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TIA Chennai 20-20 Ideas meet presentation - Capacity to Suffer Framework


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The presentation is an attempt to collate thoughts on the investment process we follow from the Gurus, Mentors and Friends we follow along with our own experience in this field.


1. We are not SEBI registered analysts

2. Educational post only and not a stock recommendation

3. We take no responsibility to keep updating about the business being discussed

4. We may or may not own a position in any of the businesses being discussed and even if we do own a position, we may change our mind due to change in any facts or circumstances

5. Plz consider this post only as a framework to keep tracking businesses and understanding them

Published in: Economy & Finance
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TIA Chennai 20-20 Ideas meet presentation - Capacity to Suffer Framework

  1. 1. Ashish Kila Perfect Research Aug 2016 Our Investment Philosophy…
  2. 2. • The content of this presentation are only for information of the participants and not to be construed as investment advice. Please consult your financial advisor before acting on it. • Disclosure regarding ownership of stock(s) discussed- “Invested” • We are not registered as Research Analyst/Investment Advisor. Mandatory disclosure as per SEBI RA regulation (irrespective of whether registered or not): • The research analyst owns stock in the subject company and that’s the only financial interest in the subject company
  3. 3. • We don’t have actual/beneficial ownership of one per cent or more securities of the subject company (at the end of the month immediately preceding the date of publication of the research report or date of the public appearance); • We don’t have any other material conflict of interest at the time of publication of the research report or at the time of public appearance • Our associates have not received any compensation from the subject company in the past twelve months;
  4. 4. • Associates have not managed or co-managed public offering of securities for the subject company in the past twelve months; • Associates have not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months; • Associates have not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months; • Subject company is/was not a client during twelve months preceding the date of distribution of the research report and the types of services provided: • Research analyst has not served as an officer, director or employee of the subject company; • Research analyst or research entity has not been engaged in market making activity for the subject company.
  5. 5.  Our Chairman - Mr. R.A. Kila  Perfect Research Team
  6. 6. My Profile  CA  MBA from MDI, Gurgaon  Worked with - Goldman Sachs & Religare Securities & Morgan Stanley  Currently working as • Director, Perfect Group • CIO, Perfect Research With Mr. Ashish Dhawan With Mr. Basant Maheshwari With Prof. Aswath Damodaran Blessed to have got Vicarious Learnings from my Role Models …
  7. 7.  For us In the words of Bharat Shah Predictability of earnings are more important than growth in earnings (if you can’t value a business, price has no meaning) Quality of earnings are more important than Quantum of earnings ‘Longevity’ vs. ‘Magnitude’ ‘Accelya’, ‘OFSS’, ‘Mahanagar Gas’, ‘IGL’ ‘CARE’, ‘Nesco’, ‘Kovai’, ‘IGL’, ‘Mahanagar Gas ’ ‘Nestle’
  8. 8.  ATFL o 80% of revenue contributed by edible oil (Sundrop & Crystal) o 20% from Foods (Act II Popcorn, Sundrop Peanut Butter)  The Parent- ConAgra: o ATFL is affiliated to ConAgra Foods, Fortune 500 company and is one of North America's largest packaged food companies. o ConAgra Foods' consumer brands can be found in 99 percent of America's households and its 27 consumer brands enjoy No. 1 and No. 2 positions in their respective categories and 29 consumer brands generate >USD100mn (Rs 600 Cr.) in retail sales each year.  Brands of ConAgra :- source:
  9. 9.  In case of ATFL: Management is taking decisions of expansion where they have clear right to win. It is impacting the growth of the company in shorter term but holds the key for the success in the future. • Early mover advantage in potentially large categories ◦ Extruded snacks market at ~ 12000 cr. , growing @ ~10% ◦ Potato chips at ~ 6 – 7k cr. ◦ Popcorn estimated to be less than 300 cr.
  10. 10.  Twitter – capacity to suffer
  11. 11.  Transitioning from Commodity to Brand: Management could easily invest in ‘Sundrop’ and increase the top line however chose to back branded foods Particulars FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Net Sales (In Cr.) 780 653 721 705 789 764 760 782 Gross margin %(1-RM/Sales) 22.4 29.6 26.9 29.7 31.3 32.8 35.1 33.80 Particulars FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 OIL 87% 85% 83% 85% 83% 81% 79% 77% FOOD 13% 15% 17% 15% 17% 19% 21% 23% 50% > 40% Future
  12. 12.  Management is confident for its food portfolio to treble its revenue to Rs. 5000 cr. In five years by entering new product categories - Source: Annual Report Particulars FY11 FY12 FY13 FY14 FY15 FY16 FY21E Inorganic Chemicals 50% 48% 51% 52% 49% 48% Fertilizers 39% 41% 37% 35% 38% 39% Other Agri inputs 11% 11% 12% 13% 12% 12% FMCG + *Others 0% 1% 1% 1% 3% 2% >20% Total 100% 100% 100% 100% 100% 100% *Others includes Water Purifier, Nutritional Solutions • Pulses forming approx. 88% of total ‘Others’ revenue • By FY21 out of 27% (Others business), food business can contribute >20% if management meet the expectations Particulars FY11 FY12 FY13 FY14 FY15 FY16 Total Income from Operations (net) (in cr.) 11,061 13,815 14,859 15,895 17,203 17,708
  13. 13.  Quality, Cost, Time • In the triangle of quality, cost and time, one can get two out of three. • In case of Agro Tech, management says they must get the cost structure right otherwise they will have to pay for it in future – so they chose high quality at low cost
  14. 14. 0% 5% 10% 15% 20% 25% 30% 35% -50 -40 -30 -20 -10 0 10 20 30 40 50 60 2011 2012 2013 2014 2015 2016 CFO CAPEX ROE ROCE Increasing Capex Reducing ROE, ROCE Aggressive Investments vis-à-vis CFO, taking hit on short term return ratios Making difficult but value creating capital allocation choices: A tough business to create but equally tough to destroy Fig. in Cr. Source: Ace EquityNote: ROE, ROCE are on secondary axis
  15. 15. It is not the magnitude of returns that matter but it is the durability of returns which matters the most  In case of AgroTech, company has no major competitor in Act 2 popcorn in India (Virtual Monopoly and a first mover advantage)  Company has successfully placed Act 2 popcorn in India where now it has an edge over competitors  Now, it is focusing on the peanut butter to leverage their competitive advantage  Taste advantages are durable – ‘Maggi’ vs. ‘Everyuth’
  16. 16. To find a wonderful business, One needs to find them small and get them when they’re little. ‘Agrotech’, ‘Wonderla’, ‘PVR’, ‘V-Mart’, ‘CCL’, ‘DCB Bank’, ‘IDFC Bank’ Size of fish is important in relation to the size of the pond
  17. 17. Source: Yahoo Finance ConAgra Foods, Inc. Unilever Plc. Difference in no. of times Mcap(in Billion $) 20.33 131.83 6.5x Revenue*(in Billion $) 11.64 58.79 5x Agro Tech Foods Ltd. Hindustan Unilever Ltd. Difference in no. of times Mcap(in Billion INR) 11.94 1999.02 167x Revenue**(in Billion INR) 7.82 331.94 42x Globally In India Scope of opportunity  ConAgra Vs Unilever *TTM figures as on 30th June 2016 **TTM figures as on 31st March 2016 Global Popcorn 52,000 cr. North America 31,876 cr. Latin America 6,552 cr. Europe 9,724 cr. APAC 3900 cr.
  18. 18.  The food market in India is pegged at Rs 6 lakh crore, including rice, staples, flour, spice, pulses with many segments controlled by unbranded players including local kiranawallahs 2,00,000 cr. 5% 98% 40,000 cr. 5% 85% Industry Size Unorganized Share Industry Growth Source: Stalwart Advisors
  19. 19.  India has around 150 no. of Parks, out of which 16 parks are spread over 40 acres of land and rest are merely over 10-20 acres  Unorganised or standalone parks are inefficient to meet the growing demand in the Amusement industry Market Size 3,000 cr. Industry Growth 20% Organized market 75% Source: Annual Report, Stalwart Advisors Particulars Global U.S EMEA China India Industry Size (in INR cr.) 1,62,500 > 78,000 32,500 21,450 3,000 No. of Parks >800 400 >300 850 150 India: I USD= 65INR
  20. 20. DATE:- 31/03/2016 * As on Date Source: Money control  Banking is all about its management quality and Risk management practices - Banks *M.CAP(In Rs. Cr.) P/B ROE 3,17,674 3.73 16.91% 18,196 1.2 3.42% 3,318 1.3 11.16%
  21. 21. If you’re right about “what”, you don’t have to worry about “when” very much” You don’t need to focus too much on “when”, you only need to focus on “what” With a wonderful business, you can figure out what will happen, you cannot figure out when it will happen
  22. 22. ATFL is available at the following valuations: 1994 Nestle similar to Agro tech today ? Nestle Today – after 20 years Particulars fig. in Crs. Topline 700 Profit 40 M.Cap 2,500 Particulars Value inCrs. CAGR Topline 10,000 14.4% Profit 1,200 18.4% M.Cap 61,000 17.2% Particulars Multiples Price to Sales 1.46x Stated Earnings 23x Owner's Earnings <20x Source: Annual Report
  23. 23.  Inefficiency in pricing of quality business mentioned by ‘Prof. Sanjay Bakshi’ “The market’s inability to spot an emerging moat that is growing slowly over time (the “boiling frog syndrome”)” Source:
  24. 24. Perfect Research T-24A Green Park Extn. New Delhi – 16 Blog: Twitter: @ashishkila Please feel free to contact me with any unanswered questions, suggestions & ideas.   +91-9999751327 Do you have any Questions, Comments or concerns ?