In mid Dec’14 we shared a detailed report (26 Pages) on a very good stock with our Alpha and Alpha + members and would like to share with you details on the same.
We have always believed in doing few things but doing them really well. Wise leaders focus on doing a few things well and then building from there. Rather than diluting the resources in a bunch of mediocre things, they create momentum and excellence in a few areas and if those go well, they add to them. So while the company under consideration isn’t the largest company in India in its industry, it commands leadership status in the few products it deals in and is the best managed company in its space.
Details on latest Alpha recommendation
The stock that has been chosen for recommendation deals in few products but is a global leader in all its key products with a very high market share. In fact one of the major reasons for the company’s concentrated product basket is the fact that they do not want to manufacture run-of-the-mill products, instead their product selection criteria is very stringent with focus on niche products with very strong technological barriers.
A testimony to their focus on technological barriers is their technical partnerships with renowned institutions from countries like France and Italy which gives the company the access to commercial rights to patented technologies.
Some of the competitive advantages enjoyed by the company are as below:
Low cost: The Company’s austere operating culture has translated into low overheads, which makes it possible to compete even during challenging industry downtrends. The result is that the Company is one of the most competitive manufacturers within its product spaces the world over.
Scale: The Company enjoys the advantage of scale as it is the largest manufacturer of its key products with more than 20% market share globally.
Integrated: The Company is one of handful manufacturers in the world in its spaces of presence and the only one to be extensively integrated with one product serving as the raw material for another product. A large part of the Company’s product basket has been prudently structured with an inbuilt inter-dependence. The result is that products are either consumed within or marketed to customers.
As far as the industry in which the company operates is concerned, various reports suggest that the industry is likely to deliver a growth of 17-18% on the back of buoyant domestic demand and encouraging export opportunities. Further, what is important to note is that industry is characterized by strong R&D requirements, stickiness of customers, long-term contracts and limited competition, thus placing incumbent players at very strong advantage.
Operating Performance – As far as the performance of the company is concerned, it has been a very consistent performer with 25% + annualized growth in sales and profits over the last 5 & 10 years cycles and has consistently maintained return ratios in excess of 20%.
- 10 years sales growth – 30% + CAGR
- 10 years EBITDA growth – 40% + CAGR
- 10 years PAT growth – 40% + CAGR
- Avg. Return on equity – 30% +
- Debt equity ratio – < 0.50
- Cash flows from operations – In line with reported profits
- Dividend payout – 15% +
- Promoter holding – 50% +
In terms of financial performance, the company has delivered on all the parameters like growth in sales and profitability, consistency in margins, strong cash flows from operations, low levels of leverage and high returns on investment.