Summarization and interpretation of Nature and Business model of SG Mart, compiled from Concall, Investors Presentation and Annual Report.
Which types of problems SG Mart is going to solve for the industry?
As you all know that, we have been running two manufacturing companies for many years now. One is APL Apollo Steel Tubes, and the second is Apollo Pipes, which is in the plumbing segment. What happens is that as manufacturers, we always struggle to push our material with the large distributors. The countries outside India like China, South Korea, Japan, which are actually the manufacturing hubs in the world, they have very large trading giants who are lifting material in bulk from the manufacturers and then distributing those products. This is what we always miss as manufacturers, whether it’s in steel tubes or plumbing pipes. So, we thought let’s start a trading company.
The business version of a contrarian question: what valuable company is nobody building? Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable. If there are many secrets left, there are probably many great companies yet to be started. The best place to look for secrets is where no one else is looking. If you find a secret, your face a choice: Do you tell anyone? Or do you keep it to yourself? Answer is: whoever you need to, and no more. In practice, there’s always a golden mean between telling nobody and telling everybody- and that’s a company. The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside —Peter Thiel.
(Peter Thiel is an entrepreneur and investor. He co- founded PayPal and Palantir, made the first outside investment in Facebook, funded companies like SpaceX and LinkedIn).
Is it the right time to start the business?
When India is taking a leap forward to become the world’s manufacturing hub, China plus one policy actually being played out in the minds of global consumers, we thought it’s the right time that we should support the manufacturing sector by becoming one of the largest traders in the country. From December 2023 till December 2025, India’s steel capacity is going to go up by 50%. So, it’s the right time to start a venture which is into steel trading to take material from steel companies and then distribute for them and create a business model out of it.
Which products to start with?
We have spent four decades of manufacturing and buying and selling of steel, upstream, downstream products. So, let’s start with steel as the product and then we fully establish ourselves in steel trading, and then we move to other products into whether it could be Agri commodities or other construction material product.
Example: - Amazon shows how it can be done. Jeff Bezos’s founding vision was to dominate all of online retail, but he very deliberately started with books.
What is the business model?
SG Mart comprises three business models:
• First - B2B Trading of long and flat steel products, buying directly from the steel producers and then distributing it in the market.
• Second - Creation of a vast network of service centres, where upstream steel is processed and sold in semi-finished shape to various steel user industries.
• Third - B2C Distribution of products like TMT, Light Structures, Metal Sheets, Welding Rods, Mesh Net Steel etc. which are sold as branded products.
What gap the company has identified?
In B2B metal trading:
The industry gap that we identified here was that steel mills are dependent on very small size distributors and dealers who lift material directly from steel mills and then distribute it to their customers who are like user industries down the line. The largest distributor which we could identify in the industry was doing a volume of 25,000 ton a month. Now, that’s like ridiculously low if you look at India sitting at 120 million tons of steel capacity today, and we are talking about a 300-million-ton capacity by 2030. So, there is no way that this incremental capacity can be consumed or can be absorbed by these small SME traders.
In B2B is service centers:
Now here if you look at the industry like auto sector, consumer durables, construction industry, they don’t buy raw steel like in coil form or long steel form. They need processed steel, which acts as an input to their factories and then they make washing machines, refrigerators. It is used in automobile bodies, in construction, in bridges, etc. So, there are small service centers, very unorganized service centers, which are run like mom-and-pop stores. There is no Pan-India national level organized chain of service centers which can ensure the quality steel availability to the user industry. So, this is a gap we thought we should work upon. And anyways, the steel, the input for these service centers will be the raw steel, which I’m buying anyways, for my trading business. So, I can divert some of the steel to my service centers and I can process it and earn extra profit on that.
In B2C
Here we want to leverage the distribution network in the downstream sector which the group created for the steel tubes over the last 30 years. Now if you look at our group dealers who are doing business in steel pipes, steel pipes are 20% of their total business. Rest 80% they do rebars, angle channels, welding rod, mesh, wires. This is massive consumption but almost like INR3-4 trillion for non-tube products which these distributors buy from small manufacturers. Apollo played a pioneer role in formalizing the steel tube industry but for other products like angle channels, rebars, welding rods, this industry is still highly unorganized. we have a visibility of demand for INR3-4 lakh crores in multiple products. We aggregate the demand from our distributors and against that we do tie-ups with efficient, good quality manufacturers and we bridge the gap between the SME manufacturer and an SME trader.
Benefits of service centers cum warehouse:
The network of service centers which we are creating can act as a warehouse for either metal trading or for B2C distribution products. So, we are not going to spend extra money on creating more warehouses. My service centers will act like warehouses plus the processing unit.
Diversification:
Once we establish this business for steel, we create a proof of concept for the steel sector, then we are confident that the other industries will also come to support and to take support from SG Mart. By that time, we will be able to move to other sectors. we have already started seeding some of the non-steel products like we have done tie-ups with industry leaders in tile segment, in electrical fitting segment, in bath fitting segment, in branded rebars to support the construction sector. We are reaching directly to the contractors and real estate developers and we are doing the B2B business.
Win-win situation for everyone:
What I have to offer is the power to buy in bulk, right, multiple products, offer the same product at much lower cost than what that trader would be getting from the manufacturer. And we are only looking for 2.5%, 3% EBITDA spread, which is not very high for my services. And this also I will be generating by two sources, one is improving the efficiency in the manufacturing process, right? Because if I am doing a business with a manufacturer who is doing, say, 50% utilization rate as of now, and I take his utilization rate to 70-80%, so his cost of production will come down and he will pass on that benefit to me, which I will keep 50% myself and 50% I will share with my customer. Plus, I will use APL Apollo brand, right, to get the premium from the market, from the customer, that will add to my EBITDA.
All good companies make profit by solving a unique problem. Creative product means new products that benefit everybody and sustainable profits for the creator.
Sustainability of Earnings:
Earning 2.5%, 3% margin makes my business pretty sustainable. What we have to look is keeping our working capital requirement low, churns 15-20 times in a year, zero creditors, zero debtors, and make 35% ROC, maybe higher. If we are able to do that, then my business model will be very, very sustainable. And then we will replicate this in the other industries once we are able to create this full model.
Sequencing markets correctly need discipline to expand gradually. The most successful companies make the core progression - to first dominate a specific niche and then scale to adjacent markets.
Focused approached:
See, as a group, we always like to work on our core strengths first. Our strength or right to win was in steel sector. That is why we started with steel sector. Unless we see this company making INR500 crores EBITDA. We don’t want to invest into sectors where we don’t have much expertise.
Competition:
If you see, there is no national level player, who has a network of service centers. They are all, like I said, mom-and-pop stores. Steel traders, the distributors who are attached with the steel producers, there are also SMEs, multiple end number of unorganized players. And any unique company which has access to downstream traders in the steel sector who are doing these steel pipes, rebars, angles and channels, that also no one has except our group. So, in that way, I mean, difficult to name anyone who could be our nearest competitor. I would say our nearest competitor is unorganized sector.
*There is a sweet spot when any industry migrates from unorganised to organised and India is going through a classic phase of unorganised to organised. If you find the companies in that sweet spot, the time to buy is now. I don’t care timing. — Ramesh Damani.
Solving problems:
For steel mills to focus on production:
Steel Mills like to work with large distributors. So, SG Mart comes in and acts like a large distributor, so they sell the material to us and then that metal, we either sell to the retailers or their own small dealers. Because like I said, the largest one was doing 25,000-ton monthly volume. But the smallest one was doing 5,000 ton as well. So, then the steel mill will say, okay, I will stop servicing 5,000-ton dealer on my own, why doesn’t that small dealer buy from SG Mart? Okay, so that’s the segment in metal trading.
For OEM industries:
In our service centers the customers are OEM industries like consumer durable companies, automobile companies, construction companies who are buying processed steel. Earlier, what happened is that a small mom-and-pop processing center. They don’t have enough steel supply from behind and the quality of machinery what they have installed like cutters and slitters, etc., that also is likely outdated. So here we are trying to address the problem that, I am a service center with high-tech machinery. My quality of my processed steel will be better. For example, Havells. at head office level, I do a tie up with Havells that for all your factories, we will be supplying from my service center near to your factory. Right now, they don’t have any national level players. So, each of the factories is buying steel from the local mom-and-pop processor. So that’s the value proposition I’m going to offer to large manufacturers.
Risk of bad Debts:
we are going to do cash-and-carry. We are talking with banks for providing channel financing services to our SG Mart’s customers. We have our own group in NBFC with us. So, I will not be having debtors more than 3-4 days. So, my risk on debtor write-off is also taken care of by having channel financing services for my clients.
Risk of inventory loss:
first vertical, which is metal trading, here we are doing back-to-back sale, like purchase and sale. So, the risk what we carry is from 0 to 10 days. Which is very limited. Steel prices in India normally are reviewed like once in a month. On first day of every month, all the steel producers come out with a new revised pricing policy. So, if you are doing business within 10 days, there is no risk as such to carry to your balance sheet.
Second is service centers. Now, service centers, yes, here the inventory days will be 20-25 days, but then here the margin is high. So even if there are some write-offs, you have to take some write-off, but your high margin does take care of that.
Then third is distribution business. Distribution business, B2C, is mainly secondary steel, right? Whether it is rebars, secondary, angles and channels, welding rod, which is not a very volatile product anyways. They are sold more as product. And here also, like the inventory days in the system will not be more than 20. So, the fluctuation is manageable easily.
Strength:
The Group has long experience in the steel downstream sector. Its strong relationships with steel producers strengthen the Company’s ability to source raw steel from steel mills. The Company has a strong distribution presence for downstream steel products. Its trading capacity is 20 times more than the current largest steel trader. Moreover, the availability of funds allows it to make strategic investments for business growth. SG Mart offers a one-stop solution for all construction needs, making it convenient for builders to source materials from a single platform. Solving the problem of minimum purchase requirements allows small builders to procure necessary materials without the burden of bulk buying. Offering standardised quality and prices ensures reliability and trust among customers, helping to build a strong brand reputation.
Management should have great competencies, passion for growth and above all unquestionable integrity. When you find a top-class business run by top class management, you get a top-quality company. —Ramdeo Agarwal.
Opportunity:
The addressable market for the B2B construction material industry alone is huge – it is currently estimated at INR 6 trillion, moving to about INR 8 trillion in three years. The bottom-line is that even if a fraction of these estimates transforms into reality, demand for building products will remain robust.
Weakness:
Being a new player in the field, awareness of the Company’s presence and operating model will need to be achieved to generate growth. Economic downturns can affect the construction industry, reducing demand for construction materials. Also ensuring timely delivery to remote or hard-to-reach areas can be challenging and may affect customer satisfaction if not managed efficiently.
Disclosure: - took small position after reading concall and willing to add more in future if management walk the talk. It is not a buy or sell recommendation.