Indian Plywood Industry - Value Migration On The Way

The Indian Plywood industries is at the cusp of a new era. Over the last few years, the organised players (Century Ply, Green Ply, Kitply etc) have been growing at double the rate of the overall industry. This signifies that there is value migration happening from the unorganised unbranded products to the organised branded ones. The overall organised sector is growing 20-25% CAGR. Organised sector is 30% of the overall plywood sector.

The overall plywood industry size is Rs. 180 billion (source: Greenply AR 2015). The MDF industry size is Rs. 13 billion growing at 15-20% over the last 5 years. MDF is engineered wood made from wood (fibres), glued together using heat, resin and pressure. It is also a superior substitute for cheap unorganised plywood. It faces competition from imports. Demand in this sector is driven by ready-made modular furniture, modular kitchen, ready-to-move into offices/retail outlets, a need to substitute low quality plywood, affordability, increasing awareness of customers of better alternatives and shortage of time.

The Indian govt has imposed a ban on new licenses for manufacturing due to the environmental impact. This will help the existing majors.
Growth Levers
GST & its impact
    • Remove inter-state tax anomalies
    • Remove differential with unorganized sector hence a value migration from unorganized to organized players
   
Other growth levers
    • Home renovation cycle is declining
    • India's per capita income rising along with disposable income
    • Rising urbanisation and aspiration levels amongst people
    • Govt focus on "Housing for All" -- Rs 22,407 crores allocated by FinMin for 2015 to create 6 cr (2 cr urban + 4 cr rural) complete houses by 2022
    • Government Announcement regarding construction of 100  smart cities    
    • Focus by HFCs on Tier-2, Tier-3 locations

Over the short term (< 1 year), the industry may have moderate growth owing to the subdued demand in real estate sector. However, the growth levers are likely to kick in over the medium term (2-3 years). The industry looks to have bright prospects over the long term (10 years). It would be interesting to keep a watch on Century, Green and any new player in this space.

Filter Out The Noise

I have stopped blogging over the last few months to be on the right side of SEBI's guidelines. Now, that there is some amount of clarity, atleast in my mind, I have decided to continue chronicling my thoughts once more. The only change is I will restrict myself from discussing specific stocks or valuations related to stocks. 

The last few months saw a tremendous amount of volatility. We have seen both 29000 and 25000 on the Sensex since April 2015. We have seen the Green drama, the unending US Fed rate hike soap opera keeps playing in the background every few months. We are also witnessing a human tragedy of great proportions in the Syrian refugee crisis. The run-up to the US elections has started and is likely to pick up momentum in the months to come.

Closer home, the Bihar polls are heating up. Lalu-Nitish-Modi are battling it out - or so the media would want us to believe. Hardik Patel wants reservations for the Patels in Gujarat. Monsoon session in Parliament did not achieve much, again as expected. Raghuram Rajan did not decrease rates.

So, where am I going with all this? I just want to highlight that all of this is noise. I sometimes go back and read old newspapers. I am yet to see an issue where there is no news printed. There is always something going on. As an investor it is critical to filter out the noise from the signal.

The signals which are important to me as an investor are the following:

1. Passing the GST bill - this has long term implications as it is a fundamental shift on the taxation front. This bill has been making for over a decade and we may be in the last lap of the marathon. 
2. Land Bill - After the Singur agitation, land acquisition all over India has become a non-starter. India needs a stable land acquisition policy so that industries can realistically acquire land for projects. The government does not seem to be making much headway on this.
3. Improvement in Corporate Results - Quarterly results in general have been quite dismal. Management of nearly all the companies' for which I have attended conference calls stated quite candidly that on the ground there is very little traction in the core sectors.

I am skeptical of a major impact of rate reduction that everyone is so keen on. I cannot think that a company will decide to invest in capacity expansion because interest rates are 0.5% down. We need some major projects in the infrastructure space either by the government or incentivized by the government through tax cuts to kick start the real economy.

In the meantime, filter out the noise and remember that in India, news channels are for entertainment ;-)

Stock Update: Sintex

Sintex has come out with a decent set of results for FY2015. 

FY2015 Results (Consolidated)

Sales : 7006.6 cr (up 20%)

PAT : 528.8 cr (up 45%)

EPS (Diluted) : 13.5

Building materials grew 16% yoy (from 2734 cr to 3176 cr)
Custom moulding grew 21% yoy (from 2566 cr to 3107 cr)
Textile grew 33% yoy (from 546 cr to 724 cr)

The company also announced that it had won a large government order for rural RO water shelter enclosure and healthcare centre from couple of states.

The company will add about 1 lakh spindles by Sep 2015 and 2.2 lakhs by Mar'16 bringing the total spindle capacity to 3.2 lakh spindles. Overall the company plans to increase total spindle capacity to around 10 lakhs but that depends on capacity utilization of the initial setup. Company expects operating margins from the textile division to improve by 0.5%  with economies of scale coming in with new capacities getting on-stream.

In building product segment, new products in segments of environment & clean fuels, cold chains and warehouses are driving growth along with education and healthcare sectors. The company has received fresh orders in Prefab segment from new territories and for new product ranges. The company is the only company in India to get government approval for prefabricated biogas plants.

Custom moulding did very well both in India and Europe and is likely to continue with good performance with a pickup in industrial activity.

Of the total US $ 120 M FCCB conversion, only US $ 17 M is yet remaining to be converted, which will happen in Q1 FY'16.

High debt and low promoter holding (and promoter pledging of shares) remains a risk and creates an overhang on the stock.

Overall, it is an interesting stock to keep a watch on.

Book Review: The Education of a Value Investor by Guy Spier

I just finished reading Guy Spier's The Education of a Value Investor. Guy is a well-known value investor who runs the Aquamarine Funds and is based out of Zurich. He has been educated at some of the most renowned educational institutions like Oxford and Harvard Business School. In his book he goes over his career as an investor and money manager and shares his wisdom. 

This is not a how-to book. It has very little in terms of the author's investment process. He does not even talk much about his stock picks and the rationale behind investing in them. As the subtitle in the name of the book suggests, this book truly ties to capture the author's quest for wisdom, enlightenment and through them, wealth. This book is more about getting wiser through self-reflection than about investing.

The book starts with his joining a Wall Street investment banking company D H Blair. His disillusionment with his education starts then. He starts to question the efficacy of an education which cannot help him make the right choices in life. He starts to hate his job and sometime during this period discovers Warren Buffett through a book (Buffett: The Making of an American Capitalist by Roger Lowenstein). This opens up a new world for him. A world of ethical living and value investing. He then goes ahead and makes dramatic lifestyle changes to "bring in Buffett into his life". 

During this period, he met Mohnish Pabrai, an event which again transformed and changed the course of his life. They developed a deep bond of friendship which amongst other things led them to jointly bid for a charity lunch with Buffett.

The book chronicles multiple things that he did to lead a life that was congruent to his beliefs. He moved away from the competitive madness of New York and settled in Zurich, stopped subscribing to his Bloomberg terminal. He started writing thank you notes to people everyday and other such things.

The book is fascinatingly intimate and authentic. Spier talks about his thought processes, his doubts, his shortcomings very openly. This is what drew me to the book. I could identify myself personally with a lot of it. I had, and continue to have similar questions, doubts and dilemmas, both in my life and in investing.

My biggest takeaway from the book is that it seeded the thought of transforming my life, one step at a time, by making small changes which can compound over a long time, by surrounding myself with the people I like, admire and respect, caring for people and doing small things everyday to help others and most importantly, setting up myself in an ecosystem which suits my inner self and helps me to lead a life congruent to my core beliefs. Just for this, this book is a must read.

Stock Update - Sintex Industries

Sintex has been part of my portfolio before and suffered a lot due to untimely acquisitions and foreign borrowings. They are still paying the price for that through  equity dilutions because of conversion of bonds to equity. The reason I started taking a re-look at the company is that it is uniquely placed to gain from the Narendra Modi government's thrust on Swacch Bharat and Clean Ganga projects. Additionally, the new mandate for CSR activities and the resultant push from corporates in making toilets and classrooms in rural areas will create a demand for the companies products.

Swacch Bharat, Clean Ganga & CSR thrust:
Sintex is a market leader in pre-fabricated toilets (90%-95% marketshare) where they manufacture and install toilets with water tank, soak-pit or bio-gas chamber. The total cost outlay by GoI for Swacch Bharat has been put around Rs 62,000 cr of which Rs 14,600 will be provided by the Central Government. Clean Ganga  proposes to spend Rs 51,000 cr to completely stop  discharge  of  untreated  sewer  and  waste  water  from small and medium industries and urban habitations into the Ganges. Under the mission, all villages along the river is to be made free from open defecation. This represents a huge opportunity for toilet blocks, waste management and package treatment  plants. Sintex is a market leader in this space.


Custom Moulding & Textiles to add to growth:
With a revival in the industrial activity, the custom moulding division has started picking up and is expected to improve its performance in the future. This quarter the growth was 24%. 

Textile is starting to get benefits of the capacity expansion that the compnay had undertaken. 100,000 spindles will start every quarter next year 2015-16. Incremental 200-250 cr of revenue will come in at 50-60% capacity utilization. At full capacity, the new capacity is likely to add 1700-2400 cr to the topline.

Negatives:

• The company has outstanding FCCBs which will result in equity dilution to the tune of 25-33% which will be a dampener for EPS growth.
• The company has been investing a lot on capex and is currently running a negative cashflow, though it has positive cash flow.
• Govt projects typically mean delayed payments and high working capital requirements.

My expectations of growth

FY15 - expecting EPS range of 11-12. At a PE of 12, price can be 132 - 144.

FY16 - Expecting growth of 30%. EPS 15-16. PE of 15-20. Price can be 225 - 320.

Disclosure: I am not an investment analyst. Stocks discussed in the blog should not be construed as buy / sell recommendations. This blog is a chronicle of my actions and thoughts in the markets. Please consult an accredited financial advisor before investing yourself.

Portfolio Update - 2014

Another year comes to an end - one which has been an eventful year for India, with a new government at the center, one which has a majority in the Lok Sabha, after decades of coalition politics. The stock markets have run up a lot on partly fuelled by overall global equity market rallies and partly by the hope of an economic revival in India under the new government.

2014 was also a great year from a return perspective. My portfolio returned 135% gains during the year as opposed to a 30.75% rise in the Sensex and 81.67% of the HDFC Equity Fund. (As I have explained above, I try to see my performance with respect to this fund just to make sure that I am not wasting my time picking stocks!!)

Most of the great return came from just sitting out on the picks that I had in the portfolio. That is the beauty of having a long term portfolio with good and stable businesses. I continue to hold on to nearly all my long term picks and remain convinced about their growth prospects in the future. 

During the year, some notable changes in the portfolio were as follows:
New additions - CCL Products, Sintex, Symphony 
Reduced holding - Mayur, Cera
Completely booked profits / losses - Selan Exploration, Finolex Cables, Page Industries

I have also updated the Portfolio page.

The case for Mayur was very interesting and I had to spend a lot of time to think through. It continues to be a business which I am most confident about in the long term and the stock performance over the years has been a 100+ bagger for me, so endowment effect was very strongly present. The only reason to sell was I decided to book some profits as it had grown above 25% of my portfolio and was creating risk that I was unwilling to take.

I wish all my friends a great, prosperous and rewarding 2015. 

May the Force be with you in 2015!

Disclosure: I am not an investment analyst. Stocks discussed in the blog should not be construed as buy / sell recommendations. This blog is a chronicle of my actions and thoughts in the markets. Please consult an accredited financial advisor for financial advice.

Weekend Reading - Curated Links of Interesting Articles - Dec 6-7th

Excellent compilation of Bharat Shah's investment philosophy

http://contrarianvalueedge.com/2014/11/28/bharat-shah-buy-quality-only-quality-at-fair-price-and-hold-for-lt/

How See's Candy changed the way Buffett invested in businesses

http://www.nasdaq.com/article/the-surprising-lessons-warren-buffett-learned-from-a-candy-company-cm418297

How to Dramatically Improve Your Investment Performance with Behavioural Economics
http://time.com/money/3604960/daniel-kahneman-thinking-fast-and-slow/

Snippets on the future of Indian markets from the Gurus

http://firstbiz.firstpost.com/money/wisdom-from-indias-wealth-masters-from-jhunjhunwala-to-other-stock-mavens-111452.html

Software product development with the help from business leaders and not by sitting and dreaming up great products

http://knowledge.wharton.upenn.edu/article/creating-great-software-is-about-taking-blockbusters-a-step-further/

James Montier talks about excessive valuations in the US markets and the need to hold cash during these times

http://www.fuw.ch/article/the-stock-market-is-hideously-expensive/