Carysil (earlier Acrysil) - Kitchen sinks

Stock Opportunities Untested - but worth a good look
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Quoting Ayush from dalal-street.in:

Acrysil (M.Cap 53 Cr):**Acrysil is theaonly company in all of Asia a and one of just a few companies worldwide a manufacturing quartz kitchen sinks.a The company posted a goodJune quarter. The management talks about big ambitions in theannual report. If they actually end up delivering what they are aiming for, this stock can give fantastic returns.

The co is a very small player in global markets and has been gaining market share slowly. The co has started getting very good growth in domestic markets - the growth is about 40% for last 2 years (though the base is small)

As per the annual report of the co, the size of global granite sink industry is estimated to be around 10 mln nos per annum.

Last year co sold about 1.8 lac sinks.

We further did some ground work by speaking to architects and builders and they do seem to know the brand name Carysil.

Beyond the statement, we wanted to highlight (and encourage discussion) about the aggressiveness of this small cap company of around 50 Cr. which has been growing well and has some ambitious plans.

Negatives

  • The company tone has been super aggressive in most of it’s annual reports, even when it failed to deliver. eg: 2011-12, had very bad margins, but the company din’t care to explain.
  • Recent allotment of 2Cr worth of equity to the promoters is a concern.
  • Most of the sales are coming from exports. The company explains its drop in sales as due to currency appreciation. So the recent growth may be due to currency depreciation.

Positives

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Able to generate good cash flows to pay dividends. If the company captures it’s place as a TTKPrestigeor Asian Paints, by taking over the premium segment, the free cash flows would be plentiful and might be able to command PEs of 25+ (10 years down the line).

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This was my first impression. Would be great to get the opinions of senior valuepickrs, like Ayush/Hitesh/Donald.

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http://www.indianotes.com/Investment-Idea/Acrysil-Ltd-Buy-at-CMP-133/184562/12200001.00/C

HDFC SECURITIES ALSO RECOMENDS THE STOCK

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Thanks Prasanna for starting the thread on Acrysil (its been long pending from my end). I had done a store visit of Acrysil two weeks back on insistence of my good friend Ravjeet. Here is a quick summary about the visit:

I had visited Acrysil Ltd’s exclusive showroom on October 16 at Ahmedabad in the evening around 7 - 7:15. And guess what, I was able to meet the Company Secretary who had his office just above the store. However, I wasn’t prepared for the meeting as it was just a store visit to check out the company’s products (I am yet to go through its AR’s and dig deeper).

First of all, a quick word about the store. The store displayed quartz sinks, steel sinks, kitchen faucets, chimneys and gas stoves. A quick look at the product and one could see that the company manufactures/trades premium quality products. The smallest quartz/steel sink was priced at around 5200/-. The bigger sinks were all priced more than 10000/-. Surprisingly, the price of quartz and steel sink was almost similar. Also, the faucets were quite stylish and were pretty costly costing more than 10,000/-. The chimneys and stoves also looked pretty good. The company manufactures only quartz and steel sinks while it imports faucets, stoves and chimneys (stoves and chimneys from Germany [forgot to ask them about faucets]). However, I was the only customer in the store. But I was pretty impressed with the products.

Now coming to the meeting with the CS. He was pretty forthcoming and was ready to share information about the company. He has been associated with the company for the past 4 years. He said that year ago the company had faced issues and was on verge of going into BIFR. However, the performance of the company has improved significantly over the past few years. The chimneys and stoves contribute just 2 - 3 % of company’s total sales as it has been just 1 year since it started selling them. Steel sinks contribute 20% to company’s total sinks sales while 80% is contributed from exports. Exports constitute 80% of company’s total sales and it exports to US, UK, Germany, France and other countries. The company doesn’t have any marble/quartz mines. The company has installed capacity of 3.25 lakh units per annum and is currently operating around 80% of its capacity. The company will not gain much from rupee depreciation as it also imports some of its raw material. I wasn’t much prepared for the meeting and told him that we will have a detailed discussion later.

We can actually dig deep in to the company and gather information about it. We can initially meet the CS (most probably after Diwali) and get our queries answered. In case we are satisfied with the answers, we can visit their Bhavnagar plant and get more clarity about the business and the company.

Regards,

Ankit

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Launch of berbel by acysil.

http://www.youtube.com/watch?v=T0YGstb-ToA

http://www.youtube.com/watch?v=PaKsfvf87lE

As you know Germany is the heart of engineering, there is a company which is endeavouring to make world’s best range hoods and smoke/cooking vapour extractors

http://www.berbel.de/

Acrysilhas got rights to sell their appliances in India too

http://www.youtube.com/watch?v=t2h8XrHvxe4

http://www.youtube.com/watch?v=zjXXENmx7vE

http://www.youtube.com/watch?v=VGf7jF-9pp8

regards

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Tirumal, thanks for sharing the videos. Its good to see that the co has very high quality products.

Ayush

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The business model of quality Western products which cater to vast Indian mkt has proven very successful in case of cos like Page Ind, Jubilant food & even our own Astral through Lubrizol.

Can this co also do that ? Seems the new MD is a polo fan .can he concentrate more on business n execute ?

I had spoken to their local sales guy in Delhi who said the co is having good demand for their main product granite sink n they have pricing power for it but not for other products.

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The father and son were drawing 6lakh and 4 lakh per month plus perquisites. Thats a substantial portion of the profits

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Thanks Tirumal for the links, i had not understood the full significance of quartz sinks so far,they did help to establish the product quality in my mind.

@Ankit, Great to know that cost is very close to steel sinks.

The business does look interesting to track.

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Acrysil has installed its Carysilgranite sink in the upcoming prestigious Wave City project of Ponty Chadha family at Noida .

Installations of branded products like Jaquar faucets,Astral plumbing, Finolex cabling, Kajaria marblelike Ceramics & now Carysil granite sinks enables builder to charge premium pricing even though overall cost of these branded products doesnt exceed much in %age term inoverall cost.

This gives good pricing power to makers of these quality products.Having pricing power together with opportunity size is an excellent combination for wealth creation in stock market .

Acrysil granite sinks have unique USP of multicolor sinks fitting in with overall Kitchen decor in any color instead of solitary steel shade. Seems not much competition is there for them .Further price starting from rs 6000/- to 20,000/- makes them very affordable to large no of users in Indian middleclass .For business class bursting with black money these items are anyway not an issue.

The company has recently added capacity to 2.75 lacs sinks pa & their SS sinks made from imported German steel also stand out.

This qtr will be good for them but the co shud be viewed in annual basis only.It being in periodic call options is making the co available at very cheap price.Against sales of 80 Cr mkt cap is till 50 odd crore n PE 5-6 div yield of 2-3%.It can rise if it comes out of call option as performance is improving.

The company could be a good wealth creator & needs to be carefully studied.

Disc-I am invested with a small qty & risks associated with co I have mentioned earlier.

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Current M.D Mr. Chirag Parikh assumed responsibility in Nov. 2008, and we do have AR since 2010 easily available. So we have almost 5 years of company performance under his leadership available for analysis. Here is some data i picked up and thought would be good get some guidance from all of you.


 Sales Net Profit M.D Salary installed
cap. 		Domestic
Sales		 Sales Qty. Fixed Asset pur. Div. Paid
2009 50.84 7.38 1,80,000 4.7 cr. 126909 6.58 cr. .76 cr.
2010 45.97 6.08 cr. 36L + 6L (perks) +
2% of N.P		 2,00,000 6.8 cr. 113609 5.36 cr. 1.06 cr.
2011 55.45 6.10 2,50,000 8.68 cr. 138024 11.68 cr. (restated in FY12 AR as 5.96 cr.) 1.14
2012 62.22 3.94 2,75,000 12.4 cr. 148491 3.43 cr. 1.15
2013 78.44 5.50 72L + 8L (perks) +
2% of NP		 2,75,000 18.9 cr. 180619 7.97 cr. 1.14

1. Why does it look like, the company is always in a hurry to add capacity. It's been consistently operating at capacity of 50-60% levels. Is this normal ? Or should we consider this as a negative for management ?

2. Domestic sales have been inching up nicely from 15% contribution in 2011 to 24% in 2013. My general impression is there is a market for this kind of product in India.

3. This point mentioned by CS to Ankit doesn't seem to match up to the data present in AR "The company has installed capacity of 3.25 lakh units per annum and is currently operating around 80% of its capacity.". Any comments on that ?

4. Company seems to be spending all the profit into fixed asset creation. Which i think in turn is linked to point no.1 , i.e., hurry to create capacity, which is not getting optimally used. Is this a fair comment to make ?

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The story looks quite interesting, as its 4 largest manufacturer of granite sink in world and still doesn’t have 100 cr in sales.The top 3 have 70% market share. So looks like winner takes it all.

Opportunity size is pegged in company AR at 1 crore granite sinks/year and company has paltry 1.8 L granite sinks in FY13, market share of around 1.8% of world.

Growth rate of segment domestically will be high which will be catered by Acrysil and internationally Acrysil can benefit by snatching market share from smaller players or penetrating into top 3’s pie. The growth in domestic market of both stainless steel and granite sinks look sustainable, a little hard to predict their international business.

Average realisation per sink was low around 4000 Rs for FY13, this seems contradictory to observations by Ankit where he mentioned the cheapest being 5200 Rs and are much higher for export segment. This is one place where numbers don’t add up. Even stainless steel are more expensive than 4000 Rs. There may be some dealer commission which might reflect in here but still realisation is too low and has led to margin being surprisingly low in a premium segment. This is one point on which we can question the company representative.

Company has mentioned capacity of 2,75,000 granite sinks and as mentioned by Company secretary total capacity is of 3,25,000 sinks. My guess is the rest 50,000 units might be of stainless steel sink produced by Acrysil steel.

Utilisation rate of 80% might make sense if we consider companies performance in FY14.

On a utilisation rate of 80% on 3,25,000 units, and average realisation of ~4047 Rs/sink (9% stainless sink and 91% granite), we get yearly revenue of around 105 cr and half year revenue of 52.5 crore which is close to actual figure of 52.39 crore.

Even if we consider the total capacity to be 2,75,000 and utilisation rate to be 80%, it will give higher realisation around 4870 Rs (at 52.5 crore half year revenue) which may explain higher margins of the company in Q1 and Q2 FY14. We need to confirm the actual capacity for both the segments which will give us better picture.

For Company to have 1000 Cr of revenue by 2020, it will have to increase its market share to around 15%, which looks possible due to lack of competition in Asian market. But the capacity required to produce such results would also be around 20 lac units. So capacity addition at brisk pace need to continue for that.

As Raj mentioned, company is constantly reinvesting to create more fixed assets, which I can attribute to reaching higher capacity in the futures and management aggression. They might be committed to 1000 Cr sales by FY20, which may have led to unoptimal usage of existing capacity before committing for further capacities. I guess we need to watch FY14 capacity utilisation and demand scenario before accusing managers of being overly aggressive.

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Some negatives are

2 lac Warrants issued to promoters in July, 2013 at 100 Rs

Future competition from TTK Prestige, Hawkins Cooker, Asian Paints, etc possible mentioned in recent HDFC report (I doubt it due to high capital intensive nature of this business as others are mostly into asset-light business model)

High inventory days and lower Return on Assets.

How the company manages its operational efficiency will be critical as Asset turnover ratio will be low (1.5-2) even as the company expands. NPM should expand to above 10% range since this is premium segment and can lead to better ROA in future.

Views Invited

Regards

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Thanks Utkarsh for your analysis.The numbers discussed byyou are only for sinks,and I think management has given overall2020 targets, and they may go completely wrong either ways.

The fact that it is able to grow very fast in India (on small base although) seems to indicate good traction for its steel sink. The exports should also do very well sinks after currency movements.

I think It ismore important to analyse other business lines it has recently forayed into.Canthe same sales channel be levereged to sell chimneys and other kitchnware. If yes, the imported product line from Germany can do wonders for this company. If no, its a one product company in aurban housing market, which should keep growing at decent place unless there are accidents (competiors focusing on it,over agression).

I have decent position in this stock and would like to take more views from senior VPs.

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You are right, the target of 1000 cr by 2020 looks a bit hard to get unless they have a tremendous demand for their imported products and 1000 cr alone by sinks doesn’t seem possible.

Even if that happens, I guess imported products would lead to lower net margins but higher sales and more capital efficiency if they leverage their network.

IMO, the best part of the story seems to be growing domestic market size (which is still 22% overall sales) of their market and enough caveats which can let it continue to grow till 2020.

We need to get deeper into the story and understand other variables.

Disc: Hold starter position. Will probably increase allocation as conviction builds.

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Is the company coming out of put call option ? If so when n what could be the price impact? Has price already run ahead in anticipation n not much juice is left now?

Any scuttlebutt on the domestic sales ? In Delhi the sales have been brisk.

But majorly the co is into exports n the co performance last qtr was not meeting the expectation. Any updates on this front.

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The company would surely be coming out of periodic call auction. As the average volume are above 10000 since Sept quarter. Moreover SEBI is relaxing/abandoning the norms from Jan onwards and acrysil satisfies the criteria to be out of this periodic call auction once and for all. Yes, the price seem to have run up in this anticipation.

Not much idea about scuttlebutt on sales etc.

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Acrysil is up close to 30% in last few sessions. Looks like story is reaching out but how they capitalise the opportunity and turn the story into numbers will be critical going forward. As even at this high price, it is 100 cr market cap company.

Vivek, you said sales has been brisk in Delhi, which segment - sinks or other imported stuff from partners? Pursuing the partners high end products will help it create niche in the lifestyle segment of higher middle class and upper class.

I visited @Home in Surat area, didn’t find kitchen segment products there. There were designer sofa and drawing room sets. Looks like custom designed kitchen are still in their infancy and have not yet caught the eye of people.

Will be visiting a few of specialised kitchen stores in next couple of weeks in Surat to see if they have started to sell or have heard something about Carysil products?

Disc: Invested

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Q3FY14 results out

Net sales 25.3 cr vs 19.3 cr (up 31%)

Profit from operations 2.97 cr vs 2.28 cr (up 30%)

Operating Margin 11.74% vs 11.81 %

Other income 0.43 cr vs 0.15 cr (up 187%)

PBT 2.61 cr vs 1.76 cr (up 47%)

PAT 2.05 cr vs 1.27 cr (up 61%)

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I am highlighting some negatives PURELY BASED ON NUMBERS and last 15 years HISTORY.

Highly capital intensive business [low asset turnover], working capital intensive [33% of sales stuck in WC], not much pricing power [ASP CAGR last five years 6%, decline in margins]. Cash tax rate on average lower than 15%.

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Some negatives

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  1. ASP growth for last decade averaged 3% and for last five years 6%. This is reflected in decline in EBITDA margin from average of 24% during 2008-10 to 17% by 2013.
  2. On an average 33% of sales is stuck in working capital over a period of last 5 years.
  3. Pre-tax OCF declined from average of 20% during 2008-10 to 14% during 2011 & 2012). It further declined to 9% during 2013
  4. Asset turnover [taking total assets] remained between 1.1-1.2 for last 15 years. Even for 2013 its was at 1.2x. This shows business is highly capital intensive. This is also reflected in the depreciation.
  5. Cash tax rate for last 15 years averaged 12% [except for 2011 when it was 38%]
  6. Some how 2008-10 looks like outlier, exceptional years. ROE, ROA etc were super during this period.
  7. RoA since 2003 [except for 2008-10] average 6-7%. RoA during 2011-13 has declined from 15% to 10%. Higher ROE is driven by higher leverage.
  8. Despite 50% growth in sales during 2009-13, EBITDA remained flat at around 13crs during 2009-13.

Some critical questions:

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  1. Still majority of revenues are from exports. Who are its competitors in the export market? What’s the share of China in overall exports? Is there a possibility of dumping by China in international markets in case China’s domestic demand slows down?
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