I’ve looked at the whole thread on the company posted here. Would like to summarize here for anyone taking a fresh look
2017-2018 Phase
- Co growing well in terms of growth and margins
- Co planned to add 15 stores evey year (existing 90-100 stores)
- Being compared to D mart in India and Home depot in USA
- The story was around growing demand for building product in India
- Institutainal interest was seen and research reports were released
- stock was trading at >50x PE and people projecting growth of 30%
All these things happened when the co. has very poor cash on the balance sheet. The IPO was made to give exit to PE investors but not enough capital raised for expansion. The ROEs were less than < 15% and so the co. was not able to fund it’s growth. planned to raise 300cr via QIP and it never happened
2018-2019/20:
- Management wanted to increase sales by offering at lower prices. Margins reduced from 7% to 3%
- Tried to hive of some steel processing business
Street didn’t like the reduction in margins. Stock took a beating
2020-Current:
- Management optimized Working capital cycle
- reduced unviable stores. Current store count same as 2017
- Much better balance sheet
My thesis:
- Sales growing at >20% for coming 4-5 years. Management guiding to double sales in 4-5 years
- Net debt free baance sheet (already happened in H1 FY24)
- Improving sales mix of non steel business from ~10% to 25% by FY28. This has margin of ~9% against 3.5-4% for steel business
- Above point will lead to expansion in EBIDTA margins
- This combined with higher SSSG will improve the EBIDTA margins further
- Depreciation to stay at same level as no aggressive store expansio going on
All this would lead to a business growing at ~20% with >20% ROCE with net debt free balance sheet and opearting leverage would continue to play out. This would make for a very good investment thesis
Anti thesis:
- Slow down in building material industry growth for any reason
- Limitation to grow Same store sales beyond some value
- Concentration in South India
- Opening stores in new regions may lead to poorer return ratios (poor IRR)
- Pressure or margins
- Competition grabbing market share (Grasim has entered into B2B building material business and plans to invest 2000 cr in next 2 years, launched in Aug 2023)
Disc: Tracking but no investment at the moment. There may be inaccuries in the data/story presented here
Thanks
Praveen
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