This post is not BUY/SELL/HOLD advice but a statement of my personal analysis and opinion.

• NSE: ABFRL is one of India’s largest fashion retail companies with Madura (premium) and Pantaloon (value) house of brands.
• ABFRL’s brands include household names that capture the entire gamut of discount and premium customers, including in-house and foreign brands such as Van Heusen, Peter England, Global Desi and Forever 21.
• ABFRL has the ownership / perpetual license of its brands unlike competitors like Future Fashion and Retail and Shoppers Stop. Intangible Assets.
• These intangible assets however are not translating into improved ROCE (Return on Capital Employed) and this is not a source of competitive sustainable advantage
• We can blame the industry structure and the value conscious Indian buyer who prefers substitutes to brands when it comes to discretionary spending such as apparel. The discount disruption by online players like Myntra and Amazon has spoiled the buyer and changed industry structure.
• We can also blame the huge debt on its books and asset-heavy (rent is 600 crore) model of its brick and mortar retail format, which leaves little in terms of EPS for stock price appreciation.
• To give you a sense of the enormity of debt, the company reported post-merger, a Goodwill of 1795 crore (which includes Pantaloons, Madura and Forever 21) but the debt with accrued interest stood at 1881 crore.
• Premium brands do not necessarily lend to margins – Compare ABFRL with Kewal Kiran that manufactures discount brands such as Killer Jeans. Kewal Kiran has an OPM of 15% while ABFRL with its premium brand portfolio clocks under 10%. What matters more is getting the right product-market mix and returns on operating assets.
• Even in the same omnichannel format, COGS is 93% of sales while Future Lifestyle Retail (Central, Brand Factory etc.) manages costs more efficiently (COGS 90% of sales).

Thoughts on the post-Merger Future

• Investing decision depends on 2 factors –
  • How you feel the Industry Structure will evolve, i.e. will it move towards omnichannel or stay focussed on heavy discount online sellers?
  • How will the post-2015 merger between Madura and Pantaloons play out in terms of producing operational synergies?
• If Industry moves towards omnichannel presence it will benefit ABFRL due to its presence across segments and geographies. However Amazon has recently tied up with Shoppers Stop and this will provide stiff future Omnichannel competition.
• The Madura (menswear) component of ABFRL business is EPS accretive but the Pantaloons (womens/kidswear) business is loss-making. The future depends on how effective the turnaround of Pantaloons will be.
• The future depends on the effectiveness of operational synergies arising out of the merger between Madura and Pantaloons (See below)

Thoughts on Relative Valuation

• Enterprise Value / Net Operating Revenue and EV / EBIDTA ratios are both twice that of Future Lifestyle, which is reasonable given the Debt to Equity of ABFRL is also twice that of Future Lifestyle. This seems to indicate Market is not giving a premium to ABFRL over Future Lifestyle inspite of its “premium brands”. The brands also in turn are not giving any incremental ROE benefit to ABFRL.
• The market is not discounting future operational synergies from the Madura / Pantaloon merger. Perhaps it doubts the execution capabilities of AB group (Other group companies like Grasim, Hindalco haven’t created investor wealth) or is just put off by the debt on books.
• Both Future Lifestyle and ABFRL will be beneficiaries of a secular uptick in consumer growth due to operational leverage but Future Lifestyle may benefit much more (See below).

Earnings Quality

• On Jan 9th, 2018, the CFO S. Visvanathan has resigned to pursue a career outside the Aditya Birla Group, or so the group said in a press release.
• In 2016-2017, the Cash Flow from Operations went up from 310 to 418 crore.
• The DSO and Inventory Days also went up in the period and so did the Days Payables Outstanding which very conveniently shows a decrease in cash conversion cycle.
• These ratios may suggest favorable trade terms, vertical integration or may warrant a deeper dive to check for financial controls for ABFRL.

DISCLAIMER:

This post is not BUY/SELL/HOLD advice but a statement of my personal analysis and opinion. I do not have any position in stocks mentioned in this post.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the 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”. No BUY/SELL/HOLD advice is offered on this blog, in any form whatsoever. Views expressed are my own and not of my employer. Stock Markets are very risky and can cause a permanent loss of capital. You should seek professional advice.

This post is not buy/sell/hold advice. Please see the disclaimer at the end before reading further

Soya products and the edible oils are areas I have been closely following. India imports  67% of its demand for edible oil. This is economically unsustainable due to several reasons. There are a few key factors about the industry:

• The demand for edible oils is inelastic and insulated from macroeconomic conditions as cooking is a basic need for survival.
• India has failed to be self-sufficient in edible oil production due to misaligned incentives for farmers and low agricultural efficiency, which causes Indian soya to be globally uncompetitive in prices.
• Soya has applications beyond cooking oil in cattle feed (poultry), food proteins, value added products (like soy milk).
• China is driving the global demand in soya and increase in prices of the raw material.

The Indian government unfortunately has not recognized the importance of self-sufficiency in cooking oils and has not made it a policy priority. However with GST and the financial demise of large listed companies like Ruchi Soya, the space has opened up for smaller organized players with good balance sheets like Madhya Pradesh based Kriti Nutrients. I would prefer companies based in M.P and Maharashtra as they have the competitive advantage of sourcing Soya from local growth belts.

The financial health of Cooking Oil and Soya companies has been tenuous. Edible oil and Soya products is a low margin and commodity business. Bad macroeconomic and industry conditions have wiped out many companies big and small (e.g. Ruchi Soya). Only a few remain investment grade.

The cyclicity in the business is through the supply side – introduced by dependence on raw materials like Soya and Sunflower. The production of edible oils and soya products is subject to the vagaries of the monsoon and Indian agricultural conditions. The demand side itself is not cyclical as cooking oil is in demand around the year. This makes companies with good inventory management stand out.

Due to these factors discussed, it is also wise, when investing in the edible oil sector, to look for companies that are not pure play edible oil manufacturers but look to be mini-FMCG or food processing companies – thus diversifying their risk.

Kriti Nutrients: Offers products such as Soya flour, Sunflower oil and produces Soya liechestien for Nestle (probably for use in their baby food products). Kriti management though conservative has shown an intention to launch value added products albeit slowly. With access to M.P’s soya-belt, they are well positioned to capture new product categories like Soya milk and protein foods when the market is made. It also makes me believe they are a good acquisition or partnership candidate for large FMCGs like Britannia and Nestle. Fun fact: Inventory turnover of Kriti Nutrients is better than Nestle’s. All of this is not discounted in the price as Kriti trades at multiples that are normal to the edible oil industry.

Sanwaria Agro: The company is more of a food-processor than Kriti Nutrients, which leans more towards being an edible oil company. In addition to edible oil and soya chunks; Sanwaria offers flour and even basmati rice. The price has run up significantly in the past few months.

In sum, a few reasons to be bullish about the edible oil/soya product businesses are listed below:

• Unorganized to organized: GST pushes the unorganized market towards an organized market benefitting large and mid-sized listed players with low leverage and good inventory management
• Push to pull: Domestic demand will see growth as the country moves towards self-reliance in edible oil and competitively priced soya products
• The business has emerged out of a multi year down-trend, so valuations are reasonable
• Reliance on monsoons is going to decrease and agricultural incomes are set to rise incentivizing farmers to grow soya and edible oil cash crops – securing supply side cyclicity
• Protein intake increasing in a vegetarian country and the addition of value added products will see increased demand for soya chunks, tofu and other soya proteins as well as soya milk in the medium to long term
• Health and quality consciousness: Soya oil is healthier than its counterpart – mustard oil, which is the dominant variety of cooking oil in India

DISCLAIMER:

This post is not BUY/SELL/HOLD advice but a statement of my personal analysis and opinion. I hold Kriti Nutrients since lower levels so my views are biased.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the 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”. No BUY/SELL/HOLD advice is offered on this blog, in any form whatsoever. Views expressed are my own and not of my employer. Stock Markets are very risky and can cause a permanent loss of capital. You should seek professional advice.

This post is not buy/sell/hold advice. Please see the disclaimer at the end before reading further

• Grauer and Weil is one of India’s largest companies in the Electroplating and Coatings chemicals business.
• It is a diversified conglomerate of both commodity and speciality chemicals, with interests in paints and real estate.
• The diversified businesses may be holding down growth in the core chemicals business
• Management decisions need to be closely monitored

Continue reading “Grauer and Weil: Are the Risks worth the optionality of future growth?” →