This case study will be divided into three parts:
1) December 2011
2) December 2011- May 2013
3) May 2013 – March 2020
Part-1
Screening: Let’s assume the date today is 26th December, 2011. We come across a company named Acrysil which has increased its sales more than 4 times over the past 5 years, so we think of investigating the same.
Business Internal
Acrysil is mainly in the business of making Quartz Kitchen sinks (made using Quartz second hardest material after diamond) using patented technology from German manufacturer Schock. It is the only manufacturer in Asia and there are only three more in the world. These are mainly premium kitchen sinks. The company started as joint venture in 1987.
Sales:While the company majorly into exports, from 2003 it has changed its focus on domestic market and has grown sales from 1 crore to 8 crores till now.
Let’s look at the financials to understand the business of the company.
The income statement of the company clearly represents that of a front in line value chain product, with majority proportion on other cost, typical of a consumer focused company.
Over the past an interesting thing is visible, there was almost no increase in the sales of the company from 2000-2003, However the company has been able to maintain almost similar margins.
The net realisation of the company from sinks increased particularly over those 3 years (2000-2003) points to some kind of advantage. Though the small case may counter that. This we will study in more depth later.
Lets have a look at the Balance sheet of the company.
The high fixed asset turnover further confirms the consumer oriented nature of the company. Clearly the company has 2-3 months of working capital that needs to be blocked, in addition to sales.
Normally in consumer facing companies, debtors turnover is among the key variables. Similar seems to be the case here, As from 1997-2006 the company had 6 months of Debtors payment cycle, which has reduced to 3-4 months in 2011 along with increase in sales. Once or twice credit stuffing is fine, however increasingly doing it can lead to major problems.
Let’s look at the external structure of the industry and the company.
Business External
Currently, there seems to be no competitors to Acrysil in India. However, if we talk in terms of the export market there are 3 other manufacturers. The industry in very young stage as of now.
Competitiveness
Scarcity as a principle increases the value of the company, so if the company has certain competitive advantage (Moat) it is useful. Currently, the company seems to have some kind of pricing power, as can be seen in net realisations from 2000-2003 period . In fact, from 2000 to 2009 the company has increased its net realisation from Rs 3000 to 3900. This is with increase in volumes.
The source of the moat is technical tie up with german company Schock. Generally, moat dependents on single technologies are not that durable however, time will tell us what does the management do with the same.
Fraud
This is no way to undermine the hardwork of promoters on the ground. It is just a basic risk management tool for us.
There seems to be no signs of the same.
Growth
As the GDP per capita of the country is expected to double over the next 10 years, the share of consumption in the country is expected to rise. As economies grow, the pie of upper middle class is expected to grow in the country.
The price of the sinks vary between Rs 5000-15000 per sink. Even if we take 1 million (Arbitrary assumption the number is way higher earning between 2-10 lakhs per annum) middle class households , the market size is around 500-1000 crore. Both of these variables are expected to expand over time.
Let’s look whether the company can ride this kind of trend.
Acrysil seems to have the capacity to ride this trend. The growth in Indian segment of company from 1 crore in 2003 to 8 crore in 2011, further confirms this trend.
The company’s plan includes mainly geographic diversification in India and abroad.
Management
As of now no comments can be made in management in regard to their transparency, efficiency and capital allocation.
These opinions may change with time
Risk
1) The company has only a single plant
2) Dependency on German Company – Very critical
3) Now before expanding capacity beyond a level, there needs to be certain volume growth else the balance sheet could impair
Valuation
Currently the Mr. Market is valuing the company for around 45-55 crores. The P/E ratio of the company is around 8-10, the current 10 year interest rates around 9%. Now if the company grows its earnings successfully, then there are high chances of rerating.
Conclusion
As on 26th December 2011, We have invested some portion (4%) of our portfolio. Once the fundamentals slightly confirms this we may increase our allocation over time. You may differ on this and we would love to know why?
Source: in.tradingview.com
Key Variables to Track:
1) Sales per Outlet, Number of Outlets
2) Sales Volume + Net realisation per piece
3) Marginal ROCE
Review: We will review it almost every year, keeping in mind the 3-4 year view perspective.
Purpose
The purpose of these case studies is to practice such cases and help all of us develop patterns to take similar decisions in future and avoid mistakes of both omission/comission. Its like practice before the main match. We may have made some mistakes or you may not agree with us. However, we would love to know why you think so or what you may have done differently? So that we may all learn together.
You may visit screener.in, main annual reports and in.tradingview.com for prices. These resources are really helpful.
Before Going further it would be better if you Analyse the case or do the valuation or allocation according to your own Method. That way it may help you to do better with the case further and sharpen your mind for future.
Pick Parts of the case study and use it as it may be helpful to you.
May we all learn and progress together.
What Happened?
We will cover the next phase, from 2011-2013 in part 2. (Please click on 2 on the bottom of the page)
Argha Investment Advisers 