Maximum growth

Post my comment on Maxwell on 14 Jan ’14, Maxwell has continued its relentless march forward and has gone up by nearly 30% in the last 1 week from around 41 to 53 today. The stock has nearly tripled in less than a year and as things improve, can only go up from here.

I had written about this first in Feb ’12 here and later re-affirmed my faith during Diwali ’12 (here) when it expectedly hadn’t gone anywhere since Feb. However, all the things which I had mentioned in both of my posts still hold good and are slowly starting to fall in place for Maxwell.

Maxwell can be called what is known as an Inner-wear company (a much polished way than otherwise) much in the same category as Page or Loveable Lingerie, though not in the same class as yet. Maxwell owns the inner-wear brand VIP which most Indian would be familiar with.

Back in the old days it had the ad – “What's he got that I don't?” for the VIP franchisee brand. However, that has changed since then with the advent of Page (with its Jockey brand) which transformed the inner-wear market.  An interesting insight I read is that a few years back, there was the trend of low denims which made it a must to have a good inner-wear brand to be visible. And this is exactly what Jockey capitalized on and gave VIP a run for its money, so much so that what VIP was to the public earlier, Jockey became to the market.

To be fair, Maxwell hasn't seen any growth in the last 10 years, with a stagnant topline of 200-225 crore over this period, largely its own doing. And one of these was that it tried to move into the spinning segment which took quite a toll on its resources. Maxwell also had another set of problems over the last few years namely, power problems and labor unrest. But these are now a thing of the past

Now over the last few years, they have charted out a new path with the following strategy:

-       hiving off the resource sapping spinning business

-       focus on branded garments business

-       tie up with international brands

-       moving into new segments such as signature collections

-     also look at product extensions into women’s wear (Eminence), sportswear (Frenchie and Frenchie X) and thermals

As a part of the implementation of this strategy, in June ’11, they sold one of their spinning plants for 39 cr., then in '14 they sold the Navi Mumbai unit for 9 cr., and they have plans to plan to sell their Tamil Nadu unit for 12-15 cr. Also in the sale pipeline is their Gujarat unit. This will reduce their working capital from 80 cr. to 60 cr., a gain of 20 cr. which in turn will reduce the interest outgo.

Analysts expect it to post an EPS of 5.5 for FY 16, giving it a forward PE of about 7.5 while Page and Lovable trade at upwards of 20; of course they are much bigger players and have different strengths but they have been able to make a mark for themselves in this nascent industry.

So the success of Maxwell largely depends upon the execution of their strategy. They have a strong brand VIP but that has got completely overtaken by Jockey in the last few years. So they couldn’t keep a strong brand going in a large market. They are also targeting a market share of 30% for the women’s wear segment from the current 15%, in the next 3 years.

With the above steps executed, they should see a significant margin expansion; margins have already improved to about 10% in the first half of the current year. In the last 1 year itself, from Feb '14, the stock is up more than 200%.With the right steps taken this could well be a multi-bagger in the years to come.

Buffetisms

A recent discussion with a friend triggered this post. While discussing some stock recos, one of the questions he asked was regarding the price targets I expected for the stocks I had recommended to him over next 2-3 years – Aditya Birla Nuvo, L&T and CARE. If you read Warren Buffet’s quotes, you will realize that simple thinking or a simple solution to a problem is often the best solution. And I for one, do try to follow his philosophy, where possible and more importantly applicable.

Let’s just see the stocks I have written about and see which of Buffet’s philosophies went into them:

Buying a stock is about more than just the price

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

For this reason alone, I have avoided Page Industries and Eicher Motors. Given that they have good businesses which have done well over the last few years, but they certainly don’t quote at fair prices. I would rather go for Ashok Leyland or Tata Motors which are much more reasonably priced than Eicher Motors. When u are at the top, the only way u can go is down.

The next few are some of my favorites.

The best time to buy a company is when it's in trouble. 

"The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they are at the operating table."

In the last 3-4 years or so, a couple of my recommendations have been Wockhardt and MCX which fit this philosophy to the t. Both are excellent businesses but ran into grave trouble, some of their own making and some not. As I had written in my blog, there was nothing wrong in MCX’ business then (Aug. ’13) and nothing is wrong now. But then, it quoted close to 300 and today it is quoting close to 840. And the cause of this trouble was not the business but the parent company which was in deep trouble over irregularities in its subsidiary NSEL.

Same is the case with Wockhardt. With a seasoned Khorakiwala at the helm, it made some wrong bets on foreign currency derivatives way back in 2008. Saddled with a debt of over Rs. 3700 crore, Wockhardt had gone in for the corporate debt restructuring (CDR) process. Following that, it defaulted on redemption of $110 million (around Rs540 crore then) of bonds in October 2009. To add to its troubles, a group of 3 FCCB holders filed the winding-up petition against Wockhardt in January 2010 which was admitted by Bombay HC. The fact of the matter was that Wockhardt was slammed from 2 sides – one was the INR appreciation (Wockhardt’s business was heavily export-centric, accounting for as much as 80% of its turnover) and the other was the inability to pay back the FCCB amount. This led to a run on its share price which collapsed from above 1000 closer to 100 in no time.

The company made some wise moves to get out of this trouble – it sacrificed a part of its hospital business, the entire nutrition business and animal health business. With this, some amount of sanity was restored. In 2009-10 Wockhardt’s debt equity ratio was at an alarming level of 5.5 which now reduced to just 0.4.  During this period, the share price moved from less than 100 to close to 1500.

Once there was some clarity on how it wanted to move forward, I boarded it at a reasonably good price and made good money. Again, there was nothing fundamentally wrong with its business; it made some wrong moves and more importantly put together plans in place to get out of the mess it found itself in. I still hold it from around 700 levels and expect that it will move much higher from here onwards, though it has appreciated by close to 50% in the last 2 years or so. Of course there may be bouts of ups and downs but then it can’t be a 1-way street can it? I am sure that the able Mr, Khorakiwala would have learnt his lessons and is putting in place a structure to prevent such mishaps, leading the company to more assured and stable growth.

Stocks have always come out of crises.

"Over the long term, the stock market news will be good.”

In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

The one company which fits the bill above is JSPL.

If you see the price action in the recent times, it seems clear that people have accepted that the damage has been done to the extent that any improvement on the coal auction side would help them come back which is one of the reasons they lost this entire ground. Also the penalty issue which is still hanging fire could start abating if they were to get some sort of a respite which is likely.

At the same time the ordinance for the mining side could improve even the steel business for them. So all in all, they can come back from this much stronger, much like Wockhardt. If you are patient enough with this, returns could be manifold.

Take the next 2 together.

Think long-term

“If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”

Forever is a good holding period

"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

As I have written in my blog, when you invest In equity u should have a minimum holding period of 3-5 years, the longer the better. If u catch a good company, the returns over a longer time-frame can easily be 20% compounded annually. And very few instruments will give u that kind of return in India, now or in the future.

For e.g. take Aditya Birla Nuvo (ABN) which I wrote about in Nov. last year. With a young KM Birla at the helm (he is less than 50, so unless something untoward happens, has a long way to go; and he has running the Birla group splendidly for the last 19 years from the age of 28), ABN can also flourish from hereon. Once it starts hiving off its subsidiaries into separate companies, real value-unlocking will happen

Same with L&T the only diff. being there is no defined promoter family behind L&T, but there is a professional board which will ensure its wellbeing.

 I started buying ABN from ’05 when it was called Indian Rayon and was around 350. Since then, I have bought it at various levels over the years, even at levels of 1000 thus getting an average price of around 700. And I have no intention of selling it off anytime soon, unless I need the money.

Same with L&T – started in ’99 when it was around 200 and kept adding at various levels. Since then, it has given 3 bonus issues, 2 of them 1:1. Can you ask for more?

CARE is a new entrant since it came with an IPO only in 2012 @750. Now it is around 1600. But compared to its peers, it is still not expensive. I have already written about it earlier. This is the only stock among the listed rating peers which as yet hasn’t been grabbed by any rating MNC (CRISIL has S&P, ICRA has Moody’s, and now IDBI wants to get out of CARE to monetize its holding, giving any other MNC exactly the entry it may be looking for). And mind u, being a niche stock, it will never be cheap on the valuation front (not the price). But if u stick to it, returns are likely to be secure and manifold.

Clinical growth

This is one stock I can bet not many (fresh or experienced) would have heard of. Poly Medicure (PM) is a small cap stock which came on my radar way back in 2007, when it was around 170. Since then, it has more than rewarded its shareholders with 2 1:1 bonus issues every 3 years in 2010 and 2013, and is now quoting at around 910. It has given a CAGR of 23% over the last 7 years, and that is without including the bonus issues. You can do the calculations for the rest. Even in the current year, it has returned 162% YTD. The promoters of this relatively unknown company are also the quiet Baid family holding about 48% stake. And none of the major institutions have discovered this yet.

One of the main reasons that attracted me to this scrip then was its miniscule equity capital of 5.5 cr. Post the bonus issues over the years, it still stands at a reasonable 22 cr. And the company has a market-cap of more than 2000 cr. On this tiny base, u can imagine the effect of any jump in profits has on its EPS and hence on the overall valuation. And the other reason for my interest was the company’s business.

Established in 1995, PM is one of the leading producers and exporters of medical disposables in India. The company is mainly into manufacturing and selling of healthcare disposables like Intravenous (IV) Cannula, blood bags, Blood Transfusion (BT) set and various other disposables. These products are widely used for infusion therapy, anesthesia, urology, gastroenterology, blood management, surgery & wound drainage and others. This is a niche business requiring a high degree of engineering and automation in manufacturing processes; need for continuous R&D and innovation; highly skilled workforce and technical knowhow, and long duration to get product approvals. So the entry barriers for new players are significant, and there are hardly any Indian companies that are in this field. A few major MNCs that I am aware of in this field include Siemens and J&J.

The medical disposable/equipment industry plays a crucial role in the healthcare system. Medical disposables have enhanced the ability of physicians to diagnose and treat diseases, improving overall health and quality of life. These technologies have changed the mainstream practice of medicine. These devices include not only diagnostic technology but also analytical techniques, providing physicians with fresh, accurate and rapid information. Also, minimally invasive technologies allow surgeries that are safer, with less pain and trauma, requiring significantly shorter hospital stays and hence are becoming increasingly popular leading to a higher demand for such products. And that is where PM would benefit.

In light of its widespread applications, the medical device market is witnessing explosive growth. As per a research report by Edelweiss, the global market for medical disposables is valued at ~USD 120bn, growing at 4% CAGR. This will continue to accelerate as demographics and market drivers increase their pressure for new and innovative product offerings at affordable pricing. The same report states that the Indian medical disposables market is pegged at USD 0.8bn and growing at a healthy pace of 17% CAGR for last 4 years. The domestic market is highly dominated by imports at 70% of the total demand. Out of the balance 30%, 18% of the medical disposables are produced by organized local players like PM while the remaining 12% is produced by unorganized players. The company exports about 75% of its products currently, so there is still a huge scope for market expansion for established players like PM.

PM exports its products mostly to Europe, Asia and South America and supplies to over 80 countries across the world. Exports contribute 70% of total revenue. Export sales are mostly via distributors. Domestic business is conducted via government tenders or via distributors to private hospitals. Recent management commentary indicates that the company is likely to focus more on Nephrology products (related to kidney ailments) in the coming period. Today, India imports most of the products including the basic ones in nephrology field. So there is a big opportunity for PM to make these products and bring in good, new technologies at affordable pricing.

Now the govt. has also approved FDI in medical devices which would directly benefit PM. Earlier, the medical devices industry was being clubbed with Pharma and hence approvals had to come thru the FIPB route which took anywhere from 6 months to 1 year. Now this barrier has been removed. Also with this new regulation in place, the medical devices segment will get separated from the drugs and pharma business which will help pricing.

PM has 3 operational facilities in the north – 2 in Faridabad near Delhi and 1 in Haridwar. And a 4^th one in Jaipur, in Mahindra SEZ, is yet to be commercially operational.

With the govt’s focus on Make-in-India, along with secular growth prospects for its products, and aided by INR deprecation (as 70% of its products are exported), PM appears to be in a sweet spot at the moment. Latch on to it for healthy returns over the coming years as has been its record.