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:

Negatives
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.

Positives
  1. They are the only company in Asia producing these sinks and only 1 among 5 globally at Indian costs. Check prices at alibaba.com, 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.
Competition

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.

8 comments:

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