Control Print - Deserves attention?

Stock Opportunities
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Hi Dhiraj- thanks for your note.

As you say, one has to relate the financial numbers to a specific industry sector/business model to really make sense of it.

The Page situation is very different. It is a Pan India player with thousands of retail points hence the need to maintain a certain level of inventory, despite quarterly variations it has done a fabulous job of converting profits to cash flows over the years.

Control Print is a very small B2B player in a cut throat industry. An investor would do well to ask how they broke into a comfortable club of well entrenched players with deep pockets? Looking at their WC management gives some clues as I mention in the 1st para of my earlier note.

This is not to completely write them off. One simply has to keep tabs on them to see whether they actually manage to scale up with such a WC intensive business model. Any more cash infusions would also be a red flag. Not much point diluting shareholders to pay dividends.

Cheers

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Bobby,

Thanks for your comments.

I do not want to consider Control print as next big idea. Only limited point is a small company, with decent free cashflow, credit profile and dividend paying record, which fits my criteria of investment.

Regards
Dhiraj

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But also see this note by Prof Bakshi - http://farnamstreetblog.us4.list-manage.com/track/click?u=8e07fafb870eb449ad41c8693&id=24d4d6607c&e=7586f0814a

Disc: long

Reproducing here:

Slow Inventory Turns as a Business Strategy
Q: Why, often the correct strategy is to have SLOWER inventory turns & an
“inefficient” working cap cycle?
Slow inventory turns translate into lower returns on capital. Why then should lower
returns on capital be good for a business?
The answer lies in thinking about the tradeoffs between profitability and longevity.
To be sure, a business which earns poor returns on capital (in relation to passive
returns available to investors generally) is an economic failure. But a business
which earns high returns on capital, could, under some circumstances, be worth
more to its owners if it was somewhat less (but still quite) profitable.
Take, for example, a business that sells mission critical parts to its customers.
When you are selling replacement parts for aircrafts, then for airline customers,
unavailability of a critical part carries huge opportunity cost. Therefore, for a vendor
to have a deep and enduring relationship with its airline customers, it makes sense
to carry lots of inventory items - even when it’s known that many of those items
may not be needed for months, or even years. Just having those parts on hand,
near the customer, translates into an excellent value proposition for the customer
which solidifies the relationship by creating high switching costs. And someone
who is fixated on the efficiency of working capital cycle might miss this important
point.
For some businesses, therefore, having slow inventory turns is a valid business
strategy to create strong customer value proposition leading to high switching
costs. And sometimes, keeping inventory turns low also creates entry barriers
because for new entrants, slow inventory turns, when combined with lower profit
margins than the dominant industry player, create insufficient returns on invested
capital.
For business owners and managers, its always a good idea to focus on long-term
value and not on near-term profitability. And sometimes, decisions that hurt near-
term profitability increase long-term value. Keeping inventory turns low in some
businesses, was just one such example.
Note: The above does NOT mean that the idea of slow inventory turns as a source of
competitive advantage applies to all businesses. Many super efficient businesses
with high inventory and asset turns also have high entry barriers. - Sanjay Bakshi

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105

Great discussion on the thread. Kudos to the ones riding this 7 bagger (from 70 Cr market cap to almost 500 Cr mcap).

Would like to know the views of those with long positions on the specific risks.

1. Customer switch on installed printer base: The thesis of selling high margin consumables builds on the idea of customers holding on to the installed base (coder/maker/supplier).

The avg cost of new installation is 1.5L - 2L
Avg cost of consumables per year 1L.
10% migration is industry norm. What additional product innovations are being aimed by CP to prevent migration of existing user base.

2. Very high working capital cycle: This has been discussed threadbare.

FY15 NWC days at 200 consisting of
Inventory days (180)+Receivable days(100) - Creditor Days(80)

This high WC requirement puts pressure on PAT margins, hampers cash flow and seriously hinders any productive R&D investments.

3. New MNC competition: While India Market is currently a 4-player oligopoly led by Domino Printech (~33%), Videojet (~29%), Markem-Imaje (~22%) and Control Print (~16%). Any New MNC competitor would hurt CP the most. How well equipped are they to handle this challenge (increased competition and pricing pressure) ?

Key Global Vendors:

Danaher/Videojet >> APAC
Diagraph >> Eastern and Central Europe
Domino Printing >> Lat Am
Dover (Markem-Imaje) >> MEA
Hitachi Industrial Equipment >> NA
ID Technology >> Western Europe.

4. Advancement in Technology: Most global MNC players have significant R&D Investment to cope up with emerging technology challenges. How is CP handling this area ?

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There seems to be wide variety of variables that influence the business and its capacity to develop a predictable business model… If interested may go through the following reports

http://www.videojet.com/content/dam/pdf/NA%20-%20English/White-Paper/wp-pharmaceutical-packaging-serialization-us.pdf

http://www.videojet.com/content/dam/pdf/NA%20-%20English/White-Paper/wp-problem-solving-through-root-cause-analysis-us.pdf

Please note, I have not yet studied Control Print business beyond financials … But just trying to understand the broad business and its criticality.

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Many thanks @aveekmitra, this info helps increase some circle of competence.

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Very interesting Videos on different Marking and Labeling methodologies, types, technologies and options…

Seems the requirements of the industry varies widely…Some sample videos enclosed … More can be found in the website of the Company named ID Technologies … It is based in US

http://www.idtechnology.com/videos/large-character-high-resolution-inkjet-marking-with-bump-and-turn-conveyor/

So industry, product, manufacturing process defines the marking and labeling need and requirement.

And possibly the technology is evolving with industry demand and character …

Just for understanding the business context in which Control Print operates

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BIS specifies the marking and labeling requirements; testing methodologies for durability of markings for Electronics and IT goods

http://www.bis.org.in/cert/Labelling_July_Rev_01.pdf

Similar standards may be there for other industries…

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try to dig more on KBA & other partners of Control print and any USP n moat they have

Delhi sales guy of CP told me that the speed of their printers is much faster then competition.See if they have Patanjali as their customer which can take the co to next orbit.

CP sales guy was v confident when I first spoke to him in July 15 and co has walked the talk and his projection since then.

Similar was the reaction from of manfg guy working in Gauhati plant catering to Godrej,Emami,Tatat steel and other customers .Assam n Sikkim remain the last 2 states where tax exemption are still tehre for a long time to come unlike HP n Ukhand.This is all the more better for CP due to the newly commissioned plant of CP and proximity to customers.

Both these gentlemen are with CP since 5-7 and 10-12 years. Attrition seem v low at CP which is a positive sign .

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Please do not ask price related questions on the forum. Also buy/sell recommendations should be avoided.

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Hi Great set of discussion on various factors…I did meet the new CFO of the company. Following were the pointers that were discussed:
On Inventory: Company follows a three tier business model.Not only it directly sells the inventory of the printer and inks to the customer but it also gives the printer on lease to the customer and charges for the ink and depending on customer needs leases the printer and inks both to the customer.This has resulted in around 10-15% of the inventory on the books of the company.Also since printer is core to the manufacturing process of the customers the customer would not like the manufacturing to stop at any point in time and as the printers cannot be airlifted but have to be road or rail transported to customer premises which is time consuming, it becomes necessary for the company to maintain inventory of printers at its key locations.
Receivables: As their customers are large generally their receivables are stretched.Also i think considering the competitors are larger than these guys it could be that they are extending better credit period for end customer.
Competition: Nothing much different from what has been discussed earlier in this thread except that they mentioned that most competitors import ink and printer and sell as a result Control Print is more cheaper.There was a mention of Videojet putting a facility in this thread.Can we have the source for the same?
Growth: The growth in the industry will be led three factors:
a) Increasing need from existing customers
b) Addition of new customers because of FSSAI and other regulatory requirements
c) Addition of new industries
Margins and return ratios:Since they have recently added the Guawahati facility they would not need much capex anytime soon rather there is large scope to optimise capacity utilization between Nalagarh and Guawahati as Nalagarh goes out of tax exemption.The CFO sounded reasonably confident on controlling inventory in future.This should be a big positive if they actually deliver.

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Control print would be listed for trading on NSE.
Find enclosed link for CFO interview on CNBC:

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They not paying me my fraction after bonus share, what should do ? They just answer me, they will, they will.

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I am doubtful about management now, there was bonus share more than 6 months ago, for 2 share they gave one, I had 15 so should get 7 bonus and half ( fraction ) in cash, but more than six month now, they saying they will, they, shall complain to sebi ? I am new person, so please suggest me.

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Anyone attending control Print AGM Tomorrow at 12 pm?

Find enclosed latest presentation about the company
http://controlprint.com/investor_presentation.html

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I hold share in the company and no change in my position in last one month. Please note that there might some misunderstanding while taking down notes in AGM and hence reader shall aware about same. Also, all investor are advised to do their own independent due diligence as my views might be biased due to my interest in the company.

Snapshot from AGM in Mumbai On August 5 2016
Guwahati Expansion:
The company intend to spent Rs 10 Cr further to shift last stage of assembleing of Printing machine from Nalagadh to Guwahati. The company has very limited space in Nalagadh. Hence, in order to increase the capacity to increase, it would do around 75-80% of manufacturing of printing machine in Nalagadh and then sent semi knocked kit (my word taking inspiration from automobile industry) of printing machine for final assembly in Guwahati. The central and state duty benefit is also one factor behind this decision. Nalagadh facility exemption from tax is expected to get over from 2017.

GST and Guwahati Expansion:
While the management has no clear reply about GST and benefit from State/Central government from various tax due to incentive to invest in underdeveloped areas, it believe that there are various case in Supreme Court/High Court which support Governement giving tax benefit to units which does investment in remote/undeveloped area based on those incentive. Many large players, even after GST announcement, have contuinued very large investment in under developed area with assumption of the incentive being avaialble. Having said that, there is no clear view about Control Print ability to get fiscal benefit by investing in Guwahati at this stage.

Debt:
The company has only cash credit facility used for working capital and has no long term debt on balance sheet. The proposed capex of Rs 10 cr would also be financed from internal accruals.

High Inventory and working capital cycle
The company need to place order for printing machine with its Technical supplier with certain minimum economy size. However, the sales of company is not correspondingly matching. Hence, the company give order in minimum batch size which give optimum cost from technical partner and then supply in domestic market based on demand. Hence, only way printing machine/consumable inventory turnover increased would be when demand for machine/consumable approaches to minimum batch size. Hence, over a period of time, with increased demand, inventory holding period may decline marginally. However, it would continue to remain high in medium term.

Sri Lanka Operation
Currenly, the company operation in Sri Lanka are loss making. In SAARC countries like Bangadesh, Nepal and Pakistan, the company could get distributor who were willing to market company’s product. However, in Sri Lanka, it was difficult to find such distributor. Hence, the company has open its branch with understanding that it may continue to incur loss for next 3-5 years. However, after medium term, same would be growth driver for the company and hence it shall be consider as long term investment rather then loss from operation.

Andheri (Chandivali) Plot
The company subsidiary has a plot in Chandivali which was suppose to monetise by real estate development. The management replied that they are waiting for finalisation of DCR plan to understand exact FSI and related benefit before taking final decision. They would rather wait for some time and get clear understanding, then to rush for development.

Plan of MNC competitor to have manufaturing facility in India
The company is very small player globally vis a vis other MNC competitor. MNC competitor has scale advantage in China facility and hence would like to import from China and market in India. The company does not have such option since it cater only to Indian market. Hence, there are limited intensive for MNC comeptitor to start manufacturing in Indian market. Having said that, it does not mean that in future, there would be no local manufaturing. It would be difficult to take call about how competitor behave as each one has own business strategy. (The management did mention that one of the competitor has plant of 30,000 printing machine per annum in China, while whole Indian market is around 7,500-8,000 printing machine per annum.)

Inventory obsolence
In FY15, the company has wrote off some inventories as it become obsolete. In order to address this risk, the management does quarterly review of inventory and also implented SAP to get better MIS about inventory. Going forward, management see limited risk of inventory obsolence.

RFID introduction
The company has introduced printing machine with RFID technology. Due to these, it would be difficult for the customer to use consumable from unorganised player. The company started delivering RFID enabled printer from April - July 2015. Henceforth, all printer of the companies are RFID enabled. Hence, very limited scope to use consumable from unorganised sector. In management estimate, nearly 25-30% of company’s curent printing population use unorganised consumable. Even other competitors are introduced RFID or alternative which would restict use of unorganised sector consumable in their machine. Currently nearly 20-25% of population would be RFID enabled for the company machine. Over a period of next 4-5 years, signficant population of printing machine would RFID enabled which would assure consumable sales of the company.

Company share in printing wallet of Large customer
There was specific information sought about share of Control Print in printing spent by large customer, say Hindustan Unilever. The management said that they do not information about print spending by the Hindustan Lever and hence would not be able to calculate same.

Ecommerce impact on industry
Ecommerce and shift to organised retail would be key demand dirver for the industry. Mr Shiva give exmaple of Rice/Wheat which was previously sold by unorgnaised sector and which did not have any printing requirement. However, when same is replaced by Lal Kila (or other Basmati brand) or Ashiward Atta, it adds to printing demand for the industry. While E commerce per se is not going to add for demand of industry, shifting from unorganised segment would drive demand growth for coding industry.

Industry Size:
Since FY16 data for competitor are not avaiable, the company has not been able to estimate FY16 market size. However, growth of the company is in line with market/higher than market. Hence, it esimtate to gain market share. In next 3-5 years, it intend to reach market share of 25% in India. Currently it esitmate for FY15 at around 16-17%. The Coding industry size normally grow at double the GDP growth in value term. In last 5 years, industry has grown at around 10-15% and expect same growth rate to continue in medium term for industry. Of the total market esimate (at around 750-800 Cr) nearly 100 Cr is unorganised.

Increase in Employee
The company has increased employee number in Design and Marketing team in order to improve product design and also increased market share. Does not expect major increase in emplyee head count in medium term.

Pitanjali as pontenial customer
Control print in discussion with Pitanjali to supply its product and service. However, nothing has been finalised as of now and Pitanjali is not using Control print machine as on date.

Machine population
Control Print sold around 1850 Machine last year. Typical machine run for around 10 years with certain segment like Cement has lower age of 5 years. The company esitmate around 7,500-8,000 Machine being operational, of which it supply consumable to 75%. Balance 25% consumable are supplied by unorganised players. The comapny is strong in Industrial segment like Steel, Cement, Pipes which has shown slow down. It has nearly 50% of sales from industrial segement and balance 50% sales from consumer goods industry. With SAP implentation, the company would improve its MIS and would get better understanding of market.

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very nicely written -very helpful

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@ Ddave - So what is the growth trigger in CP from here on?

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There has been no change in trigger in my opinion. Last two quarters have been bad for company. So industrial growth revival which account for nearly 50% of segmental sales would be key growth driver. With current demonitisation, I would not be surprised if results are lackluster at least for Q3FY17.

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Isn’t coding and marking a necessity for all companies? If they do not use such machines, what else are their options?