Could it be worth Understanding FCEL at current valuations?

Future Consumer Enterprises Ltd.

 
Management:

·         Entrepreneur who has proved a model which was not dreamt till 2000 in India. Has been quite successful in attempting and creating a culture of Shopping from Malls.

·         Set Up one of the strong Distributions set up.

·         In my view management has been quite candid in lots of his interview about his mistakes done after the first big success and after realizing that he has been accepting it publicly and has taken gr8 steps to improve it.

·         The Management has strong record of execution and implementation of such large retail projects and understanding the consumers expectations in India.

 

Business:

·         20% i.e. more than 25 cr ppl visit Big Bazaar, Food Bazaar,and other Future retail joints. The highest Footfalls are in Big Bazaar. This comprises the Major Middle Class and emerging Middle Class Bracket of People.

·         Mr. Biyani believes that the advantage of Demographics would add close to another 30 cr plus Future Groups potential customers.

·         The Company has in my understanding has clearly demarcated his business in to 3 divisions, a) Retails i.e. – Future Retail, b) Food and FMCG – FCEL and c) Fashion apparel – Future lifestyle.

·         His earlier diversification into various products, like appliances, finance, luggage, etc (basically he targeted every money which a consumer spends). But realized that its more of a mess than success. So he has focused his strategy to 2 large areas where a consumer spends and where Future group has a strong foothold and is confident of scaling it. The 2 areas are a) Fashion Apparel and b) Food and FMCG.

·         Food and Apparel are one of the biggest spending brackets of middle class, compared to elite.

·         At present more than 40% (as reported in media) of Bigbazaar and Food Bazaar sales comprises of Future groups private label item. That means without advertising a single product on television, he is able to sell large part of his pvt label food products in Bigbazaar to customers i.e. ~25 cr ppl app.

·         FCEL focuses on all the private label food & FMCG items manufactured or sold in Future Retail outlets.

·         FCEL Focuses on 3 main areas a) Food Park, b) KB Price Store and c) Aadhaar Market.

·         Food Park is 110 acre Food manufacturing plant, which could procure raw materials and provide direct customers to all farmers, mandis etc in the radius of 300 kms of its location. ( Loc: Tumkur, Karnataka)

o   A Food Park can handle variety of food related work. In my reading through various available public information is that the company would be working in a similar way it developed brands in Pantaloon at early stage, The company could develop variety of new Food Brands under private label.

o   The Focus is not only on Private label, it could also focus on tieing up with established player for new or existing products.

o   As per Mr. Biyani, a Food park of this size could generate close to 5000 – 6000 cr of sales in a year and that could also grow. He is expecting to achieve revenue of 10000cr in FCEL by 2020.

o   This will be the First Integrated Food Park in India. One of the main reasons for success of Food park is the cost management and second is the Distribution and Logistics setup. If you can scale and reach mass the food park could be a big manufacturing hub of food products.  

o   As per the available information from the website and from my personal experience from visiting various Big bazzar joints, FCEL at present is not into manufacturing non veg products, However they have egg based cakes of monginis sold in Future retail( not a part of FCEL). 

 

·          Second is the KB Price Store, which is like in my knowledge kirana store with a Franchise model. If he is able to scale that , it could be big on long term, as a typical kirana would have limitation in no. of SKU’s, but a KB price, would have an advantage due to 1 point sourcing and inventory management helping it to get more SKU to sell.

·         Aadhaar is JV with Godrej, it is like rural mall concept.

 

Valuation:

·         I am not very confident what can this company be valued, as its still at initial stage and the Food Park is still to start in this year. How the park turnout would is to be seen.

·         However comparing other global companies in China and other developing countries, I feel if This food park is able to achieve the success, than the company could atleast maintain the 1 times Mcap/sales ratio.

·         At cmp of 10 with mcap of 1600 and cash of 250 cr  the stock has EV of Rs. 1350.  Revenue at present is 900 cr with marginal Loss at the PAT level.(Loss cld wipe out or could increase, difficult to judge at current level of business)

 

MOATS:

At present I am not able to figure out any big MOAT, except to some extent the Distribution, loyal customers, Brand, Logisitical set up.

However, I believe that if the company is able to create strong food brands like it did for BIBA, AND in pantaloons, it could start creating a moat i.e. stickiness of customers towards its food products. Like at present large set of consumers coming to Future stores, purchase Tasty Treat products, which have variety of eatables under this label.

But I also believe that similar private label could be easily done by competitors like reliance, and don’t see why they too can’t scale. However the difference would be the management spirit and execution capability, which always was the difference in Big Bazaar and any other food malls.

 

RISK:

Success of the Food Park is the key to the emergence of this company. Failure to the same is the big risk. Delay of the Park also could have negative consequences.

 

 

I do not recommend anything. This is purely for my own understanding and tracking. My views are completely personal and it could be challenged with different thoughts and that is welcomed.

 www.futureconsumer.in

 

What makes me Buy Supreme Petrochem Ltd ?

My thoughts for Investing in Supreme Petrochem Ltd.

Management:

• Very Strong promoters and management team with strong track record in Indian markets. M.P.Taparia
• If you look at the Balance Sheet and check historical records, I observed that the management is good at asset allocation and not stretching its balance sheet with high debts or recoveries left over. (Similar trend could be spotted in the other promoted company Supreme Industries.
• Buy back is on at Rs.70/- per share for close to 60 lakhs shares. That itself talks about managements confidence in the Business.

Business:

• The company has been converting styrene monomer into Polystrene (PS)  which is basically used in plastic industry like refrigerator, air conditioning body, television etc.  Company holds 50% market share of the PS market in India.
• PS is more or less a commodity and sold as a commodity. There is no great technology or barriers which can stop others to make it.
• The company is now making a more value added product from its PS i.e. EPS and XPS. This requires a bit of technology, again no big rocket science here also. But the Difference would come from the way the product would be sold. EPS and XPS are likely to be sold as a Product under a brand rather than a commodity.
• Secondly, This new materials would be having applications into much larger industries like Real Estate, Construction, Infrastructure, Cold Warehouses. This Industry are here to grow in India in coming decade.
• Globally majority countries are using this advanced materials and I believe that in India too the trend would pick it up.
• The company is trying to increase the presence and awareness about this product in the Country.
• There is high scalability in this new products and I believe selling product would also lead to marginal improvement in the margins from the current levels.
• The Property of this product EPS and XPS is that it reduces the temperature of the inner wall by 4-5 degrees and speeds up the construction activity, giving a green house effect.
• 60% of China, 80% of Europe and US are using EPS as material for construction. Developing countries like Brazil, Kenya etc are also started using this material.

Quantitative Analysis:

• The Debt is very less i.e. 65 cr.
• Capex is not much required as capacity are ready and under utilized.
• Inspite of the nature of business being a commodity, the company is still generating high ROCE% >20% in last couple of years. In 2013 it was at 30%. I feel this is more due to management and its ability to compete even with low margins. ROA% are high and Margins are low, but High ROCE% attracts more competitors, but ROCE% is just not factor of  good business but management decisions also. 
• With this new product I feel that the company would be able to maintain high ROCE% and generate returns higher than the cost of capital for a sustainable period of time, given the scenario of Infrastructure improves in coming future under the new government. 
• Sales cagr of 18% between 2008-2013, PAT Cagr 19-20% between 2008-13. This was the weak period of the economy which came down from 9% to 4.5% gdp growth. Rest you could expect for future.

RISK:

• The most important risk is the acceptance of the new Products in the Indian market. Failure of the same would just change the Investment case.
• The volatility in the Oil prices and Rupee Dollar movement, as majority raw materials is imported.

Please do your analysis for investing your hard earned money. This are just thoughts not recommendation to Buy. View, thoughts, doubts are most welcome. Please write back to me.
 

Wabco India Ltd.

Wabco India Ltd.

 www.wabco.com  &  www.wabco-auto.com

 

What makes sense about Wabco India ?

• Global Leader in Providing Braking System in the World.
• Strong Presence in India with more than 80% market share.
• Majority of the Indian CV's are its Clients e.g. Tata Motors, Volvo, Ashok Leyland, M&M, Navistar,Dailmer Chrysler, Scania etc.
• The company has consistently focusing on increasing per vehicle content every year to improve the revenue and gaining strong foot hold in the Indian CV business.
• Indian CV has been slow in last 2 years however looking at the size and the demand of CV's in next decade its clear that vehicles with heavy tonnage are likely to increase with more better roads than what they are today.
• With quality of roads increasing, cost of road transportation decreasing and more better engines and vehicles coming in place, it is natural that CVs demand shall increase.
• Indian government is keen on improving the safety standards on Indian roads and has proposed to have mandatory to use ABS and such high end braking system compulsory for vehicles. 
• There is still lot of scope for Mining, Construction, Logistics movement in India which wld definitely demand for more CVs in future.
• Wabco Global is looking at Indian facility as an export base for their certain markets like South America  and certain North American Markets. It has new plant in Mahindra SEZ which is clearly focused for Export.
• The company at present clearly enjoys the pricing power due to near monopoly in terms of technology. The Product also has its critical importance in the overall vehicle.
• From the Broad points mentioned I feel this is a Company which has strong Economic Moats, and with growing economy it has scope to increase its revenue, and bottomline in next 5 years and improve ROCE% further provided it does not go for any high capex( unlikely as current capex is done)
• RISK: However it is linked to the cyclicality of the CV business.
• The advantage is that during the weak CV cycles, it is the best time to gather such business for long term.

I feel valuing this company on fundamentals and rating them on PE or EPS or BV etc would not justify its real potential. Understanding its broad strength would play a bigger role. I could be wrong in my view and thoughts.