This part will be divided between
4) 2020 and Beyond
Let us assume that today is 30th September, 2016 and we evaluate the Acrysil’s performance over past three years.
Over this time period, the company has almost doubled its sales from 80 crores to 174 crores, while maintaining above 20% ROCE levels.
It has achieved this growth through both increasing product profile and increasing distribution within and as well as outside India.
Distribution & Product Strategy: Slowly the company is spreading its distribution network from north to south India. It started with north and slowly expanded to south. Now the company has more than 1600 dealers across the country. In the export market (Which we think is more competitive) the company has acquired a company in UK for distribution.
As expected, by increasing the product profile the company has been able to command higher pricing power indicated by increasing sales price per piece.
Expansion: Almost entire capital was reinvested in the same business. In terms of financing, the company raised first warrants in 2013-2014 period, which were at almost the share price. Majority of the capital was initially financed through debt. However, in 2016 the company diluted equity by offering preference shares @ Rs 570.
The company has expanded capacity and the increase in advertisement expenditure further indicating the intent of management for growth. The company has been comfortably able to increase prices over time.
Further more debt in the balance sheet may be risky. The chances of more debt seem less considering the capital raising done by the management.
While the earnings of the company has almost doubled, the price has almost risen by 5 times resulting in PE expansion from 10 to around 30 levels. The 10 year government bond yield has fallen from 9.0% to around 7.5% levels, which has further contributed to this increase in PE.
At this stage of time we will do nothing to the allocation done in the company. You may have a different opinion and we would love to know what you would have done and why?
Let us assume today is 4th October, 2018. We plan to evaluate the results of Acrysil over the past two years.
* In order to calculate price of sinks deliberately entire sales have been considered as its trend and direction is more important rather than the number
Over the past two years the sales of the company have grown from 174 crore to around 196 crore. There is a slowdown in the growth of the company. While the ROCE has also fallen from 20% levels to around 12-14% levels.
Lets investigate the growth first.
Despite depressed growth levels, the company is expanding using quartz to introduce new products and expanding in new markets. Both these actions are slowly demonstrating the pricing power of the company (as we had expected before). Further there has been an increase in number of distributors of the company and the sales per dealer too is intact and is in fact increasing.
The reason for depressed ROCE can be either due to expansion or due to slowdown in the business? However, despite slowdown the company is expanding as evidenced by increase in fixed assets.
2018 Annual Report
Overall the company seems to be going in the right direction. Still the sales is 200 crore. It seems to have entered an investment phase. The sales per dealer, Volume and Price per sink will be critical for future.
Disconfirming evidence: The increase in raw material prices beyond the companies capacity over the long term may become worrisome. As these are showing diminishing pricing power trends, contrary to what we had expected. Normally, the company takes around 3 years to show pricing power.
An interesting feature that can be seen in the income statement is the effect of operating leverage kicking in as the company is scaling to around 200 crore levels.
The EPS of the company has grown by 25%, the price has almost fallen by 60%, resulting in a PE contraction from 30 levels to around 16.
At this stage, we will do nothing as the sales price per sink and sales per dealer are intact. If there will be further growth we will add slightly more.
What you would do? Even if you think differently we would love to know why?
(Though easy in theory falls like this are troublesome when really invested, however cases like these help to sharpen the mind to go through these falls as and when they arise).
Let’s assume today is 6th September, 2020. We plan to review our investment made in Acrysil over the past two years.
The past two years the ROCE of company has improved from 12% to 18% levels and the sales have grown from Rs 200 crore to Rs 276 crores. Lets focus on the ROCE first.
Economies of scale (manufacturing cost) and operating leverage (advertisement cost) has resulted in improved margins back to previous levels.
While on the growth side, The volume of sales of quartz sinks have increased, even the company is getting pricing power through introducing regular new products into new markets using Quartz technology. The business in the UK market too is growing. The manufacturing capacity has improved from 400,000 sinks to 500,000 sinks per annum.
Capital Finance: The promoters raised warrants @ Rs 550 per share to fund the above growth. Keeping the Debt/Equity ratios at reasonable levels.
The company is expanding into kitchen appliances. Currently Quartz sinks sales contribute 70% of the sales, however depleting quartz tech products may signify poor moats, so this is a problem to be checked in future.
Now instead of investing in the Quartz linked business (Moat), the company makes further investments in the kitchen appliances business, our thesis needs to be rechecked.
Quartz sink business in the domestic market has stagnated, to be checked if further stagnates, growth may be a problem.
The EPS of the company has doubled while the Price has remained same resulting in PE contraction from 20 to around 14 levels.
At this point of time we will slightly increase our position in the company. You may have a different opinion and we would love to know why so?
Though its easier said having more than 50% fall in price over 5 years and still holding while the share is stuck in its range, is a tough call in reality. However, cases like these help us to strengthen the pattern recognition in our mind.
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.
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.