Attractive roof

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With higher margins and operating profits than the industry leader, Visaka Industries is a better bet.

Last year, we prayed, “God, give me a market that is cheap, where my limited money can buy a lot, where I am spoilt for choice, where I can dictate the price ….”

God immediately stamped the arzi ‘Approved’, scanned it to his relevant department and went on vacation.

God got an urgent buzzer from his office last week. His secy read out a message from earth. “God, give me a market where I have already bought cheap, where prices appreciate, where I recover my losses, where prosperity returns and where I too – like you – go on vacation.”

 

This time God sought out the Business Standard columnist absconding for three months. “Emergency. Report for duty,” God conveyed.
So here.

Buying an industry
When I went on the blink in mid-June, I was still into writing on how one could buy into companies. Ek arsaa guzar gaya; I am now writing on how one can buy into an entire industry instead. Asbestos cement sheets in this case.

The principal product of the asbestos cement sheet industry is the corrugated material that we find on industrial sheds and rural homes. The industry went through the wringer for a year-and-a-half as raw material costs hardened; Hyderabad Industries reported a decline in post tax profit from Rs 37.68 crore in 2005-06 to Rs 13.97 crore in 2006-07 and Rs 14.08 crore in 2007-08; Visaka Industries reported a corresponding decline from Rs 19.26 crore to Rs 23.74 crore to Rs 7.67 crore.

The corresponding decline in profits reflected in their respective market capitalisations, creating a unique opportunity. Take Visaka Industries’ valuation as an industry index: if this company with a 17 per cent market share can account for a ‘clearance sale’ market capitalisation of Rs 100 crore, then hypothetically one can buy the entire industry in this country for no more than Rs 600 crore. Which means that if I can get 600 investors to put down just Rs 1 crore each, I can – hypothetically – delist an Rs 3,000 crore annual revenue industry growing 15 per cent per year. At least.

Industry insight
The asbestos sheet industry has evolved interestingly. Around the turn of the decade, industrial offtake accounted for 60 per cent of the AC sheet industry’s offtake, government orders 20 per cent and retail purchases 10 per cent. Then something happened: in one of the sharpest reversals in consumption patterns seen in any industry in such a short period, the numbers just reversed.

Industrial offtake dropped to 15 per cent of the overall offtake, government purchases 5 per cent while retail offtake – people like you and me – now accounted for 80 per cent of all the sales of asbestos sheets in India. Amazing.

You would think that while this churn was happening, the industry’s offtake would be dented. Not really: the industry (based on seven members who are a part of the industry association) offtake increased every single year from 2003-04 to 2007-08; the incremental annual offtake across the four-year period was lowest at 1.80 lakh MT in 2006-07 and the highest immediately after at 3.30 lakh MT in 2007-08 when the industry went through its most challenging trial in recent years.

At some points, the industry’s annual growth was around 18 per cent and just when the general optimism pointed to a 20 per cent growth, the industry growth declined to around 15 per cent. Not something that would make shareholders laughing to the loo each morning but healthy all the same.

Cost push
It would have been perfect – steady growth, limited players, no fresh entry and reasonable realisations – had it not been for an unexpected hiccup. A ton of asbestos sheet requires around 425 kgs of cement and just as the country’s cement appetite increased, supplies remained restricted and prices appreciated.

What used to cost sheet manufacturers Rs 90 a bag of cement became Rs 190 a bag. Sure this hurt; and since one needed to pay for cement directly when building a house, rural home building also staggered, affecting asbestos sheet offtake. So, sheet makers now had it bad on two counts – an increase in their raw material costs on the one hand without the opportunity of being able to recover pass-on costs. Bottomlines melted, investors dumped their stock and fund managers turned up their noses each time you casually hinted ‘asbestos sheets’.

This had a trickle-down fever. Instinctively, sheet manufacturers slowed investments in fresh capacity creation; the institutional response was to see the cement aberration blow over.

Some months later, cement supplies increased, prices moderated and there came a point when asbestos sheet supplies cris-crossed growing demand and the keen-eyed industry watchers quietly started putting away all their ‘sell’ recommendations into the recycle bin.

Sheet realisations stabilised (November 2007), then strengthened (January 2008), inventories were liquidated (April to June 2008) and monsoonal prices dipped and recovered (July-August 2008). What was an average realisation of Rs 6,000 per tonne for the industry in 2007-08 now strengthened to Rs 7,250 per tonne.

Turnaround
The first quarter of the current financial year showcases the vigour of the turnaround. During the third quarter of the last financial year, the venerable Hyderabad Industries reported a net loss Rs 1.9 crore; in the last quarter of 2007-08, it reported a net profit of Rs 3.78 crore and then in the first quarter of the current financial, net profit was a stunning Rs 17.08 crore. Visaka ditto. Net profit of Rs 53 lakh to Rs 3.78 crore to Rs 14.64 crore.

Correspondingly, the EBIDTA margin of Hyderabad Industries did a Lazarus from a mere 1.27 per cent to 9.84 per cent to 17.25 per cent; Visaka strengthened from 8.58 per cent to 13.63 per cent to 18.09 per cent.

Opportunity
This is what I like about Visaka Industries:

 

 

It was the seventh largest industry player in 2002-03; it is the second largest today. It is clearly accounting for a disproportionately larger share of the industry’s growth 
 

It accounted for 6 per cent of the industry’s market share in 2002-03; it is 17 per cent today and only 150 bps behind the industry leader even as the industry leader has probably lost ground during this period 
 

It was the first to sense a growing traction from the country’s retail and rural segments; it deepened its distribution network even as other players were content to stick to tried and tested positions; correspondingly, it grew the number of its units from three in 2003-04 to seven today even as the cumulative units of the country’s leading manufacturers increased from 34 to 43; evidently, Visaka has singularly accounted for almost half of the growth coming out of the largest manufacturers 
 

It marketed around 5.50 lakh tonnes of sheets in 2007-08 and expects to achieve 6 lakh tonnes in 2008-09 and around 6.40 lakh tonnes in 2009-10 

Its AC sheets business is around 80 per cent of corporate revenues (textiles, the rest), making it effectively an asbestos sheets company

Lastly, this is my clincher. In my comparison of Visaka and Hyderabad Industries, the pretender reported a higher EBIDTA of Rs 31.16 crore in the first quarter of 2008-09 against the emperor’s Rs 30.39 crore, but suffers from a market capitalisation more than 40 per cent lower. 

I have a term for this. Half-volley.

Mudar shockingly does not hold any Visaka stock. He heads India’s annual report agency called Trisys. He responds with speed at Mudar@trisyscom.com