Projections as on 25.05.2021:
FY21 sales: 7’150 cr., @12% growth: FY25 sales: 11’250 cr., EV: 28’125 cr. (2.5x EV/sales translating into 25x PE), Assuming 0 net debt Mcap ~ 28’125 cr. (share price: 1649)
Business quality
Year
ROCE & ROE > 20%
Positive FCF
FY10
Yes
Yes
Total # years
12
FY11
Yes
Yes
# ROCE & ROE > 20%
7
FY12
Yes
Yes
# Positive FCF
9
FY13
Yes
Yes
FY14
Yes
No
SUM
16
FY15
Yes
No
AVERAGE
66.67%
FY16
Yes
Yes
HIGH BUSINESS QUALITY
No
FY17
No
Yes
FY18
No
No
FY19
No
Yes
FY20
No
Yes
FY21
No
Yes
Confidence in projection (Medium)
Business quality (high/medium/low): Medium (Generates FCF in majority of years, recently ROEs have dropped below 20% but ROCEs are still >20%)
Promoter quality (high/medium/low): High (Able to garner market share from exide + grew while industry was struggling)
Financial projections (high/medium/low): Medium (Maybe sales growth turns out to be <12%)
Valuation projections (high/medium/low): High (Should get 2.5x EV/sales multiples)
Is it a cyclical business (Yes/No): Yes (caters to auto OEMs and industrial segment which adds cyclicality)
Summary
Companies
Ticker
Projection date
Price
4 years fwd Price (FY25)
Price return %
Dividend yield %
Total returns %
Confidence
Business
Promoter
Financial proj.
Valuation proj.
Cyclical?
Amara Raja Batteries Ltd.
nse:amarajabat
25.05.21
764.40
1,649.00
21.19%
1.44%
22.63%
Medium
High
Medium
High
Yes
Comparison with Exide
Year
FY16
FY17
FY18
FY19
FY20
FY21
Sales growth (Amara Raja)
9.66%
15.15%
13.95%
12.11%
0.68%
4.54%
Sales growth (Exide)
10%
11%
12%
-7%
2%
PBT margin (Amara Raja)
15.65%
13.21%
11.79%
10.75%
12.29%
12.21%
EBIT margin (Exide)
11%
12%
11%
10%
10%
9%
Amara Raja has done better than Exide in terms of sales growth and margins.
Major business risks / monitorables
Lead acid battery getting replaced with lithium ion
Overambitious guidance: Management had eyed for 10’000 cr. in revenues by FY20. Only managed 6’839 cr.
Lead acid battery market is very competitive, especially from the unorganized side which account for 40% of market size
Is not backward integrated into lead (exide is backward integrated). Lead and lead alloys account for ~70% of total manufacturing cost. Currently setting up a lead smelter capacity in Chittoor
Environmental concerns: On 03.05.2021, a closure order was served to the company’s manufacturing plants located in Chittoor from the Andhra Pradesh Pollution Control Board. An interim suspension of order was granted on 10.05.2021
Receivable write-off: Wrote off 25-30 cr. of receivables from BSNL in Q4FY20 (hoping to get the amount and write it back in FY21)
Location risk: Operates from two locations in Andhra Pradesh (Tirupati and Chittoor). This offers better economy of scale and the plants are integrated with all critical components including plastics battery cases which are sourced in-house
Political affiliation: Jaydev Galla (Congress affiliation?)
Corporate governance:
High salaries
Related party transactions
There was a lot of noise made in 2014 period about upfront payment for land lease at a higher than market price, business kept performing and stock rerated
The most important thing is business has kept being good (although return ratios have deteriorated) and management has allocated a large chunk of money to grow the business, and returned the rest via dividends.
I still think valuations are favorable, one worry for me is lower free cashflow generation going forward with their very big investment in lithium ion space.
Their projected expansion plans are obviously very ambitious and probably not achievable within that timeframe. One stuck project of NHPC has led to subdued return ratios for 8+ years, this is also a risk that SJVN faces, especially given they are also making a thermal project in Bihar. Lets see how future pans out, they are definitely undervalued on their current operating capacity.
hello harsh , my two cents on kaveri seed , i m tracking this very long and invested also but exited before 6 months before , in the past maharasatra govt made pricing caping on seed , this is the whole structutral changes and in my opinion pricing power is not in hand in company , how you see this type of structural chnages, still in watchlist , your opinion matters us lot, thanks in advance.
Regulatory risk is always there in this business. That being said, the core business delivers very high return ratios and incremental growth is coming from rice seeds which is both higher margin and currently outside price controls. This is not to say that government will not regulate prices at some point in the future. In the 2007-15 period, the strong growth was due to adoption of hydrid cotton seeds and Kaveri’s good offerings in this segment. Now, growth is due to adoption of hybrid rice seeds (which offers much higher acreage, doesn’t have any royalty associated, and has higher margins). I have no clue as to how long this growth engine will be there, anyway the business doesn’t require much maintenance capex and hence most earnings are paid out to owners. Here is my speculation about Kaveri.
Updated projections as on 27.09.2021
FY21 sales: 1’033 cr., @10% growth FY25 sales ~ 1’512 cr., To sell at 4x EV/sales, EV ~ 6’048 cr., Mcap ~ 6’048 + 500 (cash) ~ 6’548 cr. (share price: 1085)
Business quality (High)
Year
ROCE & ROE > 20%
Positive FCF
FY10
No
No
Total # years
12
FY11
Yes
Yes
# ROCE & ROE > 20%
9
FY12
Yes
Yes
# Positive FCF
11
FY13
Yes
Yes
FY14
Yes
Yes
SUM
20
FY15
Yes
Yes
AVERAGE
83.33%
FY16
No
Yes
HIGH BUSINESS QUALITY
Yes
FY17
No
Yes
FY18
Yes
Yes
FY19
Yes
Yes
FY20
Yes
Yes
FY21
Yes
Yes
Management quality (Medium)
Organic sales growth greater than category level growth: Yes and no (Lost cotton market share in core AP market but gained in Maharashtra and Northern markets)
Able to find new avenues to grow: Yes (Were able to gain market share into cotton, then rice)
Treats minority shareholders in a fair manner: Yes (Very good buyback record since 2017 + consistent (but low) dividend)
Guidance shouldn’t be relied upon. Before 2015, they used to under promise and overdeliver and now the reverse is happening
In 2016, management didn’t provide for royalty payment but had to finally give 39 cr. Also, auditor was unknown at that time and SEBI had issued a forensic audit on the company. Additionally, they made political contributions to a party which was out of profits (and not CSR).
Confidence in projection (Medium)
Business quality: High (Generates very good free cashflows + high return ratios of >20%)
Promoter quality: Medium (Have been able to find new growth venues but there are certain lingering issues about taxes)
Financial projections: Medium (The high growth in rice and vegetables should be able to propel growth)
Valuation projections: High (Should easily trade above 4x EV/sales in good times)
Is it a cyclical business: Yes (seed is a cyclical business)
@harsh.beria93
A few points from my side: As per the recent investor call Lithium Ion battery will not replace Lead Acid battery. Lead Acid battery will continue to be used as auxiliary battery for a long long time.
Again read somewhere that they have done backward integration for Lead. Will search the source
There have been rumors that Amara Raja did not cooperate with PCB and the High Court told the company to cooperate with APPCB. It seems the electricity board had cut the power to the company and the company has gone to court and reestablished electricity. And then the company may have mentioned that they are moving to Tamil Nadu and later recanted its statement of moving. They have got a stay order on the PCB’s order.
There has been another instance of the same kind on Sangam diary, whose director is a senior ex MLA from TDP, to make way for Amul and this has created an uproar.
I don’t follow the company so I know nothing about the technology changes in batteries, but the chance of this political overhang remaining for extended period of time, at the least till the next election, cannot be put aside. I don’t know if these things are priced in or not.
As of today, I have reduced my stake in Powergrid from 4% to 2%. This is because its priced appropriately (close to 2x P/B) and I don’t have a clear visibility of its growth due to very high asset commissioning. This is good for free cashflow generation but creates doubts regarding business growth (or growth in book value). TBCB projects, Railtel and consultancy projects cannot fill this hole as they are still very small compared to transmission revenues. On the other hand, utilities such as NHPC and SJVN have higher growth visibility and are trading cheaper. I am thinking of giving a higher weightage to them to fill this gap. Will update once I have made a decision. Model portfolio is below, cash remains high at 25%
As of today, I added 2% stake in Aditya Birla Sun Life AMC Ltd. My speculation about the same is below
Latest projection (11.10.2021)
Sales will grow by 10% from 1’200 cr. in FY21 to 1’757 cr. in FY25. At 60% core margins and no other income (for conservativeness), PBT ~ 1’7570.6 ~ 1054.2 cr. and PAT ~ 1054.2.75 ~ 790 cr. At 50x PAT, Mcap ~ 39’500 cr. (share price: 1372)
Confidence in projection (Medium)
Business quality (high/medium/low): High (Although inferior to HDFC AMC, mutual fund is still a very good business)
Promoter quality (high/medium/low): Medium (has been consistently losing market share to bank backed AMCs)
Financial projections (high/medium/low): High (Sales should easily grow @10%+ given the underlying compounding of equity + extra inflows)
Valuation projections (high/medium/low): Medium (50x exit multiple is a little stretched)
Is it a cyclical business (Yes/No): Yes (AMC business is inherently cyclical)
Dividend pay-out will be ~50% of PAT. FY22 PAT will be ~600 cr., so dividend payout ~ 300 cr., Dividend yield at share price of 705 (market cap: 20’315 cr.) translates into 1.5%
Companies
Ticker
Projection date
Price
4 years fwd Price (FY25)
Price return %
Dividend yield %
Total returns %
Confidence
Business
Promoter
Financial proj.
Valuation proj.
Cyclical?
Aditya Birla Sun Life AMC Ltd
nse:abslamc
11.10.21
705.50
1,372.00
18.09%
1.50%
19.59%
High
Medium
High
Medium
Yes
Updated portfolio is below. Cash remains high at 23%
As of today, I have added 2% stake in Sharda Cropchem Ltd which is a part of my cyclical basket. Sharda sells agrochemicals in developed (EU, NAFTA) and developing parts of the world (LATAM). They identify molecules, register them with the authority and then source it from (mostly) Chinese vendors. As a result, they don’t have any manufacturing assets, leading to a very asset light business model. On an employee base of 175, they do turnover of >2600 cr. (14.8 cr. per employee).
Since the pollution crackdown in China starting in 2018, raw material prices have increased structurally leading to a decline in gross margins from the earlier 35% levels to the current levels of 30-32%. As a result, market has de-rated the business from earlier valuations of 2-3x EV/sales (prior to 2018) to <1.5x EV/sales post 2018. Management is very upfront about every issue, they have grown the business very well, preserved the balance sheet (net cash), funded through promoter debt when required (in FY18 gave 170 cr. at 10% interest rate to fund working capital for a few months), and given reasonable dividends (15-20% of PAT).
Apart from the Chinese supply problems, Sharda also suffers from stiff competition from innovators who set the pricing of agrochemicals. In the last few years, global agrochemical market hasn’t grown much but Sharda has grown very strongly. Here is my speculation about their future.
Projections as on 13.10.2021
FY21 sales ~ 2’400 cr., at 15% growth, FY25 sales ~ 4’200 cr., sell @2x EV/sales, EV ~ 8’400 cr., Assuming 0 cash level, Mcap ~ 8’400 cr. (930 share price)
Confidence in projection (Medium)
Business quality (high/medium/low): Medium (ROE is almost always < 20% but greater than 17%, generates reasonable free cashflow)
Promoter quality (high/medium/low): Medium (details below)
Financial projections (high/medium/low): High (15% growth seems achievable given the promoter is growth oriented, underlying business allows for 15% growth + 15-20% dividend payout)
Valuation projections (high/medium/low): Medium (Hasn’t traded at these valuations since 2018, however this multiple can be improved to 3x if gross margin improves or intangible asset turnover goes > 6x)
Is it a cyclical business (Yes/No): Yes (agriculture is a cyclical business)
Management quality (Medium)
Organic sales growth greater than category level growth: Don’t know (Don’t know the appropriate benchmark, have grown well that’s all I can say)
Able to find new avenues to grow: No (Have not found any meaningful new market, non-agri portfolio has grown slower than agri portfolio)
Treats minority shareholders in a fair manner: Yes (Reasonable dividend payout + management do not sugar coat things)
Sales growth guidance can be relied upon. Do not rely on margin guidance
Companies
Ticker
Projection date
Price
4 years fwd Price (FY25)
Price return %
Dividend yield %
Total returns %
Confidence
Business
Promoter
Financial proj.
Valuation proj.
Cyclical?
Sharda Cropchem Ltd.
nse:shardacrop
13.10.21
322.65
930.00
30.30%
1.55%
31.85%
Medium
Medium
High
Medium
Yes
Updated portfolio is below, cash remains high at 21%.
Hi Harsh, I guess I mentioned we have lots of overlaps in our portfolio - just a question would you consider replacing HDFC and HDFC AMC with Kotak Mahindra bank.
My bet essentially is on the underpenetrated financial services plus the optionality of their subsidiaries getting listed. Shared some of my thoughts here.
On comparing the ROA tree of Kotak and HDFC bank (standalone level excluding subsidiaries), I found that Kotak has more volatile and lower ROAs (along with higher GNPAs), implying that they are not at par with HDFC bank in terms of core lending operations. This is probably why they don’t lever up to HDFC bank’s level, hence delivering lower ROE. This is despite them having higher NIMs (especially in recent years), which also implies that their operating cost structure is inferior to that of HDFC bank.
COVID has provided a very good asset quality test and Kotak bank has again delivered much higher NPAs. Additionally, Kotak had to dilute for having sufficient buffer whereas HDFC bank didn’t require dilution and maintained asset quality through the crisis (+ higher growth). Dilution matters much more over the longer term, in terms of book value compounding per share. Overall, I don’t rate Kotak’s underwriting at the level of HDFC bank, which implies that I am not willing to pay a premium for Kotak bank.
As lending financials is a very opaque business, if I am unsure about the quality of lending I will want a very attractive price to cover my downside. As HDFC bank didn’t show asset quality problems, I am happy valuing them at 4x P/B (on core operations) but I won’t pay that multiple for Kotak.
Thanks for sharing detailed rationale for holding HDFC. Much helpful, especially on asset quality and dilution related aspects. I actually have all 3 banks HDFC + ICICI + Kotak but with higher allocation (picked when it was 1700 levels) to Kotak .
Agree there is a premium on Kotak but as I mentioned my play is not just standalone bank but on whole financial services package. Let’s see how it pans out.
As of today, I have increased my position size in Ajanta Pharma from 2% to 4%. This is because of their very robust Indian business performance and reasonable valuations. The African institutional operations have large uncertainty, however superior US strategy should be able to more than offset it. My projections remain the same as before.
This brings down cash to 19% and I am looking to deploy it soon. Updated portfolio is below
I have been able to find some opportunities to deploy cash (summary below).
Increased position size in Sharda Cropchem from 2% to 4%. Their recent growth has been really impressive, they are cheap and growing fast
Added Aegis Logistics (4% position size). Growth is coming back, though the Vopak deal was at lower valuation, it opens new opportunities in new chemicals. I will post more details in a subsequent post
Added Control Prints (2% position size). Niche business with reasonable growth, attractive economics
Added Shemaroo as a deep value bet (1% position size). Business is reviving and valuations are very cheap.
As a result, cash position has been reduced to 10%.
@harsh.beria93 Its good to see u have initiated position in aegis logistics . Last year in valuepickr many seniors were actively tracking this company and seperate threads were created on this and video presentations were there. Now it seems no body is interested and due to multiple headwinds, covid disruption , promotor demise , JV with vopak, market share decrease etc. 50% down from 52 week high just before JV with vopak announced . LPG future is still a question if we compared to LNG,CNG etc but company is still on track on their planned capex . Latest result is showing company is back on track and except haldia expansion plan company ( as per latest concall , haldia will be track on last quarter of FY23) is well on execution too. Waiting for ur view on this
Gas logistics + liquid + new business:
o Gas logistics volumes should grow from 3mn MT in FY20/21 to 7mn MT in FY25 and EBITDA of 1000/ton should make EBITDA ~ 700 cr.
o Liquid EBITDA should increase at 10% from 173 cr. in FY21 to 250 cr. in FY25
o New business: I am assuming they get 100 cr. EBITDA from newer ventures with Vopak
o EBITDA ~ 1050 cr., assume they get 60% share (Mumbai operation is completely theirs and has higher profitability), Aegis’ EBITDA share ~ 630 cr.
Gas distribution volumes should grow from 1.65 lakh MT in FY20 to 2.5 lakh MT in FY25 translating into EBITDA of 187.5 cr. (assuming EBITDA/ton of 7000 in-line with FY21 numbers)
Total EBITDA (Aegis’ share): 630 + 187.5 ~ 818 cr.
EV/EBITDA: 25x implies EV ~ 20’450 cr., assuming they have 2’000 cr. net cash on balance sheet (from sale to Vopak), Mcap ~ 22’450 cr. (share price: 640)
Business quality (medium)
Year
ROCE & ROE > 20%
Positive FCF
FY10
Yes
No
Total # years
12
FY11
No
No
# ROCE & ROE > 20%
3
FY12
No
No
# Positive FCF
5
FY13
No
Yes
FY14
No
No
SUM
8
FY15
Yes
Yes
AVERAGE
33.33%
FY16
Yes
Yes
HIGH BUSINESS QUALITY
No
FY17
No
No
FY18
No
No
FY19
No
Yes
FY20
No
No
FY21
No
Yes
Management quality (High)
Organic sales growth greater than category level growth: Yes (Have grown market share in gas business)
Able to find new avenues to grow: Yes (Built gas business from cash of liquid business, now venturing into other chemicals)
Treats minority shareholders in a fair manner: Yes (Very good dividend payout)
Negative points: Gave very large ESOP in FY19
Confidence in projection (Medium)
Business quality (high/medium/low): Medium (Gas business is very high ROCE, but liquid business is 12-18% ROCE)
Promoter quality (high/medium/low): High (Grown gas volumes faster than Indian imports + good dividend track record)
Financial projections (high/medium/low): Medium (Gas volume projection is on the bullish side, need to continuously track progress)
Valuation projections (high/medium/low): High (Should easily trade at 25+ EV/EBITDA, has also traded at >30x EV/EBITDA for prolonged time period)
Is it a cyclical business (Yes/No): No (Distribution business is non-cyclical, sourcing business is more cyclical in nature)
Monitorable:
The main story is growth in LPG volumes in distribution (from 3mn MT to 7mn MT). Monitor this
Joker in the pack: Auto and retail business. Keep monitoring volume of LPG there
As of today, I sold my stake in Jamna auto. I bought it in April 2021 as a replacement for IEX (which in my opinion was fairly valued at that time ). If I had held onto IEX, returns would have been higher as IEX has doubled whereas Jamna has gone up by ~70%.
Jamna is a play on MHCV revival. Though the CV cycle is still in early stage, stock prices have zoomed in anticipation. I have valued Jamna on a 10x EV/EBITDA multiple (on conservative side as CV downcycles can be bad and prolonged) giving me an exit price of ~150 by FY26. The incremental returns have fallen below 10% and I have exited accordingly. So my current CV cycle play is via Ashok Leyland and Atul auto. Cash is at 11% and detailed portfolio is below.
@harsh.beria93 Sir seeing your portfolio it seems that you are quite bullish on AMCs. Then, what do you think about CAMS instead of the AMCs as even when there is market share gain of one AMC over the other, it remains unaffected. In addition to that, they have are also becoming RTAs of PMSs, AIFs and NPS funds.
I had evaluated CAMS at their IPO time, the one thing which made me focus more on AMC companies was the fact that revenue growth of CAMS would always be much lower than AUM growth of the industry. At the time of CAMS IPO, management had guided future revenue growth of 12-13% assuming mutual fund AUM growth of 17-18%. Its probably a good time to evaluate their performance against listed AMC companies since 2018 (which was when growth in mutual fund AUM started slowing).
Since FY18, HDFC AMC has outperformed everyone with 23% CAGR growth vs 14% for Nippon and Aditya Birla and 11% for Cams.
So my initial hypothesis that AMC business is superior in terms of growth profile compared to CAMS has turned out be true. Both banking and non-banking AMC have outperfomed in terms of growth in profits, with the best performer being HDFC AMC. None of these businesses require much capital with great return profiles where a large part of profit is paid back as dividend.
If I had to assign valuations to these businesses, I would pay the highest valuation for HDFC AMC (or bank backed AMC like ICICI/Kotak/Axis) followed by non-bank backed AMC (Nippon/AdityaBirla/UTI) followed by a registrar like CAMS.
In terms of EV/EBIT or P/E, CAMS is garnering the highest valuation followed by HDFC followed by Aditya Birla/Nippon. This is incorrect in my assessment, lets see how future unfolds.
Thank you for the explanation sir. However, don’t you think that CAMS should get a slightly premium valuation as competition between the AMCs doesn’t affect it much.
Secondly, in the past 5 years, CAMS competitors have come down from three to one, whereas competitors of HDFC AMC have been continuously rising and now are increasing even faster. With the advent of these so-called new age AMCs like Navi, Zerodha, and Groww don’t you think that HDFC AMC is going to have a tough time? It is even facing pressure from the likes of other bank-backed AMCs like ICICI and SBI who have aggressively gained market share at their expense.
Lastly, just a query do you know the reason why HDFC AMC’s net profit hasn’t risen much in the past 5 quarters?
). If I had held onto IEX, returns would have been higher as IEX has doubled whereas Jamna has gone up by ~70%.
