’t know if this means much but was going through the Annual Report of Asian Granito India Ltd. and the following fact about their Engineered Stone division (Marble + Quartz, about INR 110 cr in Revenues in 2014-15) caught my eye:

“Cutting-edge technology: The Company uses the top-of-the-line Breton stone-cutting technology that helps retain the natural beauty of marble.”

Don’t think it means much cause it says marble and not quartz. Also, as per the wordings of the company they don’t export anything from this division and actually plan to increase imported products for sale in India. So I don’t think there is any competition for Pokarna’s quartz. But if anyone is aware of more details, please share.

Thanks
Sachit

I had some help from the hedge fund which shorted caeser stone and I found the following:

  • selling price for daltile (could not find it specific to pokarna’s quantra) is on par with others - so nothign different here
  • we would not know about the price they are selling to daltile at - my sense is it should be 10% lower to push higher margins to daltile to make them feel incentivized
  • so it comes down to pokarna’s RM as a percentrage of cost being much lower than caeser stone’s.

we know that

  • AP/telegana have not given away these mines through open auctions. there is no public information on how chettinad got these mines and how much they are sharing as royalty etc. it all seems very obscure here.
  • pokarna has on board a guy who is charge sheeted in the coal block allocations cam - yugandhar. We all know how coal block allocation happened
  • Given caeser stone is present in India, I am not able to understand why on the face of it chettinad (check them on google to understand the unsaid) would sell to pokarna at a lower price than what caeser stone would buy at. No one seems to have an answer for this and I suspect we will never get an answer as it involves getting info from chettinad group.

As things stand, given pokarna’s dependence on one single mine owned by chettinad group and possibility of a black swan event (coal block cancellation redux ?), I would look to enter at about 900 - roughly 10x or so but would be cognizant of these high impact, low probability tail risks (russian roulette risks).

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Though the company may not be transparent about raw material cost (they could argue they would keep it confidential to have an edge over competitor), they should let the share holder know what are their arrangements (contracts) to have a uninterrupted supply of Quartz in critical cases just so the production is not stopped because of raw material issue. The company should also disclose how many suppliers they have. We should pursue to gather it.
We should also request the most updated capacities for both Granite and Quartz.
I think its good if they have excess capacity (which I think they do) for the increased demand since they have added more dealers recently. Considering the current OPMs, if they can leverage the current idle capacity to the increase in the demand without additional capex its a boost for the profitability.
@varadharajanr, is there a way if you could find out how much of raw material CaesarStone sources from India , from your hedge fund contact that you have?
I have seen their report on CaesarStone, can you also find out if they know there is any other Quartz exporter from India than Quantra? Because the suggests they have researched most Quartz imports to US.

I think we are all too over concerned about one single “Chettinad” supply while the consensus is Quartz is easily available. But good to understand if they have only one raw material supplier and why Pokarna thinks Chettinad is better, does Chettinad have high quality raw material over others or something else?

With union government’s push for make in India and transparency and efficiency in allocating the natural resources, the license for Pokarnas Quartz mine should be processed faster which would have taken longer otherwise.

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Caeser stone’s sourcing from India is very minimal - less than 5 % of their total sales.

My concern is not on availabiity of quartz or otherwise but about the way quartz mines are allocated in a completely opaque manner. I can’t see any bids/solicitation of bids/even names of owners who have been allocated these mines in the past. Are these owned or leased ? if they are owned, what did the owners pay for it upfront ? what are clauses for termination ? etc

any help from anyone will be helpful.

Thanks , we have to find out why CaesaStone cant source more and more from India than Turkey? Is that something you could help with Varadharajan? And also when you try to contact the Hedgefund that did lot of research on CaesarStone and Quart Stone imports to US, if you could gather the names of other exporters from India if any.

Thanks-Mahesh

Mahesh

i did ask but caeser stone does not disclose their vendor names. They only disclose it country wise and India is not a big portion of it unfortunately.

I suspect unless we get someone in this business from India, this looks like a dead end to me. Caeser stone being a listed company won’t talk too much - we have to find a quartz mine owner/someone in the value chain to get these questions answered. It looks like an incredibly opaque, heavily regulated industry like all cash cow natural resource businesses in India and mines being allocated based on discretion

I think following are the important things that we have to get clarifications about…
1)Who are the Quartz stone suppliers from India to USA?
2)Whats the current raw material contract for Quartz , who else are the suppliers and how has the company planned to mitigate risk of raw material supply constraints?
3)Among different dealers in US that Quantra sells (Daltile, Bedrosians, IGM, and Oregon Tile) what is their share? Which dealer is the source of increased Quantra sales in last 1 year?
4)Current capacity for Quartz and current utilization?
5)Whats their vision for Quantra brand in next 5 years?

I think they have done a good job of understanding Quartz business, building capacity and developing markets, where will they take it from here is a big question.

I will prepare to write them…

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Had some discussion with Investor Relations of Pokarna about questions that I had posted here earlier.
At this point of time they are sourcing all quartz raw material from Chettinad and the he wasnt sure if they had any written contract with the supplier. I asked what if there is any interruption in supply considering the background of Chettinad, he spoke very positively about Chettinad and sounded like they are working with them for a while and are very happy, he spoke as if like its their own mine, tried to assure it will never be an issue. I wasnt that convinced though. He also said they are trying their best to get the license for their quartz mine.
He wasnt sure if there is any other Quartz stone competitor from India that exports to US. He said they should be the only one.
The Capacity for Quartz is 6 lac Sqr meter. Surprisingly, he said Quartz stone capacity is running at 80% in last 2-3 months.
He couldn’t tell me which dealer is sourcing more and more in recent quarters, he said its confidential and couldn’t share.
Having found all this info, I continue to work on this, and gather more and more info from from their dealers. Early this week I spoke to one of the Slab store of Daltile in Anaheim California, the store manager said 90% of their Quartz slabs come from Quantra. And to be honest, his feedback was too overwhelming to believe. He spoke very high of Quanta’s quality/ colors/size options. Then I asked him if they are buying more and more from them in last few quarters, he confirmed their sourcing is increased and sounded very confident, he also said their Quartz slab business is going to grow in upper 20%.
If we map all the data of spike in Quartz Slab imports from India to USA, the capacity running at 80% (Quartz) and the Daltile’s confirmation, Pokarna’s 2nd quarter has to be extremely good.
I needed some help from the guys in Dallas Texas area to speak to Daltile Corporate office and find out info matches with the data I gathered from their Store in California (since I am in eastern zone time, the corporate office is generally closed by the time I get home, they aren’t open on week ends).

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outstanding work - I am convinced about demand for their product, and quantra’s differentiation - the only fly in the ointment is their sourcing and dependence on chettinad group run by relatives of SPIC group, which is known for its not so stellar governance.

Cash flows are good, operating leverage is high and as long as sourcing can sustain - that’s the one black swan we have to be cognizant of.

Thanks or the good work

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http://www.stoneupdate.com/us-stone-imports/statwatch-monthly-report/954-statwatch-no-dog-days-for-imports

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