Much-Beyond-Number

Let me start with a practical example today – an example of the extent at which we go to ensure we present investors with the best of businesses to invest their hard earned money.

After initial due diligence, over the past few months we have been tracking a particular business that seems to have a good potential.

Let me give you a glimpse of their financials:

  • Net sales up by 15% in Q3FY19
  • Total expenses up by only 12% YOY
  • Expenses as a % to sales down by 160 bps
  • EBITDA saw a jump of 27% YOY – EBITDA margins expanded to 17.3% YOY
  • Due to repayment of debt, interest expenses are down by 55% YOY.
  • On a longer tenure – Net Sales, EBITDA & PAT have been up by 7.7%, 13% & 22% respectively (CAGR) over the past 5 years.

Company management:

The Promoter, Chairman & Managing Director of the company carries over 45 years of experience in the industry and oversees the entire business and has transformed the company from being a small player to one of the leading manufacturers in their space of operation.

What does future have in store?

Given the higher disposable incomes and changing demographics, this industry is poised for a strong growth. And hence we expect the company’s revenue to grow at a CAGR of 9% over FY18-23E. We expect EBITDA to grow at a CAGR of 15 % and margins to average 17.2% on the back of strong volume growth and premiumization leading to operating leverage. Company has been continuously reducing debt and aims to be debt free in the next one and a half years. Thus, debt/equity is expected to trend down going forward.

Aren’t these strong and vital indicators for a business to be performing well? Yes they are.

But does it stop just there? It surely shouldn’t!

To be sure that the expectations we have from the businesses are actually delivered, we not just went ahead and met their management – but even before we met the management, we met some other stakeholders of that business – their distributors in Maharashtra.

Here are the key findings:

  • Data related to consumption is reliable as it gets verified at 3 different levels
  • Demand in the sector remains agnostic to price increase. There has never been a year when the industry has reported a drop-in volume.
  • Even after demonetization, there was no impact on volumes.
  • Volumes are fairly predictable. There may be small variations in volumes, but the industry has never seen huge variations. There is seasonality in this sector, but it is fairly predictable.

After meeting the stakeholder – we went ahead and met the management of the company just to reiterate on our positive outlook towards the business.

Here are the key findings:

  1. Growth to be higher than industry – Company intends to grow at a rate higher than the industry which is expected to grow at 5-6% as the company is targeting to increase market its share. Growth is expected to be around 12-13% YoY in the next 2-3 years.
  2. Premiumization drive to continue – Along with the existing premium products new product launches will only be in the premium category going forward.
  3. Margin expansion – Company had targeted improvement of 150 bps margin improvement every year from FY16. Margins target will be met by FY21 – from 11.3% FY16 to ~ 18.5% by FY21. This margin expansion has been mainly on account of operating leverage due to increase in volumes and product mix change. Any price increase in the states will be over and above the stated margin expansion.
  4. Strengthening balance sheet:
    • Debt reduction – Company plans to be debt free by FY21 and has been consistently reducing debt since FY17.
    • No fresh capex – Existing capacity is sufficient to meet volume growth target for the next couple of years. Thus, no further capital expenditure will be required.
    • Working capital reduction – Favorable market structure changes in one of the key consuming states has led to reduction in debtors leading to working capital reduction and this in turn has boosted return ratios, i.e. RoCE.
  5. Industry outlook – Growth in the industry is likely to come on the back of rising disposable incomes, increasing young population and growing aspirations of the youth. Growth in industry volumes is expected at 2.5-3.0% from CY17-CY22. In terms of value, growth is expected at 6-7%.

Yes, this is the length and breadth we go to ensure that investors invest in the right businesses.

And would this not be a business you would also want to invest into?

Identifying a fundamentally strong & robust business is surely not an easy task, especially when it comes with an added responsibility that based on this, other investors are going to invest.

It takes tremendous amount of scrutiny, analysis, number crunching, identifying the future potential, understanding the management pedigree and a lot more.