Quick question on Vikas, is the company able to pass on tine price increases to customers easily? Tin has risen a lot in price in the last 6 months (much higher than lead which is their competitor) and seems to not be correcting like other metals
Yes the industry is able to pass on the high tin prices easily. The entire industry works like that. As per my conversation with the China guy, they have a system wherein they have to input prices of raw materials, and they directly get the price to be quoted to any customer at that point in time. I have verified this with Mr. Atul - President of Plastic association who is also a customer of Vikas.
Tin is not competing with lead. The big players like FInolex, Prince, Astral all use MTM. Lead is used by the smaller (unorganised) markets. MTM as a raw material forms only 1-2% of their total RM cost. So, the demand for MTM is not that elastic vis a vis the price of MTM. The big players like Astral have been using CPVC and MTM as their marketing tool. They write on their pipes to be lead free.
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Abhishek
Great work buddy. Small query: None of the promoters is a technocrat or has any qualifications in chemicals…does that increase dependency on this Asshutosh guy that they have brought in a little too much?
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Hi Gaurav,
For new product development - yes. For the existing products like MTM - No. If Asutosh Kumar goes away, the R&D is at risk. So, I had the same question to the management. I asked them how they see to develop their R&D side in future? He said they are looking at hiring industry experts in R&D to further boost R&D. This is like; there will not be any damage if Mr. Asutosh goes away because company owns the technology for its products. It will only bring R&D at halt for sometime.
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what is the total market size in india for lead based stabilizers and tin based stabilizers? I just want to know what will happen to the demand of MTM in case the total market shifts towards the lead free stabilizers. Also are there any other products that can replace MTM in near future?
It is given in the AR (i dont remember the exact number). The market is growing at 20% CAGR. However, it all depends on the awareness and govt. regulations. If govt. bans lead tomorrow, the market opens up. What can be the total market size of MTM for India is not known. There is no substitute for MTM, because MTM is the most safest chemical. This is said by dow chemicals in one of the reports I had read while understanding the business. There are other reports in public domain as well that claim MTM to be the safest or eco friendly.
ABhishek, What is the margin of safety here? Can you allocate a substantial portion of portfolio to this? say a 15% allocation?
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Hi Gaurav,
It is based on individual choices/risk taking capability. I cant suggest you the allocation 
But if you are confident on the business and its prospects, you may bet substantial portion. Margin of safety is there. The stock is available at PE of 11. The fair valuation should be at least 15 for like businesses. Again this is subjective thing.
agreed. Its just that the CFO is the only area which is concerning, however i have seen plenty of expamples where the companies have started realizing free cash flows after successive years of negative CFO. What are the promoters like? did they sound legit? is he a first generation enterpreneur? do they seem like they have a growth mindset?
Yes he is a first generation entrepreneur…his dad started this company…but they were into trading business…vikas garg always wanted to get into something niche manufacturing…he is aggressive on growth…
Promoters stake has reduced year by year ,have idea why is it so ?
You may refer the report attached by me on the company. On 9th page under market cap analysis, I have mentioned that major stake sale was done to Prince pipe the biggest customer of Vikas Ecotech. Promoter have sold only 2% of their total stake in the market apart from this since 2008.
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Thanks for the clarification…
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Prince Pipes stake crosses 8%. Dilution happens by customer acquiring stake in the company.
Was just digging about Jayant Chheda and Prince Pipes. Here is a video -
Some important points -
1). Prince Pipe attained a turnover of 1100cr in 2013-14. Considering, the EBITDA margins of Astral and Finolex, Prince would be making highest EBITDA margins of 15% in the market. So, company must be making 180 cr at EBITDA level. So, approx, if it makes 120-140 cr at PAT levels, the promoter has infused close to 45-50 cr in VIkas Ecotech!! Important is materiality - would anyone with such a background pump in 50cr in a clear cut fraud ??
2). Prince Pipe want to expand globally now (said in video). This was what Vikas Ecotech had been saying about expanding with Prince Pipes in Latin American and Mexico markets… I think the dots get connected.
3). Jayant Chheda is a self made man. He has grown this company from scratch. Being a first generation entrepreneur, and the way he has scaled this business; it gives a sense, that he must be a rational capital allocator.
4). Just tried to understand the impression of Prince Pipes and Jayant Chheda in the industry from the president of All India Plastic Association. He said he respects the man a lot. He is a veteran.
Disc - Please do your own due diligence. These are purely my views.
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I don’t understand why equity must be diluted for a customer and that too at the prevailing market price?
If 34 crores is all that was needed, why not raise it along with the huge Working capital loans? Doesn’t sound a very shareholder friendly move. This looks close to 12% dilution.
Have you checked the debt equity ratio? It is far better to dilute equity than to go bankrupt.
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Abhishek,
As i understand from your detailed analysis and my talks with the mgmt, the working capital cycle is going to get better over the coming year.
Cons:
My question is: why not embark on the expansion plans once the working capital gets better. If that happens even the equity will be valued better and dilution less.
Besides Interest coverage ratio is not so bad that they will go bankrupt.
Coming to the good things:
Pros:
From the facts above, it looks like the 2 companies are working very closely towards expanding and are aiding each other in growing.
I am stuck in a quandary between these 2 conflicting thought process.
Hi Anand,
I used to think on the same lines, but my views have changed now.
Being an investor in a business and actually executing the business is a totally different experience. We are typical investors who would seek value in a stock, hold it till the growth exists and would never mind selling it later. After that, some other stock and some other story. We tend to forget this stock with time. It is rather the promoter who has pumped major part of his net worth in the company. He is who works throughout the year to ensure that the balance sheet is strong and the business grows. We actually do not know the ground realities. It takes a lot of time to get good clients in your kitty. It takes time to build real strong relationships with them. It takes time to get market share. We track the company from year to year through its annual reports. A lot of events, transactions happen within a year. We are only concerned with the results/growth. So,
1). Promoter knows better than what an investor knows about the business and the industry. When you have launched a new product in the market, you have to think of getting more and more market share rather than generating positive cash flow. Cash flow is secondary, market share is primary.
2). Think if dilution has happened, your stake has been diluted much lesser than the promoters stake in absolute terms. If you are holding 1% in this company, promoter is holding 43.51%. In absolute terms, he is going to loose more than you.
3). As an investor, we tend to look at the dilution as a very negative point, because we have a short term position - say less than 3 years. For the promoter, the company is his baby, which he has to nurture. If the baby dies, it will screw the promoters net worth.
4). If the orders for the product are consistently growing, should the management think about the dilution or should they think about product acceptance?
5). Debt equity ratio is 1.43 times. If they would have raised further debt, the ratio would have gone to 2 times which is dangerous for a business which is still establishing its products in the market. Further, it is not a Britannia or colgate that everyone is going to buy irrespective of recessions or boom.
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I definitely see your point Abhishek. I am with the promoters in believing that they are doing things in the best interests for themselves and in turn-us as minority shareholders.
With pretty bright prospects for a well positioned company, i feel that the company could have negotiated a better price than the 17rs allotment.
This is the same frustration that arises out of the fact that the receivables are too high in what could have been a reasonably negotiated timeframe compared to other peers in the industry.
It appears that the company is willing to take certain hard bargains in a bid to grow better. These things usually are imbibed in the cultures of a family, corporations etc. It is this culture/mind-set that i am wary of.