Hello,
I am neither an insider nor related to management. I have taken some pain to deep dive to get the requisite details and getting our queries resolved.
I feel that whatever one does, he should give his best at it. Else, one is only wasting his time over half-baked efforts.
There is one more update that the company has submitted to exchange regarding ISO certification.
Thanks for sharing your views, Naman! I agree with you on many points. I am trying to develop a better understanding of this company.
Could you share the mistakes made by Mahindra EPC and Jain Irrigation? Infact, it would be interesting to know why did Mahindra acquire the company. Please share if you have some knowledge of this.
Have you heard if the promoters plan to move the company to the main board (NSE)? After 3 years of IPO, there isn’t any compulsory market making for shares on SME exchanges and then most of the stocks hardly trade. I am concerned that the shares may become almost untradable if the company does not migrate on the board (NSE).
I just looked at financials of Captain Polyplast. Their net margins have been in the range of 2.5% to 3.5% for the previous three years, which I consider to be low. So, all major companies (Jain, Mahindra, Captain) seem to be working on low profit margins for like forever. The low profit margins in this industry would imply that Return on Equity would be high only at high amounts of financial leverage. Over long periods, this strategy would prove to be risky, especially for the smaller firms.
Intrestingly, the interest cost for Captain Polyplast is ~7 crs, but the total debt is only ~20 crs. The effective interest cost comes out to be 35%, which is too high. I did not delve any deeper. I was concerned that they could be underreporting debt by managing it down temporarily at the time of reporting of the balance sheet. The financials of Captain Polyplast made me think why is it that the material cost of RM Drips has been lower by 15% of revenues when compared to Captain Polyplast. Infact, the Material Cost / Revenues of RM Drips is lower than the bigger brand names like Mahindra too. It is not clear as to how they are selling at a much lower price than the bigger names. They must be selling at substantially lower prices since they have doubled their revenues once again in FY17 while others (Jain, Mahindra, Captain) have reported a marginal decline.
Also, the P&L statements suggest that the price of raw material has fallen over the previous 2 years and the benefits of about 10% to 15% have been retained by the manufacturers. If the prices increase by 10% now, then it would wipe out all the profits if the increased costs are not passed on to the customers. Even if one large player decides to absorb the cost increase to garner market share, then other competitors would find it difficult to pass on the cost increase.
The company seems to be growing fast and the operating leverage can help generate fabulous returns for the investors. But, the doubts seem to persist in my head. 
Views/Criticism solicited!
Here is a comparison of R M Drip with its peers
Sales
R M Drip is tiny compared to others. Signet is mainly a trader.
Source: Capitaline
Margins
Margins are in line with others.
Source: Capitaline
Source: Capitaline
Source: Capitaline
Du Pont Analysis
ROE is highest in the industry.
Source: Capitaline
But that’s mainly because of higher leverage. This has already dropped after IPO.
Source: Capitaline
Although ROA is also highest in the industry. This ratio will improve further as sales turnover increase will increase offsetting the effect of lower leverage.
Source: Capitaline
Source: Capitaline
Asset Turnover is already in line with industry. This ratio will improve as utilization improves.
Source: Capitaline
Asset Utilization and Working Capital Ratios
Debtor Days - This will rise further. This is a key monitorable.
Source: Capitaline
Creditor Days - This will drop further. I have noticed that many SMEs try to offer faster payments to their suppliers using the IPO money in order to get cash discounts so they can show improvement in margins.
Source: Capitaline
Inventory Days - This ratio is likely to go up as company is planning to stock up so it can deliver products quickly to customers and distributors.
Source: Capitaline
My notes on the company are here
Disc: Invested since IPO and thereafter.
Naman, Appreciate your hard work.
Nice comparasion…Thanks bro
Thanks for the detailed comparison Yogesh!
The present good profitability of RM Drips follows from the low cost of materials. It is 55% of revenues over the previous 3 years, similar to the larger players like Mahindra and Jain. I find it difficult to understand. I will explain with the following illustration.
The company claims that they sell products that are comparable in quality to the larger players but substantially cheaper. Assuming that the larger players are selling the product for 100 Rs., R M Drips would be selling it for 80 Rs. The cost of material is ~60 Rs. for larger players. If the raw material used by R M Drips is of similar quality, then the cost of material would be 60 Rs. for R M Drips too. So, Material Cost / Revenues for R M Drips would be 75% (60/80), which is what Captain Ployplast reports. Then, how does R M Drips manage to keep Material Cost/Revenues at 55% to 60%?
Views invited!
Fair points Pranav. I shall also keep these things in mind going forward. A different perspective is always better. As far as I know, Jain has been riddled with debt issues which it is trying to get out of. EPC was clocking good PAT margins when M&M took over but post that there has been a dip. Nevertheless, it has been a great acquisition for M&M.
Fabulous work Yogesh. Detailed peer analysis will help one and all.
@namanjain excellent work on RM Drip. Could you please elaborate how you arrived at PAT of 4 Cr for FY 18? PAT for FY 17 is 1.4 Cr but out of that 0.35 Cr is from Package Scheme of Incentives - Subsidy. Company says this is recurring but not related to business activity. I am not not sure how can this be recurring if it is not related to business activity. Any thoughts on that?
Assuming this is not recurring, PAT has to quadruple to reach 4 Cr in Fy 18 which looks a little optimistic. 3 Cr PAT is more realistic assuming 60 Cr sales and 5% net margin.
@pranav_pratap I think gross margins are not directly comparable since companies have different sales mix (which changes from year to year) different processes, different machines and vendors etc. EBITDA margins are more comparable. To me RM Drip is not a low cost producer story but a fast growing small company story where sales can grow 3-4x in next 2-3 years without any capex as capacities are already in place.
Really appreciate your hard work. Kindly share the source details for your graphs. Would love to see more such comparisons across other sectors, specially pharma.
Thanks, Yogesh,
I agree that raw material cost may be different due to superior sales mix of R M Drip. Sprinklers may be more expensive and their sales of sprinklers may be more than that of their competitors. I had missed this point and will see if I can look into this. Unfortunately, I may not manage to make time for this. But, I don’t think that they have machines and processes that are far better than that of the competition.
If possible, share your views on why do you think that the company is not competing on prices. It is difficult for me to understand how a small company has become fast-growing where established players have stagnated if it is not a low price story. They have not come up with a superior technology or some formidable competitive advantage. The company claims to be selling similar quality products at lower price pointswhich was confirmed by harishm.
Data is sourced from Capitaline Database. I have also updated my post to include source.
Company until 2014 was a manufacturer of sprinklers on a job work basis. In 2015 it received funding from local investors so it was able to expand manufacturing capacity. At the same time Mr Dash who has good experience in flat line drip irrigation system joined the company and also invested in the company. These two rounds of funding enabled the company to expand capacities and grow sales. Don’t look at the % sales growth as it is coming off a low base. In absolute terms growth is 14 Cr with is tiny for a large player like Jain Irrigation. All of this information is available in IPO prospectus.
Growing capacities is the main reason behind past and expected sales growth. Current utilization is only 25%. Often, price is not the only criteria buyers use to buy a production. Distribution, service, credit terms, technical assistance etc are also important aspects. Price is important if you are selling a commodity like cement or yarn in a market to a wholesaler. Here branded products are sold to distributors who sells directly to end user.
I do not think getting a ISO certificate is really a big thing for any business. I do not see any competitive edge as compared to it’s peers.
Disc : not invested
Exactly ISO certification means that you have a process and you follow it nothing more nothing less. It could very well be a process of how to make poison for human consumption you can still get a ISO certification.
I agree with you. But, I am not sure if R M Drips has a superior brand when compared to the established players. The company says that they provide similar quality at cheaper prices when compared to the big competitors and the scuttlebutt also shows this. So, my guess is that they are competing on prices when compared to the bigger players. If this is true, then I would be concerned about the low values of Raw Material / Revenues in particular and the sustainability of profit margins in general.
However, I totally understand that there could be some explanation to all this that I am overlooking.
Hi @harishm,
The DRHP of Captain Polyplast and the estimates from the five-year plan allocation suggest 35000 Rs to be the cost of drip irrigation per Hectare and not per Acre. Did you mean 35k per Hectare?
I think it was Acre and not Hectare. However, I remember the number clearly - 1 to 1.5 Rs/Meter is the saving as compared to an established brand.
Thanks, Harish!
I think that I am done looking into it. The farmers get a subsidy of 50 to 70% to buy this product. They are not in a position to buy it on their own. So, the total sales in this industry would depend on the amount of government subsidy, which is fixed in advance (five-year plans, etc). An extraordinary growth in market revenues is unlikely and it could be in the range of ~15% y-o-y.
Moreover, there are hardly any entry barriers for manufacturers. So, competition would ensure that the manufacturers would operate at low profitability. I doubt that taking market share from competitors would be profitable in this industry.
The market could give the big established brand names good valuation considering that this business has fewer uncertainties. However, I am doubtful that we can assume the same for the leveraged small companies. R M Drips is already trading at ~ 1 times Price to FY 18 sales. I think that I will let it pass and now onwards clutter this board less with my posts.
Sorry for cluttering the thread:
Surprised to see EPC industries reporting negative numbers.
http://www.bseindia.com/xml-data/corpfiling/AttachLive/044A69CC_4B8D_459C_BE52_3E99014438EE_171301.pdf
Is there any structural change in the business?
