Lets think next 14 quarters and beyond ( 2022) , @25% quarterly run rate BOD sales will double 4 time ( four doubles back to back = 256 Cr) from current 16 crore a quarter, that works out to be more than 1000 crores annual revenue from BOD itself, assigning 10% NPM for BOD business, BOD profit will be 100 Cr, which translates into EPS of 100 per share and certainly, you will agree to the fact that business with negative working capital, asset light, moderate moat, long runway with great management band width in terms of passion , integrity and capability will not trade at a PE of 7. Considering it will trade at 40 PE, the price should quadruple in much less that 14 quarters since market is discounting machine. Please do point out where I am wrong.
Disclosure: Invested at lower level, currently 20% of portfolio.
Though I m heavily invested in this counter
- Basis for 25 percent quarter on quarter growth for 4 years, then, someone can argue for 10 years. Assumptions are good but need strong validation. Online book sales market is 3k crores if I remember and repro expects it to be 8k crore . I am skeptically of such a huge jump in 4 years specially if one seems how with less promotions e commerce growth has fallen from 60-70 percent to a mere 18 percent . So, let’s say if e commerce continue to grow at 18 percent and I f books grow at 20% ( few points higher higher than overall e-commerce ) then the whole market size after 5 years will be 7.5k crores. Repro is not yet aggressively working in high volume low margin books marker So. Let us say this is 60 percent of market , so, key market comes to .4 of 7500 which is 3k crore. Let’s us say they take 10 percent of this market (current overall market share is 1.5 percent ) at 12 percent pat margin which turns to 300 cr revenue and 36 cr pat. The remaining 4500 cr let us say they take 5 percent of market at 8 percent margin which is 225 cr revenue and 17 cr pat . So a total of 535 cr revenue with 53 cr profit . Let us say they did 20 percent better than this still turns out to be 65 cr profit. Key will be to understand unit price cost economics of competition vs Repro if with increasing volume , continuation of single point tie up with Ingram , they can build ecnoomies of scale n become price competitive in high volume low margin segment n kill competitors . This is possible with continuation of single point partnership of Ingram in India, low working capital decent margin continuation of execution. But why it may not happen
A. If the whole supply chain of online book delivery is analysed , among repro, Ingram n Amazon, the weakest moat is with repro n strongest with Ingram n Amazon . Infact I would say what repro brings to the table is a professional mgmt in an unorganised sector and not more than that compared to other two and hence they are weakest among 3 and whenever there would be a margin pressure on other two , it’s Repro which will face the brunt
B. As e commerce is not making money , it would try to screw vendors ( already happening , check 2 days back et now )
C. The kind of growth we are projecting means in 7 - 10 years repro ll b a monopolistic business which means more bargaining power. E commerce players like Amazon n Flipkart ll hate to see that business scenario n will play their cards some or other way
D. If everything would be been so rosy , the key of lock is in Ingram’s hand, why Ingram did not participate in preferential issues
I think before we think of making the most bullish assumption, we must factor in the risks of why that bullish projection can grow wrong .It always helps us to avoid bigger losses when things go wrong and nothing is permanent. Risks are unocuured events but once they occur , the game changes. Frankly with such businesses, I would like to take the conservative scenario and if it passes threshold expectation then stay invested and then let execution build the business strength unless some of business strength points get crushed over a period of time. These are just numbers and we can go wrong by a big margin but even if with most conservative estimate we cross our expectation threshold then nothing better. As Keynes says, better to be roughly right than precisely wrong and that’s where I get my comfort keeping assumption intact. Disc: invested with sizable allocation n would be happy to be proven wrong
I think now slowly we are getting a glimpse of financials so that we can build competitive vs repro cost economics to try to peep in future. Waiting eagerly for q4 FY 18 financial statements to make an attempt over that
By the way heartening to see continuation of momentum in BOD run rate , falling debt n check on traditional business . Paper prices are though playing havoc on gross margins
Thanks Saurabh for detailed rightup and reminding all the risks that can nullify the assumption going forward. Another thing based on current 5500 books per day, for 16 Cr revenue per quarter, they need to expand significantly, say more that 10X to scale up, roadmap for that is yet to be seen going forward.
Risk of Ingram pulling out from Repro is least likely, off course nothing can be ruled out in world of capitalism, since they have to undergo big revenue disruption at-least for couple of years and thereafter too not going to have significant delta of profit even if they do it by themselves or find another partner. Ingram will never tie up with Amazon in order to protect them from being eaten away by Amazon demon given that past history of Amazon.
Risk of sluggish market growth is bigger risk but that is where management bandwidth is key to gain market share by prudent strategy for business growth in terms of market share gain. However, that is yet to be seen going forward.
Thank You once again,
Yes, so far apart from small things here and there, bigger plan and execution looks on track. Let’s hope for the best.Concall will give further details like receivables n all.
These assumptions are very farfetched. If things like that do happen it is very likely that amazon/ingram will aquire repro’s online book business. Thing is there is some IT infra needed, there is printing infra needed and that may not make sense for ingram to build here in India. A company that is making money by simply licensing out digital information, why would they want to set up a full fledged printing press? If amazon aquire ingram it will be because amazon can use that entire digital library for its future plans globally as well. Worst case repro turns into a manufacturing contractor for amazon. You can take multiple examples of some of the biggest global brands preferring to turn into hollow companies. McDonald’s, Porsche etc etc
Thats why I tried to compare these companies on capability to build a moat and highlighted Repro does not have any and the only reason they were selected is a professional management in unorganized sector and hence i would let the execution story play and take calls on valuation rather than building a long term story as the the tussle between overall supply chain participants can result in an unexpected outcome for Repro. So, good to hold stocks and be bullish but keep eyes open understanding the risks and be vigilant. Agree with all your points. Still, Repro may or may not achieve those numbers and other two may or may not acquire this business because of 2 key reasons:
- Does not fit into their size
- They know they can screw it the day they want because what it brings to table they may get from other but what the other two bring to table, it cant get anywhere else in simple words
For amazon and Ingram to look at other suppliers, they would have to run through all the quality control measures, deal with multiple print houses etc: Why would they want to do this? When they have a reliable partner in Repro India. Repro also gives ingram access to its Indian titles. Amazon will mostly focus on the ebook business going forward as they can sell their hardware. In which case Repro again represents an opportunity with regards to that in rapples. If you are amazon why would you discard Repro and set up in house manufacturing etc? Why would you discard Repro and look at other suppliers, when repro have everything in place and built their business around ecommerce? With warehousing pan India, one book factories and trying to integrate offset into their production model.
Anyway Repro was always a risky investment as their old business was also suffering. Assuming old business turns around and can post a 20cr PAT we paid around 25x at a 500cr mkt cap.
Given that greater moat with Ingram/Amazon, Margin Squeeze pressure on Repro by both Amazon and Ingram will be highly likely outcome in future but that will only happen once they achieve certain critical size where margin squeeze will not screw up the entire business. As such, any future margin increase accrued out of economy of scale in future will be eaten away by Amazon/ Ingram but again then scaling up should make business sense for Repro, if only Ingram / Amazon going to benefit from this. IMHO their is case for every body to remain in business as long as they make money in fair agreement and understanding and at the cost of each other. Other scenarios like , Amazon acquiring Ingram, Ingram finding another partners does not make a business sense as already cited by members. It is yet to be seen that, What Repro management will do in future to fend off their margin squeeze. Nonetheless, these events if at all will take place , will only happen after Repro achieve critical size. I am not invested in Repro for life time, if going gets smooth even for couple of years , we will make no less that 2 to 3X from here.
IMHO their is case for every body to remain in business as long as they make money in fair agreement and understanding and not at the cost of each other.
Promoters has decreased in their stake in the company by 3% in Dec’17 quarter. Curious to dig rationale behind it ?
It was sold by abhinav vinodh vohra to a sonam rishabh parekh at 799. No idea about why or who that is. If promoters decrease stake in he next quarter then we will know that something is not okay. As of now they seem focussed on growth and growing the company and its valuation. Vijay Kedia continues to hold a large chunk of the company. So does Malabar fund. Let us wait until next quarter.
This helps. Lets keep in radar. Thanks
I think this the first time we have got complete clarity on the capacity that they have
One Book digital Print capacity current 6000 books per day going upto 20000 books per day in FY19
Digital Print short run capacity of 25000 books per day which is suitable for printing 30-1000 copies at a time
Offset Print capacity worth 200-300 crores of business annually in Gujarat.
Books on demand run rate for Jan 2018 was 5500 BPD. The interesting thing was that out of 5500 only about 2000 was printed on the one book printer the rest I assume was pre printed using the digital short run printers. Two important takeaways one book print capacity in FY19 will be 10 times the current utilization. BOD sales can be greater than the capacity of one book printers because of pre-printing.
I know the printing space. Let me throw some clarity.
- Repro’s moat is not its printing technology it is its relationship with content publishers. Reasoning as to why this is a moat is well known
- Printing anything in a small capacity is more expensive just like any other industry. So printing on offset and warehousing fast moving titles, technically gives Repro higher margin, therefore they can compete on the front titles.
So dont bother about where the books are printed for bod. BOD’s unique propostion makes repro the market leader in mid and back end titles. It also gives repro an edge when trying to sign new content producers. Im being careful with repro, valuations are very expensive. I think one of main comfort factors still is the old bsuiness. If they can take their old business to 20cr net a year then at 500cr valuations seem reasonable for new business. it is a bet on the management scaling up an unexplored market for the most part.
Yes I was aware of that and I agree with you.Online market in 3 years is going to be say 4000 Crores (not considering the 8000 crores) and mid and back titles is going to be 20% of that say 800 crores what percent of that market can Repro take being the only player in that space (their claim). 800 crores means nearly 55000 books per day assuming Rs 400 per book, I was just working out Repro’s revenue stream based on capacity against a potential revenue of 800 crores. Yeah you can argue if the demand is there putting up capacity is not an issue and can be done with internal accruals alone. however I was just trying to work out the revenue potential with the current capacity
For mid and back titles what will be the margins …?
thrown clarity caught
Management interview on BloombergQuint on 12th Feb - Mr. Khera was very vocal about next year focus will be on BOD gaining market share and not margins. However he added the margins will remain same.
Any links for same interview ?
Like I said, be very careful with repro india. Sooner or later they have to show profits. We all know they can, but question is when will they show us the seperate numbers and the actual profitability of the BOD business. We all know that they want to make money. Driving up market cap is the best way for them to do that. Let them grow, let them scale and market their stock/company. As long as we see through it and focus on the bottom line of the old business growing hence protecting valuation, we should be fine. As long as we know what we are getting into and what mgmt is trying to do I think that that mitigates 15% of the risk in any investment.