TCI CMP110

Business+Moat:TCI is India’s leading Multimodal Integrated Supply Chain Solutions Provider with a Global presence. With expertise developed over five decades, customer centric approach and extensive infrastructure,TCI today moves 2.5% of India’s GDP by value.In a highly fragmented road transport sector, TCI is no more a commodity kind of player but a business driven by Brands and Networks => moat => pricing power. Apart from moving goods, TCI doing more complicated works like 3PL,inventory management, order processing, delivery, payment collection, labeling &packaging, warehousing and storage.

Management:Very important criterion-the people whom you are dealing with? If you get it wrong,then all other facts and numbers become unreliable, everything is a  waste of time.Good conservative Management with over five decades of experience.Governance and disclosure standards are high from the legacy of being listed over 4 decades since 1974. Now, infusing young blood with Vineet Agarwal elevated as MD last year,only raises hope. He is not only the face of the co but represents the industry on many issues.

Asset size:Covered warehouse space of mammoth 10 million sq ft, 7000+ fleet of customized vehicles (1500 owned), network of 1000+ IT enabled offices, call centers across India, 5000+ strong trained work force, 4 cargo ships, nearly 200 properties across India, presence in 4 countries, 10.5MW wind forms, high potential JVs etc. Can you duplicate the setup (replacement cost) for 900 crs?Imagine how many years it will take for anyone new to come up with such gigantic stuffs.

Opportunity size & Scalability:The country’s logistics sector is expected to cross US$200 billion by 2020 from current size of US$125 billion.Logistics is middle infra, hence a direct play on economy. In 2007, India was barely $1trillion economy but now kissing $2trillion.Despite current hiccups, hopefully set to double in 6-7 years and many more trillions to follow. So does the goods manufactured, consumed, imported and exported. No choices but all things have to be moved, who is going to do it? The great new Indian consumer society consuming like never before, who is going to fill the shelves? Logistics is unavoidable bridge and you have to pay the toll. Obviously leaders like TCI, armed with some finest assets in the industry, will leverage this asset base and benefit.The industry is one of the most fragmented.With technology adoption and the advent of modern sales formats, the unorganized sector is gradually losing out to organised counterparts.

Prudent debt management:Despite being in a capex driven industry, they are very careful with its debt. Net D/E ratio at 0.6 & Longterm D/E at 0.15. Long-term debt is just 20% of total.Interest cover is 4. Highest credit ratings from rating agencies.Capex mostly funded from internal accruals. From 2006-2013, their total capex was 501 crs. During that period, net debt increased only by 123 crs (from 113 crs to 236 crs), means they generated 378 crs from internal accruals over the 7 year period. This cash generation would only increase going forward.They propose big a capex of 230 crs for this year, FY2014— 60 crs from internal accruals & 170 crs from debt. These capex are unavoidable in this business since you have to be ready with infra to seize the opportunity bcaz of likes of GST & FDI. Given their prudence with debt, these big capex may bring short-term pain as higher interest costs but do bring fruits over long-term.

Carving for better margin:Their approach seems pragmatic about growth— knowing topline is vanity, bottomline is sanity.They let go off many deals sensing bad payments.Self-restricting the growth of credit driven TCI Freight, since its debtor days crossing normal 60 days and putting stress on working capital. That’s how they keep the business in rock solid footing.Management tries for better profitability with better business mix. Now, the two high potential divisions SCS, XPS are contributing 55% in sales and 70% in profits. In future the share of SCS, XPS & Freight in sales would finally settle as, 35:30:25 respectively. As high margin businesses taking lion share and improving, margins would pickup.If Management gets things in order, TCI can finally achieve net margins around 8%.

GST proves elusive:Usually logistics grows at 1.5 times the GDP rate. As a direct economy play, lower GDP means lower growth for the co.But I think over a 5 year period, things will even out.GST for logistics is somewhat comparable to what Cable Digitisation meant for Media.It would bring a 15-20% cost advantage and more business for logistics players over 3 years period (single national market, seamless movement of goods across state borders, emergence of hub&spokes distribution model etc). Not only for logistics, the positive vibe of GST will be felt across the board. It alone can lift GDP 1-2%, really big deal for a growth starving nation.GST can be delayed but not denied.With Modi at helms now,things surely can only change for good.

Consistency:Over the last 5 years from FY2009 to FY2013, which was very difficult period for the world trade after the 2008 meltdown,the CAGR of TCI in:-
BV = 10% (rs.40 to rs.60)
Topline = 15% (1350 crs to 2140 crs),
Net profit = 20% (33 crs to 70 crs).
Not expecting anything this fiscal 13-14 as more of a period of consolidation.PAT more or less would be at the same level.
Assuming TCI will continue to grow at 20% rate from now on— which it achieved in the worst period of world trade— net profit will be in triple digits for first time in FY2015-16. And over next five years,say from 2016-17 to 2020-21, they will make 250 crs at 20% CAGR. And fortunately, say, the much expected tail winds (like GST, retail FDI, GDP growth etc) happens soon after election.Then a bit of higher growth can be possible. At 30%, they will net 370crs.At 40%, they will net 540 crs.Over last 10years, 2003-2013—they never had a down year— topline up 4 times (530 crs to 2140 crs) and bottomline up 11 times (6 crs to 70 crs).

Valuation:Last quarter results are on may 24th so not making an assumption.Better to see and pen an update once the same gets announced.For fy15-16 they will cross 100crs of PAT.So at present prices it quotes at 9 times its fy15-16 earnings.Lets put a reality check to its peer group valuations.Gati trades at 15 times forward,Blue dart trades at 20 times fy15-16 earnings.There’s no point which should make the leader TCI quote at such a large discount to the peers.Putting a conservative multiple of 12.5-13,I arrive at the target price of 170 bucks.A great high conviction bet.Bet it on for coming 3-5 years to make a pot of money folks.

Gulshan Polyols Ltd CMP70

Story:Muzaffar Nagar based Gulshan Polyols Ltd (GPL) has emerged as the largest manufacturer in India of 70% Sorbitol and Calcium Carbonate.Its production facilities are spread over 6 locations in 5 states covering land area of more than 150 acres. Company has installed capacity of 1.05 lac tonnes of Calcium Carbonate and 60000 tonnes of Sorbitol.In order to reduce energy costs, GPL also has 10MW of cogen power.

SORBITOL 70%:GPL has fully integrated facility for producing Sorbitol (Corn to Starch to Dextrose to Sorbitol) with 3MW cogen power. Sorbitol is mainly used as Sugar substitute and bondingagent. Main user industries are Healthcare,Cosmetics,Confectionary,Textile,Paper,Paints industry etc.

CALCIUM CARBONATE :Company producing various varieties including PCC, GCC, ACC and WGCC. Installed capacity is 1.05 lac tonnes with 7MW cogen power plant to meet energy requirements. GPL is also 1st company in India to install onsite PCC plant at a paper factory.Main user industry for Calcium Carbonate are PVC&Cables,Dentrifice,Detergents,Rubber,Plastics etc.

Clientele:GPL’s customer list includes who’s who of corporate India:-
FMCG :Colgate, Dabur, ITC, Unilever, Wipro
Food :Brittania, Candico, Yahoo Foods
Paints :Berger, Asian Paints, Kansai, Pidilite
Paper :ITC, TNPL,BILT, ABC Papers, Century Pulp
Pharma :IPCA, Cadilla, Torrent, AstraZeneca, Novartis, Pfizer, Merck etc

Buying of promoters:Last year, promoters had increased their stake by 5% (maximumpermissible limit through creeping acquisition route). Again, in current year promoters have increased their stake by another 3.50%.Now, PROMOTER STAKE STANDS AT 73.64%. A comparative small promoter increasing stake by 8.50% in less than 2 years speaks of confidence of promoter in future prospects of GPL.

Valuation:.GPL has been reporting consistent performance and steady growth. Same has been possible due to strong cost control measures, highly efficient production practices,and dominant market shares with strong/top brand customer base. Despite so called economic slowdown and global factors and rising interest rates,company has been improving its performance year after year which speak s of efficient management. With low debt, interest cost account for less than 1.50% of total sales.For FY13, GPL Pat rose 34.70% to 24.13 crores, translating into EPS of Rs 27.43. Company doubled the dividend to Rs 2.50 per share.For H1, GPL has achieved good nos with topline rising by 18% and Bottomline rising 14%.Newly set up plant in Rajasthan has contributed to higher turnover.GPL is likely end FY14 with topline of 310 cr ores and Pat of Rs 25.50 which will provide EPS of Rs 30.20. Hence, stock is available at extremely low PE Ratio of 2.5x FY14E EPS.Current Marketcap of GPL is just 64 crores whereas CASH ACCRUALS OF PREVIOUS 2 YEARS (FY 12 and FY 13) stand at Rs. 69.53 crores which means market cap is less than 2 years’ Cash accruals.

Buffett Partnership Letters: 1961

Berkshire Hathaway’s letters to shareholders are oft-quoted and Berkshire’s annual shareholder meeting is well-followed, as value investors try to glean the wisdom of the world’s greatest investor. But before he ran Berkshire, Warren Buffett was far less followed and ran his partnership with a sum of money much smaller than he employs today. The issues he faced then are probably far more relevant to the individual investor today than are Berkshire’s current challenges. The following series attempts to summarize the key takeaways from Buffett’s partnership letters.

Add Value Or Don’t Do It

Buffett’s objective is to achieve long-term returns superior to those of the Dow Jones Industrial Average. If he is unable to do that, he notes that there is no reason for the partnership to exist. Capital would be mis-allocated.

Long-term Focus

What happens in any one year is irrelevant. In fact, during bull markets, Buffett expects his returns to be lower than those of the market. What’s important is whether the partnership can outperform over several years, cumulatively. Buffett is “much more geared towards five year performance, preferably with tests or relative results in both strong and weak markets.” 

Asset Values Are Sometimes Ignored

Buffett discusses a stock in which he invested 35% of the partner’s funds. The company, Sanborn Maps, had lost a lot of earnings power in recent years. However, the company had stockpiled cash during its good years, and therefore had a portfolio of investments adding up to way more than the stock price. The company was on sale for just 70% of its investments (in the form of blue-chip stocks), with the map business thrown in for free!

Patience Is Key

Buffett has begun open market transactions of a “potentially major commitment”. As such, he hopes the stock does not increase in price for the next year, in order that he may accumulate more shares. A stagnant stock in which the partnership holds a large position would most assuredly hurt the partnership’s short-term performance, but that is irrelevant in the long term.

Buffett Partnership Letters: 1959 – 1960

Berkshire Hathaway’s letters to shareholders are oft-quoted and Berkshire’s annual shareholder meeting is well-followed, as value investors try to glean the wisdom of the world’s greatest investor. But before he ran Berkshire, Warren Buffett was far less followed and ran his partnership with a sum of money much smaller than he employs today. The issues he faced then are probably far more relevant to the individual investor today than are Berkshire’s current challenges. The following series attempts to summarize the key takeaways from Buffett’s partnership letters.

No Need to Forecast the Market

Buffett describes the market in the late 1950’s as exuberant, as “investors” believe they can make easy money in the market. He does not know how long these speculators will be able to add to their numbers and keep prices moving higher, but he stresses that he does not attempt to forecast the market.

Illiquid Investments Not A Problem

Buffett notes that during bull markets, he would be satisfied just to match the performance of the general market. However, during bear markets he believes it is likely his fund will outperform. This is because he owns a lot of securities that don’t move with the general market, including tiny companies that are owned by few people and don’t trade often.

Willing to Sell Cheap To Buy Even Cheaper

Buffett describes one particular large investment his fund sold out of in the previous year. Buffett purchased a bank stock for around $50/share that he believed was worth $125/share. (It had earnings of $10/share.) Because he was so confident in his estimates, he wanted the stock price to remain low so that he could continue to purchase shares at a low price. He ended up selling out at $80, which is still undervalued in his estimation, in order to take advantage of an even more compelling situation.

Willingness To Bet Big

Buffett was willing to invest 35% of the partnership’s assets in the new situation!

Influence Counts

Buffett did not consider this investment more undervalued than some of his other securities. However, becoming the largest shareholder of this stock, which comprised of investments worth substantially more than the stock price, has benefits that he hoped would help realize large profits in the following year.