Friday, May 15, 2015


It is hard to find companies (at the right price) that have extremely high barriers to entry, with un-leveraged balance sheet,  good corporate governance, decent dividend payouts, low risk of technological obsolescence coupled with great growth potential.

If all the qualitative attributes check the box, then price would be in such astronomical multiples, that would make it hard to choose between a very prosaic commodity business at significantly cheaper multiples versus a high quality business at 60 times earnings. 

In frothy times that we are in, it is easy to imitate the lemmings and drop the standards and stay out of the market. Or one could venture into frontier markets which is what I have chosen, and play the mis-calculated game of high uncertainty in politically troubled countries with a few bargains.

We are invested in Nigeria in an outstanding company called Red Star Express. An ex-employee has written a book which is a must read for every potential business man, or investor in Nigeria.

Unfortunately the book is only available in paper copy, and I forgot the book in India during recent travel, with all important ideas highlighted or dog-eared.

One of the most important idea is that running business in Nigeria without a 10-15 year plan will send you back packing home penniless. That is the fate of most Multinationals. Running business in Nigeria is like being a Politician cum Finance Minister of a small country with CEO responsibilities added in. You have to secure your own fuel, ensure own power generation, ensure safety of employees, have transport fleet on cratered roads, and much more. 

In the United States UPS (90 Billion USD) and FEDEX (50 Billion USD) punched so hard at DHL ( 50 Billion USD), forced it bleed 9 Billion dollars by 2008 before the company pulled plug. That is right 9 with B. That is the power of network effect ! that a mega 50 Billion USD company could not make a dent. Courier networks, planes in conjunction with value added logistics and support services are one of the hardest to assail economic forts.

Imagine establishing a network in a country (Nigeria) where your courier delivery boys could be killed on the streets. Red Star Express has lost a few to Boko Haram. The company founded by ex-DHL employees in 1990s, turned the game back on DHL, hired the brightest, paid 2X the salary, established strongest brand in the industry. The list of innovation and failures goes on that allowed the company to compound @ 68% in revenues over a period of 15 years such as incentive for employee to buyback the vehicle used for delivery, to minimize repairs. The spirit of camaraderia and teamwork has been unmatched. The book is a packed thriller with tragic challenges that threatened the very survival of the company and eventual triumph in any entrepreneurs life. While DHL publicly does not speak about market share. I can tell you that DHL Nigeria has 800 employees and Red Star Express has close to 1700 associates. DHL Nigeria is much weaker in domestic business and dominates in export/import. Other competitors are UPS (also formed by acquisition of local company), TNT and local companies.

In the recent year when GSK, Nestle, Unilever, Cadbury in Nigeria either suffered losses or major revenue shrinkage, understandably due to violence in Nigeria, Boko Haram etc, Red Star has kept its profitability intact. We think very highly of the company and its management.

Red Star is the franchisee of FedEx which is among the highest barriers-to-entry businesses anywhere in the world, and we believe that "moat" will be much wider/deeper in future. Courier  is less likely to be price regulated compared to other high barriers-to-entry oligopoly network industries such as rail, gas, electricity.

We love the tough on ground economic environment in Nigeria and we adore the 22%ROE, 6% dividend yield and 6PE ratio that the share trades at. We believe this is the stuff that 20, 30 or 50 baggers are made of. Nigerian entrepreneurs on the whole are responsible for low levels of corporate governance and the multiples. We expect the company which has not missed a dividend in decade to be an aberration and at par with MNCs and expect sharp re-rating.

It may take a while but the bloody headlines will eventually change for Nigeria. There is a lot of room for positive surprises !  We expect a very remarkable performance in revenue growth and significantly more in share price than revenue growth over the coming decade. Courier business, logistics, internet penetration, portals, online shopping are at similar levels of maturity as India and are ripe for an exponential take off. 

In my opinion the challenge will not come from any MNCs, it cannot, its another Vietnam jungle battle for a Western CEO, given that CEO's role is that of a Prime Minister, but the local Amazons of Nigeria, ( KONGA, JUMIA which are their Flipkarts) setting up their own courier business could challenge the exponential growth that I envisage.

Friday, April 17, 2015

30% CAGR, 30% ROE, Debt Free, 10 PE, Monopoly or Near-Monopoly

There was a lot of above stuff few years back and may yet be available again dear to every greedy and/or miser investors heart, as described in subject line.

I was in India and recently tuned into CNBC TV 18 after ~5 years for few days. I heard only one sensible thing on this channel. It came from Sanjoy Bhattacharya, "In my life, albiet short in itself, I have never seen an Auto Component Manufacturer at 80+ times earnings - BOSCH India, so there is something wrong."

I also had joint pain and to fix that I read ~half a dozen books last month. I came to the conclusion that best of the best doctor in any corner of the earth knows much less than 0.0001% of mechanics inside the body. I knew the level of ignorance already as my wife was PhD in Microbiology but did not know the yawning chasm. Like Munger, its best to take the finest offerings of all the paradigms, nutritional science, ayurvedic science of doshas, rhythms, primal elements that circulate in body like air, fire, and deeper dimensions of body, modern allopathic diagnostics etc. For nutrition, book by Dr Joel Furhman titled "Fasting and Eating for Health" may be your best 10$ spent ever on health. Second best on nutrition, Terry Wahls - The Wahls Protocol.

I generally spend 6 - 8 hours a day related to investments, not that it always helps. Was reading how 1 Lac INR invested in SYMPHONY LTD. in 2005 India, turned into 2600 Lacs in 2015, did I even make 26 Lacs from each Lac invested when I got in 2009 ? I have nothing but eerie silence. The best investment in a short life is one that moves in your favoured direction within a year or two. Major part of the portfolio needs to be geared towards that.

I think finally I have (fingers crossed) found a company that should compound topline 25% during this decade (atleast has been for past five), bottomline even faster. If, re-rated, which is highly likely, 40-60% Cagr during the next ten years. The feeling I am getting is of extremely heady intoxication, just the same as when I bought Page Industries at 350 Rs in 2010 at 10 times earnings, and recommended to my friends/clients all the way until 4000 Rs two years back. The company is outside India, growing at 30% CAGR, debt free, roe (and all that jazz), available at 10 times earnings and is a monopoly (more than market leader). More on that later.

In India, I think the C grade and B grade has performed better than A grade over the past 18 months. Look at 52 Week High Lows, and you will know what I mean. First time ever, mid and small caps are richly valued across the board. At these levels some companies in India that I still like are Sarup Industries, Dewan Housing, Gulshan Polyols, Ambika Cotton, Kovai Medical. One of the most abominable statements blurted out by tuxedo clag gang on business channels is "For long term i.e. 5-7 years, 20% CAGR is possible". This statement is recounted when Acrysil is 100 or 700 a year later, this is yet again repeated ad fininitum whether Gulshan is 60 Rs or 350 Rs an annum later. So, the sooner you ignore and start turning stones around yourself, the better. Gladly, value investing is a message in vain for majority.

An interesting assertion from Vivekananda was along the lines, "I would not go to school, but rather train my mind for 24 years, and in the 25th year put in information from books of all the libraries of the world". Accordingly, a fantasy to get extremely wealthy, is to work on your mind to recall your past life, bury gold in a forest before kicking the bucket in this life, start your new life with a bounty of gold dug and hidden in previous life each time. So, in a few lifetimes you can own the planet, you know what even 7% compounding on principal of 10,000$ is for 400 years is right? More than 100% of all assets on the planet! , so please be contented with 5% compounding.

While 5% may be undercutting, I often get requested to please divulge more risky equities, that can offer higher returns. That assumes Risk is a lever to be turned on to Increase returns. Facts are quite the opposite.

Wednesday, February 11, 2015

Sarup Industries

I had written a deep value investment idea for the partners in 2013. I had only invested in personal capacity and then sold most at no profit no loss.

I got a bit late in identifying the changes recently and again entered at 80 Rs levels post BSE announcements in Dec 2014, which I failed to notice and another on 6th of Feb, bought only after 10th Feb. Main proposition of the footwear company that started same time with same financial muscle as Relaxo, i.e. little to nothing, (and is 50 times smaller today than Relaxo) is a mall project. This project was held in suspended animation due to some conflicts, my guess and real estate slowdown.

The six floor mall project would have market value anywhere between 400 - 600 Crores. Even if Sarup gets 25% of the net constructed value, the company will derive 4 times its market cap.

Based on sale value of commercial shops in Model Town (which is one of the posh areas) part of Jalandhar, minimum price is 10,000 Rs/Sq. ft. and goes as high as 20,000 Rs/Sq.ft Constructed area is 3-4 Acres. Post construction 4-6 floors will be available for sale/letting. Based on worst case scenario as explained, company should either derive annuity income or get one off lump sum. Footwear business come free. 

Friday, February 6, 2015

Hairy (squared) Business - Radix Industries

Unique and thematic businesses are characterized by steep PE multiples, disregarding DCF or other sane measures of value.

This company (RADIX INDUSTRIES BSE: 531412) piqued my interest as it bids and sells hair ( remy hair ) donated in South Indian temples. 

Human hair sell for as much as 50 Lac INR per tonne. Industry size is roughly 2500 Crores INR.

This hairy business get more hirsute as I feel the company's share have already been cornered by promoters and their friends and family members indirectly leaving no value. Company is growing 100% YoY but the industry size / MCAP (300 Crores) of 8 times  leaves little room for appreciation for investors as promoters bought shares for 2 Rs but have artificially kept the price inflated at 300 Rs.

TTD sells human hair for Rs 77 crore

Factor this: In 2011-12, the Tirumala temple earned nearly Rs200 crore out of its total revenue of Rs1,949 crore, from auctioning human hair. 

According to L.V. Subrahmanyam, executive officer of the Tirumala Tirupati Devasthanams (TTD) that manages the temple affairs, the projected revenue for 2012-13 from auctioning hair is around Rs150 crore, but going by the ever-increasing number of pilgrims flooding the temple, it is expected to surpass last year's.

Disclosure: Not invested in Radix Industries.