Bodal Chemicals : A turnaround story

Introduction

4–5 years back, Bodal chemicals was in lot of debt. The company had debt-equity ratio of 8.78. However, Chinese government’s crackdown on specialty chemicals companies changed picture of Indian counterparts. Chinese government imposed strict pollution control norms on chemical companies. This led to under-utilization of their capacities. So, this move vacated Chinese dominance in chemical sectors. So, who would be favored by this event? Obviously, Indian chemical companies. Bodal is the beneficiary of this favorable event. Generally, I don’t believe in turnaround stories, unless they show consistent earnings growth and strong, predictable business model. However, Bodal deserved a serious analysis.

Business model

Bodal chemicals manufactures specialty chemicals for textile, paper, plastic and leather. 71% revenue comes from domestic markets and 29% revenue comes from exports. They export to more than 50 countries. Bodal has wide customer base of 375+ customers worldwide. The company has total 9 Manufacturing Units in Gujarat-India. Bodal Chemicals has a modern, well–equipped and in-house R&D Lab for testing and new product development; and constant improvement in the existing product lines. Expansion in new plants and inorganic growth through acquisitions and joint ventures will drive revenues growth in long run. These expansions happened without using significant debts. Their long term debt is negligible.

In detail, Bodal has following divisions :

1. Sulfur and bulk chemical division
2. Dye intermediates : Nearly 70% of production is being exported worldwide to various clients including several multinationals. Apart from being leader in indigenous market, products are being exported to China, Korea, Thailand, Taiwan, Japan and European belt. Today, Bodal is one of the largest manufacturer & exporter of Intermediates in India. Bodal enjoys 25% share for dye-intermediates in Indian market.
3. Dyestuff : Bodal has invested more than 0.5 million U.S.D for making International level Dyestuff, technical service laboratory, dyes quality control laboratory, paper, leather and textile dyestuff. Bodal enjoys 9% share for dyes in Indian market.
4. Trion : TRION T.C.C.A, the compound is a disinfectant, algaecide and bactericide mainly for swimming pools and dyestuffs, and is also used as a bleaching agent in the textile industry. It is widely used in civil sanitation for pools and spas, preventing and curing diseases in animal husbandry & fisheries, fruit & vegetable preservation, wastewater treatment, as an algaecide for recycled water in industry and air conditioning, in anti-shrink treatment for woolens, for treating seeds and in the organic chemical synthesis. Main market is US. It has received license in USA for environment protection. Trion Chemicals manufactures specialty chemicals and its base products.

Positives of Bodal Chemicals

1. As other countries are regulating their dyestuff industry with mandatory norms for waste treatment, it eliminates their domestic companies’ ability to dump the goods to global companies. This level-playing field of competitive pricing only adds to advantage to expand market share globally with quality conscious products and solutions.
2. Bodal will continue to make sustained investments for capacity expansion and keep a comfortable debt profile. E.g. SPS processor and Trion Chemicals.
3. Large population, low per-capita consumption of chemicals, strong GDP growth outlook and favorable initiatives by the Indian government.
4. Certain recent developments in China have presented a substantial opportunity to the large and organized Indian manufacturers of dye intermediates and dyestuff.

Negatives of Bodal Chemicals

1. Revival in Chinese Market : If Chinese player starts to manufacture at the capacity utilization level of pre-crackdown period, Indian companies in this sector are going to be disrupted. This is the primary threat for Bodal.
2. Unfavorable commodity cycle : Bodal is a commodity player. If demand from end industry turned down, Bodal will get hurt. This had happened in last couple of quarter.
3. Unorganized players may turn up the heat : This segment has many unorganized players which could sell products at lower prices. However, after the advent of GST, unorganized players have to conduct their business in formal sector. This has turned negative for unorganized players because they have to pass all the pollution control tests, which may not easy. So, for this sector, Government’s regulations act like strong barrier to entry.
4. Increase in raw material prices : Bodal uses crude as raw materials. If crude prices increase, their turnover decreases. They pass on cost to consumers.
5. Scalability of growth : In last 2–3 years, Bodal could show stellar growth in earnings. But, considering some of the headwinds in the sector, growth may slow down.

Management quality

Management has very good experience in chemicals sector and built the company from scratch. Mr. Suresh Patel is a first generation entrepreneur. The important thing is company has negligible long term debt. This management could make the company almost debt-free. Company is expanding in organic and inorganic ways which I believe, moat-widening acquisition. So, overall management is hungry for growth, with little debt on their financial statements.

Investment rationale

I bought bought Bodal Chemicals at Rs. 171.9 per share. The main reason is favorable outlook for the company in next few years. Their expansion plans will add significant revenues. Management could achieve significant return on equity (30%+) in last 3 years, with less debt. Given the commodity nature of the business, I don’t want to allocate too much investment capital to this stock. So, I have very small holdings in this company. But, I believe that in the long run of 3–5 years, this business may grow satisfactorily. Recent correction in the stock gives very nice opportunity to accumulate shares at cheap valuations.

References

1. https://www.bodal.com/
2. Annual reports of 2013, 2014, 2015, 2016 and 2017.

Call to action

If you like the article, please share and comment your views on it. Also, I have decided to revamp my investment strategies. As part of the same, I want to concentrate my holdings to 2 businesses per year. Earlier, I invested in a company per quarter. That was 4 businesses per year. These new strategies will be applicable since year 2018. So, I will share 2 businesses where I have invested in. Also, I will share 2 blog posts on my investment philosophy. Also, I will share updates on business performance and my views on the businesses in my portfolio. So, next stock will be shared in Jun-2018. Please stay tuned.

Disclaimer

Investment in equity market is subject to market risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

Also published on Medium.

Huhtamaki PPL : This MNC has an awesome story to tell

Introduction

As part of this blog, I share where I have invested my savings in the last quarter. Q3 FY2017–18 will end by this month. While researching for investment ideas in this bull run, I found one pretty cheaply priced and nice quality packaging multinational company’s stock, Huhtamaki PPL. Huhtamaki PPL is an Indian subsidiary of Huhtamaki Oyj, Finland. Huhtamaki Oyj is the specialist and one of the top manufacturer of packaging products globally.

Huhtamaki PPL’s history dates back to 1935. It started the production as “Paper Products Ltd.” In last 80 years, company expanded at multiple locations in India. Since 2011, the parent company is investing significant amount in packaging businesses in India in the form of inorganic growth. Huhtamaki PPL has 14 manufacturing plants in India. It also started new plants in this year in North-Eastern states of Sikkim and Assam. This makes pan-India presence for customers with flexible packaging materials.

Business model

Huhtamaki PPL provides aesthetic and sustainable packaging for FMCG and Pharmaceuticals companies across the country. It has many products in its portfolio. Looking at the portfolio of packaging solution, I strongly believe that Huhtamaki PPL touches lives of every Indian. That’s the reason, Huhtamaki PPL can be described as simple and awesome business.

This company derives most of the revenues (96–98%) from FMCG sector. The key clients include Britannia, Cadbury, Castrol, Coca Cola, Dabur, Emami, Eveready, GSK, Godrej, Hindustan Unilever, ITC, Marico, Nestle, Pepsi, Perfetti, P&G, Tata Tea, TTK-LIG, Wipro etc. 80% of the revenue is derived from domestic market while 20% is derived from exports. This company has presence across 4 continents (South Asia, Africa, Middle East and Central America) catering 50 clients.

Let’s do SWOT analysis for Huhtamaki PPL.

Strengths

1. Huhtamaki PPL enjoys a unique client base in FMCG sector. All these companies are doing really good in the market because of deep penetration of them. Hence, it is continuous stream of revenues for Huhtamaki PPL.
2. While FMCG sector has direct association with spending power of population of the country. Considering inflation cooling off since 2014, the increased spending power is set to rise. So, packaging industry is going to be stable for considerable amount of time.
3. Superior technology and strong parental support provides competitive advantage.

Weaknesses

1. Any slowdown in FMCG and pharmaceuticals industry will affect this company as the company is dependent on these two sectors for revenue.
2. Company has done expansions (organic and inorganic) in last few years. This may result into rise in debt.

Opportunities

1. Strategic acquisitions of Positive packaging : This company was a competitor to Huhtamaki PPL. This acquisition will push market penetration.
2. Capacity expansion in North-East areas is going to boost the revenue and profits.

Threats

1. 60% of revenue is generated from 10 clients only. The growth prospect can be hampered in case of untoward business incidences.
2. Competition from unorganized players may hamper profits.

Management quality

68.8% of the company is owned by its parent subsidiary. The management could grow this company to multi-billion dollar company over the period. I believe this management is hungry to make expansion in Indian market. It pays consistent dividend over last 5 years. The strong promoter’s holdings enhances confidence of minority shareholders. The management had a clear vision for the company. ( You can watch Video.)

Investment rationale

Given the huge size of India and improved standard of living of people, FMCG sector poised to make lot of money. To cater to such humongous demand, packaging businesses like Huhtamaki PPL are certainly going to thrive.

Additionally, major stake in this subsidiary is held by parent company. That means, this company can provide niche technology and lot of investment to its Indian subsidiary. This is going to augur well for the company in the long term. Management of the company is awesome, hungry for the expansion and shareholder friendly. Unique products and deep market penetration is going to help company make profits in the long run.

I bought shares at Rs. 243 on an average price. The share was trading at P/E < 20. It has moved ahead of Rs. 300 within 2 months. So, the company’s stock was cheap, company has debt under its control and making profits. I strongly believe that if an investor has long term holding period for this company, this company can give very good returns and dividends.

References

1. http://www.moneycontrol.com/
2. http://www.huhtamaki.com/web/flexible-packaging-india#/
3. Annual reports from 2012 through 2016.
4. Management’s presentations

Call to action

If you like the article, please share and comment. Next stock will be shared in the month of Feb-2018. So, please stay tuned. Happy New Year 2018 to all of you.

Disclaimer

Investment in equity market is subject to risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

Originally published in https://medium.com/@cpaithane/huhtamaki-ppl-this-mnc-has-an-awesome-story-to-tell-6cf725b8ff3f

Apollo tyres, an attractively valued bluechip stock

As part of this blog post, I have started publishing rationale behind my stock-picks in every quarter. In last blog post, I have explained how Karnataka bank can add value to your portfolio. While searching for quality picks, I found another blue chip company worth adding to my portfolio, Apollo Tyres !

Introduction

Apollo tyres is one of the biggest tyre manufacturing company which enjoys ~20% of market share in India. The company also has presence in European market (Netherlands and Hungary). It is 17th biggest tyre producer in the world.

Business

Apollo tyres has presence in commercial and personal vehicles segment. Company has made debut in the 2 wheeler market in 2016. The company sells under brand name “Apollo Tyres” and “Vredestein” in India and in European market respectively. Now, I am going to present SWOT analysis of the Apollo tyres.

SWOT analysis

Strengths

1. Apollo Tyres enjoy diversfied business presence in the market including India and Europe. The company has plan to expand in Middle east and US market.

2. Apollo Tyres provides tyres to commercial vehicles, passenger vehicles and 2 wheeler space. Hence, it is a full range player.

3. Apollo Tyres has acquired Germany based, retail tyre distributor, Reifencom GmbH. The purpose of this acquisition is to expand retail network in Europe.

4. Apollo Tyres is focuses on R&D through center in Germany.

Weaknesses

1. Company doesn’t have presence in European OEM market.

2. Still couldn’t cope up with cheap imports from China.

Opportunities

1. Company has a vision 2020, to be premier tyre company with a diversified and multinational presence.

2. Leader in Truck Bus Radial tyres in India.

3. Eyeing European market.

4. Expansion of plans through new Hungary plant. Initiatives to capture new markets like Mid-east, South east Asia.

5. Anti dumping duty imposed by Govt. Of India will help Indian tyre manufacturers.

6. GST to play major boost for auto and auto-ancillaries companies as consumption will increase after next couple of quarters

Threats

1. Dependency on natural rubber and crude oil and government’s interference in controlling taxes on them.

2. Cheap tyre imports from China.

3. Economic slowdown in India and Europe could be a threat to earnings.

4. Indian currency fluctuations could result in pressure on margins.

Quality of management

Apollo tyres is run by seasoned entrepreneur Onkar Kanwar. Even though challenging domestic and global business scenario, the company is profitable and distributing good dividends while keeping debt under check. The management has expansion plans across continents like Europe, Middle east and US. This management could scale the distributor network in pan-India. So, I have faith in the management.

Conclusion and investment rationale

Despite being strong blue chip company in tyre sector, valuation of Apollo tyres looks reasonable. It is trading at 239 as of today. Company provides 20%+ RoE with consistent EPS. Considering growth in auto sector, tyre sector poised for growth. Hence, their earnings will certainly improve. Well established companies like Apollo tyres will benefit from recent anti dumping duty. Apollo tyres is also expanding in 2 wheeler market in India. Additionally, distributor network expansion in Europe will be seen as unlocking upside potential. Company has less debt (0.22 debt-to-equity). That’s why, I bought shares of Apollo tyres.

References

1. http://www.moneycontrol.com/

2. https://www.apollotyres.com/en-in/car-suv-van/tyre-finder/

3. Annual reports of 2014–15, 2015–16, 2016–17.

Call to action

If you like the article, please share and comment. Next set of stocks will be shared in the month of Dec-2017. So, please stay tuned. Happy Diwali to all of you.

Disclaimer

Investment in equity market is subject to risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

Karnataka Bank — On the journey of transformation !

Introduction

Karnataka bank is decades old private sector bank whose business is primarily located in southern state of Karnataka with expansion plan across pan-India. The bank is well governed and complying with Reserve Bank of India’s (RBI) guidelines.

Business model

Karnataka bank has stakes in following business operations :

1. Treasury operations
2. Corporate / Wholesale Banking
3. Retail Banking
4. Other Banking Operations like stock trading in stock exchanges, insurance and mutual funds.

SWOT Analysis

Strengths

1. Government of India (GOI) is taking steps to resolve distressed assets.
2. Government of India has plans for financial inclusion.
3. The bank is conforming all the guidelines set by RBI.
4. The bank has taken initiatives to mitigate financial risks.
5. The bank is willing to take new customer centric initiatives.
6. Good market share in southern Indian market.

Weaknesses

1. Non Performing Assets (NPA) menace in the banking industry in India.
2. The bank is tied up with distributors to provide Non Banking Finance Company (NBFC) services like insurance and mutual funds. They have least presence in NBFC space.

Opportunities

1. Government’s focus on infrastructure spending and boost to manufacturing will enhance bank business. Also, Government’s agenda of financial inclusion augurs well for banking sector.
2. Aim to provide less cash economy provides ample opportunities to participate in the digital banking.
3. Karnataka bank has a vision 2020 to double the turnover by 2020.
4. Wide and growing distribution network in multiple states and union territories.
5. Bank aim to provide NBFC services like demat trading, Insurance and Mutual Funds. Bank has tied up with multiple institutions to provide the service.

Threats

1. Rising NPA is a problem for this company. Karnataka bank has slippages in earnings due to NPA. However, NPA is well contained as compared to other banks available in the market.

Quality of Management

Promising financial ratios maintained as per direction of RBI. Karnataka bank is paying continuous dividend. The management is hungry for sustainable growth. By 2020, they want to augment the turnover by twice.

Conclusion and investment rationale

I bought shares of Karnataka bank this quarter because stock is available at very cheap valuation at P/B of 0.7. Other banks in the market with this quality are available at 2X or 3X of book value. Significant check on NPAs (2–3%) is a sign of quality management. Government’s boost to resolve NPA issue will turn into favor of all banks. So, investing into a good bank early is necessary. If bank’s Vision 2020 plan plays out well, the book value of the bank should go up by 2X. Additionally, other indicators (like Return On Assets, consistent Return on Equity and EPS growth etc) for financial institutions look good. This will create great wealth for long term investors.

References

1. http://www.karnatakabank.com/ktk/Index.jsp
2. http://www.moneycontrol.com/
3. Annual reports of Karnataka bank from 2014 to 2017.

Call to action

If you like the article, please share and comment.

Disclaimer

Investment in equity market is subject to risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

----

Originally published on medium : https://medium.com/@cpaithane/karnataka-bank-on-the-journey-of-transformation-23f4588a9cd2

What I learned from my Valgrind tryouts

Recently, I was spending time on making data structure library memory leak free using valgrind. 

So, posting what I learned from using valgrind. Though things are very simple, it helps in writing better code. 

The data structure library can be found here : https://github.com/cpaithane/cp_ds_lib/tree/master/src

===============

Valgrind error symptom : invalid write of 1 byte.

1. strlen returns output excluding '/0' character. So, if malloc or character array
is used to allocating memory, allocate strlen(str) + 1 number of bytes.

2. Also, string should terminate with '/0' character. Something like as follow :
str[strlen(str)] = '\0';

===============

Valgrind error symptom : invalid read of 4 bytes.

1. This error was coming out of removal of singly linked list. The list was 
traversed as follow : 

 tmp = head;
        while (tmp)
        {

                i++;
                head = sll_remove_node_0(head);
  tmp = tmp->sll_next;

        }

2. As part tmp = tmp->sll_next; code is accessing recently freed memory. The memory
is freed by sll_remove_node_0(). 

3. Fixed as follow : 

        while (head)
        {

                i++;
                head = sll_remove_node_0(head);

        }

4. Lesson learned : Always look at pointer after freeing of memory.

==============

Valgrind error symptom : Source and destination overlap in 
memcpy(0x4207278, 0x4207278, 4)

How to fix : 

node = malloc(len);
memcpy(node, temp, len);
Proceed further.

==============

Valgrind error symptom : Conditional jump or move depends on uninitialised value(s)

head of linked list was uninitialized and it was checked for some decision making.

Initialize the pointer to NULL.

==============

CP's data structure's library

Recently, I am investing an hour or two to write build a library of data structures. This library is written in C language encompassing implementation of multiple data structures. It also has test cases which provides code coverage for possible scenarios. This can be found at https://github.com/cpaithane/cp_ds_lib repository. It can be pulled from linux terminal using following command :

# git pull https://github.com/cpaithane/cp_ds_lib

Please provide your review comments on the work.

Thanks,
Chetan Paithane