Thanks to a great and powerful mandate to Modi sarkar – markets are making newer highs and sentiment has turned bullish after a very long time.

All our top picks have been multi-baggers and they continue to do well. Here is an update on how FY14 panned out for them along with what future might hold-

Relaxo Footwear – The company posted 20% sales growth in FY14 with significant margin expansion that led to profits going up 46% to 65 Cr. It shared its first investor presentation in Q4 see here. This has been a classic case of having identified an emerging moat at reasonable valuations run by an ethical and competent management. Over the last 12 months, the stock has seen a decent re-rating and a bridging gap in valuations compared with leader Bata. They sold 10.8 mn pairs of footwear in FY14 and increased production capacity to 160 mn pairs, which should take care of next 2-3 years.

I remain very bullish on the prospects for Relaxo and expect 18-20% CAGR in topline and a higher growth in profits due to rising margins.

VST Tillers – As expected VST posted exceptional results with 30% rise in revenues and 80% jump in profits. The stock has seen massive institutional interest and hence the run up from 400 to 1850 in last 8-9 months. It posted an EPS of 96 in FY14 so its trading at a trailing P/E of 19+ which might have run ahead of its fundamentals, but lets not forget the story has just started playing out – They have setup a new tractor plant with a capacity of 36,000 and company is likely to sell 15,000 tractors in FY15 (100% jump over FY14) . Their product is way superior compared to rivals like Mahindra’s Arjun. The surplus land worth 500 Cr. when monetized will be the bonus here. However, as a caution one might book partial profits.

Ashiana Housing – Ashiana closed FY14 with booking of 22 lac sqft (18% growth) See Q4 Investor Presentation. Since I continue to be bearish on real estate as an asset class, my bullishness on Ashiana Housing might sound ironical. This is owing to my opinion that this company stands out from the crowd – be it the balance sheet, the operational strategy, execution or the management style. The management is very smart and treat land as raw material and do not speculate by stretching the balance sheet. Their execution is not only great but pretty fast too, the reason why it has earned such a good name among home buyers. Further, the effect of moving to completion method of accounting should be over in current financial year and the P&L will start reflecting a fair picture.

Honda Power – Here the exports story continues to play out. In Q4 exports figure trebled to 75 Cr vs 20 Cr. last year. Even QoQ it was up 50% (Vs 50 Cr. in Q3). There were some exceptional losses- closure of Poducherry Unit(consolidating operations@Noida), Inventory write-offs(due to change in emission standards)- all totalling to 9 odd Cr, otherwise PAT would have been higher. Exports to EU are expected to start this quarter. The company might do a turnover of 850-900 Cr. in FY15. Stock has doubled since the new year address by the president (see here) confirming our initial hypothesis that Honda wants to make India its export hub. Given the tremendous export potential and a strong cash-rich balance sheet, this should continue to be a core holding.

EPC Industrie – I shared my research on this scrip recently (see here) when the price was 100 and thanks to a strong mandate to Modi Sarkar and their loud and clear focus on Food Security and Irrigation, the stock has more than doubled in no time. EPC, being one of the largest micro irrigation companies in India, would be a big beneficiary of this.  And the likely synergies with other Mahindra companies will only make things easier for EPC.

 

“A rising tide lifts all boats. It’s not until the tide goes out that you realize who’s swimming naked”

Lot of good companies have seen significant re-ratings in their P/E multiple however there are whole host of dud companies which have doubled and trebled in this rally. Lot of these companies have such stretched balance sheet that they will not be able to turnaround in a hurry, some may not turnaround at all. I would suggest this is a great time to get rid of such companies and move to quality stocks.

But you might ask in such markets is there any quality stock still available at decent valuations? A small company operating in an area where size of the market opportunity is enormous, has some competitive advantage, a strong balance sheet and run by competent and ethical management? Well there is one such stock and it has not participated in this rally at all.

At Current prices, V-Mart is worthy of entering ones core portfolio. Given the population of our country and aspiration levels of countrymen, retail is one of the most lucrative businesses in India. At the same time, it continues to be one of the most difficult businesses due to – low entry barriers, absence of customer loyalty, sizable overheads in terms of rentals & staff costs, and the last but not the least inventory management (dead stock). The list of failures is endless – Koutons, Subhiksha, Vishal….. The ones who seem to be doing it fine aren’t making any crazy money either – ShoppersStop 3-5 % operating margins & Trent has operational losses from last 5 years.

If you dig deeper into the story, you realize the overheads in this business are just too high Why? The rentals are exorbitant. Decent location on high streets and malls costs 150-250 per square feet per month, in places like Delhi’s CP/Khan market its even as high as 400-500 psf. Even if you are an anchor tenant, rentals are still very high in Metros.

High rentals is a huge problem, because your gross margin is fixed, generally in the range of 30-35% in fashion and in case of Kirana its even lower at 12-17%, as you cant sell over MRP.

So whats the way out? Be like Radhakishan Damani’s Dmart and buy all the real estate? 😉

A relatively new company setup only in 2003 seems to have figured this out and the mantra is:

“SKIP THE METROS; ITS SIMPLY NOT VIABLE THERE”

V-Mart is focusing only on Tier II & III  Cities where it pays average rent of just Rs 25 psf. The first problem of keeping costs low is addressed here. But what about the demand? Are people buying stuff from V-Mart in these regions?

If you haven’t been to one of the V-Mart stores near you, please take a day out, travel and experience it.

People in these regions have never experienced something like this before – they call it a mall 🙂 These guys are used to shop from either local markets or road side. Entering into an Air Conditioned store, getting served a glass of cold water, having trial rooms (means a lot specially for ladies) and having washrooms is something they have never experienced before.

One might think that the market size in such towns would be limited but that would be a wrong notion. Take for example, Gorakhpur in UP where V-Mart has opened not one, not two but THREE stores and all three continue to be in the best performing stores despite entry of competitors like Max and Big Bazaar .

V-Mart is first organised store in most of the towns it enters, which gives it the first mover advantage. Company is riding on the high aspirational levels of Indian middle class from these towns – It surprised me when I learnt that they have a store in Srinagar. Though the store has to be closed for various reasons throughout the year, its still one of the best performing store.

Its a pure retailer with 100% manufacturing outsourced through 1500 vendors across the country. They sell decent quality stuff at dirt cheap prices – T-Shirts starting 99, Shirts 299 and Jeans 449 and still manage to make above average money (10% OPM) as the overheads like rentals, staff costs and marketing expenses are minimal. They follow a cluster based approach in expanding stores; keep new one within 150 km of an existing store. Walmart followed a similar strategy and see here how Walmart grew from its first store in 1963 to 4400 in 2010.

Management has guided for a topline growth of 30% CAGR for the coming years i.e. opening of 20-25 stores annually. My analysis gives me confidence that 8-10% same-store-sales growth and remaining from new stores is achievable given the size of the opportunity and the zeal in the promoters.

Balance sheet is in great shape; they have net cash of 55 Cr. I don’t see a strong case of margin expansion here, but maintaining 10% should not be difficult.

This is the one of the few stocks that hasn’t participated in this rally and is still available at 300 implying a forward P/E of 15-16 and sales multiple of less than 1. A 20-25% earnings growth and some re-rating with scale and entry of institutional investors are likely to make this a multi-bagger. An esteemed fund manager Keneth Angrade, CIO of IDFC MF, known as Mid-Cap Mogul has 4.3% of the equity in IDFC Premier Equity. Other institutional investors include Westrbidge and Aditya Birla.

PS: Its in no way related to Vishal Retail, except that the promoter was heading Vishal Retail till 2002.

Some Reading material for you – 

Visit Note_Mgt Q&A

V-Mart’s Investor Presentation Q4 FY14

V-Mart’s FY13 Annual Report

1974 Walmart Annual Report

An interview of Harvard Prof. on Indian Retail in Forbes

If you still have more time – Read an interesting report written by a friend – Has case studies on Walmart and Target here

Happy Investing!