Dear Friends, I could not find any thread on this company in the forum.I find this company to be one of the most exciting investment ideas currently and would like to present it to the wider investment community. However, if there is any existing thread on this company, then the moderators may close this.
At the outset I would like to apologise as I have been wanting to initiate a thread on this company since the market cap of Rs.600 Crores. However, my perennial laziness has prevented me from doing so till now (It has also prevented me from initiating any thread till now for that matter). In the meanwhile, the company has runaway to a market cap of Rs.1,100 Crores.
Most of the investment Hypothesis can be read through from the attached report where the analyst has articulate the key drivers very well. To save time, effort and space I would like to run you through the key drivers of this story. Although a bit dated, it captures most of the points well.
Research Report Dimension Securities.pdf (528.0 KB)
I have highlighted the key Hypothesis Below:
Change in Business Model: I have been observing this company since 2014 and have also interacted with the management team as a financial sector participant during my previous assignments. However, I never found it to be investment worthy till as late as June 2017 because of the following reasons:
- High dependence on Government Business:The company used to derive almost 50% its turnover from the Government business which was low margin, working capital intensive and Low ROCE business. This business pulled down their overall RoCE. However, since this was a substantial annuity business of around Rs. 400-500 crores, the company got the requisite scale and their resources were fully utilized. This also meant that their bandwidth was fully utilized and they never had the aspirations to go beyond Tamil Nadu (and South India) in a meaningful way.
Now the twist in the tale was that they had received this order from the AIADMK government and this contract was not renewed after 2016.This literally meant that their turnover halved in 2017 and 2018. A company which can do Rs.900-1000 Crs at full utilization of its capacity was forced to decrease it to about Rs. 400-500 Crores. This also sort of shook up the management and there was a conscious decision taken at the board level to change the business model and compete in the open market. Also, more importantly geographic diversification was taken up seriously.
- High Geographic Concentration: The company used to derive almost 85% of the business from the South India market till as late as 2016. As I write this, they are aggressively diversifying their operations across South India and ramping up their plans to increase their presence in North and West India. To the best of my knowledge, they have set up internal targets to decrease the contribution from South India to about 60% of their turnover by 2021.
What I like about the company…
Secular Growth Story- Kitchen appliances sector has always been a darling of the Stock Market and we all know the stratospheric valuations commanded by companies who have exhibited profitable growth strategies in this segment. Specifically, the sub-segments in which the company operates, there is a large segment of unorganized market (in some case, as high as 50%) which is expected to be consolidated rapidly post introduction of GST. Hence, I expect the company to exhibit impressive market share gains in its key markets and segments. Would advise you to go through the latest investor presentation as attached to understand their key sub-segments among other things. Most of it is pretty self explanatory.
Investor Presentation Butterfly Gandhimati.pdf (1.5 MB)
Large Delta in Financials expected over the next 2 years: The company came out with stunning Q2 results post which there has been a frenetic rally. I expect the company to close FY18 with Turnover of around Rs.500-550 Crores and PAT of around 20-25 Crores. There is a large scope for operating leverage to kick in over the next two years since the company can report upto Rs.1000 Crores with minimal maintenance capex. I expect the company to grow its turnover at 30% CAGR over the next couple of years as it coming of a low base and has all the backend infrastructure in place. FY20 PAT is expected to be around Rs.70-80 Crores on a turnover of around Rs. 900-1000 Crores. With much improved working capital cycle, the RoE is expected to shoot upto 30-35 percent. In fact, the continuous improvement in its leverage over the next 18 months is expected to provide a big kicker to earnings also.
Change in Management Structure and Attitude: One more reason that I never invested in the company was the laid back management culture and a satisfied promoter family with limited hunger in their belly. That is also the reason they never expanded beyond South India aggressively. However, all this changed with the appointment of Mr. Prakash Iyer as the CEO, who represents the PE firm in 2016. Multiple senior level hirings have ensured that the strategic roadmap is set for the next 3 years and they are showing the right intent to convert it into a serious player in the next couple of years. From what I know, they would be looking at aggressively introducing new models and segments in the next 18 months.
Valuations: Since beauty lies in the eyes of the beholder I leave it to you to consider the valuation aspects. However, I have made enough mistakes in the market to not be fooled by Rs.1000 Crores valuation for such a beautiful consumer story. For a company with a very strong brand positioning (folks in Tamil Nadu can substantiate my claims here) and potential to grow its topline at around 30% CAGR over the next two years, I would give this company a valuation of around Rs.4,000 Crores (40x on FY20 PAT of Rs.80 Crores and 4-4.5x on FY20 Sales of around Rs.900 Crores). It is rising from the ashes and the earnings are expected to accelerate substantially over the next couple of years and the key in this story is going to be operating leverage. I am personally betting on the fact that it is headed to glory and may reach its full potential by 2020 by following the footsteps of TTK Prestige and Hawkins.
- If the geographic diversification is not executed carefully, then it has the potential to stretch the financial resources of the company and the promised earnings growth may be delayed.
- The improvement in margins while chasing growth will require focused efforts from the management. Any churn in the current management team which is performing very well needs to be tracked.
P.S.: I would like to make a strict disclosure that I have my positions at an average price of around Rs.420 and hence my opinions may be extremely biased. Hence, whatever I post here, please take it with a pinch (rather a bowl) of salt. This is not an investment recommendation and should not be construed as one.