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Stock discussion

Pokarna The frog that can become a princess. Stock discussion. Law of diminishing returns. “You make maximum money when things go from truly horrible to just getting better. The time of maximum fear and judgement (mis ?) is the time to buy. “.

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Stock discussion

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  1. Pokarna The frog that can become a princess Stock discussion

  2. Law of diminishing returns “You make maximum money when things go from truly horrible to just getting better. The time of maximum fear and judgement (mis ?) is the time to buy. “ “Better to be the first to squeeze an average quality sugar cane than to be the 5th to squeeze a good quality sugar cane. Sirf chilka milega !”

  3. How to antagonize friends and be unpopular while making money from market “You can’t make a lot of money buying what everyone is buying” You make maximum money when something goes from utterly hopeless to bad.. John templeton – maximum pessimism -=

  4. Asymmetric risk-reward equation Promoter behaviour Actions in line with share holder needs Understands what’s capital allocation Random decisions based on passion, employement generation for family members Shrinking balance sheet/repayment of debt Strong profitability growth Business Strong topline growth “This party will never end” analystspeak Valuation Trades for zero growth Trades like at near bankruptcy valn

  5. What attracted me to pokarna • Huge demand for quartz kitchen tops in the USA • Market is more than $ 2 bn and growing at 10 %+ • Better heat resistance,

  6. Three businesses of pokarna Quartz Granite Apparel 40 % + EBIDA 25 % EBITDA Profitable for family members as a hobby Profitability 25 % ROCE and 60% ROE 20 % ROCE Forced charity, shall we say ? Value to shareholders 8.3 lac/N.A. 8.85/70-75% NA Capacity/cap.util 65 % 30% 3 % Capital employed (%)

  7. Management commentary – Q1 FY 17

  8. Incredibly strong cash flows and huge op leverage in quartz

  9. Pokarna’s quantra has an unique chance of becoming a no.3/4 in the US market USP Ceaser stone quality at 2/3rds the price Busness summary • Average price realization is at $ 6 Vs $ 9-10 for caeser stone • As yet, not present in DIY stores like home depot, ikea • Primarily sell through distributors and yet to establish a strong brand • Higher realizations as distribution ad brand get entrenched • Tie-up with a DIY home retailer that give volumes • Jumbo slabs of higher thickness that have disproportionately higher realizations Levers to improe ROIC

  10. US market – large and growing Quartz is in the sweet spot of growth US housing is strong and growing

  11. Entry barriers • Huge capital outlay • Access to quarries/RM • Distribution network • Ability to do mass customization on the production line • Access to technology and certifications “Kosher”, quality accreditations from retailers in USA

  12. Mental model : All four engines are firing • Improving sales and profitability • Shrinking balance sheet/reducing debt • Improving ROIC • Changing management - Q2 FY 16 – results presentation uploaded; Q1 FY 17 – conf call and analyst meets; Repaid FCCB and came out of CDR in 4 years

  13. Poke the karna

  14. What’s the hair on the frog • Very few professionals in top management – seems to be a family run business • Lots of RPT – not material but a sign nevertheless. However, reducing in size and volume • Emotionally attached to the apparel business- see no light at the end of day for it.

  15. What do industry experts say ? “Pokarna’s quality is amongst the best in quartz and granites “ – fellow exporter from Jaipur • “Gautam Jain is very conservative and hence the reluctance to expand capacity by taking on debt. The FCCB and CDR debacle possibly is playing in his mind .” • Analyst tracking the company “Going forward, increasing capital allocation into quartz would be the driver of value.”

  16. Scuttle butting • Checked US port container landings and verified it with pokarna’s shipping data – it broadly matches • Checked with an ex-daltile employee to check on daltile’s criteria for choosing pokarna – feedback is positive • Checked with a Jaipur based granite and quartz exporter and he confirmed pokarna has the best brand name amongst indian firms in the US market

  17. Snippets from AR ‘16 Quartz : • Focussed on jumbo slabs to improve realization • Formed a JV to enter Netherlands • Expanded distribution in the USA • Got kosher certification in USA • Implemented SAP

  18. AR ‘16 snippets

  19. Strong demand in countertops

  20. Strong cash flows

  21. Asymmetric risk-reward • “ What matters in the markets is how much money you lose when you are wrong and how much you gain when you are right..” • Stan Druckenmiller

  22. But is past history at dissonance ? • Yes – a few mistakes have been made • Sticking to apparel • No professionalization • Not enough focus on quartz which is growing global market • Have always been cash flow positive • Have never diluted equity • Repaid the FCCB in full and CDR compense • Irrespective the company has delivered 1600% in 20 years (16 % IRR), not bad by any standard

  23. What can go wrong ? • More money into apparel – unlikely • Company is not able to handle the large capex for quartz – medium probability as funds required are in excess of Rs. 200 Cr. • How soon the company can do this capex and monetize it wil drive whether this goes to the next level of Mcap

  24. Recommendations • A good start would be Rs. 700-760 which translates to a Rs 450 Cr. mcap • At an OCF of Rs. 140 Cr. This gives a near 25 % OCF yield and will be at 6 x FY 17 PE • This captures the downside risk adequately – do not see a more than 10-20% downside unless there is a black swan

  25. Potential upsides/optionalities • Stake sale to a global player • Apparel shut down/sell out • Improvement in granite division • Improved visibility and transparency • All of these should lead to a PE re-rating. The key thing is patience.

  26. Comparing the positives and negatives Positives • Early entrant into a global, fast growth segment • High entry barriers • Huge currency tailwinds • Make in india beneficiary Negatives • So-so management but evolving well • Capital allocation still an issue but not a very material one • Professionalization has some way to go

  27. Where can this go to • At a FY 18 EPS of Rs. 150 assuming this re-rates to 10-12x this can go to Rs. 1500 or so.

  28. Valuepickr • AR 14,15, 16 • Equirus research reports on pokarna • Inputs from a hedge fund that is short on Caeser stone, pokarna’s prime competitor in the USA

  29. Disclaimer • “ When facts change, I change my stand. What do you do sir ?” • I hold this stock having bought at near CMP prices

  30. Thank you

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