Coffee can method

Investing Strategies
133

Paint Industry Facts on Mks

Indian has fairly consolidated Rs 50000 CR paint market and Big 4 Asian, Kansai, Akzo & Berger Paints account for major part of it .

47%20PM

Paint industry Gr is typically 1.2 to 2 time of GDP as they can normally pass on inflation to consumers .

Berger paints over a period of time has been able to close in price premium gap vis a vis Asian paints and that too some extent explains last 5 years outperformance - Movement from bulk to retail packs also improved realisation and profits . But lot of this now in base .

Asian paints has diversified a lot in recent years and picked up multiple battles with many players - One needs to see how management copes up with this .

Consolidation of Real estate is not good news for paint industry as it improves bargaining power of developers aka in Middle east and China

Similarly if there is rise of organised paint & interior design services say under Urban clap . Livspace etc kind of option - it will reduce bargaining power of paint companies . But this will take lot of time to happen .

Today valuation of paint companies are high vis a vis historical multiples …

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Pidilite apart from distribution, brand and other normal marketing sales and distribution stuff has extreme edge by virtue of its string relationship with the Carpenters and craftsmen. They are ones who decide products to use on most cases. This is a strong moat according to me for this innovative company. Also with stuff like hobby ideas, which I think was ahead of its time, and didn’t work as I anticipated…but this company does things differently. Disc. Part of my core holding. Interested in Asian Paints as well.

Btw anyone has idea of how the bath products of Asian paints doing? They launched premium bath products either self or in partnership and retailer had them placed alongwith jaguars…

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True, I believe the innovation too is a major moat

Currently this segment forms an insignificant part of the company ( roughly forms about 1.25% of revenue as per latest AR ) and it may take time to scale up . So its best to give a weightage to paints business and then decide on investment thesis

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Since, Pidilite is already an undisputed leader in its segment, what kind of market size is left for it to grow?
I haven’t read much about this company but from intuition it seems that the further growth of the company depends on the growth rate of the real estate sector.

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Yes correct . Even i am wondering the same thing . However few factors that can be considered they are very innovative and constantly bring out new range of products like different range of fevicols for different conditions and innovations create markets like their hobby ideas etc
They have acquired some brands like Roff etc and that hence I believe they may be open to growth through inorganic route although that is just basis looking at past history. They have acquired quite a few products inorganically
They are also into children segment which is ever growing and that can be another driver although that segment is not very significant .

Being an amateur investor, my views may not be correct
Would love to hear other experts thoughts on the same .

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Yes, Inorganic growth is an option but given that they operate in almost a monopolistic environment (~ 70% market share), inorganic growth in their domain shouldn’t give them any significant market share.

Of course if they want to enter a new domain, inorganic acquisition would be useful, but entering a new domain through acquisition is useful only if the acquired company has a significant market share or growth visibility in that domain.

Finally depending on a sector growth (in this case real estate) to grow has its perils. Consider the case of Castrol India, and how they are struggling to grow, in spite of having all the same ingredients that Pidilite has now.

I am also a novice investor, so please rectify me if my understanding is incorrect.

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@sujay85 , Agreed to all the points except that IMHO Pidilite cannot be compared to Castrol as Pidilite is a much more secular stock lesser prone to cycles as compared to Castrol and is also perhaps lesser prone to disruption

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140

How does V guard compare to Havells as a Coffee can candidate ?

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Pidilite has a huge runway as far as construction is concerned be it real estate or infra, products for individual consumers via its Bazaar segment, for artists and craftsmen via Fevikryl and Hobby Ideas ways, it has products in automobile, some specialist segments like under water construction, also additives for paints so wherever paints used pidilite can be there, used in renovtions and rebuilding, not to mention special situations like water proofing which is now a norm etc. etc.
Disc: This is not a recommendation, only discussion. Part of core portfolio

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Hi Everyone,

I would like to bring another potential candidate to the thread.

Larsen & Toubro Technology Services (LTTS)

L&T Technology Services Limited (LTTS) is a leading global Engineering Research & Development (ER&D) company offering consultancy, design, development and testing services across the product and process development life cycle. LTTS is committed to engineering the change with disruptive new age technology solutions.
LTTS offers a portfolio of engineering services across industries. LTTS closely follows the technology trends in the ER&D industry and have focused on key technology areas that impact the various verticals in which we operate. These include (but are not limited to) digital engineering, mobility and augmented reality, IoT (including IIoT and NBIoT), automation of knowledge, robotics, autonomous & near-autonomous vehicles, energy efficiency and imaging and video. LTTS is the only Indian pure play engineering R&D Company of its kind to offer ER&D services and solutions to all major industries viz. Transportation, Industrial Products, Telecom & Hi-Tech, Medical Devices and Process Industry.

1: Transportation:

The Company offers engineering services and solutions over the complete spectrum of the transportation industry, that includes OEM and Tier 1 suppliers in automotive, trucks and off-highway vehicles, aerospace and rail industries. The segment delivers end-to-end services from concept to detailed design through manufacturing, testing, aftermarket and sourcing support helping OEMs and Tier 1s develop products in a cost-effective manner. The Company also helps its clients develop cutting-edge transportation technologies such as autonomous driving, electric vehicle and drones.

2: Process engineering:

The plant engineering practice provides end to end engineering services for leading plant operators across the globe. The Company provides services in E/EPCM, engineering reapplication and global rollouts, plant sustenance and management, regulatory compliance engineering along with chemical, consumer packaged goods (FMCG) and energy and utility sector clients. The Company specializes in traditional engineering procurement construction management (EPCM) and operational maintenance projects, as well as contemporary digital engineering enterprises. The Company is advancing its engineering footprint to encompass the digital sphere and working with customers on ‘Smart Manufacturing’ technologies such as automation, IoT, analytics, and augmented reality (AR).

3: Industrial products:

Industrial products practice helps original equipment manufacturer (OEM) customers across building automation, home and office products, energy, process control and machinery. The Company’s expertise in engineering industrial products helps customer drive innovation and efficiency, and retain a competitive edge. The Company helps streamline the product development value chain, enabling customers spearhead business growth. This Industrial Products segment offers end-to-end product development counsel, leveraging expertise spanning software, electronics, connectivity, mechanical engineering, industrial networking protocols, user interface/user experience (UI/UX), test frameworks and enterprise control solutions

4: Medical devices:

The Company’s domain expertise, supported by robust technological capabilities, helps medical device OEMs address industry challenges, accelerate time to market, and optimize costs. The Company focuses on delivering solutions in diagnostics, patient mobility services, musculoskeletal services, life sciences, surgical services, cardiovascular, home healthcare and general medical.

5: Telecom:

The Company’s expertise in digital engineering such as the cloud, internet of things (IoT), artificial intelligence, data analytics and other areas in telecom domain enables its partners to leverage the right telecommunications strategy. With expertise in product variant development, 5G capabilities, simulations and automation, and product and mid of life support, the Company is a one stop-solution for the clients. It also provides futuristic solutions and IP Cores that address some of the pressing needs of the semiconductor industry. The Company’s narrow band IoT (nBIoT) solution provides the complete IoT device management designed with low memory and low power footprint enabling easy integration to custom target platforms.

LTTS offers design and development solutions throughout the product development value chain and provides solutions in the areas of mechanical and manufacturing engineering, embedded systems, software engineering and process engineering. LTTS provides services and solutions in the areas of New Product Development, Product Lifecycle Management, Engineering Analytics, Power Electronics, M2M Connectivity and IoT.

Automoation of processes, AI, IoT etc: is the future. I think companies that are innovation driven and depend on innovation for their survival are perhaps the ideal long term bets. (take 3M as an example, not comparing though). My knowledge on IT is very limited but as per my understanding IT is a great business model that can generate high returns on capital and is able to throw out decent cash flows.

The company comes from a very respectable corporate house & is innovation driven with a target of growing fast. Further they have a target of generating a Large number of fresh patents every year. Patents are a wonderful thing for a business to own.

the info is from the attached file that was shared with me from a fellow boarder @S_Banerjee

I would like the inputs of senior members and fellow members on this company and its outlook. @dineshssairam @hitesh2710 @basumallick @rupeshtatiya @vivek_mashrani apologies as I’m sure I have missed some other senior members.

LTTS.pdf (1.6 MB)

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LTTS is a good company but in my opinion, not one where I cn put money and then forget for 10 years. The space is very dynamic and they a a bit-player in the space. Its not a given that will do well in the next decade.

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The bargaining power in a service based company operating in high skill area like automation, IoT, augmented reality, etc, lies with the employees, as the entire value lies in their skill pool, company is just a name. If tomorrow a competitor, say an agile startup, provides better term to employees, company will have to match those terms to retain talent. Therefore the excess profits will flow to the employees and not to the shareholder.

Yes service based company like TCS have been able to create immense wealth for its shareholders in the past, but that is because the skill levels they required in the past were not very high and we had large supply of people in the country within the required skill bar. That may not hold in the future.

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In today’s ever changing world I do not see any company where we can put money and forget for 10 years.

LTTS is a good candidate which is adapting newer technology and delivering quality business. Not sure about years, but I feel LTTS can sustain and deliver in long term. My personal opinion.

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@basumallick is correct. A few things to consider:

  1. Everyone says all Tech is prone to disruption. You can verify this by looking at how many Tech companies have come and gone in just the last decade Vs how many companies have come and gone in a less, disruption prone industry like, say, Tyre production. I do not know the statistics myself, but I am quite sure that in Tech, the percentage of companies which have stood the test of time will be minuscule compared to the ones in Tyre.

  2. Prof. Aswath Damodaran, who is supposed to be the master at valuing Tech companies (He was among a handful of people who called the Tech Bubble long before it burst), says that Tech companies age like cheese. That is to say, even if the company survives their peers, the pace of innovation assures that they reach the ‘Maturity’ stage of the Business Life Cycle very soon. In effect, every Tech company has to innovate a new purpose/strategy for themselves every 7-10 years. Those who don’t adapt often struggle to scale (Look at Wipro for the past decade).

  3. Specific to LTTS, there is always the point that the space they are operating in is new. There would probably be just a handful of people in the entire country who can positively guess the direction of this industry. I personally don’t think I can. But if a lot of people think the same too, then by definition, it cannot be part of a Coffee Can Portfolio.

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Another company in similar space is Tata Elxsi

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Indian companies are not “tech” in true sense of the word. They are people companies. More headcount more revenues. When technologies change, these people will retrain their workforce. Remember that most (probably not LTTS) of these so called tech companies started on COBOL and Y2K. They have come a long way since then, and they will continue for some time to come. Their strength comes not from innovation or products, but an adaptable workforce. There may be small pockets where the above thesis does not hold good 100%, but just think about why these companies obsess about offshore/onshore ratios and have a fit each time the H1B/GC rules are changed!

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Being in Indian IT industry for a long time, and whatever study I did on LTTS, I can say LTTS is not a service provider IT company in true sense. They are product based IT company dedicated in innovation. I am not sure their offshore/onshore ratio and operational activity totally, but in comparison to others it is different.

Most of the IT companies do bill their workforce to clients and generate revenues. But LTTS is somehow different. Although not sure their billing methodology, if someone can put some light it would be helpful for me,searching this answer.

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They are not much different than other IT companies. They do the same things others do. The difference is their specialization in specific domains / industries where the skill availability is limited. Secondly, they have no product of their own. They work on other companies’ products and services.

I don’t wish to sound bearish, but there are some companies which are able to successfully able to create this perception in the investors’ mind that they are in some way different (LTTS, persistent etc). But if you dig down and see what they actually work on, you will find that they work on products/services of others. For TCS/Infy, the client is an end client like say a Bank of America, whereas for LTTS etc the end client could be a PTC or a Dassault Systems.

A simple test to figure out if a company is doing something “different” or extraordinary is their OPM. You will find that all these so-called differentiated companies are making the same 15% margins as everybody else. TCS/Infy are making 25% OPM. There is nothing else to look at :smiley:

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Do they work in service providing support projects with repetitive work? On your point they have no product of their own, then what are those patent they are filing. They are owning few patents which is not jointly owned with clients.

Working on different research based product is advantage over other product based IT companies where they are restricted to only few.

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Patents mean nothing, trust me. Nortel & Lucent had the richest portfolio of patents and yet went down the tube. Most Service Providers have centers of excellence in certain technologies where they invest the benchers to do prototyping, patents etc so that they can showcase to clients their expertise in technologies of interest. When it happens that they reuse any client idea in their inhouse patent or product, they get their asses sued as has happened recently with couple of companies.

Remember the name LTTS stands for Larsen & Toubro Technology Services. It means only one thing, its a Services company. Oh, regarding their offshore/onshore models, etc, please look at their latest investor preso. Its no different than any other. Their onsite is 47%, offshore is 53%.

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