Tilak Nagar Industries Ltd - Picture abhi baaki hai mere dost!!!

Name: Tilak Nagar Industries Ltd.
Scrip code: 507205
Traded on: BSE & NSE
CMP: 130
Target: 200

Story: There lived a wealthy family in India doing business in the Sugar and IMFL space. The parents were aged and the son was doing his higher studies in US. The Father passed away in 2000, after which the Mother was looking into the business operations. Some moles present in the company were making use of this opportunity for their own money making purposes. However, the Mother passed away as well in 2002 and this made the Son to come back and take care of the company. He only came here to know that the business was in shambles. However, he used his strengths and skills to remove the blockades in the path of growth and moved the company into a growth trajectory. Well, did you ever think that i was writing a script for the next Rajini starrer? Though the story could suit him, i was actually writing the story of Amit A Dahanukar and Tilak Nagar industries limited.

Tilaknagar Industries Limited is engaged in the manufacturing, marketing and selling of Indian made foreign liquor (IMFL) and spirits. The company manufactures and sells a range of alcoholic beverages. The Company’s products include whisky, brandy, gin, rum and vodka. On February 14, 2008, the Company acquired Surya Organic Chemicals Pvt. Ltd. On February 6, 2008, the Company acquired Prag Distillery Pvt. Ltd. The Sales volume, number of cases sold, presence in India, Sales and profits have all been improving in the past few years. TILAKIND could emerge as a growth opportunity in the IMFL space which is dominated by a single player.

The company has been clocking very strong growth rates of around 65% for the past few years. For the financial year FY 09, the company reported total net sales of 240 crore (up by 86% as compared to 145 cr in 2007-08) and a net profit of around 20 crore (up by 67%). This kind of growth rates are impressive, given that the company operates in IMFL space which is growing at around 15% and the leader growing by around 20%.

This industry is one where strong brands will stand while the others fail. The company and its products were not much known prior to 2007. But the marketing initiatives and the brand value creation initiatives that the company had undertaken seems to be paying off. The company came up with initiative that will result in its products getting into all the segments at the right price and right brand value. Some of the key initiatives were like launching surrogate brands, local language advertising and Co branding with movies. Today, its premium brandy product Mansion house has crossed more than a million cases in sales. Tilak claims that they have more that 65% of the brandy market in South India and Mansion House is the highest selling brand. Some of the other brands include Senate Royal Whiskey, Courier Napoleon, Mansion House, Savoy club, SHOT and Classic Vodka.

Some of the Key financial ratios clearly indicate that the company has been progressing over the years and Amit has done a good job. Operating margin moved up by 9.7 % in FY 06 to 20.91 % in FY 08, while the net margins are around 10.59 % from just 1.67 %. While ROCE has improved from 20.39 % to 42.65 % in 2 years, the company has been doing good on the debt part as well.

There seems to be some kind of valuation gap in the IMFL space. Tilak Industries is trading at a valuation of just 3.58, while it is way higher for the other players - United Spirits at 28, Radico Khaitan at 35, Shaw Wallace at 70. When considering the Price/Sales ratio also, Tilak has been at the bottom of the pyramid. Also, the promoter’s holding in the scrip is above 50% which gives a lot more comfort from the Investor’s perspective. It is acceptable that the leaders and the ones with very strong brands could command higher PEs, but there seems to be a bigger gap in valuations between the companies. The company is clearly on a growth path and one more year of strong growth and introduction of some strong brands could improve the PE.

A big run is awaited soon in this scrip.

Sources: Business Standard, BSEIndia, Google!

Best regards,
Saurabh

I can be reached at saurabhb@kpmg.com

KGL : A brief snapshot – Stay away for the moment

Karuturi Global needs no introduction. I am sure many of you would be betting on KGL as a super multibagger and even more of you would have this in your portfolio. Karuturi, often termed as the Global leader in cut rose production is one of the hottest stocks due to 2 reasons. One is the expansion in Cut rose production (1 billion stems that they wise to produce and target for FY 10) and the other is their foray into the agri business with a mammoth land allocation.

For the ones who are not aware of Karuturi, Karuturi is termed as the World's largest cut rose producer with a current capacity of 650 million stems and most of their production comes from Ethiopia and Kenya, due to factors like good climate, support from government, closer proximity to the European markets, tax advantage given to these countries and availability of land and cheap labor. All these reasons do look very logical. Total sales rose by 9 times between FY 06 (43 crore) and FY 08 (397 crore) and they reported a total sales of 440 crore and a net profit of 125 crore in FY 09.

Massive Expansion -
Currently they have 250 hectares (1 ha is approx 2.5 acres) under cut rose cultivation - 174 in Kenya, 70 in Ethiopia and 10 in India. 450 hectare of land has been allotted to KGL in Ethiopia and they are planning to bring them under cultivation in the next 2 to 3 years. For their Agri foray, the lease deed has been executed for 3 parcels of land - 11,700ha, 108,300 ha and 191,700ha. This totals to 311,700 ha which is roughly around 775,000 acres of land. When i say this size, i would also like to mention that this is almost 7 times the size of Mumbai. Why do i say this? Just because all papers have mentioned this and i am not willing to be left out :)

With the above kind of expansion plans, all kinds of sales and price targets are flying over. Even the company has mentioned that they would expect agri business to constitute more than the cut rose business in 2 years. This would give a rough sales target of around 2500 crore in revenues by FY 2011 (considering that the company implements just 50% of their cut rose target in the next 2 years)

Fine, let me come to the topic. We are recommending a high degree of caution for the conservative investor and i personally, would not advise this counter to anybody for the next 2 years. Check out the following -

1) There are 2 ways by which a company can move in the growth trajectory - by making the business better OR by making it bigger. KGL has opted for the latter, which is not right kind of growth for the company. Why should KGL foray into agri business, when their existing cut rose business is doing very well with a net profit margins of around 28%? The company is currently operating in only 250 ha for cut rose business and why should not they expand their current business instead of leasing out 311,700 ha of land for agri business? This doesn't make any sense. The only reason which i can think of is to give mind blowing numbers like 7 times size of Mumbai, 750,000 acres and create a fancy around the stock.

2) The company is termed as the Global leader in cut rose production and i seriously doubt it. The Floriculture industry is valued at 80 billion USD out of which cut rose industry is valued at 64 billion USD. How can a company with 400 crore of revenues for the year FY 09 be a leader in a space that is valued at 275,000 crore? :) I wonder who really termed them as the World's largest cut rose producer.

3) Since KGL is an asset oriented company, it is very important to look at ROA. The one reason why ROA could go wrong is for a company which has trademarks, patents, huge brand image like in the case of Coke or Boeing, since these invisible strengths are not taken into assets. However, KGL doesn't have any of these and it is safe to use ROA. The ROA for the company is on a constant decline - The ROA has declined from 33% in FY 06 to 12% in FY08. A constant decline in ROA for a growth company which is asset driven is a clear sign of trouble around the corner.

4) From the share holding pattern filed by the company in Mar 2009, it is evident that the Promoters hold only 23.84 % in the company. It should be noted that out of this holding, around 80% of their stake has already been pledged as securities for the loans availed. I really wonder how the expansion plans would be funded. Though the company has reported that the lands have already been acquired on lease, how would the business run going forward? To develop and to cultivate the lands for both agri and cut rose expansion, they need huge amounts of money and the share holding pattern does not seem to be giving any clues as to how further funding would be done.
The total share holdings of the promoters have been on decline from 50% to 23.84% in around 2 years time. Also, few FIIs like Quantum fund and Morgan Stanley have been offloading their stakes (this should be taken with lesser importance)

5) The growth in Total receivables for the company is not under control. The growth has been the same as the sales growth. Though this may be acceptable to some quarters, when you look at the size of the receivables, it sounds caution. The company has reported a Total receivables of 189 crore for FY 08, when the sales and the profits for FY 08 were 395 crore and 102 crore respectively. Yes, the total receivable for the company at the end of the financial year has been much higher than the net profits that the company had reported. This essentially means that the company could be boosting sales by giving more credit and hence more receivables. The company is booking the sale and announcing it but it is not collecting money.

6) The company bought Sher Agencies of Kenya almost by Sep 2007 for a total amount of around 330 crore. The price was equivalent to almost one time the then sale of Sher Agencies. However, the company has written a Goodwill of around 117 crore in to the balance sheet for the year FY 08. The Goodwill at 117 crore seems to be on a higher end.

7) The income tax and the interest numbers reported in the balance sheet seems ........ Consider this - The company reported a total debt of 311 crore in the balance sheet of FY 08 and reported an interest expense of 5 crore for the same year. All the debt has been reported as Long term debt and though we are not sure if all the debt is through Zero coupon FCCBs, the interest of 5 crore makes me only suspective. Also, the company has reported that the Income tax was just 60 lacs on a taxable income of 125 crore. I guess paying tax only on the Indian operations alone should be much higher than this.

8) There are only two ways by which a stock price can go up. 1) The Premium or the PE that an investor is willing to pay for the company should increase 2) The company should report more earnings and the earning per share should increase.
The promoters have been constantly diluting the equity such that the EPS has fallen from Rs. 35.70 in FY 08 to Rs.3.41 in FY 09. I have just considered only the basic EPS and the diluted EPS would be much lower. Though one of the reasons could be the stock split in FY 08, the promoters have been diluting their stake as well. With such a huge number of outstanding shares and the business growth slowing down due to the expansion plans, believe me, the EPS of KGL will grow only at a conservative level for the next 2 years. That would be reflected in the stock price as well.

9) Cash from operating activities is very low compared to the net income. For example - operating cash flow for FY 08 was just 23 crore when compared to the net income of 104 crore. This is due to the total receivables outweighing total payable by a large proportion. By the balance sheet of FY 08, the total receivables was 189 crore while the total payable was only 47 crore. Clearly the receivables are very high and their growth sounds caution.
Clearly, as scripted, conservative investors should stay out of the company. Even the risk takers who believe that the company will succeed should wait for a year seeing how the agri foray turns out and how the financial statements shape up.
Source: Arun Gopal

Stock market is a pure gamble

For the last three days, I have been watching the Indian stock market with utter amazement. On Friday, the BSE Sensex closed at 12173 . On Tuesday, it closed at 14302. A full 17% increase in two days. You would have made a killing if you bought on Friday and sold on Tuesday.

Nothing has changed in India except that the Congress won an unexpectedly comfortable victory in the general elections. On “sentiment”, paper wealth of Rs 350,000 crores (US$ 75 bn) has been created in two days. This is pure stupidity. Unfortunately, the stock market gets a disproportionate share of public interest. And where the media and public watch, politicians follow. So economic policy starts to be dictated by the mayhem in the stock market. The stock market is NOT the, or even the most important, barometer of the economy. Its just one of the many markets that exists. In the long run, the stock market as close to a perfect market as humans have ever invented. But the operational word is “long term”. In the short term it’s a pure gamble.

90% of trading in a stock market is speculation. Maybe even more. These are punters trying to make a quick buck every day. You know that utter madness has crept in when you see Madras maamis in 9 yards sarees staring at a screen and day trading. Politicians and businessmen should ignore the stock market and concentrate on real performance. Forget having the ticker on all the time in your office. Watch your sales. Watch your profits. Or if you are in the government, watch growth, public debt, investments. Ignore the clamour when the stock market falls (notice that there is no clamor when it rises insanely).

It’s a free world. Let the punters lose their shirts, or their sarees. Real people – investors, businessmen, government – just watch it once a year. The other 364 days, focus on performance. You may be pleasantly surprised that, that on the 365th day, when you notice the index, it has hit the roof.