Virat Crane Industries Limited (VCIL)


(anuj mittal) #22

Virat Crane has been hitting the upper circuit for the last 5 days continuously and has already gained 33% in the last one week. Has something shifted in the fundamentals or is just momentum because suddenly the market has recognized it? Could not buy anything as there are no sellers during the trading session!


(Chaitu) #23

Nothing changed fundamentally…but would like to tell you that risk will be more when we add at these levels.
Last year low milk prices helped the company …let us see how this will perform this year.


(NMB) #24

Fairly robust numbers from Virat Crane.

Eps growth of 98% YoY.

Annualized EPS of 4rs…gives us a FMCG player valued at barely 10x. Could do a lot better if their product offtake improves in coming quarters.

The Annual report should give some clues.


(Rajeev Jawahar) #25

Virat Crane came out with it’s Annual report, which was quite insightful. Here’s the link:
http://www.bseindia.com/bseplus/AnnualReport/519457/5194570315.pdf


(Rajeev Jawahar) #26

Received this pretty informative note on the Co., from a reliable source, that I found to be quite an eye opener.

Disc: Virat forms a part of my core portfolio.

** ***Interesting small-cap opportunity to look at - Virat Crane Industries Ltd.*

Virat is a play on the largest value-added dairy products – Ghee, which accounts for 28% of the dairy industry.The dairy industry in India is highly fragmented and regional, and so is Virat. However, the industry is growing at around 13% and organized sector, which accounts for one-fourth of the industry, is growing at 20%.

Virat’s ghee, marketed under the brand “Durga”, is a 25-year old brand and a household name in Andhra Pradesh. The brand is perceived to be rich in quality, known to have a distinct aroma and flavor and is sold at a premium of 5-30% to other ghee brands in the region. It has a very strong brand recall in South India, especially Andhra Pradesh.

Over the last 3-years, higher marketing spends, geographic expansion into Karnataka and Orissa has resulted in revenue compounding at a CAGR of 36% (much higher than the industry growth of 20%) and EBITDA increase by 3.5x. This is on the back of –
Steady improvement in operating margins from 3.6% in FY12 to 13.5% in FY15, despite the increase in advertising spends from 0.2% in FY12 to 3.5% in FY15.

The robust growth in revenues was against negligible capital investments thereby leading to higher asset turns of around 13x, and healthy cash conversion cycle of 10 days. This helped the business generate healthy operating cash flows averaging at 89% of the profits over the last 3-years. ROE and ROCE also stood solid at 35% and 51%in FY15, with negligible debt on the books.

Until now Virat’s sales were “naturally” driven by the dealer network with no push from the company’s end. The management is now pursuing a three-pronged growth strategies to leverage on the premium positioning of the brand “Durga” – 1) continue to penetrate deeper into Andhra Pradesh, Orissa and Karnataka through the vast dealer network, 2) setup a new plant in Orissa to strengthen its presence in the state and also get access to new regions like West Bengal, Maharashtra and Chhattisgarh, and 3) diversify into new value-added products like curd and paneer through brand extension.

The company is hence well poised to scale its business and transform itself into a dominant value-added dairy company in Southern and Eastern part of India. Despite the healthy profitability, returns and other operating metrics, Virat trades cheap at 13x ttm earning and 8.2x EV/EBITDA, against all the other publicly traded dairy players in India.


(Samir ) #27

Valuable discusion.VCIL is visible brand n looks set to be bigger.I don`t have much knowledge of it though…thinking to invest in it,so your information is valuable for me,thanks.


(Akaash Bansal) #28

Last year Milk prices were high sir, as stated by promoter in current AR. instead of that they have increased APATM% from 3% to 8.5%…excellent…


(DAGARWAL) #29

But now this company has started commanding a respectable pe ie 18 more than many other promoters …So should we wait to get the run up somewhat exhausted ??

Disc - wanted to invest after due research

Nd also why the screener is showing roe and roce different when the company is debt free .


(Akaash Bansal) #30

DISC…invested


(Kranthi Kiran Reddy Tamma) #32

Crane is sure a household name in AP & TG.
Durga Ghee, Heard of it but not sure, at least I have not seen it occupuying a shelf space of dairy at any super stores.
When I was small I don’t know what betel is, we just know crane pouch packs are used along with betel leaves.
Promoters are looking to be in a hurry to add more verticals non relative businesses which is not good.
Are they talking of unlocking the real estate value they sit on ?
Anyhow it is a common misunderstanding that Guntur is gonna be capital. to be precise the area selected for capital falls in Guntur and is near to Vijayawada city than Guntur.
Do not generalise the place Guntur, it is too big a geographical area. Chirala, Bapatla, Tenali, Sattenapalli, Macharla, Dachepalli, Narasaraopet, Vinukonda, Mangalagiri all are in Guntur and real estate value differs by leaps. One end a acer may not cost more than 2 lac and one end u might not get one fot 50 lac, I am talking of pure agri lands.
Anyhow are the management looking at unlocking land bank value ?


(richdreamz) #33

Ok, I have some time at hand and this company interested me, so I read further and my summary is purely based on:

a) Posts on this forum
b) Annual Report FY 2015
c) Internet search
d) Entry Level scuttlebutt

Disclosure

My view is biased as I intend to buy if my finances permit in very near future. I do not want to disturb the current allocation weightage in my portfolio as it’s a thought out re-allocation (as stated in the below link). I’m not a research analyst, do your due diligence. Analysing companies is my hobby.

For Points

  1. Fake products is a nice problem to have actually (it’s a compliment!) and more so for a small company as a) Only stong products/brands will be faked b) With education the revenue is going to get a boost and disproportional profits if successful.

  2. Ambition 1: Foray into states like Karnataka, Maharastra, Chattisgarh, West Bengal.

  3. Ambition 2: Foray into North India (as Bhavani Bhee?).

  4. Ambition 3: Brand extension of Durga into Curd and Paneer.

(all related diversification only, not unrelated. In fact, Ghee, Paneer and Curd are the best revenue streams for a company that has milk/cream as raw material.)

  1. Capacity expansion: New production facility at Odisha (current Guntur utilization as per my rough calculations is 72% - 65 crore/ 90 crore. 65 crore is FY 15 revenue and Total Capacity = (1500000 Kgs * 600 INR per kg). Not sure how the capex for this will be done and how much. Looks like mix of debt and internal accrual as company passed a resolution in FY 15 AGM to borrow 50 crore.

  2. Advertisements released around 2013 with Telugu film actress and the other ladies in the ad may be from Odisha. Theme of the ad looks like two fold, target the fake product (the protagonist says look at logo and hologram before buying and then the usual promotion of brand).

  3. I did not realize/bothered so far BUT the brand pull of Durga Ghee is astonishing. Kudos to @chaitu @Chaitu_1614. I have enquired local retailer and I have asked the ladies in my house to ask neighbors which brand Ghee to buy - unanimous choice is Durga. (I have recently moved to this new home, so this trick worked. Of course, we cannot base the thesis on this alone as this is just an opition of minor fraction, nevertheless provides some clue or direction. Also, we don’t buy Ghee as my mother makes it at home with Organic milk (is this a threat?). My thought process here is, with nuclear family structure gaining ground, the ladies may not find time to prepare ghee at home which is a 1 day process end to end and added to it Ghee has a longer shelf life naturally too, so buying packaged product is not an issue.

  4. Promoter quality: Though ‘looks’ like honest as per article shared earlier, I’m not sure of management quality yet as they have not been tested I believe. At the same time, there are no bad remarks on internet. I will believe them.

  5. Prima facie the metrics look good for FY 15 and started paying dividend regularly. Past numbers, I will prefer to overlook as there is no fraud as such. For such small companies, you cannot have everything in a platter. If the RoE is already above 20, you would not have this company at such valuations available now. It’s the trajectory of RoE/RoCE from now that’s important. If the promoter is shareholder friendly and willing to learn, these things will sort out as and when the promoters realise that their company is getting recognised in the market, so they will stop doing funny things.

  6. The products like Ghee, Curd, Paneer are ever green. When I was abroad, the people there used to buy the curd bottles as if there is no tomorrow (Nestle, some Swiss brands, some local brands as well) as the economy is based on both male and female working. Again if Durga is sucessful in these segments and attains some scale, the next challenge is to grow with MNC competitors.

Yet to get convinced/threats

  1. New market penetration and Competition - not easy I believe as Ghee is a localised market and not sure how strong are the local players in these respective states. But at these market cap, any extra revenue, I will lap it up as the market cap will grow to a respectable number. Market will also five good PE if there is a sustained minimum revenue of 100 crore reached at least.

  2. Management quality, execution abilities at larger scale.

  3. Some inter party transactions (loan, investments in a pharma company) - though not huge amounts. I would prefer if they call back these loans and use them for this company’s growth.

  4. The website is NOT informative, that’s a plus as well as the company is not well researched yet.

  5. Any sudden raw material price increases or shortages. I believe they forged some long term contracts with Heritage etc. to insulate themselves from price. If executed properly, this is a nice move.

  6. Corporate guarantees as reported in the annual report FY15. It’s a red flag for me. The quantum is also not small for the size of operations. However, as the company gets discovered, the management should, hopefully, realise the things that will impact their market cap.

CONCLUSION

Even if company does half of what it wants to do and grow the current revenue at at least market growth of 13-20% (as per @RajeevJ post above) , the present valuations look cheap in the hindsight. I would give the company 2 years to materialize the above said things. Merely an increase in raw material should not be a reason to sell if company comes up with ideas to reduce such impact. If the RoE sustains above 25% with low/no debt and pays dividend and the story goes as per above, I see no reason why this will not get are-rated PE equivalent to FMCG sector.

In the short term, the decrease in milk prices by about 8%-10% should give the needed fillip to the bottom line. If revenue too grows at 30% plus, then this year should be a better year for company as well as shareholders. Valuations are still inexpensive IF we see an EPS of around 4-5 for FY16.


My richdreamz portfolio - visit my portfolio to learn together!
(Akaash Bansal) #34

@richdreamz :+1: research . i think all your concerns at last depends on management quality & execution.Mangement looks reliable seeing the 40% payout FY15. If anyone knows more about the management please share. i have bought a good chunk yesterday :v:


(krishna) #35

@everyone,
Being the originator of this thread, i want to caution you about current promoter personal ethics, since some of you are making it part of core portfolio.

I shouldn’t put that in public forums, i hope investors will understand , what i mean about Kantharao (as name tells the story)


(Rajeev Jawahar) #37

Virat Crane hit the ceiling price of Rs. 63.70 on BSE. Up 30% for the month. I understand under new rules it will not be allowed to go higher during the current month. Perhaps a good time to accumulate gradually. There is a strong buzz that the Co.'s performance in the current year is improving & an interim dividend is a possibility.


(Raj Panda) #39
  • Durga Ghee has a good brand recall in Odisha. But like we know there are also many duplicates around. My understanding is, the particular flavor that Durga uses, is easy to copy by other vendor’s. With a similar flavour, it’s hard to tell the difference between fake and original in matter of Ghee. Probably it’s not a crime if another local company uses a brand name sounding like durga and sell’s same quality ghee. Devi is another popular “duplicate” one, if i remember correctly and has good support from good local film star in endorsements.

  • Odisha in particular, never had a very effective milk cooperative like the kind of Gujarat(Amul) or Karnataka(Nandini) had . Not sure of milk cooperative effectiveness in Andhra. Odisha has Omfed, but it was primarily happy to supply to milk and not so enterprising to enter into value added products like ghee, paneer etc. Need to watch if we can expect Durga to have similar success in Karnatka and other markets as it had in Odisha & AP, Nandini (KMF) is a strong brand and has strong products in most value added categor. http://www.kmfnandini.coop/

  • Even in Odisha, things are now changing, with a strong private company like Milky Mu entering into fray. They are considered to be good and have provided good challenge to Omfed’s monopoly in milk and are entering into value added products category. Also the ghee market now has options from national brands like Britannia, Amul etc… and ITC is going to be the new one to market soon.

  • Last years Virat’s result had a support from new Andhra Govt’s largesse to distribute free ghee packet’s to the tune of 3.7 cr. So we can consider it into our estimates.

  • Gross margins have seen a sharp jump in last few qtrs. However, company say’s it’s raw material "milk prices has increased and it was able to smooth it out and increase PAT margins. Any clue on this ?


(c.t.sreenath) #40

A similar argument for investment rationale is seen in Heritage foods,Hatsun agro. Heritage foods (AP based) too realised high margins from the value added products like curd,gee,panneer and has aggressive plans of increasing the value added products pie. They are in route to increase VAP to 25% of sales.

Though it’s sort of a comfortable validation to see different companies focusing on Milk VAP , the competition will be fiercer in both new & existing markets. Companies like heritage / Hatsun are better placed to play it , with integrated milk operations and their own retail outlets (parlours) .

Dicl - Invested in Heritage foods


(richdreamz) #41
  1. I think, what Heritage is to Andhra/Telangana, Nandini is to Karnataka. Primarily, Heritage & Nandini are milk sellers (various types, UHT, non-fat, full-fat etc.) and of course they do value add sales as well like Ghee, curd. However, brands like Durga are niche Ghee sellers and are identified by customers as such (in future may be Paneer and curd as well by Durga). For example, Heritage has a very good brand recall in United Andhra (very famous Chandrababu Naidu’s company!!!) but for Ghee, people generally opt for Durga (niche). High volume milk sellers may not concentrate so much on niche products. Having said this, it remains to be seen how Durga is received by Karnataka people. As per annual report, the initial response is good. If it gets real good reception in Karnataka, this state alone could provide huge revenues. The company need not think of other states at all!

  2. Good that free sales were done as this could provide recurring sales :slight_smile: . Once used to Ghee in food, people cannot go back as the taste is so much better.

  3. Price increase smoothening out could be due to agreements with Heritage etc. for supply of milk at specified rates and quantities?

Disc - invested in Virat (Durga).


(richdreamz) #42

Milk forms high part of expenses for Virat Crane as it’s the main raw material (~ 80% of expenses). So, a sense of how milk prices would pan out in near future is important to evaluate the company’s bottomline growth.

Milk price in India:

When compared to last year, milk prices are low and are expected to be low in 2015 and 2016 as per media reports (sources below).

Global milk price
The global milk prices play a key role on the Indian milk prices because -> Already we are priced at least 30% above global prices and If there is any further price increase in India, this will lead to import of milk and/or usage of milk powder. So, organised milk prices will remain low in India for the foreseeable future. USDA predicts increasing global milk output for 2015 and 2016.

Milk forms about 8% of Indian monthly per-capita expenditure and so has a high impact on inflation figures, second only to cereals. So, I think for food security, a sustainable low milk prices should augur well and as per RBI’s projection overall inflation should be under 5%. However, I also think that high demand for milk might keep prices in a range as the domestic consumption increases as the per capita income for Indians go up.

Now, as milk prices fall, I think the milk product companies may also have to reduce their price of curd, ghee etc. I do no think the companies pass on the full benefit and thus better margins and bottomline.

Sources:


(Raj Panda) #43

Here is the local trend of milk prices in Odisha over last 3 years. Dont’ expect the cost trend for Virat to be very different than this.

Sep 2012 - Up from 24 to 26 for a litre of toned milk

Feb 2013 - Up from 26 to 28 for a litre of toned milk

Feb 2014 Up from 28 to 30 for a litre of toned milk

Aug 2014 Up from 30 to 32 for a litre of toned milk
Not finding a link for this, but refer the below link on business standard it confirms the hike news.

December 2014 Up from 32 to 34 for a litre of toned milk

So roughly 40% increase (24-34) in raw material cost in last 3 years between Sep 2012 to Oct 2015. With this being 80% of expenses am assuming it’s a pass through for Virat and hence 40% of the revenue increase we have seen in past 3 years is attributable to the increase in raw material price ? Will that be a correct way to interpret this data ? Because, Ghee after all is a commodity with price linked to milk price?
And without an increase in Milk prices, revenue growth might struggle to that extent ?
and like you mentioned, you are not expecting any more milk price hike soon :wink:


(richdreamz) #44

Good point.

Yes, until 2014 the milk prices are on an uptrend, quoting a sentence from the indianexpress link in my above post:

Between May 2010 and May 2014, retail prices of toned milk in Delhi went up from Rs 23 to Rs 38 a litre — a 65 per cent jump in 4 years. But since then, there has been no rise and the scope for it is also limited in the “near future”, according to R S Sodhi, MD of Amul, which last raised prices on May 9, 2014.”

Now some important points on why Virat now is different from Virat during 2010-2013 (based on posts in this forum itself by other members):

  1. Virat had fake products issue (not that it is not there any more) but I think as we go along this issue will gradually subside.
  2. The product sales were primarily due to good distribution/dealer network and not so much push from the company itself.

When the above problems subside gradually, the revenue will see better growth (we are still on a very low base so lot of scope here)

So yes, the majority of revenue growth would have come from price increases.

However, as per the latest annual report (latest AR has better information in management discussion and analysis section compared to past reports) -

  1. Management is proactive in generating revenue growth where they mentioned they want to expand to other geographies, new plant in Orissa to cater to Eastern states, brand extension.
  2. As a logical extension to this low milk prices, revenue growth from ‘price realisation’ might be less as you rightly said, but this could be to some extent offset by point 1 as above.
  3. However, the margins should get a boost and hence better RoE etc.
  4. I think there might be ‘natural’ revenue growth owing to better GDP numbers during 2015-2018 as compared to 2010-2014 (at least this assumption should be made, if not, there are a lot of other sectors that will also get impacted like housing, consumption etc. and you cannot be in equity market :wink:
  5. The whole ‘consumption theory’ picking up on which many other stock prices are at high PE (Hawkins, Whirlpool, Paints etc. etc.) while Durga is quoting at benign PE, so there is a very good scope of PE re-rating if the story pans out as expected.