Great work Karan

No opinion on your opinion, but very happy to see that someone did the boring work of reading the annual reports and judging the mills situation based on facts

As somebody who actually invested (heavily) in sugar and made a crazy return over the last month, I can tell you the factor you put forward was the one least paid attention to

@samir_brd
well said about commodity prices.
I think it is not possible to time the bottom (without luck). The cyclical downturn generally lasts for few years and varies from industry to industry. For sugar it is going on for sometime now, we are not at the beginning of the downturn. Now how long this continues is anyone's guess.

Since the sugar companies are under lot of financial stress, the most important point to look is which company can survive the downturn that is which companies are unlikely to go bankrupt and have decent management .As per hearsay some of the sugar mills in eastern UP have already shut down. Many of the co-operative and small mills must already be under duress.

I invested thinking that as the mills are being forced to buy cane at high prices, the govt is likely to give some support to the sector. The govt did provide export subsidy but as it turned out due to surplus supply the international prices were not remunerative even with the subsidy.

But how long this can continue. Are we going to need sugar after 10 years - Yes. Are we going to let our sugar industry die, farmers suffer and import all our sugar - NO. The present situation is unlikely to continue for several more years as more mills will go bankrupt. Cane dues to farmers are already high and is likely that govt will want it to go higher. So some improvement in the sector should come. Hopefully.

However, i am not considering a scenario of high sugar prices, there will be lot of hue and cry and govt in all likelihood will remove subsidy and reduce import duties. Govt will not like sugar prices to go off limits, how much it can control ? I have no idea.

The company looks interesting. A brief of its financials:

(* long term debt is Rs 22.5 cr from Tata Capital payable in Sep 2017; unsecured’ bullet repayment. Short term debt is Rs 4.8 cr)

Investment thesis:
• Slightly difficult to project financials for each year
• Therefore, there is need for a big picture call
• Over 5 years, existing 14.3 million sq ft of development could yield sales of Rs. 2500 crore as per the company presentation (works out to appx. Rs. 1750 per sq. ft, which seems reasonable)
• Godrej properties average net margin for last 5 years is 15% (range 10.3-19%; 10.3% for FY15). Assume 10% for Arvind.
• Net profit works out to Rs 250 cr (Rs. 375 cr. Assuming 15% net margin)
• This is average of Rs 50 cr net profit per year (although it would be lower to begin with and would increase with time)
• Assume PE of 20 after 5 years (current PE of Godrej is 33).
• Market cap could be 20*50 = 1000 cr. i.e. 5 times of current market cap of Rs 200 cr. Sufficient margin of safety?

Risks:
• Execution ability
• Company needs to keep getting more projects so that growth continues to remain visible, so as to justify 20 PE
• Owners are mediocre – not pristine, but not a total chor also.
• No change in business model – continue to focus on residential and remain asset light
• Heavy comparison with Godrej properties

Annual report: http://www.arvind.com/pdf/annaul_finacial_reporting/2015/Subsidiaries201415/ArvindInfrastructureLtd.pdf

Change in inventory of negative Rs 37.05cr seems to have had a major impact on profitability. Reduction in trade and other receivables by Rs 73.9cr has positively benefited cashflows. Need to look deeper into these.

Just did a quick relative check (figures are rounded; please inform if there are any errors):

Views welcome.

Disclosure - initiated a starter position today. Not a recommendation. May add/or exit based on further study.

http://rakesh-jhunjhunwala.in/now-even-billionaire-narayana-murthy-of-infosys-is-charmed-by-textile-sector-buys-chunk-of-prof-sanjay-bakshis-fav-textile-stock/

I see recommendations on ‘sugar’. Fundamentally, given government policies on cane prices, a company in sugar cannot make money. And politically, the government cannot let sugar prices shoot up. Unless there is total decontrol of sugar and sugar cane, it is unlikely that there will be a story. This is a slippery slope upwards.

from ;- bala 's blog