Friday, 15 September 2017

Weekly Reading - Some interesting stuff

Ray Dalio's principles, before his book launch

Characteristics of successful investors (a bit generalized)

A glimpse of how man & machine work 'hand-in-hand' at Amazon

A lot more Lithium mining is needed in the near future

Having a kaleidoscope of mental models helps in navigating the investment world when most are edges are disappearing

The tough stance of RBI and the changing regulatory environment is forcing Essar to look at paring its debt

Friday, 8 September 2017

Weekly Reading: Some interesting stuff

What provides the edge - deep research or insights derived from thinking over multiple subjective arguments?

Deliberate practice does not add much value in a probabilistic field of work such as investing

Chinese flying trains - An alternate future of transportation?

Ashish Chugh's take on investing in Indian markets

Fear of missing out has taken over from value discipline, a development that is a sure sign of a bull market. Also, includes a discussion on bitcoin and ETFs.

An interesting business model - MoviePass users receive a debit card that they can use to see up to one conventional 2D movie a day.

Saturday, 2 September 2017

Weekly Reading: Some interesting stuff

Media needs a champion who can take on the government without fear

Setting priorities of life - from a person who survived a near-death experience

Harvey’s floods shut down almost all of Texas state’s plants, 61 percent of U.S. ethylene capacity has been closed, resulting in a sharp spike in prices

On Sept. 1, Google shared a list of the most-searched “how-to” questions around the world. It’s a moving portrait of all the beauty, bewilderment, and struggle of human existence. 
https://qz.com/1068114/googles-most-searched-how-to-questions-capture-all-the-magic-and-struggle-of-being-human

The economics of free
https://www.economist.com/news/finance-and-economics/21727073-economists-struggle-work-out-how-much-free-economy-comes-cost

Friday, 18 August 2017

Himadri Chemicals - A play on Li-Ion Battery

Himadri is a Kolkata based company mainly focusing on coal tar pitch and carbon black.
Product chain
Main Products

Coal tar pitch:
- used in the manufacture of aluminum, which is used in automobiles, airplanes, televisions, radio components, rockets, beverage cans, wires, cables, smartphones, furniture, foil wraps.
- finds downstream use in the manufacture of graphite electrodes in electric arc furnaces.
- specialized coal tar pitch, which is used in long war head missiles.
- manufactures coal tar-based thermoplastic polymeric coating, which is used as an anti-corrosive material in underground and offshore pipelines.
- Coal tar distillation capacity is 4 lakh MTPA.
- 70% market share
- Debottlenecking of capacity at 20cr planned to increase capacity

Carbon black:
- used for reinforcement of elastomeric materials. Carbon black is a critical raw material in tyre and other rubber industries, inks, plastics and paints.
- manufactures a range of specialty carbon black with specific applications in plastics, fibre, inks and food grade materials.
- Carbon black capacity - 1.2 lakh MTPA
- 17% market share

SNF:
- manufactures SNF (Sulphonated Naphthalene Formaldehyde), which enhances the performance of concrete for commercial and core infrastructure constructions.
- manufactures PCE (poly carboxylate ether) which is a performance chemical used in next-generation super-plasticisers to manufacture high-strength, high performance concrete.
- Dumping from China poses a threat
- SNF capacity - 68,000 MTPA - Largest capacity in India

Advanced Carbon (Anode for Li-Ion batteries):
- manufactures advanced carbon used in the manufacture of lithium-ion batteries that power smartphones, electric vehicles and digital cameras as well as airplane brakes that make flying safer.
- The consumption pattern of anode materials are slowly shifting from natural to synthetic graphite. Himadri offers anode materials in both synthetic and natural varieties.
- Co is the only company in the world to have in-house access to raw material making its products superior in quality.
- Moved from batch processing to continuous processing.
- Current capacity is 5 MT/month. New capacity of 50 MT/month coming onstream from 15 Sep 2017.
- Expected CAGR of 40%; no need to have firm contracts as demand is huge
- Realizations are 6 lakhs - 7 lakhs / MT for the finished product.

Plants:
Himadri has seven manufacturing units across India – four in West Bengal and one each in Andhra Pradesh, Gujarat, Chhattisgarh – and is now setting up its eighth unit in Odisha. The Company exports products to more than 10 countries.

The Company had been incurring losses during the last three years, even though at the operational level, they reported profitability. Primarily, the losses that the Company incurred were due to a depreciation of the INR and inventory losses on account of fall in the price of crude oil. The inventory pileup continued during the first two quarters of 2016.
The co took measures to reinforce operational efficiencies; appointed a consultant with global expertise to help us incorporate best-in-class practices.

The business model is unique and fully integrated to manufacture speciality chemicals. Use coal tar as the raw material and distil it to produce naphthalene, oils of various grades and coal tar pitch. The naphthalene produced is used in-house to manufacture SNF and refined naphthalene of the highest purity. Heavy creosote oil is sold to customers for specialised applications while other oils are used for making carbon black. We also produce
clean and green power. The power generated is used to power the entire complex while the balance is sold to the State Grid.

Inelastic Demand:
Aluminum smelters cannot moderate consumption during a downturn without having to shut down one (or some) of their manufacturing units. The cost of shutting down and starting afresh is too high. This means that coal tar pitch manufacturers are assured of regular offtake in even the most challenging
of markets. The strong offtake across the last two years, when aluminum and graphite industries were going through their worst phase, stands testimony.
Reason for decline in the Company’s earnings in the last 3 years:
- INR depreciation
- inventory losses due to fall in crude

What has changed:
- reduced its exposure to foreign currency loans
- debt reduction
- net debt of the company reduced by 225 Crores during 2015- 16, including the repayment of long-term debt of 122 Crores, even as the financials appeared stressed.
- LT debt reduced from 414 cr in 31-Mar-17 to 310 cr on 30-Jun-17, reduction of 104 cr.
Non-promoter holding:
- Bain Capital
- Vallabh Bhansali

RISKS
- The profitability of the company is susceptible to volatility in raw-material prices (forming 85% of total cost of sales) as the prices of raw-material are volatile in nature due to linkage with crude oil prices and global demand and supply.
- The company is also exposed to foreign exchange fluctuation risks due to high dependency on imported raw-material, foreign currency term loan and no fixed hedging policy.
- HSCL’s operations are working capital intensive due to requirement of high level of inventory on the back of lead time involved in import of few raw-materials (imported pitch and carbon black feedstock) and high credit period offered to its customers.

Financial Ratios from Screener

Disclosure: Not currently invested.

Friday, 28 July 2017

ValuePickr Goa Meet - Disruptions in Technology

This year my main presentation at the ValuePickr Goa meet was on disruptions from technology. Being from the tech industry, this is a topic which is very close to my heart. I enjoy following new tech and new tech businesses. Wearing my investor hat, it is also wonderful to evaluate businesses which may be benefiting from tech upheavals.

What tech disruptions basically implies is, it impacts the terminal value of an investment. If you think of the value of a business, it is the sum total of all cashflows from now till eternity. Now if a business is severely disrupted, the terminal value of perpetuity goes down to zero (0). In a DCF, the terminal value is what derives the majority of the current value - sometimes 80-90% of it. So, if the TV goes down to zero, we need to question the overall valuation we are willing to pay for such businesses.

On the other hand, I also argue that in most circumstances, disruptions are relatively slow (from an investment perspective) and investors do get a chance to react. For example, Kodak did not get wiped out overnight, it took years for that to happen. So, it's important to be aware of change but not get swayed by it. Its important to understand the scale and impact of change before reacting.


Friday, 21 July 2017

Stock Update: Supreme Industries

BEAR CASE
  • RERA to impact housing demand adversely. Negative impact on pipes segment.
  • Competition is strengthening in pipes with Astral, Ashirvad & Finolex. Supreme has lost market share from 35% in 2009 to 26% in 2017.
  • Competition is moving across the value chain and product range. e.g. Astral is moving into agri pipes and Finolex is moving into plumbing pipes.
  • No major breakthrough product from the company in the recent past that can boost sales majorly. Composite cylinders still in initial stages.


BULL CASE
  • Overall price cap on crude and buildup of new Polymer plant capacities in USA, China and Middle East will keep a lid on high Polymer prices.
  • Govt focus on 1) Affordable housing, 2) Formalization of economy through adoption of GST, 3) Doubling of farmer's income by 2022, 4) Swacch Bharat Abhiyan, 5) 100 smart cities
  • The distributors strength has gone up to 2973 by the end of March 2017 compared to 2699 by March 2016.
  • Market leader in plastic piping systems with 7230 SKUs
  • New Kharagpur plant for PVC,CPVC & HDPE pipes to commence from Nov'17. New Roto moulding plant at Kharagpur to commence from Aug'17
  • The co has launched Overhead Water Tanks in various capacities from 500 liters to 5000 liters. Also launched Septic tanks in collaboration with a South African company
  • Co manufactured solvent cement – SILBOND was approved by NSF-14 in both the varieties i.e., PVC and CPVC. The PVC variety also was certified by BIS and hence the products are going in the market with necessary ISI and NSF marking. The Company has further introduced BLUE SEALANT suitable for metal threaded joints. As a result Company now got all the products available in the segment of adhesives, solvents & lubricants required for various Piping Systems.
  • Informal sector comprises of 40% of plastic furniture segment and with GST that share is expected to reduce over time
  • Co has started exporting to USA and has found good acceptance for some of its products
  • Co is making car interior parts for Honda and Maruti Suzuki and is continuously acquiring new business from existing customers
  • Co has started a new product range using foam for children's education, toys, sports, health sector and interior decoration
  • Composite cylinder order for 2.5 lakhs pcs from Bangladesh. BIS certification received and HPCL is expected to start trial runs.
  • Capex planned at 300-350 cr in FY17-18

Monday, 10 July 2017

Learning from Berkshire’s Acquisition Criteria

Looking at the 100-plus businesses that Buffett has accumulated, a casual observer may feel that it is a collection of random businesses. But look closely and you will find a pattern. Who else, but Buffett has articulated the common thread amongst all his businesses when he published the Berkshire’s Acquisition Criteria.

A fact that we need to keep in mind is that these criteria are not for his general stock purchases but for acquiring controlling stake or whole companies, but they give a glimpse of how Buffett things about buying companies.

There are six criteria which are simple and straightforward.

1. Large purchases (at least $50 million of before-tax earnings)

Buffett looks at opportunities to deploy large amounts of cash. It makes very little sense to buy companies which would make up a fraction of a percentage or a couple of percentages in his overall portfolio. The same principle applies to investors as well – to look for companies where we can invest between 5-10% of our portfolio with conviction.

2. Demonstrated consistent earning power (future projections are of no interest to us, nor are "turnaround" situations)

Buffett looks for companies with regular and consistent cash flows and earnings. This significantly reduces his universe of investible stocks as some sectors are by their nature not amenable to such characteristics. Cyclicals like cement, metals, sugar, oil have never been part of Buffett’s core holdings -though he has had shorter term (five years) positions in stocks like PetroChina.

"Both our operating and investment experience cause us to conclude that turnarounds seldom turn," Buffett wrote in 1979, "and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price."

Investors should focus on finding good businesses with reasonably consistent cashflow and ability to generate profits for a prolonged period (many years or decades) and then try to buy them at a discount to intrinsic value.

Having a portfolio of good businesses, without being leveraged and not needing to pull out of the market when there is a downturn, can produce good results over a long period of time.

3. Businesses earning good returns on equity while employing little or no debt

Stocks of highly leveraged companies should come with a statutory warning like in cigarette packs, “Investing in highly debt-ridden companies is injurious to wealth”! The foremost reason for problems in companies over a long period of time, which results in permanent loss of capital for investors, is high debt. If an investor can simply avoid them, half the battle is won.

Return on equity (ROE) is one of the most important ratios to look at for a company. A business needs to be able to generate ROE above its cost of capital and above an investors opportunity cost to be considered for investment.  Over a long period, a business which generates high ROE will tend to be value accretive.

4. Management in place (we can't supply it)
An honest and competent management that treats minority shareholders as equal partners in the business is crucial for the long-term success of an investment. Since, minority shareholders usually are not able to control or influence management decisions and policies, special emphasis is required to understand that the management would not try to enrich itself at their expense or try to get into ‘diworsifications’ for self-aggrandizement.

5. Simple businesses (if there's lots of technology, we won't understand it)
Here again the focus is on businesses which can be understood by the investor – the circle of competence. Understanding means that the investor understands the industry dynamics, the competitive positioning of the company within the industry, how the company makes money, the demand and supply economics etc. It also means some idea about how the long-term future would look like for the business. This is precisely why Buffett tends to avoid those industries and companies which are prone to rapid disruption and change and sticks to the old-world businesses.
An investor can start with studying businesses that they are familiar with and learn more about it and its competitors. Over a period, the circle of competence can be expanded to include new industries and companies by continuous learning.

6. An offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown)
Price is the most ready-made data that is always available for listed stocks. Every day Mr. Market gives a quote that an investor can either take or let pass. This criterion, if strictly interpreted, is not for investors, but can be expanded to incorporate the most critical concept of “margin-of-safety”. An investor should only look to buy a business if the quoted price is below the intrinsic worth of the stock. It also protects an investor from mistakes and market downturns.

Since last year the Q&A session at the Berkshire Annual Meeting has been webcast live giving an opportunity for investors across the world an opportunity to watch the Buffett-Munger duo in action, answering questions across various topics. Every year, there is some nuggets of wisdom that can be learnt from these sessions and this year was no different.

Munger and Buffett have spent their entire lives by sticking to their investment principles not chasing fads. “A lot of people are trying to be brilliant, and we are just trying to stay rational”, said Munger. Buying and holding great businesses over very long periods of time has been extremely rewarding. As Buffett aptly put, "We did not buy American Express or Wells Fargo or United Airlines or Coca-Cola with the idea that they would never have problems or they would never have competition. But we did buy them because we thought they had very, very strong brands”. Brands of course allow Buffett to invest in companies where he can predict consumer behavior in the long term.

Over the years, Buffett has been sector-agnostic and bought wherever and whenever he has seen value.
"Charlie and I really do not discuss sectors much, we're really opportunistic. We're looking at all kinds of businesses all the time. We're hoping, we get a call, and we know in the first five minutes whether a deal has a reasonable chance of happening… We don't really say we'll go after companies in this field or that field”, Buffett said.

Markets are at time irrational and provides good companies at cheap valuations. That is the time when margin of safety in stocks are high and investors need to take advantage of. As Buffett mentioned, "It is the nature of market systems to occasionally go haywire in one direction or another."

The world is seeing a plethora of new technologies resulting in completely new businesses. In the coming years, some existing businesses will die and others will take their places. Buffett mentioned that artificial intelligence would result in significantly less employment in certain areas, but that’s good for society, though it may not be good for a given business. As an example of such widespread disruption and its impact on businesses, Buffett said, “Autonomous vehicles, widespread, would hurt us if they spread to trucks, and they would hurt our auto insurance business. They may be a long way off. That will depend on experience in the first early months of the introduction. If they make the world safer, it will be a very good thing but it won't be a good thing for auto insurers."

If we follow the basic rules laid down by Buffett, keep learning continuously and apply common sense to investing the long-term outcome is likely to be positive.

Weekly Reading - Some interesting stuff

Ray Dalio's principles, before his book launch https://www.nytimes.com/2017/09/08/business/dealbook/bridgewaters-ray-dalio-spreads-h...