Friday, 1 March 2019

The Road Ahead

Dear Readers,

2013 to 2018 was one way bull run in midcap small cap, with every tom dick harry becoming a stock picker and every tom dick harry stock becoming a multibagger. When such excesses are there we have a bear market impending (I had warned in Nov 2017 with my post Be Value Sensitive) post Jan 2018 this time the bear market came but on midcap and small stocks mainly and not on the indices, now most of the dust is settled and bull run in mid & small cap will begin meanwhile individual cases where there are excesses will continue to get punished.

All these are normal market phases we need to adapt to.

We have recently witnessed Media Outlets are picking up any stock and announcing that they have spotted corporate governance issues and as a result stocks crashes 10-20% just like that.

Remember, how in 2017 there were "Rocket Emojis" flying all over the whatsapp groups related to stock markets, every stock picker was having a great time, every stock was a potential multibagger. 

Just like that now every other stock has issues, is a fraud company, or over-valued according to popular belief.

Some popular beliefs that got trashed recently was Market will crash due to BJP losing state elections, Market will crash due to Auto nos being weak, Market will crash due to Urjit Patel sudden resignation.

Another popular belief that has made space in everyone's mind now is that Midcap and Small Cap will continue to fall, Everyone believes till election nothing will happen in the midcaps and smallcaps.

Markets generally are under no obligation to reward popular belief.

I feel we are now in a situation when valuations are comfortable but panic is high, fear mongering about corporate governance is at peak. But, there might not be any panic selling left because there is no one left who would sell.

Some people also believe the current India Pakistan tension is going to play a big spoil sport for the markets. I beg to differ on this, India is a growing economy with comfortable macros for now after the Crude price crash, Pakistan will not be able to afford any war with India and escalations would just be hyped by Media.

So the point i am trying to make is, Like the BULL RUN had its excesses and it got reversed I feel the BEAR RUN in midcaps and small-caps is over now and it is time for a sharp rebound in quality mid & small cap names and it should start before the general elections itself.

2013 to 2017 was a period of many multibaggers, Right stocks went up 5x and 10x easily.
2019 to 2021 will be a period of many right stocks doubling and/or tripling, One should not get huge 10x multibaggers easily right now as the cycles and markets have started to mature up.









Which are these stocks? Right from 2014 I have been writing about stocks I like for free and would continue to do so going forward.

We also provide research to our clients at ACE Equities.

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Thanks & Regards,
The Ace Investor

Wednesday, 16 January 2019

Coffee Day Enterprises Ltd - Value Pick

Related image

Coffee Day Enterprises Ltd.
CMP 280 (ACE Equities clients at 260)
Market Cap: 5980 crores
Book Value: 115
52 Week High/Low: 374.60/237
FY18: Sales 3274 Crores, Net Profit 106 Crores, EPS 5.03.

- Headed by V G Siddhartha (ex JM Financial portfolio manager).
- Cafe Chain started in 1990s which triggered cafe culture in India .
- As of date is India's largest cafe chain with a foot print of 1600 + stores across 220+ cities in India. 
- One of the rare chains to have sustained in the same business for more than 2 decades despite regular competition from global players like Costa Coffee, Barista, Coffee World and now Starbucks.
- CCD also has outlets outside India in countries like Nepal, Malaysia, Czech Republic and more.
- Coffee Day Enterprises as the holding company for Cafe Coffee Day outlets business and Coffee Machine vending business, It has stake in Mindtree (17%) 53.8% holding in SICAL Logistics, Land parcel of 135 + acres in Bangalore and Mangalore, The Serai (resorts) and 85% stake in way2wealth stock broking.
- In late 2018, Cafe Coffee Day signed exclusive agreement with UBER Eats to launch new cloud kitchen brands in partnership, Cafe Coffee Day outlets would have new exclusive menus for Uber Eats that will create exclusive brands.
- Company tied up with Australian dairy player named Frosty Boy for milk shakes (The deal went largely under-reported in Indian media). FrostyBoy remarked it as their entry to Indian Food Market.
- Company also recently tied up with PowerSquare to offer wifi charging soon at all its outlets.
- Company has launched interesting combos as it looks to take on the entry and increasing competition from Starbucks.
- Company has launched its own app called CCD and gives discounts etc to users. Also the ability to order on the go through the app, take a pick up and stuff like that. 
- Company has announced a restructuring plan to divest their stakes in group businesses such as Sical Logistics, Kotak is advising them on the same.



 I believe Coffee Day which is India's first cafe chain is cautiously cooking up something really interesting, First their tie up with FrostyBoy, then their exclusive tie-up with Uber Eats and now their plan to divest stake in various other businesses.

As remarked above: Cafe Coffee Day holds 17.08% stake in Mindtree, Current Value about 2400 crores, CCD has total debt of 5000 crores, Interest Cost FY18 was 349 crores on PAT of 106 crores, if interest cost is halved PAT would be 280 crores and EPS of 13 in FY18 itself.

This Uber-Eats tie up and creation of new exclusive brands can create lot of value for the shareholders sooner or later.

The company's first brand with uber-eats is named Home Cravings and is offering combo meals and home cooked style food experience in Bangalore. The brand appears to be in beta stage to test the market dynamics but the ratings across bangalore on the Uber-Eats app have been good.

Key Risk: Failure in combating Starbucks threat and deteriorating brand value.

However, here actually our bet is on the Jockey (V G Siddhartha) more than the horse itself, A guy who was doing a stock market job and can do so many exciting things such as Way2Wealth, Build such a great empire, Pioneer Cafe Culture in India, survive in the business despite global competitors would surely do something to sustain further. The developments they have been under-taking such as tie-ups and all does hint at one thing, The promoter is not willing to let this business die a slow death.

All in All, Coffee Day at 1.40 mcap/sales does not look expensive to me at all.
The Costa Coffee acquisition by Coca Cola with an eye on China network does show us how the sector is exciting with more global players looking to get into this space.



Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.


Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that i might have Coffee Day Enterprises Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.

Friday, 11 January 2019

Finolex Industries Ltd - Value Pick


Image result for finolex pipes

Finolex Industries Ltd.
CMP 530 (ACE Equities clients at 500)
Market Cap: 6650 crores
Book Value: 216
52 Week High/Low: 713/463
FY18: Sales 2738 Crores, Net Profit 299 Crores, EPS 24.06.

Half yearly FY19 EPS for Finolex is at 14.48 for Sept 18 v/s 8.71 Sept 17. (66% bottom line growth)
The margins growth latest quarter was backed by good growth in their PVC Resin segment (Which is not going to be around for a long time)
Since the company is converting from B2B to B2C, Most of their PVC Resins will be utilized in their PVC Pipes manufacturing itself.

Even though numbers look very rosy the annual eps projections for FY19 are pegged between 27 to 29 v/s 24 of FY18.
At an EPS of 27, current P/E for Finolex is at around 17.
If we look at the five year average P/E that Finolex has commanded it has been around 17.
The peak P/E was 79 (though erratic) lowest p/e was 9.65.
If we look at the P/E it had at all time high of 760+ in 2017, It was at a P/E of 27.


- The company is changing from B2B to B2C with total focus now on Pipes segment.
- 70% of pipe sales are Agriculture driven.
- Is increasing focus in plumbing pipes, their total capacity is 3,70,000 MT for Pipes & Fittings.
- Has entered the higher margin Cpvc Pipes business (Astral's core area)
- In 2017, Co. signed agreement with Lubrizol the inventor and largest manufacturer of CPVC compound in the world.
- Has a capacity of 6000 MT for CPVC, did sales of 5900 MT in FY18 at 147 crores. 
- Is going to increase the CPVC Capacity to 15000 by FY20.
- We are seeing a total shift in demand from construction sector in favour of Plastic Pipes v/s DI Pipes and Iron Pipes.
- Old buildings, socieities also witnessing repairs in rusted pipelines leading to demand for Plastic Pipes.
- We believe the market can grow at a pretty aggresive growth rate soon and branded players like Finolex which has great distribution reach should be able to tap it to their benefits.
- Company holds stake worth 1000 crores in family owned Finolex Cables (Though bothers within the families have been at loggerheads) 


Key Risk: CRUDE price volatility, It is widely known that the company will witness inventory losses because of sharp crash in crude (PVC Resin segment)
However, with migration towards B2C, tapping margin accretive category such as CPVC we expect the company to negate some of the risks.

At annual EPS of 27 the stock is at a P/E of 18, and at a MCAP/Sales of 2.19.
cPVC Pipes player Astral Poly trades at a P/E of 61 and a Mcap/Sales of 5.32.

Stock has remain muted due to volatility in Crude prices, it will be very interesting to see how the management has managed the crude risk in next two quarter results.
Considering the future outlook, discounting short-term hiccups due to crude volatility throwing the spread for a toss, lower crude price is a long-term positive for Finolex Industries.
Once the business becomes totally B2C focussed, and builds on the brand value and makes a mark in the cpvc segment, will not be surprised if it is given a rating similar to Astral which trades like the Paint Sector.

Hence we have a LONG TERM buy rating on Finolex with recent lows of 430 expected to be a potential bottom for the mid/long term.

NOTE: When we bought Finolex Industries, we anticipated that the company will suffer an inventory loss due to crude fall and erosion in the value of pvc reisins, like last time when crude fell. However, This time despite the crude price correction, PVC Reisin has seen a price increase, Which means there should not be any inventory loss. 




::LINKS::
Finolex Website
Latest Investor Presentation
Screener of Finolex



Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.


Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that i might have Finolex Industries Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.

Thursday, 3 January 2019