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Thursday, July 21, 2016

The Microcap Adhesive player(Extension of previous post)

ShareBazaar whole day Workshop this August in Cities like Bangalore,Hyderbad and Delhi.FIll the form if that interests you.

Note: Extension of the earlier micro cap posts. Of those 5 companies,eastern treads and ramco systems got already covered. It's the time for the 4th stock from that list. Oh yah Sebi compliant too.

Quote: Since tweeting about it in last September at 30 bucks,company has been a near 5 bagger in a very short period. It took huge amount of work and time to have the required inputs and compile the note. I mean they haven't even got a proper website. There's absolutely nil info in public domain.At present price it seems pretty overvalued though remains a microcap with just around 50crs of market cap. 

2014-15 Annual report inputs:The company is engaged in the business of manufacturing of Wood Adhesive. It has built up a reputation as a manufacturer of “high quality” products and is known for its ethical dealings in business. The company supplies its products to leading Hardware & Plywood Stores in all over India.The company is presently in a phase of financial consolidation. The difficult times faced by the company during its initial years of operations had resulted in carried forward losses, which the company has been able to wipe off in the last few years. On account of its prior experiences, the company is presently working in certain low volume high margin niche products and also limiting its sales to few select prestigious customers. Consequently, the profits of the company are presently seen to be inadequate.However, the company is now focusing on adjusting its growth strategy with the rapidly changing economic scenario. The present consolidation phase will provide a good launching pad to the company. The company is also working with some domestic merchant for increase its business as also trying to identify some high volume, low margin products to improve capacity utilization of its facilities. Based on the buoyancy of the Indian economy, the over all scenario and the steps taken by the Management, the future outlook of your Company looks bright.

Company meet update:

1)Established in 1988, Company started as a paints manufacturing company.In 2006, they decided to take a plunge in white adhesive market and compete against Fevicol. This Ahmedabad based company gradually started expanding from Gujarat to Rajasthan to MP. Penetrated Maharashtra and acquired at a pace of 2-3 retailers per day.Product sells under brand name of Euro Marine,D3,Xtra,Grip etc.

2)They had a horror time initially to convince dealers about taking the Euro brand. Nobody was ready to keep anything other than Fevicol. Times have changed and they are enquired on a daily basis about dealership and distribution opportunities. Have presence in 13 States and 130 cities with a network of 7000 dealers. Company also have got a very strong motivated sales team.Targeting Pan India presence by next 3 years. Company does meticulous due diligence before giving dealership to anyone.

3)Debtor days at around five months from 7 months earlier and to be reduced further. Creditor days at around 75 days. Chances of bad debtors minimal. Company further ensures the same by providing rich cash discounts and incentives.

4)Senior Patel had a dream of having a listed company. Junior Patel,who seems to be a focussed humble chap,dream is to be known by his "Euro" adhesive Brand. Hired a management Guru called Himanshu Buch to train and motivate the staff(When the company was much smaller and the training continues till today)

5)Bought and shifted to a bigger 8000sqft office in Ahmedabad. To hit the FA this quarter. On being asked about the extremely high asset turns,promoters claimed it happens in this business. Also the capacity was there since last many years. No new capacity required for next 2 years.

6)Promoter claimed they have a " Sales like Hot Cake" adhesive product called "Xtra" which Fevicol copied and it came out with "Sh Xtra".

7)Promoter claimed of almost nil attrition as they take care of the employees well. All employees are send on a tour every year. Some 180 odd guys on payroll.

8)Pidilite acquired smaller adhesive companies like Bluecoat and Supershva at over 2X sales. They were also targeted but no plans to sell out for next 2-3 years.

9)Shot in the arm moment for the company came when Prince Laminates,a large Mumbai based Distributor with access to 600 dealers ditched Fevicol to sell only Euro. Company expects similar developments in Bangalore.

10)Promoter stake at 60% including associates and relatives. 96% promoters holding was pledged which was completely released recently. No plans to hike stake as of now.

11)Would be a big beneficiary of GST if or whenever happens. Pays Excise,VAT and others at 27%. 18% GST cap would be a big boost.

12)Operates with around 50% Gross Margins. Not sustainable.Will get reduced if crude moves higher. Though 5 year average Gross Margins are healthy at over 45%.

13)The competitive intensity factor where product price is tied with leader Fevicol prices. Moment Fevicol increases their product price,it follows too.

14) Have grown nearly 12 times in last 5 years,from 4crs in 2010-11 to 47crs in 2015-16. 100crs is the peak capacity sales which they are targeting by FY18. Targeting FY18 Ebitda of 8% and NPM of 4-4.5%.

15) No plans of advertising big way through the TV medium or so.Joked how Euro has a good brand recall thanks to Euro underwear,Euro cup,Euro laminates and so on. 200crs is what they can achieve with a fast speed after that the growth will slow down to realistic level. They may think of selling out then at proper valuations. 

Scuttlebutt-Retailers,Sales manager and Distributors:-(Mumbai and Himachal)

Mahesh Sharma,Himachal sales manager:He will grow 70% in his region in the present fiscal.In some product,Euro does the same thing in 60 kgs which jivanjor takes 80kg and fevicol 100.Euro priced premium to fevicol in some segment.Promoters commited looks after the grass root guys.Company keeps guys inspired and motivated.People address Fevicol as adhesives-Its like they ask for euro fevicol.

1)Bhoomi Ply:Was only shop amongst 3 in a row to have Euro, the other two did not stock it, and drove me away as they were doing hissab.Said that he stacks loads of tubs of Euro, and showed me 4 big boxes full.Had no clue what was Euro D3.Says sales are good, customers like it, not just because of the lower price.Says incentives are given by both Pidilite and Euro, nothing out of the ordinary.‎ Fevicol to get done with stock, Euro to encourage sales.

2)Local furnishing store, Borivali: Resinova Zesta is our preferred brand.‎Why choose Euro when there are cheaper and better alternatives?Euro costs us around 120 per kilo and Zesta is 115 Per kilo when we buy a 12 KG tub.We need something that gives us good reports, that dries quickly and gets the job done.Euro isn't bad, but there are better ones that do the job cheaper. We use Euro and Fevicol as spares when we don't get our preferred brand.

3)Golden Ply and Laminates:Euro sells, no issues, they're adhesives in the end.I would recommend fevicol over the rest, and there's a difference of 25 rs per kilo.Falcofix is running well and is marketed by Pidilite as the low end replacement to Fevicol.

4)Maharashtra Laminate (Big shop)‎:Didn't know Euro 9000, and had 55 Kilo tubs with Euro Marine 7000 on display. Said Euro 9000 must be ultra marine.Euro gives us incentives like cutter machines useful for carpenters and also gives us bulk discounts as incentives. Pidilite gives us nothing.Euro selling the most among adhesives.

5)Parth Ply:Euro D3 is the product that gives the output of 2 kilos of fevicol in 1 kilo, but is more expensive.Euro 7000 and Euro 7000 D3 are different, and the former is cheaper than the latter. Didn't know what is Euro 9000.‎1 kilo of fevicol costs 180 rs, 1 kilo of euro 7000 D3 costs 230 rs per kilo, but ultimately Euro is cheaper because less adhesive is needed. Performance has been solid.Incentives are given by both.Fevicol is selling more because of brand name,.else the performance is great for both.

6)Lucky Electricals and Hardware(Friends shop): Stocks Euro 7000 Marine, but calls it Euro 7000 Fevicol, says people relate to it better that way.Says that 70 percent Fevicol, 30 percent Opt for this.The 30 pc, he says, is because people are happy with its strength, and often come back to buy it once they've tried it.Did not know about D3, says that this is the one thing he stocks and sells.Did not speak much about incentives.

7)Chedda Laminates:Euro is literally the best! People need to use it once! Every customer who has tried it has come back for it! They are extremely happy with the bond that Euro offers, and it's not just the price that makes them come back.Pidilite is overconfident about its brand, and has started paying more attention to other products and their marketing, but Euro is catching up very fast.Euro is taking care of their customers by assisting carpenters, giving those instruments in the big boxes and also coupons worth 10, 20, 50 Rs etc that makes the small folk happy.They are also giving trial packets, etc to people and telling them there's nothing to lose, if you find it nice, use it!. He believes that Pidilite is losing its share in the town area and even more so in the areas north of Bandra! (Andheri, Goregao, Malad, Borivali etc). Not that Euro is the only one gaining, but it is a prominent company that's gaining.I am still selling fevicol, but I recommend my customers to try Euro and (points to shelf) I'm trying to sell more of Euro than Fevicol. (Packets of Fevicol are placed behind Euro on the shelf.)D3 is a phenomenal product, but it isn't marketed a lot by the company, so isn't popular.

8)Logus Ply and Laminates:I'm selling both, and Euro is great, but people who want Fevicol buy Fevicol only.But Euro does have a substantial share in the market, it has been noticed and is being picked up enough for me to refill it often.Fevicol gives me more margin than Euro.Euro is being picked up because the customer is also seeing what is he getting in return. Pidilite doesn't give any incentives, Euro gives them as vouchers and tools, so people see where more advantage lies and go and take it.It's not that it's a bad performer either, it's doing pretty well infact. Which is why people don't mind buying once they've tried it. The money saving isn't a huge deciding factor, it's the overall advantage.No idea what Euro D3 is."Fevicol vs Euro is like Colgate vs Pepsodent"Is Euro that popular? That it can be compared with giants of their industry like that?"Not yet, there's time for that, but it isn't impossible"

9)Laxmi Timber Mart:I don't stock Euro at all. I don't think it's a great product.I think people are greedy for those cutter machines more than they are looking for the adhesive.The machine barely costs 1500 Rs, why sacrifice the best adhesive for that tiny amount?

10)Plypoint:Euro is pretty nice quality-wise, I have had people come back and ask me more, not many, but several. It has a decent market share and is doing well.The adhesive business barely gets us any money, the margin is negligible.Both Fevicol and Euro go at almost the same rate as they come in, hardly any earnings in them.

11)Ravi Ply:Even if Euro tries hard, it can penetrate only 20-30 percent of Fevicols share.It's a good product and it definitely has its presence in the market today.It has a chance to grow if it pushes very hard for the next 5 years, with advertisements, contractor benefits, carpenter incentives, low price, bulk discounts etc.Do you think it is working hard enough?"Definitely."You stock araldite and Fevicol, but not Euro. I don't keep Euro on display that much, but I do stock it. I do have an advantage selling Euro, because it is cheaper,it sees a lot of orders quantity wise, margins are also a little better than Pidilite.Fevicol is like the Sharukh/Salman Khan of the adhesive industry, newcomers will have quite a challenge to try to topple it.

12)National Ply:Relatively large store,has loads of huge tubs of Euro lying around. Euro 7000 Marine more than the regular Euro 7000.Most Fevicol Tubs are smaller than Euro tubs and are kept on top of Euro.Euro was given more preference in display than Fevicol. Most low level, illiterate employees refer to Euro as Fevicol itself.Was a busy shop so didn't ask a lot of questions, but he seemed confident about his views on Euro.But as he flicked through the receipt book, I saw plenty Euro. However, Euro Ply was also sold there, so I could be wrong. 

Misc points: As on date they have got debt of around 8crs,mostly working capital related short term loans.They spends a fortune in sales promotions and marketing expenses. They were of the opinion that company will have to incur marketing expenses in order to penetrate new markets and establish EURO as a brand across various cities and states.The expenses will remain more or less same in the absolute terms and thus in terms of percentage of total income will gradually reduce considering economies of scale.Promoters supported the company with interest free loans during difficult times. No related party transactions. Some associates of promoters manipulated the stock price in the year of 1995  for which Sebi penalised them. Since then the promoters have turned extremely cautious and reports to Sebi themselves even in small stock price rise.
........................................................................................................................................................................................................... Btw:About to launch some "SEBI compliant" smal an  midcap services only meant for long term patient disciplined investors. Do fill the form if that interests you. Happy investing folks.

Note: For issues or assistance kindly contact Dipendu at 9007652301.

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