Ok, I have some time at hand and this company interested me, so I read further and my summary is purely based on:
a) Posts on this forum
b) Annual Report FY 2015
c) Internet search
d) Entry Level scuttlebutt
Disclosure
My view is biased as I intend to buy if my finances permit in very near future. I do not want to disturb the current allocation weightage in my portfolio as it’s a thought out re-allocation (as stated in the below link). I’m not a research analyst, do your due diligence. Analysing companies is my hobby.
For Points
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Fake products is a nice problem to have actually (it’s a compliment!) and more so for a small company as a) Only stong products/brands will be faked b) With education the revenue is going to get a boost and disproportional profits if successful.
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Ambition 1: Foray into states like Karnataka, Maharastra, Chattisgarh, West Bengal.
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Ambition 2: Foray into North India (as Bhavani Bhee?).
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Ambition 3: Brand extension of Durga into Curd and Paneer.
(all related diversification only, not unrelated. In fact, Ghee, Paneer and Curd are the best revenue streams for a company that has milk/cream as raw material.)
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Capacity expansion: New production facility at Odisha (current Guntur utilization as per my rough calculations is 72% - 65 crore/ 90 crore. 65 crore is FY 15 revenue and Total Capacity = (1500000 Kgs * 600 INR per kg). Not sure how the capex for this will be done and how much. Looks like mix of debt and internal accrual as company passed a resolution in FY 15 AGM to borrow 50 crore.
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Advertisements released around 2013 with Telugu film actress and the other ladies in the ad may be from Odisha. Theme of the ad looks like two fold, target the fake product (the protagonist says look at logo and hologram before buying and then the usual promotion of brand).
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I did not realize/bothered so far BUT the brand pull of Durga Ghee is astonishing. Kudos to @chaitu @Chaitu_1614. I have enquired local retailer and I have asked the ladies in my house to ask neighbors which brand Ghee to buy - unanimous choice is Durga. (I have recently moved to this new home, so this trick worked. Of course, we cannot base the thesis on this alone as this is just an opition of minor fraction, nevertheless provides some clue or direction. Also, we don’t buy Ghee as my mother makes it at home with Organic milk (is this a threat?). My thought process here is, with nuclear family structure gaining ground, the ladies may not find time to prepare ghee at home which is a 1 day process end to end and added to it Ghee has a longer shelf life naturally too, so buying packaged product is not an issue.
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Promoter quality: Though ‘looks’ like honest as per article shared earlier, I’m not sure of management quality yet as they have not been tested I believe. At the same time, there are no bad remarks on internet. I will believe them.
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Prima facie the metrics look good for FY 15 and started paying dividend regularly. Past numbers, I will prefer to overlook as there is no fraud as such. For such small companies, you cannot have everything in a platter. If the RoE is already above 20, you would not have this company at such valuations available now. It’s the trajectory of RoE/RoCE from now that’s important. If the promoter is shareholder friendly and willing to learn, these things will sort out as and when the promoters realise that their company is getting recognised in the market, so they will stop doing funny things.
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The products like Ghee, Curd, Paneer are ever green. When I was abroad, the people there used to buy the curd bottles as if there is no tomorrow (Nestle, some Swiss brands, some local brands as well) as the economy is based on both male and female working. Again if Durga is sucessful in these segments and attains some scale, the next challenge is to grow with MNC competitors.
Yet to get convinced/threats
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New market penetration and Competition - not easy I believe as Ghee is a localised market and not sure how strong are the local players in these respective states. But at these market cap, any extra revenue, I will lap it up as the market cap will grow to a respectable number. Market will also five good PE if there is a sustained minimum revenue of 100 crore reached at least.
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Management quality, execution abilities at larger scale.
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Some inter party transactions (loan, investments in a pharma company) - though not huge amounts. I would prefer if they call back these loans and use them for this company’s growth.
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The website is NOT informative, that’s a plus as well as the company is not well researched yet.
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Any sudden raw material price increases or shortages. I believe they forged some long term contracts with Heritage etc. to insulate themselves from price. If executed properly, this is a nice move.
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Corporate guarantees as reported in the annual report FY15. It’s a red flag for me. The quantum is also not small for the size of operations. However, as the company gets discovered, the management should, hopefully, realise the things that will impact their market cap.
CONCLUSION
Even if company does half of what it wants to do and grow the current revenue at at least market growth of 13-20% (as per @RajeevJ post above) , the present valuations look cheap in the hindsight. I would give the company 2 years to materialize the above said things. Merely an increase in raw material should not be a reason to sell if company comes up with ideas to reduce such impact. If the RoE sustains above 25% with low/no debt and pays dividend and the story goes as per above, I see no reason why this will not get are-rated PE equivalent to FMCG sector.
In the short term, the decrease in milk prices by about 8%-10% should give the needed fillip to the bottom line. If revenue too grows at 30% plus, then this year should be a better year for company as well as shareholders. Valuations are still inexpensive IF we see an EPS of around 4-5 for FY16.