Kalpesh's Portfolio

Q&A: Questions & Answers Portfolio Q&A
104

@thakurvi
Indeed very good questions.

  1. Paper industry in India is in growing phase, so demand is always there(except covid-19 like conditions), whenever large capacity comes in, prices fall then what happens is some weak players go out of business, so prices come back. Gradualy shifting market share from weak players to handful of efficient companies…
  2. Raw material prices also vary as per global/domestic conditions

so we have two kinds of cyclical components here, one is raw material cycles and second is end product cycles.

timing these cycles is difficult game as there are many moving parts and i don’t know how to play it,

I’m playing a different game here,

Consider two scenarios-
a) Paper industry go in uptrend for next few years - Satia will easily sell its expanded capacity along with existing capacity and earn great profits and increase its intrinsic value increases significantly

b) Paper industry go in downtrend for next few years - Satia will sell its expanded capacity in few years along with existing capacity and earn profits still better than FY2020 profits, increasing its intrinsic value.

So in both the cases downside is protected and intrinsic value of company is increasing,

As downside is protected I can always wait for paper industry to go in uptrend as it always happens every few years.

Lets forget all the above, there is one more way of thinking.

Almost every sector is more or less cyclical and depends on how economy is performing, banking sector is cyclical still HDFC, KOTAK are doing great, NBFC is cyclical still Bajaj Finance doing great, Steel is commodity still APL Apollo doing great, Auto sector is cyclical still Maruti Suzuki doing great.

These are all long term bets even when operating in cyclical industries.

So if we dig deeper we get to know whats common in all these?
Answer is management, a very capable management.

and I think Satia also has a very capable management, so I’m ready to ride little roller coaster rides, as my entry price is very sensible in the long run odds are in my favour.

I think monitoring these things daily or monthly basis is waste of time, newspapers will do that job for us.

There is not much, but I think they should have -

  1. professional independent directors
  2. Better interaction with investors (which has already improved in recent years with presentations provided regularly and also conducting con-calls)
  3. age of Dr Ajay Satia who is 67 years old

Invested and may be biased, do your due diligence before investing

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105

Thanks for answering.Building conviction is very important in investment journey. Holding great business for longer time is only possible when you have enough patience and patience comes from conviction. Conviction comes from learning.

Congrats sir…you have learnt a lot about Satia and thats why you have built a conviction for long term over it.

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106

Have you seen Satia latest shareholding Pattern a lot of Investors who hold more than 1 Percent have started selling in this quarter for the first time i think.

107

You are right.

May be they need cash, or they know something that I don’t know :thinking:

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108

hello sir would please provide any schuttlebutt for bharat bijlee company and why its not in your portfolio , thanks in advance.

109

One reason is electric motors have become very competitive commodity kind of business, customers don’t pay them on time, no pricing power at all.
second reason is their unfair trading practices.

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110

A. New Orders Procured:
SIL has procured two orders of 18,250 MT, one from Chhattisgarh Textbook Corporation
for 9,000 MT paper and the second from Assam State Textbook Corporation for 9,250
MT paper, total value aggregating to ₹1,250 mn with average realization of ₹70,000 per ton
to be executed in Q3 FY22 which will have positive effect on both the top and bottom line for the
quarter.
B. Molded Fiber Cutlery Business:
Management is pleased to inform that mechanical erection and commissioning of the
Cutlery machines has been completed and commercial production will start by end of this
month.
Management has indicated that they have further ambitious plans to expand this segment
immediately thereafter keeping in view the tremendous market potential with the
proposed ban on single use plastic from July, 2022.
Commenting on the order received, Mr. R. K. Bhandari, Joint Managing Director said,
“We are pleased to announce that the re-opening of schools & colleges across the country
has led to spurt in the demand of writing and printing paper along with substantial gain
in price realization and this trend is likely to sustain for the year. Despite heavy increase
in cost of inputs; we are confident that with our efforts in product diversification and
backward integration; we shall achieve results for both revenue and profitability better
than our projection for the F.Y. 2022.”
Muktsar, Punjab 02
nd November, 2021: Satia Industries Limited (SIL), one of the largest Wood and
Agro-based paper manufacturers in India with a fully integrated manufacturing facility, has received
orders from Assam State Textbook Corporation & Chhattisgarh State Textbook Corporation for the
supply of 18,250 MT paper in total.
Business Guidance:
Management projects a strong positive outlook on business in the last two quarters
especially with new PM 4 starting in December, 2021 adding minimum 20,000-ton
additional paper quantity in total production. In the current market scenario, the new
production is definite to be absorbed smoothly and contribute significantly to both top
and bottom line. Our cutlery production too will start by the end of this month.
Management has strong strategic plans in place for the cutlery segment where they
propose to add and build larger capacity after testing the performance for the first
quarter of operations.

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111

Zume-Satia collaboration covered by TechCrunch

Kalpesh Ji – apologies for hijacking your thread for Satia conversation.

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112

The closest explanation I could think of is -
“Those shareholders are all businesses, with the uptick in economic cycle, as we see around us, almost every business is doing great, they may need funds for growth or increased working capital in their own business”
people are also crazily buying real estate, that may require funds.

rest I couldn’t find much, in-terms of business Satia is doing great.

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113

@kalpesh4430 Despite all expansion news etc, Its wierd that stock has not caught momentum till now.

114

May be market worried about input cost inflation

115

Hello sir… The stock price has decreased quite a lot since then… Any reason?

Thanks

116

For the individual stock, In the short term price is a function of entire market movements, in the long run it is a function of it’s own business

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117

Ok sir… Do you expect it to perform like your previous portfolio picks?

118

I’m convinced that it will perform well, that is the reason it is 35% of my portfolio.
Let the management execute, then only we can expect it to perform, time is a friend :slightly_smiling_face:

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119

Thank you sir… This thread on your portfolio is extremely helpful!

120

Sir may I ask how you have found the potential in the management?

121

Also sir how have you found Satia’s valuation?

122

Is moat of my businesses getting stronger or weaker? And what about valuations?
Let’s find out,
1) DHP India Ltd
Management realised that doing business in India have no future due to absence of any advantages against competitors, so very wisely they decided to find entire client base to western developed world, where they had some competitive advantages against local manufacturers such as,
a. Low labour cost
b. Low power cost
c. Overall low manufacturing cost
d. Over the time accumulated approval & certifications from many countries

True capitalist always try to find ways to get away from competition, they have done exactly the same, but looking at their return ratios definitely sooner or later competitors will copy them. It will happen one day, capitalism is brutal, it always happens.

For now and next few years I think they are safe, and market is big and growing, so the moat seem to be intact.
We will have to review the business at least every year, and get clues from growth rate, margin’s, credit period to customer, management guidance etc., to keep tab on the situation.

What is value of this business from my perspective –
It is generating approx. 100cr revenue and 16cr owner’s earnings from 14.90cr of plant machinery, recently plant & machinery increased by 7cr which means, at increased capacity they can produce the revenue of around 150cr and owners earnings of 30-35cr in next 3-4 years (assumption).
They will accumulate around 140 to 180cr in cash in balance sheet by then.
image

As per my calculations present fair value of business is around Rs. 2300 per share and as I expect at least 25% CAGR in all my investments, my entry price should be at least 20% below Rs 1300 per share i.e. Rs1040 (with margin of safety).

This company available at deep discount to its fair value.

As long as moat seems intact and business is growing I have no plans to sell, unless management do anything stupid with the pilling cash or it becomes too much overvalued.

2) Vipul Organics
This business has no real moat, as technology is freely available.
Competitive advantage comes from strict gov regulations on pollution control,
As this industry is dominated by small unorganized players, gov regulations gave tailwind to few big players who can comply with regulations due to size & scale of their business allows the feasibility.

Eventually few players present in low cost Asian and other low cost countries will gain most of the world market share over the time, so these few players will keep on growing as long as market don’t saturate, and they start competing with each other.

Vipul organics was just above the threshold of feasibility to comply with norms at the right time, so survived.
I invested in it based on sector tailwind, trading to manufacturing shift, backward integration and operating leverage.

What is value of this business from my perspective –
In FY 19 their revenue was 90cr which was around 50% manufacturing & trading each, then they increased manufacturing capacity 6 time present, means now they can produce (45cr*6) 270cr revenue from manufacturing alone.

As the mix shifting from trading to manufacturing, margins will increase considerably. It is seating on huge operating leverage.
Owner’s earning will be around 30cr in FY26.
image

As long as tailwind is present and management is executing well, I want to stay invested.
Clear sell if too much overvalued.
This is available at deep discount.

3) KG Petrochem Limited
The management of this company believes in working in value added products.
Their textile division is growing at healthy rate from long time.

As they work in value added products they have price increase pass on powers with customers. They also get gov incentives for exporting textile products.

They recently they forayed into technical textile division (Artificial leather like what Mayur Uniquoter Ltd does), initially for last 2 years they couldn’t stabilize this division, but management is capable and I believe they will do it.

As they operate in value added products and management always look to keep the moat intact, as an investor I feel safe.

What is value of this business from my perspective –
Presently market is giving them valuation of textile division only, considering problems in stabilizing or scaling up of technical textile division.
I believe management will eventually figure out the issues and scale up the technical textile division.

Textile division at 67% capacity utilization
Technical textile division at 32% capacity utilization

BPT margin’s –
Textile div 10%
Technical textile div 10% (this is conservative)

Management has guided for 550cr revenue at full utilization and I consider it to happen in 4 to 5 years. It will throw owners earnings at around 55cr.
image

This company also available at deep discount.

I didn’t like the decision of management to go for big artificial leather capex without first understanding the facts, they should have started small and eventually increase capacity.

Management has also mentioned for mega capex after 2-3years, so as long as I believe management is walking the right path at right speed, I want to stay invested.

4) Time Technoplast Ltd.
Their industrial packaging business has a stable customer base and growing business, but can be clearly seen from few years under competitive pressure.
Their composite business has a great potential to grow rapidly, it also has good margins and less competition.

Moat is not that great but addition of value added products and valuations do provide me comfort.

What is value of this business from my perspective –
Management has guided to improve working capital which will improve ROCE profile in the future.

They are generating around 200cr owners earnings now and in FY26 I expect them to earn around 400cr owners earnings.
image

I believe 250 per share is fail value of company, and to get 25% CAGR returns I need to invest at 110 per share.

Again this is a deep value bet.

5) Satia Industries Ltd
Excellent management which can convert any adversity into opportunity, and constantly on the endeavour to improve efficiency.
Whether it is Power, water, pollution, raw material, pulping etc they didn’t just solve these problems, they make lot of money by addressing intelligent solution.

They are operating at margins of 22-23% and I believe they can go to 28% OPM at full capacity utilization.

Moat here is management itself who can sail the boat safely, another moat is they are low cost producers, even if they don’t have pricing power, market share shifting to them from weak players.

What is value of this business from my perspective –
Recently they have gone for big capex which will help them generate total revenue of around 1500cr and PAT of 250cr after 3 years.
image

It is available at deep discount.
I think this company will keep on growing for long long time, obviously stock price will grow non-linearly.

These all may be small companies but I think they are great investments.

I don’t expect them to give linear returns, most of them operate in cyclical industries, patience is a key here, let the management execute, and price will follow eventually.

Disc: Not a SEBI registered advisor, do not invest on my conviction, do your homework, do your own valuations and then take decision.

This data posting here for my own future reference, views & counter views invited.

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123

Though you dont expect linear growth, do have a rough idea of how much return Satia can give?

Thanks