The harsh portfolio!

SGRL coming in with blockbuster results.

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Hey @harsh.beria93 , For PI Industries do you think the annoucement of capacity from Chinese companies around Pyroxasulfone becomes a risk for PI ? Your inputs would be helpful as you have been tracking this one. Asking coz Pyroxasulfone fortunately/unfortunately is one of the key molecules for PI + the capacity that chinese players announced is strangely above world market demand.

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Hi Harsh, I understand you are into research related to climate science. Also you have an excellent and unique investor mindset, thus would like pick your brain on below thought I’ve been having when investing stocks related to agri sector.
With the acceleration in climate change effects, agriculture is going to become much more complex. I anticipate major disruptions for economy like India where the farm ownership is very fragmented. But at the same time I have feeling that there is a big opportunity for innovative companies that can work closely with the farmers and can adapt their products quickly. How do you see this panning out over next few years and how it may impact stocks serving this sector like Fertilizers, pesticides etc?

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Massive and abrupt climate change which is evident in India and across the world can have both positive and negative impact on companies producing agricultural products.

Some of the earlier assumptions while investing in such companies from long term perspective may need to be re-looked. Erratic monsoons may have impact on their earnings in earlier high earning seasons. Also these companies may have to invest more in R&D to produce new products. Companies having exposure to IoT may able to work closely with farmers and understand their needs better.

I believe this could be an area of good research for investors as well.

I may be wrong in my analysis as have no expertise in this domain.

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@harsh.beria93 can you please share portfolio updates.

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@harsh.beria93 Hello sir , may you please share valuation framework behind eureka forbes…

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Hi @harsh.beria93 Do you still hold Chamanlal?? Got through my screener. Hasn’t run a lot. Showing decent return ratios along with acceptable growth. Wanted to know your rationale?

@harsh.beria93 hello sir , in past you made cash position arround 25% in expensive market.
So currently how much cash you hold in your portfolio? Thanks in advance

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In my understanding, PI takes a portfolio approach to managing molecule concentration, with different molecules dominating revenues at various times. While competition for pyroxasulfone is imminent, PI has successfully navigated similar challenges in the past. Looking beyond pyro and agrochemicals, PI is now expanding into electronic chemicals and pharmaceuticals, which offer significantly larger addressable markets. I am more excited for PI’s journey now as they replicate their successful strategy in industries with far greater prospects than agrochemicals.

I am not good at understanding these macro shifts, I am more detail oriented and am generally looking for bets where I have better medium term visibility.

I bought Eureka because they are leaders in water purifier market which offers very higher gross margins. For e.g., most consumer durable cos make 30-35% GMs whereas water purifier cos make 50-60% GMs. This implies a possibility of higher operating and PAT margins at optimum utilization. Also, Eureka has been reporting double digit volume growth in last few quarters, when most consumer durable cos are struggling to grow. I feel new management is doing a decent job and there is a lot of value that they can create. Some data excerpts below on Kent’s financials (Eureka’s main peer) to show that potential PAT margins can exceed 15% in good times (super rare in consumer durable space).

Yes, I still hold it and am excited by how management has opened up to investors and improved capital allocation (increased dividend payout to 10-15% + buyback). I feel with scale, more investors will see how well Chamanlal is managed. They make the highest ROICs, despite operating at lower margins than KRBL/LT foods. Managing inventories is the key in this business and they have done that very well.

Unfortunately, I have not been able to create much cash as I have found opportunities to deploy capital regularly. I have been selling a number of stocks which have done well (e.g. Godfrey, Nesco, HDFC AMC, Kaveri, Time techno, Ajanta, Amara, etc.) and reinvested in some new bets (e.g. Ambika cotton, Venky’s, AGI Infra, Gokul agro, Bharat rasayan, etc.). As a result, I have been unable to generate cash. I am also worried that in the next downturn, portfolio might see sharp drawdowns given how rewarding this upcycle has been. Lets see what future holds.

I cannot guarantee when I will be able to write the theses for some new bets, but I try and contribute to the respective thread (wherever possible).

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What’s the reason to exit AMARA and HDFCAMC ?

  • Amara Raja - mostly the earnings and thesis will slowly play out as they unfold the new 2.0 Amara energy thingy they decided upon this year. Warrants a re look as the stock px moved fast. Personally, i am also on the sidelines after being in the grind since 450. Technically i would have still held to it if other options were not available in the watchlist.
  • Hdfc AMC should still do well. And i don’t have any good reasons for someone to exit other than opportunity cost. Absl Amc Hdfc Amc these 2 are my watchlists for sometime now.

I believe it’s partial profit booking rather full exit …

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Hi Harsh,

What’s the investment hypothesis for Ambika Cotton?

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@harsh.beria93 @rajanprabu Could you please guide me how I can create my own Alerts of EV/Sales and Price to Book Multiples ? Screener.in Charts can be used for setting only PE and Price based Alerts. Thank you!!

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Eureka

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As a customer of EF, for last 20 years, I can tell, the current management lost its loyal customer base significantly. Mkt knows it, that’s why despite all the focus or words of Digital Transformation, Top line not moving, it doesn’t have any differentiated product anymore. Also many customers are no longer taking Annual Contract from EF.

The current management is needed to focus on how to retain existing customer base 1st, which is fast dwindling with poor customer service and timely attendance

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Not exited, reduced position size to fund other opportunities.

I am thinking as a mean reversion bet. Other yarn/spinning cos have reported decent nos in recent quarters because of lower raw material prices and better finished material prices. While share prices of other yarn cos picked up, same was not the case with Ambika. Plus, Ambika’s dividend yield is quite decent. In their recent AGM, they mentioned about outsourcing most yarn manufacturing and improving their free cashflows. I feel its a lower risk bet.

AGI Infra
I have recently been working on AGI Infra and have been very impressed with their growth, while maintaining high margins and low debt (see their growth charts below). Its not very common for real estate companies to fund their growth via internal accruals. I am sharing some of my work on AGI as we dont have a dedicated VP thread.

History: Incorporated in 2005 as G. I. Builders Private Limited, jointly promoted by Mr. Sukhdev Singh Khinda and Mrs. Salwinderjit Kaur, providing “premium housing at fair prices”. The name was changed to AGI Infra Limited in 2011

AR24 notes

Financials

  • Sales grew by 22%, PAT by 8%, and networth by 30%
  • Revenue recognized on delivery of flat
  • Advances (Amount received against booking of flats/shops/plots): 685.46 cr. (vs 512.14 cr. in FY23)
  • Inventories: 660.42 cr. (vs 522.59 cr. in FY23)
  • Employee expenses: 34.6 cr. (vs 26.62 cr. in FY23) – 1.2 cr. director remuneration
  • Finance cost: 7.28 cr. (vs 4.37 cr. in FY23)
  • Depreciation: 11.64 cr. (vs 5.86 cr. in FY23)
  • Capex: 33.88 cr. (vs 38.73 cr. in FY23) – 21 cr. plant + 10.85 cr. (vehicles)
  • Investment properties – seems to have bought land or invested in multiple cities (Chandigarh, Ludhiana, New Chandigarh)

Completed projects (4,327 units, unsold: 249 units)
image

Under construction projects (4,333 units, unsold: 968, unlaunched: 2,022)

Miscellaneous

  • Audit fee: 6.1 lakhs (vs 5.6 lakhs in FY23)
  • Expanding to other cities in Punjab: Ludhiana, Mohali, New Chandigarh
  • Operates an outsourcing model by appointing architects/contractors for scalability and quality construction
  • Managerial remuneration: 1.2 cr. (same as FY23)
  • CFO is paid very little (3.84 lakhs)
  • Median salary increase: 9%, avg. increase: 17% for employees. No employee drew 1 cr.+ salary
  • Employees: 283
  • Invested heavily to shift to MIVAN construction and most of their buildings are being built with this technology having all concrete structure
  • Shareholding: 2,814
  • Related parties: AGI Hospitalities Private Limited, M/s Aay Jay Builders, Svendus Capital Limited, AGI Infra Foundation, AGI Educational Society, Avendus Corporate Inc.
  • Purchased property worth 5.25 cr. from AGI Hospitalities Private Limited

AGM notes
Miscellaneous

  • Have seen 15-20% volume and 10-12% price increase in last few years
  • Targeting 20%+ sales growth in FY25, in full expansion mode in Punjab
  • 3-4 years for construction cycle. They have enough inventory in existing projects which enables them to maintain consistent sales
  • Launched 3000 flats (more of higher value) to be delivered in 3-5 years
  • 9 projects ongoing – targeting to finish in next 3 years
  • Jalandhar Heights III will be delivered in 3 months, towers were constructed only in 15 months
  • 1084 flats – AGI Smart home – construction ongoing
  • 2 – 5 bedrooms (starting from affordable segment)
  • In-house construction
  • Introduced MIVAN construction methodology to raise new towers (uses aluminum foamwork) – improve construction quality and reduce construction time by half
  • Also going for precast technology
  • Build buildings for Seismic zone 5 (although their location is zone 4). They incur 15% higher costs and charge a little premium for this
  • Marginal increase in debt (124 cr.) due to their expansion in Punjab. However, debt is very low (<3 lakh debt per unit)
  • Prefer own land, only 1 JV

Upcoming: 7 projects

  • Extension of Smart Home II – 325 homes
  • Group housing project Mohali – premium location (Sector 69)
  • Group housing in New Chandigarh
  • Utopia in New Chandigarh – hoping to start construction in 3 months
  • GT road Jalandhar – land is being acquired – mega project
  • Group housing GT road Jalandhar – mid segment flats – will go for approval shortly
  • Ludhiana – mega size project – land is being acquired
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What’s your investment thesis on venkys their trade receivables are increasing

Its been a few years since I am invested in RKEC projects; as there are no specific threads on RKEC, I am adding my notes from their last few years of operations.

Unexecuted Order book

  • Jan 2017: 357 cr.
  • Jun 2017: 444 cr.
  • Aug 2020: 823 cr.
  • Sept 2021: 867 cr.
  • March 2023: 1158 cr.
  • May 2024: 915 cr.

Problems faced since FY20:

  • Abrupt termination of a contract after 85% completion in Purvanchal project without any justification 13.04.2018; political change; 38k power connections to BPL customers; (80 cr.) negative cashflow; Went through legal and arbitration; contract validated and work completed; only 36 lakh remaining amount to be received. Bank of Baroda panicked due to large negative cashflows, added 43 cr. of negative cashflow by increasing 10% margin money; reduced overdraft limit (50 to 37.5 cr.). Consistently been convincing BOB and convinced them in 2022 which reduced margin money; took cash credit from Bandhan bank. Time lost is forever
  • Accident in Farakka project leading to loss of 2 lives: was running ahead of schedule, it wasn’t fault of RKEC, reason is yet to be found. This accident was followed by national lockdown due to covid. Project has restarted in FY24. 2.5 km bridge (4 lane bridge), one bridge by June 2024, remainder by Dec 2024 and complete project by March 2025
  • Ukraine war: steel price increased, took a 10 cr. hit on one project, in another project it was neutralized
  • 200 cr. negative cashflows since (80 cr. Purvanchal fully recovered + 43 cr. BOB recovered + 20 cr. tax issues not recoverable + 30 cr. Farakka project not recoverable + 20 cr. COVID not recoverable; steel price hike, etc.)

AGM23 notes:

  • Took more banking relationships (Bandhan bank, ICICI bank, 80 cr. from another national bank, have approached BOB to reduce margin money and increase in cash credit limit)
  • 1800 cr. bid – final decision awaited (200-500 cr. size projects), 1500 cr. bids under submission, will have 1000-1200 cr. order book at end of FY24 (achieved 915 cr. in May 2024). Want to have order book of 3x of turnover
  • Don’t undertake distress bidding which is being seen in NHAI projects currently
  • FY24 margins will see 1% improvement (actually saw 3% drop)
  • Tax issues have been resolved and tax liabilities has been provided in books
  • They had faced delays in payment of taxes, EPFO. 90% out from this difficult situation and will get out of high cost of loans by H2FY24. Still have little bit of liquidity issues. Focus is on stabilizing co in next 2 years and then go for expansion
  • Contingent liability is down to 9 cr. as of today, confident to remove remainder by FY25 (accomplished)
  • Have resolved issues that had impacted them and expect considerable growth in next 2-3 years
  • 5 projects of 300 cr. completed in FY23 (jetty in Haldia port, freshwater intake for Adani Power in Jharkhand, cruise terminal in Vizag, and 2 other projects in Vizag). No negative remarks in these orders
  • 42 cr. arbitration orders won – 16 cr. realized so far, confident to realize remainder amount
  • 30 cr. additional credit limit with ICICI bank (80 cr. + 47 cr.). Reduction in margin money by 5%, working capital has been brought down significantly
  • 17.6 cr. fixed assets added
  • 400 cr. sales in FY24 and better in FY25
  • Monthly EMIs < 1cr. in all term loans combined

AGM24 notes

  • Seeing growth opportunities in logistics, green energy sectors
  • Few more arbitration and claim cases going, this has become routine part of their income stream. 1 arbitration + 1 claim ~ 30 cr. currently outstanding.
  • No unresolved issues in Farakka project, have been given extension until 28th Feb 2025. Positive to finish by March 2025. 83% progress currently. Can get additional claim from insurance company for Farakka site
  • 400-450 cr. target revenues FY25 (Q1 was good, Q2 may not be good because of monsoon)
  • Unexecuted order book in March 2024: 900 cr. (407 cr. Andaman + 100 cr. Andaman + 150 cr. Farakka + 180 cr. Mirawal). These values will increase because of additional works in this projects + inflation (~1000 cr.)
  • 600 cr. expected order wins by December 2024 (won 186 cr. until Oct 2024)
  • Want to increase unexecuted order book to 2000 cr. order book by March/June 2025 (want to maintain orderbook at 3x of sales)
  • Receivables issue: Project in Uppada (near Kakinada) – government funded project taken from another corporate. Exited (4 cr. pending). Other receivables are in normal course of business and fully realizable
  • Haven’t paid interest to promoters for borrowings from them, will pay once their liquidity is sufficient
  • BOB (main banker) – 10.65% on CC (made proposal to reduce it by 1%); ICICI – 9.5%, Bandhan – 12% (small loans availed during covid)
  • Credit limit: BBB/Stable (with positive ) for 390 cr. Using 295 cr. currently. Got new sanctions of 35 cr. from CSB + 80 cr. from Indian bank, positive of getting these sanctions by end of this year. Can reach 600 cr. sales with this (with 400 cr. debt). Demand for bank guarantees have increased
  • Will be looking at financial restructuring (including raising money)
  • 14-15% PBIT margins, arbitration income was offset by higher one-time expenses (e.g. taxes)
  • Gross block increased to 101 cr. (from 51 cr. in FY20). Has also made them more cash strained, bought 2nd half stuff as well for commercial viability

10.03.2023 Infomerics

  • Assigned BBB/stable for long term bank facilities (310.86 cr.)
  • Activities are managed by Garapati Radhakrishna, Ms. Garapati Parvathi Devi and Garapati Ram Mohan. They are assisted by a team of professionals
  • Takes up short to medium term projects (18-36 months) and handle limited number of projects at a time to ensure timely completion
  • Unexecuted order book of 1157.6 cr. in March 2023 (to be executed in 2-3 years)
  • The average utilisation of fund based and non-fund based working capital limits of the company stood high around ~84.49% and ~85% during last 12 months ending 31st January 2023
  • Raw material fluctuation risk is mitigated to some extent with presence of price escalation clause
  • Projected to generate cash accruals of Rs. 14.48 crore in FY23

12.05.2023 Infomerics

  • Proposed Long Term bank facilities of 70 cr. (in addition to existing 310.85 cr. existing bank facilities)
  • Unexecuted order book of 1015.09 cr. which is to be executed within 2-3 years
  • The average utilisation of fund based and non-fund based working capital limits of the company stood high around ~83.69% and ~84.62% during last 12 months ending 30th April 2023

24.06.2024 Infomerics

  • Rating outlook upgraded to BBB/Positive (from Stable). Additional long term bank facilities proposed for 100 cr.
  • Unexecuted order book of 915.14 cr. in May 2024 (to be executed in 2-3 years)
  • The average utilisation of fund based and non-fund based working capital limits of the company stood high around ~81.53% and ~78.31% during last 12 months ending 31st May 2024
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Eureka Forbes

  • Volume growth & Strong sales growth for their Product business - High teens growth

  • Water purifiers has picked up for Eureka. Well placed wrt Price points for various variants.

  • Innovations via new management. Has doubled R&D - 2x life is gaining traction - market share gains too. Very innovative. Steel tanks vs legacy plastic storage tanks in water filter.

  • A&P spends grew FY24. Operating leverage as a key source.

  • AMCs ownership vs legacy service technicians taking ownerships.

  • Business operates with a -ve working capital. (Cash and carry model largely)

(Eureka has lost market share in the past. Management has turned around some of the lost grounds. Otherwise eureka has been slow to act in the past)

  • health conscious Consumption as a theme.

  • Many utility enablers will help the water purifier category.

  • Penetration can double in next 5Y

  • Clean Water as a theme given the ambition to have clean water at home and ppl picking up new variants for newer homes.

  • Newer homes will like the new innovations by eureka (Slim tech, Insta Blaze for Green tea lovers, under the counter offering with wheels)

  • Competition was very active during the last 2 decades Kent LG Dyson
    caused havoc to eureka’s market share.

  • Do Note Aquaguard has a top-of-mind awareness.

Other categories

  • Robotics : can chart same trajectory as Washing machines. Eureka is market leader in robotics. 2x’ed revenues. BIS implementation is about 6 months.
  • Air purifiers : Won’t say much coz i just saw the air quality first hand entering delhi this morning.
  • Vacuum cleaners : need for VCs is slowly but surely changing. Augers well with new office spaces opening up too as they also use VCs.
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