I am not that sophisticated at reading financial statements. The operating cash flow seems to be -ve, usually this is concerning. The inventory is normally huge, almost 7-8 months of seeds stocks are kept for processing, due to seasonal harvesting from the Sal forests, in general. Not sure if the new factory coming online has something to do with the cash situation or the current mode of outsourcing production is the reason. Receivables are in line with the increasing scale of operations. Yes, seems to me, the ramp up in raw-material stocks is causing negative operating cash situation.
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I do not recall much specifics to comment exactly. The broad overview is in this locked post
https://forum.valuepickr.com/t/bajaj-healthcare-ltd-bse-539872-bajajhcare/43462
Pretty much corona specific opportunistic growth with vit. C and chlorhexidine sanitizer uses, with some capacity added, these revenues might last longer, another full year or so. Other growth via cheap NPA acquisitions and general trend of molecule launches. Industry specific tail-winds seems due to China+1 sourcing trend. Seemed at historically cheap valuation too.
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After a little bit of scuttlebutt, I have found that one of its clients mentioned in the annual report might be bogus (Bajaj Medical LLC) as No database for this company can be found online, neither a picture of their office space or products etc.
Secondly, they have invested 5 cr rupees in issuing preference shares of Bajaj Rice Mills, a subsidiary company.
No major red flags otherwise but revenue from other giant clients mentioned remains unknown.
A little bit concerning.
Thanks for checking! Bajaj medical seems it is their own front in US market for sanitizer etc.:
About RPT, that can always be a case with small caps, with size less than 1% of current mkt. cap. I can live with that.
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Manorama IPO was triggered by the Indian govt. policy decision to allow 5% blending of non-cocoa fats in chocolates. Though the business model was a few decades old it had not scaled up beyond one-man entrepreneur shop. The product had marquee clients etc. and some expertise but outsourced the production it seems.
What is good was the back-end collection of forest produce with a well established network. After the senior generation quit, the family shifted gears, after a small gap, to scale up the business. Seems some countries like Russia, Japan etc. allow 10% blending also and Manorama is hoping that can happen in India also along with increasing consumption of chocolates etc. Europe with highest per-capita consumption already allows 5%, but US does not allow any blending.
The ESG profile of this business is super normal, that should also be of help. I am not sure about the PAT numbers and how EPS and valuation may match exactly. Earnings growth is bit fuzzy, but such specialty foods biz command decent PE multiples (I am simpleton, RoR is how I value) of roughly 20. So, my entry level provides decent comfort, IMO.
Do not think this is an elaborate Ponzi scheme, which pretty much seems to be standard judgement for any listed Indian biz., till proven otherwise. Members are encouraged to dig into this though!
Their plant, was delayed due to covid, and started after Sept. HY results. Seems processed foods and packaged sweets are favored due to covid. Earnings ramp-up might be worth the wait!
3 Likes
I was looking at it when it crashed a bit following a bad quarter
Their process involves a lot of manual self employed labourers
My concern was that at some stage if they cannot rely on cheap sourcing, costs will increase tremendously
Manual labour had a tendency to work for the next best paying job and picking from forest might not be the best use of their time
Some of the time one has to see what part of value chain a company is leveraging, like banks leverage money, IT industries leverage IT personnel and wage differential
The have outsourced this manual labour which makes their butter cheaper than cocoa butter but for how long, difficult to say. Cocoa butter like coffee, tea and rubber is governed by cheap manual labour so the company is playing one cheap labour against another
If youâre comparing them to companies up the value chain like nestle or Cadburyâs itâs probably a wrong comparison but I think you are not
They have other things as well some of them being in constant shortage world wide like Shea butter used in skin creams
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Yes, indeed the crash likely happened on release of Sept 2020 results when the plant was delayed whereas the stock price was anticipating profits from increased production! Stock had already run up to around the current levels and fell, bouncing at 500 mark with record volumes and very high delivery, missed it then.
Indeed, the negative operational cash situation is due to the huge inventory cost of the seeds! So you may have a point in this.
The raw-material (Sal seed) grows free though! (it just has to be collected) Cocoa butter is expensive since cocoa production is relatively stagnant (and demand is high), due to the limited production zone in very backward regions. Indian labour is quite cheap, esp. in the backward regions where the forest produce is being collected. Mango kernel is sourced as waste-product of mango processing. Kokum is expensive, due to limited growing areas. Processed Shea faces duty barriers and hence only seeds are sourced by the company from its Africa operations, this is most popular option it seems, as also noted by you.
Economics should not be an issue, the CBE products are cheaper hence the permission to blend has been allowed in the first place. So, CBE is cheap w.r.t. cocoa-butter, the competition is between the various CBE products, looks like.
Indian govt. policy explicitly mentioned make-in-india seeds as the only possible substitutes. With ESG branding, some premium pricing is possible in recovery. Even subsidies are possible for such sustainable activities, providing employment in isolated/backward regions.
So, in general, this is not a labour cost arbitrage opportunity mainly, though developing countries broadly do have that advantage for given in many industries as pointed out. If a biscuits company buys wheat from the farmer it is not usually called outsourcing to take advantage of labour. Here it is pretty much the same thing, perhaps even easier for the âlabourâ, who just pick from forest and sell, nothing else. Likely, only local communities have rights to access this forest produce, they cannot be substituted by corporates.
Also, do not think we have to worry about considerable pressure on labour population. There is rather a lack of sufficiently remunerative earning opportunities and gainful employment rather than competition for higher labour rates. Wages are bound to be depressed as increasing automation/mechanization of traditional high employment sectors such as manufacturing or agriculture etc. do not yield increasing jobs commensurate with the sectoral growth.
No, indeed, but they have excellent scale for a single product company, which might be a niche also. Currently at 1k Cr mkt. cap. and going by estimates of earnings-valuation growth etc. (my returns expectations) it should scale within 2-3 years to 3k Cr or more. That is not bad at all, and should support decent valuation comfort and maybe attract institutions, some of which may focus on the ESG theme.
In conclusion, most things look over-priced in the current market. But yes, there may be a pricing risk which is why the original business never took off, but the new avatar seems to solve the issue by bringing the entire operations in-house and increasing the scale vastly. Demand growth offers some comfort.
We have to see how good is the competition, Wilmar is one big player, a Japanese giant who sources from them is in same line of biz also. Let me see if I can dig more into this theme.
PS:
Thanks for the information on Vipul Organics, it helped a lot! You seem to have a lot of deeply-researched, useful insight into the markets, thanks for sharing! 
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Bajaj Healthcare has a good size group company in the agro domain:
This includes mainly fruit and veg sales and processing, also the rice mill operations and an agro-park. This looks to be competing for management bandwidth.
On the bright side, there is no conflict of interest/overlap between pharma biz and this.
The company plans to also list on NSE soon, likely to increase institutional interest.
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UPDATE:
Added Asian Granito (~4.3% weight in folio), like a special situation play. Rest holdings are all intact but reduced by a little bit to create space.
Story behind micro-cap AGL (asian granito) is investors disliked a recent preferential issue, done @180, this contract was done some 1-2 years ago at a favorable time/rate and was expiring, SEBI did not give them extension, promoters sold shares at high price in market to buy the cheaper preferential issue shares. Both drove down the price, funda story is it is no#2 after Pokarna for quartz in India, and has some export orientation. Industry PE is ~35, so damn cheap, but nothing special about the industry or the company results overall. 
5 Likes
UPDATE:
Bought Filatex today (5% weight in folio), converting from Vipul organics (reduced from 17% to 12% weight in folio).
Filatex seems like a structurally strong play on PLI, anti-dumping duty and good return metrics beating the industry, with growth coming online in FY22/23, risk is lower end-user demand as lockdowns disrupt textiles producers. It might be technically well positioned for a breakout or a long period of consolidation till next quarterly results (latter more likely).
Vipul was too much concentrated holding anyway, and not so great business quality for such high concentration.
PS: The re-evaluation of Vipul organics was thanks to the facts put forward by, KushalKasliwal
What may still not be clear is the bottomline contribution share between the various segments, but it seems safe to assume a direct mapping from revenue share.
7 Likes
Add KPR Mills, best stock in textile and sugar, margin rising to 27%. Expansion to be completed by q3 21
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Thanks for the suggestion! Looks like a good compounder but I will pass. I am done with diversification, and do not see merit in more safety in larger caps as of now.
Specifically, for KPR Mills,
- Record margins will likely not sustain more than couple of quarters.
- Ready garments capacity will fill in the drop in PAT, if any, when it increases by 34%.
- Co-gen and sugarcane operations are constrained by the quotas for ethanol and over-supply of sugar in general. They are not that significant in overall profits.
- Ethiopian recovery (time should help maybe) and âFASOâ brand sales may help in sustaining valuations.
Hence current valuations look fair and do not provide much upside. Heavy institutional holding is a plus, but not greatly comforting either.
Hmm, it turned out to be break-out actually! I had almost never heard of this stock but the numbers looked so strong, and management quality looks ok, at least they do presentations and con-calls which makes it easier to track. This is the second biggest market cap in my folio to lend some respectability. 
They even do RnD and some eco-friendly recycling things.
Currently management commentary is multi year bullish while price was near multi-year low valuation (very cheap compared to the poly yarn peer group). Hence maybe the 30% rise in past two days on record volumes.
3 Likes
UPDATE:
Bought Tata steel BSL, seems like big, long, strong, steel/commodities cycle is possible, at 6% of folio size. Tata pedigree and recovery from debt soon is plus. Sold off Vipul 4.5% and reduced a bit from others, to make space.
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Hi Vikas,
The big spike today on Tata Steel BSL (while Tata Steel is flat) is surprising as I suppose the merger with Tata Steel will be at 15:1 ratio.
Any particular reason to buy BSL instead of Tata Steel? I think if merger does not happen than BSL looks better.
Disc: Invested in Tata Steel from lower levels.
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Hi Anirban,
It looked optically cheap, but essentially it is only tata-steel, I had no clue of the merger, but it looks fully approved. Overall entity might be good that is all, it does not make sense in retrospect to prefer one over the other since merger has already been approved and ratio is 15:1, one will just track the other!
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I have not done any detailed study on the merger. Hence, I am a bit confused if the market knows something that I donât know.
I am holding Tata Steel since last 2 months. Was interested in BSL last week as a second bet on steel, but discovered the merger news and skipped.
Converted Tata steel BSL to NMDC, it is PSU but offers better medium term revenue growth visibility with own steel works starting soon and Donimalai mines starting up too.
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The investment thesis for NMDC, finally a large-cap! (though Laurus has promoted itself too!)
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Chinese eco looks over-heated, but they do that frequently. Looks like they have a policy now to move out of polluting industries. Give the immense size difference, India just behind in rankings and blessed with good iron ores but deficient in coking coal (though it maybe cheap in international markets), is a natural to fill in the gap. Risk might be diplomatic relations are strained, more than usual. Infra etc. spending might be good globally, with US plans helping.
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NMDC has a torrential cash-flow stream, with zero debt, to finance big dividends while also doing steady capex. It is part of national steel policy to increase steel production and NMDC as Indiaâs largest ore miner will play pivotal role. It has to steadily ramp up to double production likely within 3 years.
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It has a good sized steel plant (3 MTPA) coming online at just the right time. And 2 more in the works, not sure when and what sizes are planned.
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KK line doubling is half-done and slurry pipeline will speed up iron supplies since transport is the bottleneck here.
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Privatization might never happen, so elevated valuations might not be possible in foreseeable future. RISK: equity flows from sales of govt holdings as their finances are under pressure.
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The company enjoys excellent margins, gross 40% at min and 70% at max. It is a cyclical but I hope it is a spiral, so it keeps adding value at a good pace and grows in size so each cycle is bigger than previous.
PS: Asian Granito and NMDC were tracked for a few weeks before the transactions, recommended to friends etc. for short-term trades and like. I am changing phase to increasing diversification, since several of the small-caps are not well-researched and hence risk/reward is unpredictable to a fairly large extent.
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KPR Mills registered 27% growth in Roplone and 157% jump in bottomline. Stock rose 16% in todays trade at ine time. 40% expansion in garment line by Q2 21 and 500 cr expansion in sugar, current valuation are cheap.