Thursday, October 24, 2013

Acrysil got noticed by HDFC

I am truly flattered. Some of the text from my previous post on Acrysil has been verbatim quoted by HDFC Securities in their research report and the report borrows heavily from my article's contents.Notice, for example,the section on Decent margins and return ratios and compare it Point No.1 in my post. Overall, a good report. The stock price has meanwhile moved from123 then to 152 now. Hopefully, it will see many such highs backed by strong performance from the Company.

Saturday, September 14, 2013

Why is Acrysil an Excellent Investment: Qualitative reasons

This is my take on Acrysil, a one of its kind company in India, in response to a discussion with a fellow value investor on growth potential for this company:

The promoters have allotted themselves warrants at super cheap valuations(although those were at market prices but discriminatory). They have hired the chairman as a consultant at steep salary, probably justified.Another conflict of interest is that promoters have invested in the company's new steel products subsidiary at unspecified valuation. The main risk for micro cap companies such as this is corporate governance. This is mitigated to an extent by their German partner Schock & Gmbh hodling about 10% equity.

  1. They are the only company in Asia producing these sinks and only 1 among 5 globally at Indian costs. Check prices at, their prices are most competitive, quality probably is not.Now, one cannot really get costs lower than Bhavnagar.One can be concerned about recent margin decline, but on check their cost composition, one reason for declining margins can be inventory buildup and operational cost increase due to new products being introduced and larger scale of operations.Couple that with economic slowdown which is more pronounced in the real estate sector.Given all this, performance is commendable.Add to that recent rupee depreciation. That will take care of the margins.
  2. Instead of directly investing in new products, they are first doing marketing of these products and will probably later start manufacturing.There is a lot of competition but where? In Import-trading-marketing or manufacturing?Where is the meat? How many of these competitors have attained manufacturing excellence? Even TTK Prestige is selling Chinese wares with quality complaints. Hawkins has not moved beyond Cookers and the market is immense.Why would an immensely successful paints company like Asian paints enter this segment.
  3. They are still a small company, so they cannot probably address mass market right now. Targeting niche luxury segment might help them build capital and later move into mass market.
  4. Notice the mention of investing in design and aesthetics in their latest annual report. These are lifestyle products. How many companies in India invest in this.Godrej comes to mind and probably Asian paints next. But they are big. That is both an advantage and a disadvantage.With their scale, they are bound to target only mass market.
  5. The owner managers are passionate about what they are doing and taking it to the next level. This guy Chirag Parekh has promoted a Polo team in  Bhavnagar. Some people at TED thought that it must be the trait of a lazy and laid back person.What i see is a person with sportsman spirit intent on building something glorious
  6. Kitchen appliance business is hugely fragmented in India. One of the pet themes of Sameer Arora is shift of business growth from unorganized to organized and government to private. I would add from locally competitive to globally competitive to that.This is an example of that.
  7. Notice that they have tied up with some other German and Swiss companies for new products.They are selling to some big retail chains in USA and Europe. This will assure quality and revenues.
  8. Potential for growth: This is just a small company ~50crore while sector leader is about ~4000 crore market cap. The sector itself is growing. Despite the clutter, there is no brand recall except in cookers. Sky is the limit except that management will have to prove itself beyond a certain size.
  9. Competition: It does not exist. Even though there are a large number of Indian and multi national companies operating in this space, there are no established brands in these products: Kitchen sinks, Chimneys, Vents, Hobs & Cooktops and Food waste dispensers; maybe Faucets and Oven yes. Most of these lifestyle products are imported from China and relabeled by local companies as 'brands'. Building scale, distinctiveness and cost competitiveness in these high cost niche products will be even more difficult for companies whose main focus is marketing and occupying consumer mind-space.

Here is how the competition looks like:
TTK Prestige: more than half of their sales comprise of traded goods.More than half of these are traded. Of total sales, about 20% are imported.Of its total own sales, Kitchen electrical appliances consist of Rs 72 crore and gas stove Rs 2.6 crore, rest is Cookers and cookware.Conclusion, sector leader is not a competitor in Acrysil's  product space.
Hawkins: non cooker and non cookware sales are Rs 15 crore out of total sales of Rs 450 crore.
Bajaj Electricals: Kitchen appliances clock in Rs 500 crore out of a total revenue of 3500 crore. Of the total sales, Rs 2500 crore is traded goods.Consumer durables accounted for sales of about 1800 crores and profit of Rs 170 crores. Of this, 1300 crores are traded goods.
Havells: Primarily focused on electricals.Its consumer durable appliances business sells about Rs 540 crores. This consists of a wide product variety and the traded part of this comprises about 200 crores.

Besides the above, there are some small companies owned by Private equity or single product companies like Sunflame. Reliance capital invested in Gandhimati appliance sometime back.Orient and Khaitan have also started following the same formula. There are some MNCs who are currently importing products and selling under their own brand. They eventually hope to acquire some scale and start their own manufacturing facilities here.Buoyed by the high RoE in the sector, successful companies from other sectors like Asian paints are also entering the fray.Bottomline is, there is huge scope for the bottomline of specialist companies like Acrysil.

Acrysil was an auto parts company and started the kitchen sink business in last economic downturn around 2002-03.This is all what they are known for today. Performance so far is commendable. Let's see what's in store now.The species that survives is not that is fittest. It's the one that adapts best.

Saturday, February 16, 2013

Some observations on Kashmir

The politics and strategic aspects of Kashmir get a disproportionately higher attention in popular discourse than the Economic and development aspects.I have always wondered why people are only worried about political rights and not their economic well being? If you are poor and marginalized you will be trampled over. If you are powerful, the world will listen to you. The times when revolution came out of a barrel of gun are long gone.
I recently had a conversation on twitter in this respect. Here is brief elaboration and some more on the points I made in that conversation:
  1. Jammu and Kashmir has very limited fiscal resources of its own. Of its GSDP of Rs 54000 crore last year, government spending constituted 50% of this amount and of that amount, central assistance constituted 50%. To put the above figure in perspective, India's largest software company has more revenues than the entire state of J&K. It employs less people than are born in J&K every year.
  2. The budget stresses a lot on Subsidies and tax exemptions. This only increases corruption and reduces revenue collection. At the same time, there is toll on entry into any district. This only increases traffic congestion and the roads are not even properly maintained. This only increases the disgust of people with government and restricts economic activity.
  3. The School Education scenario is similar to rest of the country as per DISE data whereas professional education is way behind. A significant number of students are taking private tuition. Empirical data on street does not tally with DISE data. Why not devolve Primary Education to Local communities?
  4. There are only a handful engineering and medical colleges and no Institute of national repute in higher learning.Perhaps J&K would be the most backward state in terms of Professional education.Instead of lobbying for sparing the lives of terrorists, government should spend political capital in bringing Institutes of excellence to state.Their presence has a disproportionate impact compared to investment involved.
  5. There has been little investment in physical infrastructure in recent years and vital connectivity projects have been running decades behind. Even after so many year of  being 'integral part of India', economy of J&K is not integrated with rest of the country.
  6. Like most of the other states, Hydro power is severly underutilised. While delay in other states can be somewhat understood, in a resource deficient and insurgency hit state like J&K bordering Pakistan , it is downright criminal.
  7. Though the state government has privatised the ticket collection for tourist places in Srinagar, there is no upkeep of these places. Heaps of muck can be seen in Shalimar and Nisat and architecture has been disfigured with Lovers Letters.
  8. There are some high potential tourist spots in the state which can be developed with minimal expenditure. e.g. just cleaning up the Manasbal lake will create a new tourist hotspot more popular than Dal. Not every tourist can afford the private taxis. A tourist bus service will tremendously boost affordability thereby increasing tourist flow. The existing buses are too crowded and operate to limited areas without any proper signages. 
  9. A lot people in India passionately believe that abolishing Sector 370 will fix the Kashmir issue. The main thrust of this article is that non domicile people cannot by land in the state. This is true of many states and areas of India e.g. Uttaranchal and tribal areas. That has not stopped those areas from developing though as even if the land cannot be bought, it can be taken on long lease of , say, 99 years. Despite article 370, some Indian companies have setup call centers and Pharmaceutical industries in the state.What prevents the outside investment is, the long term unpredictability of returns because of the political risk. If even the original inhabitants of Kashmir, the Kashimiri Pandits, are afraid of returning, how can others be expected to settle down in Kashmir.

Sunday, September 16, 2012

Value Investment Climate in India

The future of an economy is determined by how efficiently it uses the limited available capital. Value Investors take a long term view and reward enterprises that are efficient users of the capital by investing in them. With a national Savings rate of 30% plus (which is likely to sustain for a long time despite the recent hiccups), one would expect a much more vibrant investment climate for equities in the country.This leads us to ask the following question:

What is holding back Value investments in India?

1. Real estate: Because of the heterogeneity, it is very difficult to make a general statement about real estate in India. But some parts like National Capital Region and Mumbai are well known to be expensive compared to their global peers.There has never been a well known bubble burst in the real estate in India. A large segment of the population thinks that in the long term, real estate, particularly land, is the most productive asset class and does not diversify away from it.

2.Gold: Indians have had a fascination with Gold from time immemorial which has its own merits. Gold can at best be an insurance against hard times when family Gold can be sold to start afresh.But the magnitude of Gold currently held by us is a bit much and tremendous Indian wealth will be lost if gold loses its glitter.To put into perspective, the current value of Gold held by Indians exceed the total market capitalization of BSE. If this capital was invested in similar enterprises, the size of our economy will double. The world's most successful investor is not very fond of Gold

3.Underdeveloped Mutual Funds Market: The market for Mutual Fund is highly underdeveloped in India and most of it is limited to large cities with 85% of the flows coming from top 15 cities. It might be due to the relatively short history that Indian Asset Management sector has had but there has not been any spectacular or iconic Fund Manager like a John Templeton or a Peter Lynch. Nothing sells like success. Yes, there have been some smart Managers like Madhusudan Kela who shone for some time before the great recession eclipsed them but the fact remains that there has not been a single Mutual Fund in India whom investors can trust with unflinching faith. We are yet to get a Magellan Fund.

4.Weak Regulatory environment: Far too many crooked promoters have gone unpunished for investors to have faith in the Indian regulatory environment. Scams and bankruptcies happen almost everywhere but probably only China can rival India in the number of people going unpunished. Even in case of China, the punishment meted out are severe and ruthless. The recent IPO scams where investors lost upto 90% of their wealth immediately after listing and recent Deccan Chronicle drama where 3 fellows looted 30+ Banks and NBFCs making a mockery of all regulations and continue to walk free are but some examples.

5.Small surplus capital: At at an aggregate level, our savings are very high as a percentage of GDP, but in absolute terms they are rather small. The complexity involved in capital allocation are quite different at different ticket sizes. At a smaller scale, return on capital is higher if a person invests in his own enterprise and returns generated by methodical asset management are comparatively less attractive. Also, for professional Asset Management to bloom, the surplus capital needs to be large enough to be deployed for long periods of time without having to be redeemed for meeting short term exigencies.

6.No Giant Value Investors: Though Warren Buffet and Ben Graham are known worldwide for their investment acumen, very limited number of people outside US can relate with them. We do have had some successful investors in India but there has not been a single investor who believes in buying and owning a  business wholly forever. The power of such people goes much beyond the economic value they add directly. Warren Buffet is like the head priest of a church whose membership keeps on increasing. We do have some tribes in India that follow value investment principles similar to Buffet but not an established church yet.

What are the future prospects?

1.Real Estate: Like all overvalued assets get corrected in time, real estate in India is also bound to get corrected and valued as per its true economic value. Real estate prices are high primarily because low supply of quality real estate. A major cause of the overvalued real estate is inadequate infrastructure. Investment in infrastructure,Roads e.g., has a disproportionate impact on real estate prices by hugely increasing supply. If India were to achieve the target of constructing 20km new roads every day, supposing the road affects 100sq m area in its vicinity, 2sq m of develop-able area will be made available for every Indian every day. If that were to happen, both sides of these new roads would be lined up with houses end-to-end and every Indian would have a 700sq m home on a highway.The upcoming correction in Real estate, whenever it happens will first jolt the economy, then release substantial surplus capital to be either consumed or productively invested.

2.Gold: Gold demand is a function of human psychology as well as availability of, and risk return considerations in other alternative asset classes.While the former cannot change overnight, later is bound to e negative for Gold as an asset class. Historically, Gold has kept pace with inflation. When the world comes out of the recession and the uncertainty subsides, risk premium on Gold will subside, making doubly unattractive. The relative share of Gold as an asset class will eventually decline but the absolute demand might not because of increased affluence. Because of the harmful effects to the Indian economy, policymakers will make an effort to dissuade people away from Gold as an investment.

3.Mutual Funds: Though policymakers and industry participants are trying to increase the penetration, these efforts will pay off only when investors see consistently superior performance. The eventual end of current recession may structurally and presence of large number of schemes may statistically aid this but the consistent superior returns is a serendipitous phenomenon and cannot be predicted.

4.Regulatory Environment is a function of the intelligence of the personnel manning these bodies as also the integrity of the government of the day. From the current state of affairs, it does not seem like things can get any worse than what they are.So, they can only get better. Having a good regulatory environment is also in the interest of the financial industry participants. The increased international competition with international Stock exchanges like Singapore and domestic ones like MCX might accelerate the evolution of regulatory environment.

5.Surplus Capital: By all indications, Indian economy is likely to grow at a relatively high rate for a long period of time to come.The stock of investible surplus capital will keep growing with the resultant increase in per capita income.

6.Giant Value Investors: We might not see a Warren Buffet in India any time soon but we might see some highly successful Value Investors of Indian origin. Prew Watsa's Fairfax financial has recently bought Thomas Cook by taking a controlling stake in this company. If Watsa continues his track record and acquires more Indian companies and make a success out of them, he might get a cult following in India. Even otherwise, there are a lot of individuals who have been following value investing principles and have succeeded in a small way. Some of them might snowball into legends ten, twenty or thirty years later.

To sum up the prospects of Value investing are cautiously optimistic in India. There are online forums and blogs that are vibrant with activities and are actively promoting Value investment. Some of them that I find interesting and helpful are listed below:



Sunday, August 22, 2010

Medical Education in India: A Synopsis

This is a compilation of the most up to date data on Medical education in India:
1. Medical Education(Doctors) Summary:This document contains the number of seats available in each Indian State in all systems of medicine: Allopathy (MBBS and BDS) and AYUSH(Ayurveda, Unani, Siddha and Homepathy).
2.Pharmacy Education Summary: This document contains the number of seats available per State in colleges that award Degrees and Diploma in Pharmacy as also those that only conduct the courses that lead to a Degree or Diploma.
3. Nursing Education Summary: This document contains the number of seats in BSc Nursing and Post Basic Nursing programs per State.
4. Medical Education Summary: This document contains the summary of the above data along with references.

The data has been collected from respective governing bodies homepages and appropriate references are provided. Related and similar data is available on Ministry of Health and Family Welfare but that is not complete from the point of view of available educational opportunities in Medical Sector. The references in document point to complete List of respective colleges along-with their contacts and addresses.

Some Observations:
1. There is huge inequality in availability of opportunities for Students across States as exhibited by following graphs:

The first image shows the number of Seats in Medical Stream per thousand students in Standard 1 presently. This captures, the inequality with respect to overall population of a State irrespective of the learning environment and outcomes that make a Student eligible to lay claim to these opportunities.

The second image shows the number of Seats available per thousand Students passing out of 12th Class. This can be a reflection on better opportunities available in some states as also poor Graduation Candidate Ratio in other states. In Karnataka both are extreme and hence disproportionately higher number of opportunities available for Karnataka Students. If we contrast the two images, we get an idea that increasing retention at the Secondary level puts pressure on the availability of higher education opportunities even in Backward States like Madhya Pradesh, Odisha and Rajasthan.

These extreme inequalities also indicate that their is no such concept called India as far as Medical Education is concerned with some big states like Assam, Bihar, Jharkhand, Uttar Pradesh and West Bengal along-with North Eastern States barely visible on the first graph. Just 4 States: Andhra Pradesh, Karnataka, Maharashtra and Tamil Nadu constituting just about 20% of India's population account for about 1.3 lakh out of about 2.4 lakh Seats across India.

2. The educational opportunities in Medical sector (predictably) has a high correlation with health infrastructure as well. In absence of adequate data on number of beds or doctors or Clinical establishment per State, we can probably use Blood banks as a proxy. The 5 States of Andhra, Kerala, Karnataka, Maharashtra and Tamil Nadu have 1085 out of total 2347 Blood banks in the country. If we look at Eye Banks, these 5 States again come up trumps with 306 of the 586 Eye Banks in the country present in these States.

3. Looking at Mental health, the top states again dominate with 1364 out of 2294 psychiatrists. Contrast this with just 12 in Madhya Pradesh, 15 in Chattisgarh, 19 in Odisha and 28 in Bihar. True, in most states,including top 5, number of psychiatrists available is less than half required in case of most of the rest it is not even 10%. The number of Psychiatrists, Clinical Psychologists and Psychiatric Social workers that we need are 10261, 14057 and 20194 respectively while the availability is 2294, 355 and 294 respectively.

4. Though it is Kerala which is famous for its Kerala Ayurveda, number of Seats in Ayurveda for Kerala is just 896 which is less than a third of those in neighboring Karnataka and less than a fourth of those in Maharashtra.However Kerala if famous for good reason, notwithstanding number of students admitted, Kerala leads with 124 Ayurvedic Hospitals and 740 dispensaries in contrast to Karnataka's 130+561 and Maharashtra's 55+469 Hospitals+Dispensaries.

5. Bihar accompanies Madhya Pradesh as the only States where number of Seats in Homeopathy is more than those in MBBS. The former is 830 and 1755 respectively while latter number is 660 for Bihar and 1070 for MP. It is Maharashtra though which has the highest number of Homeopathy colleges(49) admitting 3596 students which is close to its 41 MBBS colleges admitting 4570 students.

6.Just 3 States: Andhra, Karnataka and Maharashtra account for half of the Diploma/Degree Seats in Pharmacy i.e. 38680 out of 77195.

7. Karnataka churns out 1/4th of all Indian nurses with 18958 seats out of all India 74356. In contrast, the 19 States from bottom have less than half that number of total Seats.

8.Uttar Pradesh tops the number of Seats in the Unani System of medicine with 220 out of 620 Seats across India.

Saturday, July 3, 2010

School Education in India:An Integrated picture

Despite the well recognized challenge and payoffs of Human Development and education attainment, it is hard to find a single report or data source that gives an overall picture of educational attainment for India. If at all, the data is available with a time lag of 3 years by which time Indian economy might grow 30% rendering it obsolete. This blog had earlier looked at state level data about Engineering education. Continuing further, this article and the associated document describes the overall Statewise education scenario for India from enrollments in Class 1 upto statistics about number of students passing out of Class 12th. The data source is primarily DISE and the newspaper reports about the results of different State and Central Examination boards. The document also contain the enrollment and qualification data by gender by using the
Gender based Exam results publications. The latest available enrollment data for upper primary is for Year 2007-08 and hence compatible and comparable with the Matriculation results of current year 2009-10. But the data for Intermediate classes cannot be strictly compared to that for matriculation due to 2 year lag and hence can only be indicative of broad picture.

Here are some interesting observations:
    1. Karnataka, home state of the knowledge capital of India, Bangalore has a GCR(Graduation Candidature ratio) of 17.83 just marginally less worse than the most backward state Madhya Pradesh in this regard which has a GCR of 17.96. This means only 1 out of 10 students in his age group attains the eligibility to apply for admission to a college. Delhi is the best state on this count with a GCR of 64.4 with Tamil Nadu a distant 2nd at 55.79 and Himachal 3rd with GCR of 48.26
    2. Gujarat,an otherwise economically advanced state has a shockingly low GER of 54% at upper primary level resulting in a poor GCR of 23.30%. Only States that have a worst Upper primary GER than Gujarat are UP and Bihar. In terms of GCR, Gujarat is 6th worst among all States.
    3. At all India level there were 1.64 Crore students in upper primary and surprisingly 1.66Crore students in Matric level.This partly indicates inaccuracy in DISE numbers and partly a high number of repeaters and overaged students.Noteable high ratio of Upper Primary to matric are UP-1.61 and Jharkhand-1.24. This means that for every 10 matric students, there were 6 students in 8th Class in UP and 8 students in Jharkhand. Given that both of these states have passing rate of about 70%, even if we accept all 30% who failed are repeating where are the extra 30% in UP coming from?Certainly,UP did not experience any population boom induced by some astrologically auspicious phenomenon or any immigration shock.
    4. There were total 96.6 lakh students in 12th Class out of which 77.5 lakhs passed.Since there are about 8.6 Lakh engineering seats,every 9th Graduation candidate can opt for engineering.
    5. The overall pass percentage hides the poor pass percentage in constiuent disciplines in some States. For example, in case of Jharkhand, Science pass percentage was is 30.33 though overall pass percentage is 50.39.
    6. The matriculation pass percentage of Jharkhand has dropped from 87% in 2008 to 74.3% in 2010. Jharkhand is probably the only state to witness so much deterioration in Education attainment while most of the States have improved theirs. Chief Minister Shibu Soren was perhaps the only Chief Minister to personally release the result.
    7. Similar to Gujarat, West Bengal has a low ratio of students reaching potential graduation stage at 22.51 inconsistent with its image of an intellectuals' state.
    8. The national capital seems to have the best educational infrastructure what with 64.44% students attaining graduation candidature but this is tempered by the fact that there is only 1 engineering seat per 30 students passing out of 12th class as against the national average of 1:9
    9. Kerala is at the top in terms of gender parity with 72% of 12th students being girls whereas the ratio is almost inverted for the state on the other end of spectrum Rajasthan with 35% of students being girls.
    10. In Punjab,a state with a very low sex ratio, 56% of the students in 10th class are girls whereas the last state on this count is Gujrat with only 37% girl students in 10th class.
    11. Leadership of Tamilnadu in education is exhibited by 115% GER in upper primary, 80% of them transitioning to matric, pass percentage of both 10th and 12th standard being in 80s and 2nd highest number of Engineering seats among all States.
    12. Some of the north eastern states like Tripura and Manipur have a greater number of graduation candidates than better known Goa.
    13. The number of children in 8th standard is only about half of the number in 1st standard despite an upper primary GER of 75% for All India.
    14. In case of Jharkhand there are 5 students in 1st standard for every student in Class 8th and Jharkhand only has a GER of 57 for upper primary.
    15. A happy thing to note is that there are at least 9 states where number of students in 1st standard is lesser than those currently in 8th and there are 3 others where this gap is less than 10%. Hence,the next generation in these States is likely to get better educational facilities. BIMARU states are still not out of the woods and need to invest more in primary education going forward given the high ratio of number of students currently entering the School system to those in upper primary.

                                                                        Saturday, April 3, 2010

                                                                        Total Engineering Seats in India & some conjectures about IT

                                                                        This document contains the total number of engineering seats in each of the major states of India. Some of the southern states have a huge number of seats relative to the demand and hence some seats are going vacant. This 'some' is about 50000 seats in case of Tamil Nadu. Recently, this has been observed in Northern States like Haryana as well. An interesting thing to note here is that the number of Engineering seats in the city of Pune is greater than the combined total of 7 States. Overall, there are 7.3 lakh engineering seats in India.

                                                                        These numbers partly explain why IT companies are setting up shop in Bhubneshwar, Jaipur, Indore,Ahmedabad and Lucknow but not in Patna, Jamshedpur, Ranchi, Shimla, Guwahati and Panaji.Neither are they likely to do so despite the fact that some of these states do send students to other states in large numbers and despite the fact that quality of life in some of the latter group of cities is comparable to the former and might be better in some. When the new private engineering colleges come up, their students are below employable standards for some years. These students are employed for low wages by small IT companies mostly focused on domestic IT market. Here, they polish their skills or learn the new ones in 2 to 3 years and move into bigger and more professionally managed companies. Due to this continuous poaching, the smaller companies would vanish if there was no availability of large number of fresh Engineers willing to work for them. Gradually, quality of newly setup Engineering colleges and hence the quality of students improves thus boosting the supply of good local talent. Also ,some of the small IT companies may grow bigger and better and start attracting talented people who left their home state/region to join bigger companies. Due to this competition for talent, apart from a desire to lower operational costs, the big companies might set up shop in the small city thus improving the Eco-system further. This is not possible in States who only have a couple of thousand Engineering seats.