DCM Shriram Ltd (previously DCM Shriram Consolidated Ltd)

Thanks Anant for another great post. The competitive landscape here would be really interesting. Ideally we need a Sandeep Engineer kind of guy driving this (good acquisition target for Astral!).

This report mentions major competitors, worth looking into

  • Aparna Venster
  • Captiv Fenestration
  • Encraft
  • Fenesta Building Systems
  • Lingel Germany
  • NCL Wintech
  • Profine India
  • VEKA India
  • Window Magic

I understand the pricing and service bit, but what about quality ? Veka from Germany is a worldwide leader in this space, surprising if Fenesta products are superior to them.

Going by market feedback the biggest competitors are not the ones mentioned in the report but Rehau and LG. From a quality and mind share perspective there is absolutely no comparison with Fenesta. To give a rough idea Fenesta sells at roughly 30% higher per sft compared to the other branded players and over 100% compared to Chinese imports. The differentiation in terms of mind share/perception is such that the builder either mentions ‘Windows by Fenesta’ or ‘High quality UPVC windows’.

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Thanks Anant for the detailed analysis. Very useful. What do you think on margin of safety at current levels? I could see that stock price gone up more than 100% in 1.5 years and now with a PB of 2.3 and but the PE of 11 lowest among default peer comparison in screener. For a diversified company like DCM Shriram I do not know to compare the PE against what peer/sector, hence the question.

james,

Margin of safety has different meanings for different investors. But for the long term investor it should mean loss of capital. He would be okay with temporary dip in prices post his buying resulting in notional losses which he expects to be of a temporary nature.

So what provides margin of safety to a stock? This is often a frequently asked question and more so from guys who have newly read up Value Investing books.

For the Ben Graham followers the definitions are clear, it should not exceed certain times book value and be less than certain PE etc. For some others it would be in form of dividend yields etc. This is one way to look at things.

Another way to look at things is in terms of growth. If a company grows fast, a lot of investors would be ready to pay up for the company especially if there is promise of further growth for the foreseeable future. And if the growth visibility is for next 5-10 years, the valuations would hit the roof. We have seen such things happen in stocks we track and own e.g Ajanta pharma, PI inds, Canfin homes etc. In the journey of each of these companies investors who bought in at 6 PE would have found margin of safety diminishing at 12 and 18 PE. And those who bought at 18 PE would have found it expensive and with less margin of safety at 30-35 PE. And thats how it goes.

The moment a company starts showing consistent growth, markets start looking at it differently and start assigning a higher multiple.

DCM currently seems to be having a purple patch with chlor alkali business lending consistency to the business and PVC and both sugar and cement having a cyclically good time. Fenesta with its B to C model should be considered an optionality which if it works out can provide outsized returns and if it doesnt then the other businesses should provide growth atleast in the near term.

I cant visualise how long the cycles of the commodity businesses would last. But atleast in the near future with expansions nearing completion and cycles supporting the businesses I think there seems to be decent prospects of growth. Currently stock is available at a PE of around 11 based on its FY 17 EPS of 34. The important thing for me is the kind of business momentum the company is showing in terms of topline and bottom line. That is usually what excites the markets. In the shorter term since there has been a sharp run up in prices there might be some consolidation but if the business momentum continues into the next few quarters there could be decent returns from current levels too.

Risk remains related to the commodity cycles turning against the company.

Technically the stock has been making fresh all time highs consistently and would be termed as to be in a strong uptrend

disc; invested and added more post the results.

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Thank you @hitesh2710 for adding reply for a newbie like me, you being a very senior investor. It is privilege for me to get an answer.

Yes, I was checking PB x PE multiples being new to value investing and after learning new terms.

I am now being in a short break where I am doing intensive learning of value investing (I discovered these forums and terms only in Jan mid this year and still trying to catch up). Being a small time investor with < 10L for investing, I am holding with multiple tracking stocks (around 45 much above usually recommended no of stocks for a portfolio) with a basket approach. That helps me to better follow the story and try to learn the sector and company. Each story I am still learning I give 0.1% to 2-3% of PF allocation. Then, I am trying to track the stocks for 3-6 months for building conviction and hope to bring down the number of 15 stocks or so with 3-15% allocation.

The only sector I know reasonably is Information Technology as I worked in that indistry for about 18 years now and also used to follow MFI/SFB sector for academic and personal interest for marginalised sections. So learning new sectors, new companies and investment philosophy all is going on together. So once again thank you for the patient reply.

One challenge I faced was references I read in multiple articles to forward PE and I felt it is elusive concept and arrived with so many assumptions and can vary for investor based on her assumptions and hence never cared to work on to arrive at one. Another term I come across and struggled was margin of safety, especially many compare the current PE or PB to comparison to sector PB/ PEs (trailing?). For me, I still not know from where I can find sector PB or PE. Then for companies like DCM which are diversified will not fit in to any sector. In-depth analysis which seniors like you do (5-8 years of ARs and detailed analysis of different possibilities of risks and opportunities) still an very difficult to me as I still learning to make sense with most of the terminology and concepts.

Thank you for different views on margin of safety and when I mentioned the term, I was looking for both, that is at a reasonable PE and PB in Graham style and consistency/scope in growth and having possible downside is limited to 10 -20% max.

Now you brought up challenges of being a commodity player and cyclic nature. I am still in very new to even understand those reasonably, so decided to ride on views like that @Anant being another senior investor.

Thank you all once again for this beautiful, non partisan forum where newbies can learn rather than just speculate.

Disc: initiated a tracking position today.

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Sir
How do you differentiate between cyclical and secular growth.?

Cyclical demand is to do with commodity products like steel, sugar, cement, some chemicals etc. these are linked to demand supply scenario bcos the demand tends to be volatile across time frames. Companies with huge capacities suffering from very low demand will often face tough times. Conversely a company with huge capacity which faces demand revival is a formula for multibagger.

Secular growth is seen in companies like FMCG, consumers, banks, nbfc (the last two in a credit hungry country like india), footwear, underwears, drugs, and a whole list of things.

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I have visited FENESTA show room at Bengaluru. Few points noted during brief interaction with branch manager:
1.Fensta sales is growing at around 30% yoy.
2.Two types of customers:retail(individual homes) and builders.Good demand from both.In bengaluru growth in retail is more compared to builders.
3. More margins from retail customers compared to builders.Refused to disclose exact margin.
4. Many customers are repeat buyers, referred from friends or relatives who already installed fenesta.
5. Once customer confirms orders, installation will be done in 30 to 45 days.
6. They will take advance (% varies) only if its large order like above 2 lacs ,balance amount at the time of installation.If its small order, whole amount has to be paid by customer on booking itself.( which is bit hard to believe)
7.company products have long life of around 25 yrs. Gives warranty for 10 yrs on the products sold. As per manager they dont face competition expect few local fabricators.
It was unplanned visit. could not ask much questions. If seniors like Hitesh/Anant/Rudra have any questions please let me know. Will visit again sometime.
disclosure: invested

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My 2cents on DCM Shriram. I’ve tried my best to chalk out the past problems, how the management ha dealt with those problems and how its trying to make the business leaner and fitter for future growth

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Hi, anyone planning to attend AGM tomorrow?

I am attending AGM tomorrow. Let me know if you have any queries.

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Nice to see company filing for patent on innovation related to its farm solution business.(bioseed subsidiary). Just an update,don’t know how important is this one.( found this in Indian patent journal which gets updated on every Friday).

Q1FY18 results announced today:

Overall good performance and business momentum. The Fenesta business is the key monitorable and growth driver.
I also had an opportunity to meet @Anant and @aveekmitra in the AGM today. It is good to meet and network with VP seniors and advance your learning curve. Many thanks!

Disc: Invested

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Kindly share the updates from the AGM. Thanks.

Q1 FY18 Conf Call Updates

Chloro Vinyl Business
Bharuch Plant
The company did capacity expansion in Q3FY17, the capacity utilization has moved up from 77% (Q4FY17) to 80% (Q1FY18). Company expects the capacity utilization to improve over coming quarters to maximum of 92-93%. There is no captive consumption of chlorine by the company inside its factory walls but clients have set up factories in adjoining areas and it is captive consumption for them.

The company is doing capex of 43Cr for Anhydrous Aluminium Chloride plant and expects it to complete by June’18. This is a forward/downstream integration that would help to utilize chlorine captively and provide stability to vinyl business. There would be 48TPD consumption of chlorine along with 12TPD of Aluminium. The cost of Aluminum is low in overall cost structure. (Aluminum producers are to the east where as chlor alkali businesses are to the west). The company expects to generate RoI of around 15-20%.

Kota Plant
The company has planned the capacity expansion in chlor alkali (liquid and flakes). Total investment is pegged at 98Cr and expected completion date is June’18.

ECU prices of chlor alkali moved sequentially.
The power costs moved higher due to higher cost of coals and company expects power prices to stabilize over coming quarters. The company has 203MW of captive power generation capacity.

Sugar + Power Business
There was 48% increase in the sugarcane production in 2016-17 season. The cane planting has registered healthy growth of ~15% in 2017-18 season. The company sold 37L Quintals of Sugar in FY17. The company sold 15.8L Quintals of Sugar in Q1 FY18 and has inventory of ~17L Quintals at June’17. The inventory is carried at 3000Rs/Quintal and current selling price is around 3600-3700Rs/Quintal. Out of total revenue in this segment, 25-26Cr was contributed by power with PBIT of 14-15Cr.

The company has planned for distillery at Hariawan at the investment of 185Cr and expected date of commission is Jan’18.

Bio Seeds
The investments in this business are long term in nature. Cotton seeds contribute about 55% to the revenue and company hasn’t gained market share in northern state of Punjab & Haryana. The company expects flat sales in these states even though end market has grown. The seed season in south is not yet over and company expects some growth in south.

Urea Business
The company has capacity of 4LTPA and company sells 4LTPA. Company does not intend to increase its capacity. Subsidy outstanding at the end of quarter is 147Cr Vs. 347Cr at March’17. On asked about discontinuing, demergeing this business - the company said we consider it as an integral part of our business and no plan of shutting it down. On asked about government reforms (DBT), the company said they are getting mixed signals and clarity will emerge later.

Fenesta
The company is not looking to spin off any part of the business as of now. We are a conglomerate and we like being conglomerate. On asked about asset turns of this business, the company said there are two parts to it - Fixed Assets and WC. The fixed asset turns are high and WC is currently low at 10-15Cr. WC depends on mix of business between retail vs. builder. Fenesta revenue increased 27% YoY in Q1FY18.

The company might generate good amount of operating cash flows in FY18. On Asked about future plans, the company said investors will hear about new investments over next 18-24 months.

Results and Investor Presentation Link ->
http://www.bseindia.com/xml-data/corpfiling/AttachHis/5741de40-4821-4236-9c0e-8d8eac3011c5.pdf

Disc - All the mistakes are mine. Invested, more than 5% of portfolio. This is not a buy or sell recommendation. My views are very likely biased due to my holdings.

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I am unable to understand why they are so headstrong on continuing this low return business vertical. They would be better able to use these resource in other business verticals while generating much better returns. Is there some sort of integration between its verticals which causes them to keep this not so good business rolling? Same goes with farm solutions business.

This company as a whole is performing well from last 2 years due to tremendous performance of its sugar vertical. On the other hand, chemical business is the bread and butter… but with sugar cycle already at its peak, i doubt how long can sugar be at 35-37 iNR levels. How long are the usual tops for sugar cycles? This business would struggle if sugar stops performing.

Finesta vertical is very good but only forms 300 cr annual revenue of the overall 6500 cr revenue i.e. 5% of the overall business and is yet not profitable. This vertical is going to take time going up the ladder. Assuming 25% CAGR growth in this business vertical for next 5 years, it comes to about 900 cr topline, still not huge in comparison to other verticals.

I think this conglomerate will never command higher than 12-13 p/e for the simple reason being cyclicality of its core business vertical - sugar! If you see, similar chemical businesses are trading at sub 10 p/e, good sugar companies at cycle peak are trading at 7-10 p/e.

With 25% CAGR revenue growth guidance for FY18, stock price should grow as well while keeping p/e around 12-13 i.e. p/e won’t be rerated here.

Thoughts?

Disclaimer: Invested at 340 (Very low holding), but unsure of increasing the stake due to sugar cycle at its peak.

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This post is to discuss DBT in fertiliser/urea business in general. Effects Shriram as it has got considerable urea capacity.

Anant bhai, was going through this article - GST and DBT likely to be challenging for fertiliser sector, say industry experts

DBT is going to be a big challenge. Reason being - Today, subsidy is paid once the fertiliser reaches the dealer network i.e. 90-95 percent of the subsidy is paid. Under DBT, the payment of subsidy is being shifted to the moment of purchase by the farmers at POS. Purchase by the farmers happen only 4 months in a year. He buys the fertiliser only when his fields are ready and he can put the fertiliser, he doesn’t buy and stock them. So, the payment of the industry will shrink from 12 months to 4 months, once this DBT scheme is fully made operational. So, it has a direct bearing on the urea policy where the cost of production is fixed, interest costs for the companies will go up. Moreover, the companies will have to bear the installation cost of PoS devices. The government is firm on stopping subsidy reimbursements to fertiliser companies unless they install point-of-sale (PoS) devices at the retail end, but the industry has said this will hit their financials.


On the other hand it is being said that DBT scheme will help companies reduce the stress in their working capitals as receivables from the government will come at a faster pace.


Here is one more interesting take on why established names in urea industry - Tata and Birla are exiting or exited the urea business. Reason being given is to be able to better allocate capital stuck in low yield urea business to other verticals which are expected to giver better returns on capital. One more reason being put is that post DBT, urea leakages will stop resulting in urea sale going down. With transactions being captured at the buyer’s level, weeding out non-genuine farmers becomes possible. Once it is known who is buying and how much, the subsidy can be restricted to genuine farmers and, at a later stage, to a maximum number of bags automatically covering holdings below a certain size. Lower leakages and pilferage, could result in cost savings by up to 20% for the government.


For farmers, this doesn’t change anything as they are going to get the fertiliser at subsidized cost.


What i am trying to find out is - How is this whole DBT thing going to play out? Is it going to benefit the companies or will this be more beneficial for the government? All this run up in fertiliser stocks due to DBT is justified? Or tis is more so due to good monsoon?

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I am not too concerned how the DBT plays out eventually. Frankly I am not too concerned about the entire Urea business. The mgmt has been clear that they won’t close it since it is integrated inside their Kota unit, at the same time they have also made it clear that they are not going deploy any further capital here. The company will generate around 1000 cr of OCF, the scale of Urea business is pretty much a fly in the ointment.

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Thanks @Anant bhai for presenting a very detailed thesis. I have been reading up on the company and following are some notes →

ROCE Data

PBIT Data

  • As it can be seen from above, Chloro-Vinyl business is the main business that generated a lot of cash and warrants spending more time. I feel that this business will determine the base valuation for the business.
  • Sugar is in the cyclical upturn from FY16 into Q1FY18 and needs to be monitored. As DCM is conglomerate, they have some options to deploy the bumper cash generated by this business in good years. So far the cash is going into good businesses like Chloro-Vinyl/Fenesta/BioSeeds.
  • BioSeed has vastly underperformed since FY14 with poor ROCE. Seed businesses generally have very good economics (PBIT margin of 20%+) and with kind of R&D spends (8-10% of sales) company is doing, it would be good to get more information about underperformance.

CHLORO-VINYL BUSINESS
Since caustic soda and PVC resins are both commodities and are supposed to be cyclical, it is important to understand the cycle.

As it can be seen from above data, FY10, FY11 are the two years in which caustic soda realisations went from 22k to 15-17k & sales of PVC resins declined from 46k to 15k-34k.

PBIT margin picture also confirms the same with caustic soda margins dropping below 20% in FY11, FY12. Plastics business recorded negative margins in FY11 and 6% margins in FY12.

Sales

So let’s look at what ARs say about these in these years →
Chlor-Alkali
FY08: ECU prices are at $500-$530/tonne
FY09: ECU prices touched a high of $650/tonne and then crashed to $250-300/tonne post Oct 2008 (Lehman Crash)
FY10: International prices dropped to around $5 FOB & domestic prices dropped by 50%.
FY11: PBIT dropped (from 175Cr to 93Cr) because power realisations dipped below the cost of production. The company used swing capability to produce more chlor-alkali products compared to power, coal prices hit the margin.
FY12:: Higher RM costs (Coal, Salt etc.) caused lower margins in Chloro-Vinyl business.
FY15: Chloro-Vinyl prices fell due to global decline in the commodity prices.
FY17: The company reported chlorine sales as negative 63Cr.
Q1FY18: Power costs were on higher side due to higher coal costs.

So my conclusions →

  • Chlor-alkali prices depend on international prices and any major crash (like FY08) which causes global GDP to go down might impact ECU.
  • Since company has large portion of of its power generated from coal, coal prices have a bearing on margins. In Q1FY18, due to higher coal prices - bottomline did not grow as fast as topline in this business.
  • The company had option of comparing realisation in power vs. caustic soda/PVC and maximising profit. Question in mind: Was this a one time opportunity because of policy mess (coal block) around FY11-13? What is current trend? At what ECU vs. Power Unit cost one makes sense over another?
    If company does not have power option then next downturn in chloro-vinyl might hit company really bad.

One thumb rule about cycles that I learned from a friend is - upturn/dowturn = time taken to put up new capacity e.g. In gold mines, up-cycle can last for 5+ years as putting up new mine takes a long time. Since Chlor-alkali capacity can be usually operational within a year, the cycles shall be short at least from supply side of view.

Another thing is - since DCM (and GACL, Andhra Sugar) continue to report decent absolute margins & ROCE even in bad years, these players might have some advantage. To get a textbook demonstration of cycle, we might have to look at little bit weaker players.

Following table captures various data →


PVC
The company has 70,000 TPA capacity of PVC resins and 112,000 TPA capacity of Calcium Carbide. 80% of Calcium carbide capacity is used to create acetylene needed for PVC resins and 20% is packaged and sold. PVC consumption depends on GDP growth and primarily growth of Infrastructure + Real Estate sector.

Lower chlorine prices help the margins in the PVC business but impacts the Caustic Soda business. In that sense, they are somewhat counter cyclical. Recent capex announced for Anhydrous Aluminium Chloride shall hopefully solve this problem and provide best margins for both the businesses.

Another question, barring bad years, ROCE of plastics business has been consistently 50%+. Why isn’t there capacity expansion in this segment if India imports 1 MTPA PVC Resins?
One AR mentions that capacity expansion is halted due to lower import duty & a lot of unregulated imports. Still true?

OTHER
DAP/MOP/SSP

  • In FY17, the company stopped trading of DAP/MOP fertilisers but not SSP. What is the difference in economics/subsidy of DAP/MOP vs. SSP?
  • I almost want to say that stopping the trading of DAP/MOP is good capital allocation decision but company had stopped and restarted DAP/MOP trading in the past as well (Stopped DAP/MOP trading in FY08 and restarted in FY11).

Views Invited.

Disc - Invested, more than 10% of portfolio. No activity in last 30 days. My views are biased due to my investment. Investors are advised to do their own due diligence before investing.

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This time they say that it doesn’t make sense in terms of RoCE for the company to carry on trading for DAP/MOP. Now, coming to the part where youv’e talked about caustic soda - I think you ought to read what Olin Corp is saying about capacity closures in Europe from this year onwards - plus Caustic Soda is a major raw material of Alumina. so as long as the metal up-cycle continues, I think this division could do well.

On the point of PVC, you can very easily import PvC from China easily. till the gov doesnt saefguard that(MIP, Anti dumping) , i dont see DCM putting up a fresh line

Dis : Invested

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