Random thoughts on Manappuram Finance

Of late a friend of mine suggested me to look at Manappuram Finance Limited (MFL). Lately, capital markets have been very buoyant and hence everyday a couple of ideas prop up. Alas, I decided to give the company a look through. On the face of it the company seems worth a further dig. Some random facts from a quick look are presented below:

• Loan book size of 9000 odd crores
• 10 years sales CAGR 67%
• 10 years profit CAGR 60%
• Dividend yield: 4.5%
• P/B: .90

 MFL is a non banking finance company predominantly involved in lending against gold. Their past 10 year record looks more astonishing when you consider the fact that their business peaked out in 2012 and since then there has been no growth. Volatility in gold prices, downward trend, regulatory concerns are factors attributed by management for the dent in growth. I read through the 2015 annual report to understand the business a little better and present my findings below:

• Earlier into only gold loan financing, now planning to mobilize existing customer base through other avenues of finance viz vehicle loans, retail loans and housing loan
• Existing business having 3293 branches, 4 business verticals, 1.75 million customers and covering Pan India
• Currently South India focused with 70% branch presence in South India. However Gold loan book outstanding in South India has come down from 82% to 68% over the years
• Business seems to have peaked out in 2012, after which there has been a steady decline in Income, AUM & profits
• From the annual report figures seems 2015 has shown some revival in business after 3 years. Need to look at why this has happened?
• Started practice of recalibrating LTV ratio to tenure of loan last year and now more than 2/3rds of book in gold loan has been shifted to shorter tenure reducing vulnerability to gold prices. Full benefits will be visible from 2016
• Borrowings cost as a whole have declined by 70 bps over the year due to upgrades by Credit Rating Agencies
• Company mentions that even though opportunity in a single portfolio of gold loans where their core competency lies is huge they have diversified primarily due to regulatory hurdles faced by gold loan industry and thus the perception that gold loan companies are risky. Company also mentions of opportunity available in CV lending, affordable housing finance and microfinance
• Completed acquisition of Asirvad Microfinance (a seven year old company) AUM of 322 crores and presence in Tamil Nadu, Kerala and Karnataka. Intend to expand through this vertical(Microfinance model under holding company could benefit as cost of funds will be lower)
• Implementing Automatic Intrusion Alert Management System (AIAMS) Manappuram estimates cost savings of Rs 100 crores over 3 years due to a decline in costs
• Implementing Gold Loan Depository Services which will entail massive savings on costs front due to a decline in turnaround time for loans

I have very little understanding of finance business. What little i understand is that in the finance business you need someone running the business who understands the business very very well. Even the best finance companies in India be it banks or NBFC's have been due to an able leader who have steered their business well.
What i could comprehend from MFL is that the company was enjoying a brilliant period which hit a speed breaker in 2012. They seem to enjoy lot of brand equity in South India. (Need to look into this matter further). Also, it is difficult to gauge how good the management is from one annual report. Need to look at a lot of history for this. 

• What 2015 annual report tells us is that MFL has core competency in lending against gold. That business is facing regulatory hurdles hence the management is trying to strengthen the business so that any regulatory hurdle in the future will not have a very adverse impact 
• Trying to create other new verticals so that it can diversify its existing revenue stream  to reduce impact of regulatory hurdles in future.(I cannot tell now how much of this is diversification and how much diworsefication)
• Managing its costs well to reduce overall costs of borrowing for the company
• Adding newer verticals to kickstart revenue growth. Now entering verticals with higher yielding loans and with overall cost of fund being lower will surely boost profit. 

Finance is a difficult business where if one gets the business matrix right a lot of money can be made because in a growing country like India its a low hanging fruit(think of all the chit fund companies) However, if one venture out of their core competency for the sake of growth it can be hazardous, case in point what i have highlighted above in bold. In the case of MFl it needs to be studied further to understand more about the pedigree of the management so as to make an idea as to whether the newer ventures eventually lead to diversification of revenues along with steady growth in profits without the NPA's or the management forgets its core competency and destroys the business model altogether. Currently my study is not complete to comment on the above. Will look at this further and come up with another post.

Annual Report Analysis (Jamna Auto Industries) Part 2

In the last post i had mentioned some facts from the annual report of Jamna Auto Industries(JAI) for the year 2015. The annual report seemed intriguing, management seemed to be making the right noises and it warranted a deeper look. Hence, I dived into the past annual reports of the company going right back to 2009, and followed progressively to 2015, reading all seven years, step by step. This, I believe is the correct way of reading annual reports as it helps in understanding the view of the management and also check whether the management has walked the talk in the past. This helps in building a level of trust which is essential while taking bets on the management. Anyways coming back to the topic, i present below facts and excerpts from the last seven years of JAI which I found to be interesting. Before I present the facts a few pointers to take note of:

• This is not a complete synopsis. I present only the facts i found interesting. I encourage everyone to dig further and present more interesting facts on the company
• With the facts i present some questions which arise or which needs to be checked further for validation
• I have presented my questions in brackets just next to the facts and i have picked excerpts straight from the annual report which are in italics
• This is just another part in the series of Annual Report Analysis, as i do further reading i will present answers to the questions which arise out of the facts from the report
• Annual Report Summary & Questions
  2009
• JAI has decided to supply air suspension units and has signed a technical assistance agreement  with the US based Ridewell Corporation for manufacture of air suspension and components (Need to explore how strong Ridewell Corpn. is in its home market and whether their technology is superior?)
• Planned to set up a greenfield plant in Jamshedpur catering solely to Tata Motors but put on backburner due to slowdown in CV market
• Production through subsidiary Jai Suspension Systems (LLP) has started. The subsidiary will cater to aftermarket sales (Should compare figures of subsidiary over past 6 years to see how far have JAI been able to diversify by increasing aftermarket sales)
• Planning to derisk from over concentration on OEM market, has decided to focus more on domestic and export replacement market
  2010

• Tata Motors converted from leaf springs to parabolic springs for two of its popular HCV’s which will lead to higher margins for JAI
• Received LOI from UD Trucks Japan for supply of leaf springs

          2011

• Leader in leaf springs and parabolic spring space. Exploring leadership in Air Suspension and Lift Axle space (Need to dig deep on penetration of air suspension and lift axle space in Indian CV market and margin difference between conventional suspension system and air suspension system)
• “We will continue to focus on higher ROCE and improve PBT margins through better product mix, enhanced capacity, reduced debt as well as by further expanding our distribution network and market reach”(Should compare performance across 2011-2015 to check whether numbers conform the management commentary)
• The company is working towards the goal of bringing down the share of revenue of Leaf Springs from the present level of 90% to 65% and increase share of other product such as Parabolic Spring, Air Suspension and Lift Axle

         2012

• With the new production lines at Yamuna Nagar already having come up in stream in January 2012 and Malanpur coming on stream in September 2012, our production capacity for leaf springs and parabolic springs will be 50% higher than the peak production of 144,000 tonnes reached in 2011-12. With this expansion, we will be the second largest player in the world(Capacity coming onstream at a time when markets for CV were buyoant)
• As we grow our business and position the company for future growth and profitability, we will be mindful of our financial objectives to ensure that our net block is funded out of net-worth, to consistently generate strong cash flows, to earn a ROCE of 33% and to distribute 33% of profits as dividends to shareholders (Always good to hear the management of a cyclical company talking about sustainability and preparing business to be better prepared for an adversity)

          2013

• Implemented de risking plans to tap new markets, expand product portfolio and locations. Took initiatives to improve cost efficiency across all plants to maintain EBITDA level and as a result decrease breakeven level for the company. “As compared to the recession during the year 2008-2009 when these plans were not in place, the Company had lost sale of 4% but incurred a net loss whereas during the FY 2012-2013 the Company lost sale of 12% and earned profit after tax of Rs 28 crore.” Here we can see validation of the de risking efforts of the company
• We may also see competition growing up in the tapered leaf and parabolic spring business in the coming years with entry of new tapered leaf springs manufacturers. The overall near term outlook of the industry appears to be weak(Good to see management recognising competition in the sector, will help in being proactive)
• Another excerpt from the annual report which helps alleviate competitiveness fears “·         We produce 410 types of springs to OE customers; each type of spring has a development time. It will not be easy for any competitor to develop and supply all these types of springs in a shorter period of time”
• Outlook for 2014 “The current financial year will be challenging. The overall near term outlook of the industry appears to be weak and demand for CVs is expected to be subdued in the current year as well”

          2014

• During FY14, the company made inroads into and achieved significant scale of operations in countries which are currently dominated by Chinese vendors. Going forward, we aim to export our products to USA, Europe and Africa
• Air suspension is a type of vehicle suspension powered by an electric or engine-driven air pump. While this technology has entered India, its uptake is still in single percentage points, unlike in developed countries where the majority of buses run on air suspension(Market opportunity for air suspension seems big considering current buses mostly running conventional suspension systems)
• Lift axle suspension helps increase load-bearing capacity. This technology reduces the wear and tear of the auto parts whenever a truck runs below a specified Gross Vehicle Weight (GVW). Over time, this technology increases the life of the truck and also reduces the maintenance cost. The company is already supplying Ashok Leyland with lift axles. During the year, we also added on Asia Motor Works Ltd as a customer
• During the year under review, the Company has incurred only need based capital expenditures to conserve cash. The Company has closed down Lucknow Plant as a cost control and rationalization measure(Company seems to have learnt sustainable expansion)

          2015

• In FY16, we plan to spend Rs 75 crore to expand capacity by 30,000 MTPA which will come on line by Q1FY17 at our Hosur plant (New capex outlined)
• As a testament to our financial performance, we achieved continuous improvement in our credit ratings. In FY15, ICRA upgraded our ratings: Long Term Rating from LBBB- to A-, Short Term Rating from A3 to A2+ and further improved Long term rating to 'A' and Short term 'A1' in the month of April 2015(Credit ratings have been upgraded continuously over the last two years - signs of improved financial strength of the company)
• “We are, very excited about the future of the CV industry.” “We, at JAI, are ready to cruise ahead with a leaner structure. We expect the next couple of years to be exciting, marked by increases in market share and new products growth.”(Positive tone in the annual report by the management backed by purchase of own shares when Clearwater Partners offloaded their stake in December 2015)
• We have improved our debtor and inventory management systems. Our enhanced credit quality is reflected in ICRA upgrading our credit rating from LBBB- to A- (long term) and from A3 to A2+ (short term). The credit rating was further improved to A (long term) and A1 (short term) in April 2015. We will continue to invest from internal generations to create meaningful capacities in the future.

Annual Report Analysis (Jamna Auto Industries) Part 1...

This is my first post in the series of Annual Report Analysis. I will discuss facts presented in annual report of some companies which i find interesting. The idea of the post is to discuss if there is something interesting happening with some companies. I will present my analysis of the facts presented in the annual report of the companies. My idea here is to initiate a discussion on these companies with like minded people so that we could come to an outcome. In the passage below i present facts from the current annual report of the company and in italics is my analysis of the facts present in the annual report. I have presented my understanding of the company and i will continue to present further facts on the company as my study goes deeper. Till then here is my first post on this auto component company Jamna Auto Industries (JAI).

 Company Description

JAI is an Indian multinational Automotive parts company headquartered in Yamuna Nagar, India. It has its central office in New Delhi, India. It is one of Asia's largest Automotive parts producers

Annual Report 2015

• Six plants across the country in Haryana, Gwalior, Chennai, Jamshedpur, Hosur & Pantnagar covering bases across regions (Company seems to be spread out across the country with no bias towards a specific region)
• Growth in Commercial Vehicles (CV) market is directly linked with manufacturing activity, viz manufacturing & construction. in FY15 Medium & Heavy Commercial Vehicles (MHCV) performed better vehicle Light Commercial Vehicle (LCV) segment lagged due to a slowdown in rural income (Commercial vehicles, especially MHCV segment should do well over the next 3-5 years because of pickup in government capex across sectors, activity in mining, construction, roads and other asset intensive industries, reduced fuel cost and passage of GST)
• “The positive results from our internal Project 'Lakshya' have well-positioned JAI to ride the CV upcycle. As mentioned in our earlier annual reports, 'Lakshya' has been carefully designed to strengthen our business model by diversification in products and markets to protect against the cyclical nature of our business.” (This seems to be something interesting and will have to look over prior annual reports to find out what Project Lakshya actually is and when did they start and what do the company want to achieve?”
• JAI is India’s largest and among the world’s top three players in Multileaf Springs. (A small company and a leader in its space with a virtual monopoly in the segment. Interesting!!)
• JAI has, in the past, successfully exported to global majors such as Ford and GM. We now plan to expand our relationship with these global players as an optimal sourcing base for their global requirements. We have the potential to become a hub for global OEMs and are in the process of building meaningful capacities to increase our presence in exports and the aftermarket segment.(Trying to develop an export market for its product to diversify revenue base)
• In FY16, we plan to spend Rs 75 crore to expand capacity by 30,000 MTPA which will come on line by Q1FY17 at our Hosur plant.(Capex and timeline outlined for the expansion of existing plant at Hosur for exports, Revenues will start flowing in from H1FY17)
• ROCE improvement is a major target in Lakshya. We saw significant improvement in FY15 with ROCE at 22%, compared to 12% in FY14. Going forward, we plan to have our net block equal to net worth in the next two years. FY15 saw us continue to strengthen the balance-sheet with reduced leverage and healthy cash flows with Rs 78 crore of free cash flow in FY15 and our total debt including current maturities reduced from Rs 125 crore in FY14 to Rs 64 crore in FY15. (Ok, now i seem to be getting a hang of the project, the company plans to improve efficiency, thus reducing load on working capital, also JAI wants to have net worth equal to net block, hence going forward capex will only be linked to internal accruals, thus reducing interest burden, improving profitability and derisk business from vagaries of cyclicity. Debt has halved in a year which will have a significant impact on bottomline. This project Lakshya looks nice)
• In FY15, ICRA upgraded our ratings: Long Term Rating from LBBB- to A-, Short Term Rating from A3 to A2+ and further improved Long term rating to 'A' and Short term 'A1' in the month of April 2015.(Even credit rating agencies seem to be recognizing te potential, multiple upgrades and reduction in overall debt will lead to drastic reduction in interest costs in FY16, should verify with H1FY16 results)
• In order to improve liquidity of the company's shares in the stock markets, it is proposed to sub-divide (stock split) each Equity Share of Rs 10 each into 2 Equity Shares of Rs 5 each.(Ok, this is something i could do without. However the management seems to be on a mission to improve stock price)
• Project Lakshya: Launched on April 2012- Derisk revenue (33% revenue from new products & markets), Maximising efficiency (33% break even point), Financial Goals - Achieve 33% ROCE, 33% dividend payout & Net block to be funded by Net Worth
• We, at JAI, are very excited about the future of the CV industry. With outlook for infrastructure projects, coal mining and roads projects improving, we expect the CV industry to return to its 2012 peak levels. We, at JAI, are ready to cruise ahead with a leaner structure. We expect the next couple of years to be exciting, marked by increases in market share and new products growth. (Management commentary seems positive, also supported by positive macro factors for the industry)
• Our pipeline of products also include air suspension and new generation springs, rationalized our portfolio and consciously reduced low margin business. We aim to decrease our dependence on top clients by increasing our overall business with other clients we serve.
• In the last year, we have undertaken minimal capex for maintenance while our business has outperformed expectations. This has resulted in robust ROCE at 22% for FY15, which is a substantial improvement from 12% in FY14. (Management seems to be walking the talk, also being supported by uptick in sector)
  
  
  In the next post i will discuss further on what this Project Lakshya is all about and dig further into previous annual reports and also quarterly financials of this company to come to a better understanding on this company.
  
  
  
  
  Disclaimer: This is not an investment recommendation. I am merely presenting facts presented in the annual report of the company. None of this should be construed as an investment advice. The idea of the post is to discuss companies where something interesting is happening in the company. I might own shares in companies which i discuss in these posts.
  

Searching for the holy grail

After reading various companies which have witnessed 100x returns in the past, what has  intrigued me is the fact as to how can i identify such companies at an early stage? What do i need to look at to understand that a particular company will make it big in the next decade or so. Multibaggers have always fascinated us but we all love the next multibagger, not the current one. What has not helped my case is the fact that almost none of these companies pass the traditional tools that people preach on investing. Factors like huge free cash generation, good return on capital employed (ROCE), operating profits are something which have alluded these firms at initial stages. The traditional investment tools rarely help in identifying such firms at an early stage. Quantitative analysis is difficult and that is why investing is an art and not science. Why would we buy a firm which has a negative net worth, has had operational losses and has no timeline on when it will be turning up a profit. However, many of the current stalwarts once were in these courts. Think of Rallis India in 2002, Symphony in 2003, IndoCount in 1999 and many more. Yes, today they are brilliant companies, attracting huge investor interest, but long ago almost went under. It would have required great foresight to identify the future for these companies and even after that holding onto such companies through those years. Salute the people who were able to do it.

In my pursuit of holy grail, of trying to find what it will take for me to have the visionary power to understand such companies in infancy which eventually might lead to windfall returns i have read numerous business history, tried to understand how to apply ratios, delve deep into the psychology of the management, went through extensive interviews of past successful managers and even those who failed and a lot more. More or less it has been an ever continuing journey to find what really can help me in getting a successful investment process at the back of my head.

The result of all the reading up to now has made me understand one thing. I don’t yet know what is the most important factor successful investors look for in a company. They vary from investor to investor. What is comfortable for one could be difficult for another. The things that i have found the most important until now has been studying the size of opportunity and management focus. Those two in my mind are the most important factors i look at when investing in a company. What my experience tells me is that these two factors, if in favor for a company could make or break a company. A huge available and growing market for the products in which the company operates gives the company an opportunity to succeed in the long run and helps it in maintaining high growth rates on a consistent basis. It gives the benefits of scale and the chance of success better than other companies. However, what use is opportunity if intent is not present. This is where management comes in. If the company is run by a professional who is passionate about success, it invariably will be a successful initiative. History has demonstrated this and so these are two factors which i give a very good thought to while scouting for investments.On the face of it these are two factors which provides a strong starting point to an investor. After this there are many other factors which would either make or break a company but those will be discussed in other posts.