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Thursday, February 16, 2017

My recent interview and the PVC turnaround candidate

Quote: Happy to share my interview folks. It's been a good long 12 years experience so far. The interview is all about it.

Guess the stock:-(Available at less than 200crs market cap,the 4th largest player in its industry by capacity)

Story: Company presents the widest, most comprehensive and coast effective range of PVC products, which are manufactured in 5 Modern production facilities located across India.It has been successfully manufacturing and marketing its products under the brand named K& C with a strong network of Distributors & Dealers spread across the length & breadth of India. Company caters to the need of topline clientele which comprises the likes of TCS,BSNL,Reliance info,Shapoorji Paloonji group,BHEL,Hindalco,L&T,HCC,Rahejas etc.

Rich Product Portfolio:
CPVC Plumbing Systems
•ASTM Plumbing Systems
•SWR Drainage Systems
•Composite Piping Systems

B)Infra and sanitation:
•PVC Pipes & Fittings
•HDPE Pipes
•Underground Drainage Pipes

C) Agriculture:
•Agricultural PVC Pipes & Fittings
•HDPE Pipes
•Submersible Pipes

D) Micro irrigation Systems
•Drip Irrigation
•Sprinkler Irrigation

E) Consumer products
•Moulded Furniture
•CPVC Plumbing Systems
•ASTM Plumbing Systems
•SWR Drainage Systems
•Composite Piping Systems

On the first glance,the company looks in a terrible pathetic state. It closed last fiscal with 465crs of revenues and a loss of 20crs. The serial equity diluter(7cr equity cap to 29crs in last 10 years)also defaulted in its interest payment obligations. The debt in book stands at over 250crs. Even its credit ratings were suspended. Promoters further have pledged 64% of their holdings.So why this particular company?

Family settlement: Just like most United Marwari families,the company was managed by four brothers. From indecision to inaction to laid back family managed approach aka mismanagement it almost had everything required to put up a doom show. And it actually delivered right? Fortunately things have started changing for good. They recently had a family settlement where the smartest one,SA bought out the remaining three.

Distributors meet in Udaipur: Company organised its distributor meet in Udaipur recently after a span of 9 long years. The company hardly expected any orders but went on to receive 72crs of order from the meet itself. Glimpses from that meet is available in the below link.

Arrival of the Rockstar: Before the family settlement took place,company tried a last resort by bringing an outsider CEO to professionalise the company which too failed miserably. Arrives 28 year old Junior Agarwal,son of Sanjeev Agarwal. RA has got a Bachelors degree in Finance from the University of Northumbria,Newcastle and a master degree in renewable energy from the University of Reading.From the family settlement to organising distributor's meet,the brainchild of the junior Agarwal started changing the course of the company. He also automated the Tarapur plant(went on stream this week itself) which will eradicate 1000 tonnes of scrap,resulting in annual saving of 8-10crs of working capital and making its product undisputed.

Supply chain and distribution network:Head Office of the company is Located in Mumbai. Company has 10 Branch Offices across the country including major regional cities such as Bangalore, Delhi, Ahmedabad and Indore. It also boats of 3000 strong Dealer/Distribution Network with over 500 exclusive K Dealers.

Strategies: Factories in Phulera, Baddi, Raipur and Roha have already been shut – All machines shifted. Some excess Land at Tarapur being considered for sale as well.Closing offices,godowns and moving to direct factory dispatches.Selling owned assets – moving to rent.Rationalising employee costs and other Expenses to allow it to spend in the right places. It's moving to a leaner business model by Focusing on Products and Markets with faster Rotation of funds.

List of idle assets for selling:-
•Raipur – 5 Crores
•Baddi – 6-7 Crores
•Tarapur Land – 6.5 crores
•Indore – Deal Done at 4.5 Crore
•Dewas – 1 Crore
•Indore – 1.5 Crores

Present focus:-
•Project Sales – to be at least 100 crores per year – from 50 crores currently
•Distributor model – promoting large distributors of over 20 crores per year. Currently none at that level but 3 already identified.
•Mix: Focus on high GP products – SWR, Column, Micro, fittings.

Operating+Financial leverage: Let's have a close eye on what it possess:-
1) PVC pipe capacity is 65000 tonne
2) PVC fittings 15000 tonne
3)CPVC 6000 tonne
4) HDPE pipes 5000 tonne
5)Furniture 8000 tonne
6)Micro irrigation 3000 tonnes.
Total capacity:-1,02,000 tonnes per annum.

Company last fiscal operated at just 40% capacity. As its easily assumable even if it's grows by as high as 30% CAGR ,it doesn't need any capex for at least next 3 odd years.Another very important aspect of the company happens to be its total area available and plant,building construction difference. On an area available of 294000 square meter,the plant,buildings are constructed on just about 90000 square meters. So even if it exhausts all its capacity,the land remains available to expand further. So barring few odd crs maintainence capex and working capital requirements,remaining OCF would be used in repaying the debt.

Key Market Drivers:-

A)Real Estate demand expected to increase in 2-3 years – constructions picking up soon.
B)Real Estate Bill –Pressure on builders to Complete Projects.
C)Smart Cities, Government spending on affordable housing – housing for all by 2020 etc.
D) Mental acceptance of CPVC and uPVC pipes as a replacement to GI – Potentially 10,000 crore market further available.

Industry Outlook: The total polymer pipe industry in India is currently around Rs 18,000 Crores, estimated to be growing at 8-10% per annum. Certain segments within the polymer pipe industry have shown a higher growth rate in the past, like CPVC which has demonstrated a growth rate of around 15% per annum. Unorganised to organise sector market share is split at 40:60%. Moves like demonetisation and GST will ensure boom time for the ethical organised players.

Indian Plastic Pipe Industry:-

●Plastics are increasingly replacing conventional materials such as steel, glass, paper, iron, aluminum and leather largely due to its cost effectiveness and durability
●For example, plastic pipes have replaced almost 80% of galvanized iron (GI) pipes in plumbing because GI has zinc-oxide, which corrodes over time
●Indian pipe industry is dominated by plastic pipes, of which PVC is the most prominent
●It is also expected that plastic pipes will contribute 51% of the total pipes demand by 2020.

9 month numbers: Company so far has delivered pleasant set of numbers in Its 9 month numbers(Adjusted Demonetisation effect) Total income has increased to 320 from 324crs. EBITDA has increased from 6 crs to 18crs. Losses have reduced from 22crs to 10crs. They also are in final stages of disposing some more idle assets. Deal to be announced any day now.

Risk and concerns: Company has been able to pass on its RM costs consistently over last decade which insulates it from the vagaries of input fluctuations. Young Agarwal,though comes with a brilliant aggressive visionary brain but lacks much experience. Company story mostly is dependent on his ability to steer it ahead by putting a check on working capital,introducing newer products,higher productivity,rationalising costs and retiring debts.

Misc points:- Company to repay debt and garner WC did a preferential issue at 40 bucks and collected 30crs. Though it diluted equity by nearly 35% but they had little to do considering the precarious,near bankruptcy position. Indianivesh sec guys and close associates/friends of promoters took part in the deal. As per the promoters,after family settlement and post pref issue,"Nearly 70% of the equity belongs to us and our close friends". Officially promoters own 51% stake as on date. We did interact to a lot of distributors of the company and they vouched for the quality of its product. They also mentioned,"Things are moving at a lightning speed and we are seeing sales figure never achieved in the history of the company". The mood is very vibrant with a customer centric focused approach. " The New lad" is making all ends meet to catapult the company in top level league.

Conclusion: The company is hopeful of delivering a topline of over 600-620crs in fy17-18 with an EBITDA of 12%. They should also make a meaningful profit of 18-20crs which would be the highest since inception.With disposal of idle assets and recent preferential issue of 30crs,the company has finally some fund. The company targets to achieve a topline of 1000crs within the next 3-4 years at an EBITDA of 14%.Even if it achieves close to its aim,stock would be a huge wealth creator. Even Amulya leasing which has less than 40% of company's capacity quotes at more than its Fy17-18 valuations. Finolex ,Astral,supreme though in different orbit,quotes in the band of 2-3x their annual revenues. Even on EV/EBITDA they quote in the range of 12 to 30. If co achieves 1000crs sales with a 14% EBITDA by 2020-21,stock would be an easy 6-7 bagger. Anyways,A .3x mcap to sales for company looks massively cheap by any metric. "It's tough to lose from this company folks". Now don't bother asking about its target...:)))))))

Btw: Did play a similar company called Uniply,though much smaller in size in a different industry but it resembles the pattern.

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