Regarding Dekton material being a substitute for quartz, it is more expensive than quartz and consumer reports found the material to crack under certain tests.
http://www.consumerreports.org/cro/news/2015/06/dekton-countertop-cracks-in-consumer-reports-tests/index.htm
Some interesting points from my research:
- Ceaserstone has guided for $550 million dollar Revenue in FY 16 from ~$500 million revenue FY in 2015 in their latest con-call which means growth on a global level is close to 10% for the industry (since Ceaserstone is global market leader). Management could however be giving lower than expected guidance since I am not aware of their past guidance record
- They have set up a first plant in the US to grow their business opened in Aug 2015
- Pokarna’s gross margin of ~70% as compared to ~40% for Ceaserstone seems suspiciously high. Has anyone questioned the mangement regarding this?
- As per Ceaserstone management, their customer complaints are ~0.5% of total sales which implies customer service is not a big differentiating factor in this business
- Import data of quartz growth of 200%+ in 2015 from India to the US suggests growth for Pokarna should be good atleast in the near future provided they can keep their share constant
Differences between Granite and Quartz Countertops
https://blog.udemy.com/quartz-vs-granite-countertops/
I compared just the Quartz segment income statement for last 2 Quarters. I think cash flow statement is more relevant in this case since there is a large difference in inventory entry in December and September quarters. Its almost to the tune of about Rs4cr, see the last column. However employee expenses, fuel, tax expenses went up, which makes sense. Interest cost came down and there is significant increase in other income.
I read somewhere and have confirmed from the company that the polymer resin cost component (% cost of raw material) is higher than Quartz raw material itself. There has been larger drop in crude price which could be the reason for lower raw material cost. Surprisingly CaesarStone raw material cost doesnt show similar change in last quarter result, I dont know if the labor expenses from the US factory is increasing their amount of cost of the goods sold. These are the things we have to account when we compare with CaesarStone.
@maheshcm and @sambath I have also read in multiple sources that the price of resin is higher than quartz. You are right
I have another confusion regarding the US exports that I am not able to clarify. If you look at the quarterly exports from http://www.stoneupdate.com/us-stone-imports/analysis-mid-yearannual/920-test-of-tables you will see that in Q1 2015 the stone exports from India to US was 463,741 sq ft. Pokarna’s capacity of 8.8 lak sq. m or 9.47 lak sq ft per year or 79 K sq ft per month or 240 K sq ft per quarter. which works out to be about half US imports from India. However, the Q2 quartz imports from India is 926,000 sq ft as per stoneupdate which is a 200% jump. Pokarna’s revene from quartz has increased only slightly from Q1 to Q2 2015 but quartz imports to US have gone up 200%. So that would mean that Pokarna is not able to keep up with the quartz exports to US from India? Shouldn’t we expect Pokarna’s sales to grow atleast close the rate of quartz exports from India to US even assuming more competitors from India (none that this forum has been able to identify yet)
Even post Q2, while US imports of quartz from India is growing month on month whereas Pokarna’s business growth has slowed down which is surprsing?
I am unable to find a reason for this difference between growth in Pokarna’s exports and total Exports of quartz to US. Does anyone have any potential reasons?
There are three other Indian companies which manufacture quartz slabs in India with Chinese technologies. They are Johnson Ceramics, Asian Granito and one more. Their volumes are high but realisations are poor or nowhere near Pokarna which is the only one having superior Bretton tech. There are only 26 plants in the world having Bretton tech. so not all customers can use this expensive/exclusive material.
Sumit - Many thanks for the clarification. In your opinion, what explains the small volume growth of Pokarna when QoQ and MoM quartz imports to US are increasing at a high rate (QoQ about 200% as per stone update). Thanks
Seems you are confusing between US imports from India and Pokarna sales. Pokarna ships it to US and that is counted as imports from India on the stoneupdate site but the company may take much longer to sell this US inventory and recognize in P&L. It remains as inventories on their books till that time. Having said that, I suspect large volume increase visible in trade data might not be coming from Pokarna as explained above. Stoneupdate data should be viewed from directional point of view only.
Disc: Invested and added below 700.
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Asian granito also uses Bretton technology as per their AR but I have no idea about the volumes.
I find that odd… attached is the list of players using this technology and I do not see Asian Granitos name in it.
I think I have mentioned before on this thread. Bretton has superior tech in cutting and polishing of granite as well but that is not exclusive. Asian Granito might be making a claim regarding granite processing.
Quartz - Strong export growth number continues. Marble sees an uptick while granite declines
Discl: Not invested
Spoke to 5 Oregon tile and marble dealers…They all sell Quantra exclusively… They have high respect for the product and I was told that there are a few colors that only Quantra sells which are in high demand. I was also told that the customer feedback is very positive…Another reason why consumers buy it is because of cheaper price–average price is $25/sqft excluding the cost of installation…
i find that very low compared to other brands like Cambria and Cilestone where the avg price / sqft is $45…
Can someone confirm this please by visiting the stores?
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Spoke to a couple of Bedrosians dealers.They have discontinued Quantra and are now selling their own brand Sequel Quartz . They claim they had quality issues with Quantra.
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@sagararya, thanks for that info. I remember speaking to Bedrosian in Los Angeles area. If I remember right, they were planning to get rid of existing size and colors of Quantra and were waiting to get all new large sized slabs from Quantra, did you ask them if whether its still sourced from Quantra and sold under their brand? Bedrosian is a very big stone dealer.
**Bedrosians - Tile & Stone **
Tile Store
Address: 2176 N Pacific St, Orange, CA 92865
Phone:(714) 363-9705
This was the store I had spoken. Lets find out where do they source it from.
And I have tried several times with many dealers and fabricators to get an idea of Quartz stone cost (just the slab, I mean, excluding installation), nobody disclosed it. Where did you manage to get those prices? I think Pokarna doesnt get realization more than $10/sqrft. Thats my assumption so far.
However its a good piece of info. Please update all you find.
I spoke to a few more Bedrosian dealers…Some of them said they have very limited inventory of Quantra still but the sourcing has been discontinued…While a couple said its due to quality(I clearly remember the branch at Pheonix mentioning it), others didnt know the reason and said it was a management decision. They told me that the price depends on the fabricator… As per the discussion in the link shared below(I believe it was shared earlier in the thread as well), the cost of installation can be higher than the cost of slabs itself which plays a major factor in consumer decision making. As far as the quality of Sequel quartz is concerned, I was told they are all on par with the peers
The price that I got was from Oregon Tile and Marble dealer at Medford(btw even in the link mentioned above people have mentioned Cambria products being priced at 22$/sqf without installation)… Maybe someone can call and check again… Here is the list of dealers - http://oregontileandmarble.com/about-us/locations
I will try calling some fabricators today
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http://info.leezasurfaces.com/blog/bid/79838/How-Much-do-HanStone-Quartz-Countertops-Cost
"The HanStone Quartz price ranges between $35.00 to $75.00 per square feet for the material and between $70.00 and $100.00 when installed. "
Hi @Maheshcm @Sambath @bigvig @sagararya and others contributors, , your work has been outstanding here and you guys made it fairly easy for rest of us to understand major aspects of the company. Kudos to you.
But , I still have concerns in my mind, which I am articulating below and will be working towards resolving them and ask for your support too.
A.Quartz supply
Since the company doesn’t currently have running captive mines, I was wondering can any supply disruptions cause trouble to the company.
I did some secondary research, there are lot of approved mines in Telangana/Andhra for quartz and feldspar and Rahul Jain, ED mentioned in a interview that Telangana/Andhra has one of the best quality ores of Quartz in the world.
http://www.aponline.gov.in/Quick%20Links/Departments/Industries%20and%20Commerce/Directorate%20of%20Mines%20and%20Geology/Introduction/7.%20List%20of%20Mining%20Leases.xlsx
If the specification of Quartz they require for engineered stones is readily available, the whole Raw material subject shouldn’t be an issue.
Secondly, it’s a minor mineral meaning the Prospecting/Mining lease is a state subject and sooner or later they might be able to get permissions for their own mines.
Yes, a primary feedback is needed to confirm these data points ?
B. Capex looming ?
One area which has been murky is the numbers for Plant capacity, Volumes sold.
Assuming the price realization is same, and sales growth is majorly coming from volume growth. The company will have to do a decide on a line expansion next year itself, factoring in installation time of above a year.
One production line for Breton costs around USD 30-40 Mn(Source: spruce point report, and some links covering Cambria and others mentioned there) or 200-220 crores, given Pokarna’s already heavily leveraged balance sheet, this might not be an ideal situation. Currently around 200 cr of term loans (Promoter~ around 85 crs, Banks loans~115 crs)
Agreed, that the cash flow situation looks good given the high margins currently they are getting, but still a year or 18-20 months more could have really given the company a good footing on the leverage part.
C. Entry barriers
A production line for Bretonstone as mentioned before is around USD 30-40 Mn, this is not an extreme sum of money. Others in India and say possibly China, seeing easy availability of raw material and a large expanding profit pool would want to enter . Of course, there should be a lag before a new entrant gets a grip on production, product portfolio, quality, distribution in advanced markets?
Or, lets say an existing player from the top tier decides to put a manufacturing line in a low cost location like India?
Or, an existing Chinese player decides to get Breton production line?
Or, an existing mine owner in India decides to go for forward integration.
D. Margin Picture …… (as pointed by other fellow boarders too).
I tried to work out gross margins from Quartz segment, in past 7-8 quarters.
The gross margin has hovered around 55-60%, but the last quarter has been around 70%. If the picture is true and given Pokarna has much lower price realizations than peers, it means the mineral in India is too cheap, and other players would want to source from here as well?
E. Miscellaneous
Amortization policy for granite mines not very clear. Depreciation & Amortization line item consists mainly of depreciation on buildings and machinery.
Apparels segment… It already looks like a gross misallocation of capital plus around 25-30% Sales every year is to a related entity. Not a very inspiring situation.
At the end it seems a fine company at the cusp of catching the new trend of engineered stones from naturally occurring stones and having a huge cost advantage over peers (may be not over Chinese counterparts). But, is it a high probability bet, to know that we need a good grip on some of the above key questions and especially of Corporate governance.
I was checking Credit ratings for Pokarna . Ratings have been upgraded to A4+ (short term debt) and BB- (long term debt) in a CRISIL note dated 23 nov 2015.
Also, the note mentions company plans for a capex of Rs 2.2 billion in FY16-17 (70% debt funded). (This must have been conveyed by the managment)
Thanks for the information @leon_lph
I had spoken to the CS regarding the points you have raised. As far as quartz supply is concerned, he didnt seem too worried and was hopeful that the company would get a license for their own quarry soon. Surprisingly, he refused to answer questions on margins and capex which I thought was very odd. Apparently, he has been asked by the management no to discuss margins and capacity utilization/expansion plans… I asked him if the 8.8 lakh sqf/annum capacity mentioned in their 2009 AR is true- all he said was that it doesnt match with their records. Regarding capacity expansion the only thing he told me was that the management is yet to decide but would be wary of the debt situation.
Their gross margins seem too good to be true to me. Also I do not know the reason for the sudden spike in EBIT margins QoQ. One must also be cognizant of decline in their Granite division. Granite imports to US have been deceasing consistently.
The company is not protected from an entry barrier completely. Currently, very few fabricators keep Chinese quartz and it does not find much application in countertops as per a few people I spoke to. There are companies which are setting up plants and using Breton technology to enter the market. The market is very competitive due to strong growth prospects. It will be unreasonable to assume that the Quartz division will keep growing at such a high rate.
There are many corporate governance issues like you have mentioned. What worries me more is the apparel segment and their capex expansion plan like you mentioned. If that is true and the management is seriously considering capex of 200 crore next year using additional debt, then I will be very concerned. PESL still has negative equity if 53 cr and I am not sure if additional debt will be good for the shareholders in the long term.
That said, the downside was protected when I entered. It is still trading at a significant discount to Caesarstone even though it has better growth prospects.
Disc: Invested
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