See the bright Sun: Aditya Vision

Business Breakdown

Aditya Vision is a Brick & mortar retailer of electronics (Televisions, Air conditioners, Refrigerators, Mobile phones)

Primarily based out of Bihar. The way that electronics retail works is as follows:
OEMs move inventory to retailer after retailer purchases.

Part of the inventory in Aditya’s showrooms (display models) is on the OEM’s books. The salesmen deployed by aditya are the OEM’s salesmen. The retailer makes a small margin on the inventory that they sell, how then do they make good profits? Three things:

  1. Inventory turnover. Aditya is extremely good here. A 4.5x inventory turnover (for FY22) puts it in a league of its own.
  2. Scale, Scale Scale. According to the credit rating report Aditya holds 50% market share in Bihar. Think of the value proposition of a large retailer for an OEM. Lesser sales & marketing expenses. Deeper penetration. All the pesky issues of handling last mile of sales taken care by aditya. This is how retailers gain gross margin. And that is what aditya has done.
    Compare the gross margin pre covid (10%) to gross margin now (15%)
  3. Customer obsession & focus. How does aditya do this? Through Services (Same day delivery in the hindi heartland where flipkart & amazon do not operate), service call centers (to enable their users to express their queries to 1 touch point: aditya, build loyalty, pull factor), lotteries (Buy & Win 2021 | Aditya Vision | Live - YouTube). All purchases of 10k & above enable each customer to enter a lucky draw with top prizes of houses, cars, motor bikes. This is the aspirational india, which gets rewarded for shopping.

Market size & aditya’s strategy to capture it

India’s white goods market is 1 lakh crore.


Multiply 2.3 lakh with 45%.
Source: The World of Consumer Durables: Fast Moving Electrical Goods - YouTube

Aditya started with 1 store in 1999… Today AVL has 50% of organized electronics retail market in bihar. Their stated strategy is to expand in other states of India. Jharkhand is the first among them.

One can see that aditya’s scale up has been quite secular
image
Going forward company will focus on expanding presence in other geographically & culturally similar states. Company remains focused in increasing our store counts further and expanding in other states
in the Hindi heartland such as Uttar Pradesh, Chhattisgarh, Madhya Pradesh and parts of West Bengal.
If they can generate 1000 cr from 1 state of india, one can imagine what the blue sky scenario might look like after they have reasonably penetrated Jharkhand, UP, Chattisgarh, MP & WB.

Unit Economics

When looking at the numbers one would appreciate the fairly high ROE & ROCE that aditya enjoys.


This is powered by what I had alluded to earlier, Aditya has a broadly asset light money. All the properties are on long term lease, lease expenses are also quite low due to the geographies they operate in. By achieving an inventory turn of 4.5 despite low margins (common in retailing sector; Dmart for example has 15% Gross margins), it is able to achieve an ROCE of 37%.

How did Covid impact AVL?

Covid has been brutal for many B&M retailers. Aditya is no exception. However, something interesting has happened. As is visible from graph above, aditya has almost doubled its store count, while its revenue has been flat in last 3 years. Why? Because Due to covid restrictions, they have not had a good normal quarter. Q1FY23 was the first normal quarter after a gap of 2 years. And it shows in the numbers. Aditya’s Q1 sale was highest ever & convincingly more than pre-covid levels.

Q1 does have seasonality (marriage season in this part of the world + summers which shoots up demand for compressor products). So one should be careful to not annualize the Q1 numbers. (Q1 is typically 30-35% of sales)

Assuming a normal FY23, AVL can reasonably achieve a 1300-1400 cr sales in FY23.

Competition

Key competitors are mostly unlisted: Reliance Digital, Chroma, Vijay Sales. Vijay sales’ analysis reveals similar operating margins as AVL (Data on MCA website). Presence of large efficient organized competition has been mostly restricted in these parts of the world until now.

Risks

  1. Price is up 50x compared to pre-covid levels. Everyone wants to be not anchored to price but this is a risk one has to be aware about.
  2. At 31 time earnings this is not cheap or undervalued by any stretch of imagination. having said that, any efficient scaled up retailer gets good valuations (Trent, Dmart, Vmart).
  3. Until now, competition has largely been not been successful in competing with AVL in Eastern part of India. Patna & Ranchi do have presence of reliance digital, chroma. They havent been able to compete successfully with AVL yet. This remains a key monitorable.
  4. Key advantage of AVL remains the whitespace left by the inability of the populace here to trust & work with e-commerce like Amazon & Flipkart. That whitespace can eventually get bridged like it did in the metro cities. Remains a key monitorable.

Disclaimer: Invested, Biased.

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First of all thank you Sahil for the elaborate thesis on Aditya Vision. Based only on your writeup I guess stock price appreciation depends majorly on the addition of store count as the stock is already trading at 20 P/B which is similar to Dmart. Competition is already high in this space. Reliance Digital, Croma, Vijay sales and local players in every state and we need to see whether they will be able to expand store count and maintain the margins.

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You have actually answered your own question. Just see last 3 years:

  1. Gross margin went up
  2. Store count doubled

Already has 50% market share in Bihar so actually its the competition who is facing troubled & needs to break through, AVL is the market leader. Key question is whether they can replicate their success in other parts of India. Jharkhand seems to be quite successful from anecdotal evidence one can gather. At end of day, numbers wont lie.

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I have been to their stores following are my observations.

  1. The salespersons are very good and they will almost convince you to buy anything.
  2. The Price are higher compared to e-commerce sites. All the location they operate in Flipkart and Amazon is already there but there are some people who doesn’t trust ecommerce sites so,they go and Purchase there. But if those People will understand that service is provided by company and not the retailer they will buy where the Price is less.
  3. In these cities there is no other big electronics retail chain like Reliance Digital. If in future Reliance Digital will expand to remote cities then Aditya Vision will get crushed by them because of their competitive pricing and brand presence.
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A few factual errors in what you are saying.

Reliance digital actually already has 22 stores in Patna.

For comparison AVL has around 30 odd in Patna.

imho, Reliance digital cannot just ‘crush’ AVL, things are way more complicated than that.

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I was talking about towns wher AVL is there but there is no Reliance Digital or any other such chains in such cities AVL has a strong brand Presence. I was talking about their growth once Reliance Digital will expand to such cities.

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They are expanding to tier-3 towns where there is no large retailers. compared to Reliance which are in tier-2 towns.
image
This can be their moat also it’s how you perceive it.

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A bunch of us met AVL management few days ago. Here are the notes:

Q: What is the story of Aditya Vision?
A: Started in 1999 with 1 store. Didnt go out of patna. Condition was poor in rst of bihar. Power was bad. From 2014 we started expanding in all of bihar. Gaya/muzzafpur/darbanga was covered. Now 77 stores strong in all of bihar. Late last FY decided to mobe to jharkhand. Today 11th showroom in jharkhand, 2nd in ranchi. Jharkhand is similar in culture etc to bihar. Very comfortable. 5-6 stores are still in pipeline for jharkhand. Hope to have 100 + storerooms by end of year. Good response. Expanding rapidly. Tier 3 cities also. Misnomer was initially bihar is poor state, but contrary to that we found that lot of manufacturers can sell in bihar. Not many options to spend their money. Big manufacturers were also surprised that premium category sales are good in bihar. Another 25 years next FY: 2023. Easestern UP. Thereafter in chhattisgarh, western part of WB bordering bihar. Very asset light co. All properties are long term lease rentals. We plant to go same everywhere. Capex is nominal. 50 lakh capex: AC, false ceiling, lighting, generators. Different model of retailing: Yu are supported by the manufacturer. We ae selling their products. What will be our margin will ne initially decided before we buy product from manufacturer. They price it in a way that we are able to derive that sort of a margin. Increasing gross margin continuously for last 5 years. Purchasing power increases tremendously. Company vie with each other to have counter share in aditya vision. Manufacturer wont let their counter share decrease. Double turnover in 3 years. All manufacturer giving their own salesman to sell the product. They are called: ISD. We dont have any obsolete goods lying with us. All manufacturer responsible for their own goods. They make sure their own goods are sold before technological change they introduce. We sit on 0 level of unsaleable goods. This part of geo: lease rentals & staff costs are very low. Reliance retail has 5 stores in patna, 20 in bihar. Chroma is there in jharkhand. We share common wall with reliance digital. Dhanbad has chroma. Reason is that we are very very competitive. Manufacturers ensure that we should remain competitive since we have sizable share of turnover of manufacturer. Typically Q1 is very goood. Best. Compressor product great demand. Good margins also in Q1. Marriage season is also there in this part of india. Lagan season is there. Weddings take place in AMJ. That also contributes. Q1 has 30-32% of all our sales. Q3 is weakest among all Qs. Flooding, rains, no festivals also. Q3 becomes very good for Co due to festive. Durga puja, dhan teras, diwali, chhat puuja is there in jharkhand & bihar. 13-15% gross margin, 5-7% operating margins, Summer starts ealy these days; so a lot of sales in march. Cannot compare our last 2 years coz last 2 year Q1 was shut down.

Q: Our guidance is to double our Revenue in 3 years. Given that we are planning to roughly double store count in next 3 years & we might have 15% Same store sales growth, why is the guidance for revenue for doubling?
A:In the past we have doubled our revenue every 3 years. Want to give Conservative guidance & if possible perform better.

Q: With higher scale will our margins go up?
A: Mobile phones as a % of sales mix will go up. So the margin might go down a little bit due to that. So margin can also go down due to that. Overall guidance of maintaining 13-15% gross margin is taking that into account.

Q: What is our management strategy and do we have bandwidth to scale to 2x?
A: We rely on Technology. Software is integrated with manufacturers through APIs. Manufacturers can see inventory in each branch of Aditya vision. Just as an example of management bandwidth, Mr Bishat prabhakar has been working with us since 2005. He is a WTD (whole time director): looks after operations. Then there are Mr Tushar Jha,Ms Rashi Vardhan. We have Sales head, area manager, assistant area manager. New store opening team.

Q: What are our Competitive advantages?
A: Manufacturers cannot afford to make reliance retail or chroma cheaper than aditya vision. This makes them price their product in a way that Reliance Retail or chroma cannot become competitive with aditya vision. Just as an example:Reliance retail doesnt work on a cash & carry basis. But we work on a cash & carry basis. 2-3% cash discount, 1000 cr purchase, 30cr discount. Manufacturers have to see that we are competitive. Chroma has much more operating expenses than aditya vision. Scale drives financials. Costs are very very high for them. Still they are running in loss. Companies can give you some margin but they don’t want to disrupt the entire market.

Q: What about Competition from online businesses?
A: Some traction from online businesses in the pandemic. This part of India And even in bombay calcutta delhi most people wont buy 50k products without having some person explain to you, to check it physically. We are very much competitive. Any seller has to shell out 8-10% to the online platform. We save that margin. We are very well priced and this is the reason why.

Q: What is our Store level economics?
A: We have 4000-5000 sqft stores. All the salesmen come from manufacturers. 15 people from aditya vision. Those AVL staff will be managers, guards, store keepers. Staff costs are 1.5 to 2.5 lakh for us. Rentals are very low. Average rental is 2 lakh per store. Worst performing store gives 6 cr sales in the first full year of operation. Double in year 2. 50% jump in the year after that. Matures in 3rd full year of operation. 15% growth SSSG. Very old ones might have 10-12% for very old stores.

3.5cr of revenue to break even. 6 cr worst store does. 95% of our store became profitable in the 1st full month of operation.

Q: How will we expand into chhattisgarh, uttar pradesh while getting the same economics from the OEM side?
A: Manufacturers also see culture, we have been working with them for 10-12 years. We get the best deals because we do cash & carry business. When you are 80-90 store retail, our 0 day impact from the day material reaches our store. Material reaches store at 7-12th day. Day we receive the material we make the payment. We enjoy this very good cash discount of 2-3%.

Q: Given that our revenue has seasonality, can we improve Q2 sales?
A: If it is raining the whole day, people are not going to go shopping. Streets are water logged, rains, flooding, also there are no festive seasons in Q2. Tough to do much.

Q: Did the Agniveer protests impact us in Q1FY23?
A: We were impacted by Agniveer protests in Q1. Many of our shops were shut down for safety reasons.

Q: What is our Product mix like?
A: The Highest sale comes from panel TVs: 23%. Then Air conditioners, then washing machines, 14-15% from mobile phones. Mobiles are faster moving, lower margin products for us.

Q: Do our Product mix and profitability differ by geography?
A: yes, the competitive intensity is lower in Tier 2 or 3 towns and thus they might have higher margins.

Q: What are our Corporate expenses? Could they grow sub-linearly with sales?
A: They are 10%-15% of expenses. May not grow as much as sales.

Q: How do we differentiate ourselves from Reliance Digital, Chroma?

A: We are very customer focussed. Our people are trained in classrooms. On job training for 2 months, Then only they come to new stores. We are very much customer obsessed. We have a helpline: tollfree aditya seva number. 20-22 people work in that call centre. We use ‘Capture’ CRM software. We encourage all our customers: dont worry we will facilitate the services (like servicing a faulty AC/Refrigerator). We also run a Customer loyalty program. In this industry, you cannot quote an arbitrarily lower price. OMEs dont even allow you to give gifts to customers (So as to not distort the end prices). Hence, what we do is that Every INR 10k of purchase we give a lucky coupon. We take out a draw in a big ground & stream it online. 150k people were watching it live last year. We make sure we give the customer that prize. Last year: 2 houses, 135 cars. Each branch at least 1 car. 1000 motorcycles. We also give Same day delivery. This year, 10cr will be spent on prizes.

Q: Can we change the name Aditya vision? It sounds like a spectacles company.
A: We have spent 80cr on branding. In this part of India, if anyone thinks of electronics they think of aditya vision. Why would we want to change the brand name?

Q: What is the Scope or TAM for our products?
A: Penetration is very low in this part of country. 3.8% penetration for air conditioner vs 25% for india. Refrigerator 8% in this part of country. Money is coming into their hands. But they had no options to spend it. Thinking of going to 2-3 lakh population towns with 2000 sqft store rooms in the future.

Q: Is there a problem of Crime where we operate?
A: Mostly solved. We dont find any problems at all. On a GST level, we have contributed 100 cr SGST. We get very good support from the administration.

Q: What is the % of amount through EMIs?
A; 30% sales through EMIs. 70% is full amount purchases.

Q: We did 34000 sales /sqft of retail area pre covid. Can we do 2600 cr in cy25?
A: We are working fully to achieve what you are saying. But we want to be conservative in terms of what we guide & hope to out deliver.

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The only risk I thought while researching the company 2 months back is they might be very successful in Bihar. But don’t know if they can scale up in other states. So I was checking number of google reviews in google maps for their stores. In Bihar all the stores have good no of reviews(let’s assume no of review is proportional to sales). However they have recently ventured into Jharkhand. So I was checking number of reviews in Jamshedpur. What I found is a croma store opened much after them (like after 3-4 months) has 3-4 times more reviews then them.
Anyway it was a bad decision not to invest in it only to watch it from jump from 700 to 1400 inspite of seeing promoter buying :smiling_face_with_tear::smiling_face_with_tear:

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I couldn’t buy it last year as there was continuous upper circuit and no sellers for a long time. I was interested in it seeing their expansion nearby so invested in the sister company ACML.
Some of the things that bothered me at the time were:
They were continuously increasing debt for expansion.
They were doing buyback when they could have
used that money for expansion or reduce debt.
After doing buyback the promoter and their relatives cornered the float with less than 8% float available for trading. This is the reason I couldn’t get the shares. Some of the promoters have started selling recently which will increase the float now.
The director’s remuneration was very high compared to employees. This might be common in small companies.

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Thanks @sahil_vi for your notes, very informative.

Viewing this purely from a risk-reward perspective - Lets say they easily achieve their guidance of doubling revenues in three years, and maybe even beat it. They have categorically said that they expect gross margins to be in the 13-15% range, so no margin expansion coming for sure. In fact if anything, there is a risk of gross margins contracting a bit if they are closer to 13% than 15%.

So we’re potentially looking at 25% top line growth with 25% or less bottom line growth if they execute well. The company now trades at 1.5 times sales for a 15% gross margin business. Can it rerate further from here? Maybe it can, but I wouldn’t bet my bottom dollar on it because I don’t think there is a long and clean a runway to scale in this kind of business, and that too in new states, given the fact that there are deep pocketed national players waiting in the wings and the business has no real moat. Plus the comfort of buying white goods through Amazon, Flipkart etc is only is only going to increase. Maybe Bihar is today where Mumbai and Delhi were a decade ago with respect to e-commerce adoption for white goods. I expect the gap tp bridge a lot faster than a decade.

In my view, they are likely to hit an air pocket at some point in time, an analogy that @Worldlywiseinvestors shared on twitter recently, where they will likely scale to a point and then hit an air pocket. If the market thinks this way as well, it will not ascribe a significantly higher multiple to the business. I wouldn’t take on so much execution risk for a maximum reward inline with earnings growth. The risks outweigh the reward IMHO.

Another worry is that a couple of the promotors have sold close to 4% of total float last month during the run up too. This after they’ve been aggressively buying all through the last two years. Would have been great if someone would have asked them why they sold all these shares.

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Nothing in life is sure, except perhaps death (both for investors & their companies). In general they have been fairly conservative in guidance. Not expanding margins is actually a strategy to deepen moats in retailer. Question is not on margins but whether they can get higher economic benefit from OEMs at higher scale (imo this is a given). If they decide to pass that benefit to customers, then they create ‘scaled economies shared’ (Scale Economies Shared) which actually creates a very powerful virtuous cycle loop.

I expect PAT margins to be maintained with higher scale & operating leverage. Actually margin is only 1 aspect of the picture. You get a 80% ROCE 100% ROE business at 30 time earnings growing at 25 i think its time to close your eyes & buy (efficient retailers always are priced highly not cheaply; covid-20 was an anomaly for AVL and investors did not know their story back then; those valuations are unlikely to reoccur)

Hardly so. they have hardly 1% market share in a market growing at 12-15%. Discretionary spending is about to take off. Penetration levels in Bihar & East india are quite poor. I wouldnt be surprised if they keep doubling revenues for a decade followed by a decade of 15% growth. This quality of growth deserves a higher PE multiple imo (of course AVL will have to prove their mettle outside bihar, which they have already set out to do).

i think investing needs one to follow on ground feedback. On ground feedback is that the set of people & population they address is not even entertained by amazon & flipkart. Investor’s house helps, drivers and so forth buy from AVL. They get great service (Amazon and flipkart both suck when it comes to servicing white goods), they get same day delivery (Only amazon comes close only in metros), they get EMIs (will amazon offer an EMI to our driver or house help? Please think.

This amazon & flipkart point is like saying “Dmart wont exist , trent wont exist because everyone will always order everything on amazon”. Perhaps. But there is no indication of this happening in next 3 years. Investing is always with a rolling 3 year period. Beyond that, i dont have any visibility. When the
facts change, id be more than happy to change my thesis :slight_smile:

It wouldnt, AVL will rerate even from here. That is how efficient retailers are treated. 30 time earning must be seen in conjunction with how the sector has been treated. They have already started expanding in jharkhand (read the annual report). Chhattisgarh, UP, WB expansions in next year.

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I second the views, Big retailers are concentrating in bigger metro’s, AVL is running successfully in patna where they have competition from Reliance retail, croma and Vijay Sales, this proves model is sustainable l, I find cost too low in comparision to others, this business is very high ROCE and will be sustainable as working capital requirements are too thin. PE band might expend upwards as projected earnings will be close to 1809-2000 cr topline and EPS between 65-80 band for FY 23. If they expend like this, sky is limit.

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For me the concern for investing in such stock:

  1. Intense competition in the space, both from ecommerce as well as big retailers. Even if they are not present significantly today, it will see them in the near future. What makes Reliance, Croma or Vijay sales kind of people not to enter these cities when there is an opportunity for growth? I am sure they will be tracking AVL through their financial numbers. IMO, these big fellows would eventually eye Tier-2 & 3 cities when the growth is saturated in Tier 1. Then they can easily wipe out AVL.

  2. As such business runs on low margin and further scope for reduction when the competition intensifies. So where is the room for improvement in margins?

  3. Seasonality in the business.

  4. Significant debt on the books. Debt for working capital, High inventories.

  5. Promoter/promoter group/KMPs selling at higher levels from the open market. In Aug, 2022 itself, they sold 4.64 lakh shares.

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As per the AR, they had 40 stores in FY 20, which increased to 78 in FY 22, so doubled, but revenue remained almost same ie around 800 crore levels. If one calculates, pre covid in FY 20 they were doing almost 20 cr per store sales, so with 90 stores already, they may hit 1800 cr sales run rate, even if they hit pre covid per store sales, AR says ssg is 15 %, that will be additional. This will be the first full year without any lockdowns for all new stores.

In H1 FY 23 they have already opened 10 stores, so assuming same rate may end FY 23 with 100 + stores, having a revenue rate of 2000 cr min, without considering ssg, which will be more than 2x of FY 22 sales of 890 cr.

If they continue to open 20/25 stores every year in MP, UP, Jharkhand in FY24 and 25, then having 150 stores in FY 25 is a reasonable expectation, so it is min 3000 cr sales rate, considering no ssg.
A lot depends on execution and consumer electronics demand also.

This is also a story of unorganized to organized retail and increasing penetration in under penetrated markets as per capita income increases.

ROCE is 78 %, ROE 51 %, ( asset light) so if the growth sustains market may give good valuation of 40-50 PE

Numbers estimate: Assuming no margin improvement, conservative estimate of 1500 cr sales in FY 23, they may do 70 to 80 cr PAT, FY 24 2300 cr sales, may do 135 cr PAT

So if they execute well on forward PE, this is less than 15 PE.

There is v little information available about this co apart from AR and screener, I hope management comes out with some investor ppt and do con calls to communicate better.

I think @ayushmit bhai also tracks this company closely and may wish to share his view

Disc : Invested and views are biased

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@sahil_vi Thanks for elaborating explanation and sharing notes of management discussion. This is really insightful. Credit to you, your post about the company made me to read about its business. While going through AR 22, found some RPT proposal to be approved in AGM. What is cause of concern here is many blood relatives are associated with the company and drawing hefty amount.

Well company at this stage, could it be justice to pay salary of 6 lakhs per month to a marketing manager. Would like to know you view on this(If you have any discussion with management on the same, pls do share)

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Can u ask them about this

https://www.jagran.com/news/national-intelligence-unit-raids-on-premises-of-aditya-vision-in-patna-gst-of-rs-46-crore-seized-18397165.html

Also their constant interest in buying and selling co shares?

Also do u own the stock now?

What is so great about cash and carry…infact its riskier if inventory remains in the stores due to low sales

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Answer is, every. Too many. Would urge you to study a random sample of all indian smallcaps. You’ll find 50% or more do the same. It’s a minor inconvenience as long as company can grow its revenue & margins. Some of largest wealth creators in last 6-12 month have been Mirza & meghmani which both had rpt concerns. In longer time frame: apl apollo, relaxo, poly medicure. Rpt is a minor nuisance unless the amount being talked about is copious (garware high tech films comes as an example here).

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This seems to be the case of a management with very high business acumen operating in an gruesomely competitive segment that seems to have somehow found a niche and is thriving as result.

One thing I don’t understand about their business model is the fact that the management said that the inventory in their stores in on the books of the OEMs. Then they also said they operate through cash and carry model. Aren’t these two statements contradictory to each other?
Basically, at what point of a product’s lifecycle do they purchase it from the manufactuer?

The RoCE of this business is simply crazy( in a good way). And valuations are not unreasonable as well.

This might be one of the best businesses I’ve ever seen (other is music licensing but this is much tougher to run) if they can deploy the capital they’re generating at high rates.

Anyone have any indications as to the Return on Incremental Capital they can achieve?

Concerns:

  1. Promoter selling huge quantities.
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Invetory does appear to be in the company’s books. Perhaps they meant liability is funded by OEMs - this may have been the case in the past, say in FY20 where 184 Cr inventory is balanced by 184 Cr Payables. However, FY22 inventory seems to have been partly funded by the company, since the borrowings have gone up from 34 Cr to 115 Cr or so (Mostly short-term borrowings for inventory)

Strange thing about this debt though is that it doesn’t add up with the interest they are paying which is around 16 Cr.

That’s almost 14% interest which is abnormally high for short-term working capital finance. Even FY20 interest is 14 Cr, on a debt of just 34 Cr, which makes me question if the inventory is being financed by the company with ST debt.

Also, the CFO doesn’t reflect the return ratios of this being a business throwing out cash and needing very little cash to grow.

The direct taxes paid doesn’t add up either to the profits.

Disc: No interest. Just a customary glance on screener.

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