I had invested in Bhansali Engg Polymers a while back(Sept’17). Thought of sharing my logic behind the investment.
Bhansali Engg polymers is into the manufacturing of high-grade Acrylonitrile Butadiene Styrene(ABS) which is categorized as “ Highly Specialized Engineering Thermoplastics”. Historically, the co. had been manufacturing general grade ABS. But post the technical tie-up with the Nippon A&L, the company has started manufacturing high-grade ABS which finds usage in Automotive dashboards etc as well as fetch higher margins.
Now, coming to the important part, what made me invest in Bhansali Engg polymers.
There are some typical characteristics in the making of a multi-bagger:
1. Tailwinds supporting the industry-
The company manufactures Highly Specialized Engineering Thermoplastics called Acrylonitrile Butadiene Styrene(ABS). ABS is tough, Heat & Chemical resistant, Scratch-proof material with a good appearance and priced much lower than metal. ABS is used as a body of home appliances, consumer durables, business machines & automobile components. Automobiles are using ABS as a replacement for metal to improve fuel efficiency as well as reduce the cost. Similar is the reason for other products. Other factors driving the growth has been: a. Easy availability of credit b. Increasing disposable income and growing aspiration
2. Debt reduction-
The co. has been reducing debt and have brought it down from ₹60 cr in 2014 to Zero in 2017. That was accompanied by increasing cash from the business which was Negative 11cr in 2014 to 57 cr in 2017. Also, the cash conversion cycle has improved. All these simply implies some strong competitive advantage playing in favor of the company.
3. Increasing profit margins-
Increased Net profit margin from 0.26% in 2014 to 5% in 2017 to 9.6% in 2018. As I had mentioned in my earlier blog that Net profit should always be seen in terms of a Net profit margin rather than absolute number.
4. High revenue growth-
Revenue CAGR of 19.4% between 2014-18. For FY18, the revenue growth has been close to 50%.
5. Technical tie-up-
Indian companies, in general, lack the technical expertise to produce high-end products. If these companies have some sort of tie up, it raises the bar way above others. In this case, the BEPL formed a JV company with Japan’s Nippon and even market its product in the Nippon’s brand name, thus adding a lot of credibility to its products.
6. Time and cost to setup-
High which acts as a deterrent for any new competitor to come in. Most important barrier is the highly technical nature of the work
7. Expansion-
With the growing demand, BEPL has been continuously expanding capacity to meet the ever-growing demand. This is very important as it gives an indication of the potential sales growth of the company
In addition to the operational performance, the icing on the cake was promoter increasing their stake in the company. While there are cheaper ways to increase stake which is that of issuing warrants at a lower rate. But the promoters of BEPL preferred to buy it from the public at the prevalent market rate. The company has been quite upfront explaining everything about the operations.
One major concern I had at the time of buying was the pledged shares of the promoters. Pledged shares mean the shares being used as collateral. The promoter had over 54% of shares pledged.
You won’t get a perfect company in the market. So you need to a certain amount of calculated risk.
But according to March’2018, update the company got all the pledged shares released.
Also, while reading the company’s annual report, I came to know about an ongoing litigation against the company by some of the shareholders. Since this was something serious, I mailed the company to find the details. The company mailed back sharing the letter from the high court. Got to know that the person/company who filed the case had the intention of maligning BEPL to get the shares at a cheaper rate. The court even put an exemplary fine on the complainant for falsifying information.
By,
Shekhar Yadav
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