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Identifying leaders of the bull market the Perennial way – a case study of Astral

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Picture of Satwik Jain

Satwik Jain


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“History doesn’t repeat, it rhymes”

After studying global market history over the past 30 years, we have come to one conclusion- Markets reward earnings growth. If you combine those with large addressable markets and economic profits and high reinvestment rates, you have all the characteristics of multi-year wealth creation.

We also noticed that trends are global. What happens in the US, happens in China and is followed by India. We at Perennial Fund are on a constant lookout for these global megatrends to identify major wealth creation trends.

Most of them have common characteristics:

  1. Sector leaders hit all-time highs at start of the megatrend.
  2. The entire sector shows superior revenue and profit growth compared to nominal GDP. For eg. Astral has been consistently growing more than 20% over past 5 years despite nominal GDP at ~10%.
  3. Valuations tend to go extreme at the peak of a megatrend and laggards and inferior business models in the same sector trade at obscene valuations. For eg. Wholesale NBFCs in 2017.

Performance update of the RH Perennial Fund

Our core focus is purely on wealth creation by focusing on identifying major wealth creation trends, monopolistic & fast-growing capital-efficient franchises with reinvestment runways run by able & minority friendly management sticking to our core philosophy of growth at a reasonable price. Our proprietary “fraud search” & “forensic accounting” framework helps us weed out poor quality businesses & promoters. Our qualitative judgment helps us identify the moats of perennial champions.

“In stock markets, you can’t buy a Rolls Royce at the price of a Maruti”

We at Perennial endeavor to stay with the best of the best of the lot to benefit from the superlative earnings growth as well as protection on the downside due to sector leadership, high capital efficiencies, and reinvestment moats. Given this backdrop, we present our thesis for the real estate sector and our “heads I win, tails I don’t lose” way of playing the sector.

MACRO UPDATE- India’s balance sheet has never been so strong

  • Corporate leverage is at all-time low- most incremental CAPEX is being funded through internal accruals across sectors. The debt/ equity of corporate India is at its all-time low and CFO/ PAT is at its all-time high For eg, the Steel sector had debt of 3 lakh crores & EBITDA of 60000 crores in FY 19, in the last quarter it had debt of 1.5 lakh crores & EBITDA of 1.5 lakh crores.
  • Individual balance sheet perfectly poised for discretionary consumption- Post-Covid, top 10% of the strata has come out stronger as they are in export-oriented industries at the cusp of huge value migration like IT & Pharma. This has many implications for consumer discretionary spending and the real estate sector. Mercedes & Porche witnessed the highest sales.
  • Government balance sheet- Around the time I was born in the early 1990s, Indian forex reserves were around $5 billion, today India holds one of the largest reserves of around $640 billion.
  • GST, which was looked at with huge skepticism, has been a roaring success.
    These are the best times for organized players to create immense wealth.

We can either participate in the megatrend through developers & housing finance companies, where we take the balance sheet & market risk of the funding squeeze, or hyper scaling capital-efficient ancillaries like pipes, paints, cables & wires which can survive a worsening macroeconomic environment as well.

Given this backdrop, we present our case for the piping sector and our participation through our long-term holding- AstralPipes- Cost only 1-2% of residential real estate cost, but if not of high quality can have huge repair costs.

This has led to value migration from unorganized to organized players

Add to that transportation costs 4-6%, but if the manufacturing plant is in proximity, it reduces to 2%.

Aged 23, with no background in entrepreneurship, Sandeep Engineer wanted to create something of his own. After working at Cadila for two-and-a-half years since 1981, he decided to turn entrepreneur. His first stint was as a distributor of flavored Isabgol, a popular home remedy for constipation, across Ahmedabad. The venture shut down with heavy losses in the early 80.

But the entrepreneur refused to give up. He founded Kairav Chemicals and sold it a few years back. Engineer’s uncle introduced him to CPVC since he was head of R&D at Lubrizol in the US, the world’s largest manufacturer of CPVC pipes. It was his eureka movement. He floated Astral in 1998. In its initial days, no one accepted them as they had brought the industrial CPVC pipe to India, not the plumbing one. It was only when Astral moved into the plumbing in 2001 that their CVPC pipes began to be preferred over GI ones. Since the early 2000s, it has not looked back. From INR 15 crores revenue, it has grown to ~INR 3500 crores revenues on a trailing twelve months basis, Their cash flow growth stands at 33% CAGR from 24 crores in 2010 to 664 crores in FY 21 with ROCE upwards of 20% and CAPEX CAGR in excess of 20%.

How did they achieve this extraordinary feat?

In 2011, Engineer’s eldest son, Kairav, came on board. He wanted to make a brand out of Astral so that it becomes a pull product rather than a push one.

There were 2 things that worked in India- cricket and Bollywood. They targeted both and how. Now they are one of the most successful brands in the piping sector in India and have made inroads into adhesives as well as the tanks segment. The water tank market is 5000 crores with 250 plus players. There is a vacuum of a pan-India player. Asset turns are around 4-5x with 15% EBITDA margins in this segment. Given Astral’s visionary promoter and scale-ups in adjacencies, we see immense potential for hyper scaling of cash flows, given where we are in the cycle.

We would also like to welcome you to our quarterly con- a call where our fund manager, Mr. Satwik Jain will take you through the performance, the recent addition of the fastest growing technology company, and his “heads I win, tails I don’t lose” way of participating in unseen megatrends in the making in real estate and technology sector.

You can register at https://generationalcapital.in/webinars/

RH Perennial Fund is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services (SEBI Registration No. IINA200002601). The information provided in this newsletter does not, and is not intended to, constitute investment advice; instead, all information, content, and materials available in this newsletter are for general informational purposes only. It is safe to assume that we have allocations to all stocks mentioned here and may also sell them without prior notice. We have current allocations to Astral, Infoedge, Asian Paints. The information on this website may not constitute the most up-to-date information. The enclosed material is neither investment research nor a piece of investment advice. The contents and information in this document may include inaccuracies or typographical errors and all liability with respect to actions taken or not taken based on the contents of this newsletter are hereby expressly disclaimed. The content in this newsletter is provided “as is,” no representations are made that the content is error-free. No reader, user, or browser of this newsletter should act or refrain from acting on the basis of information in this newsletter without first seeking independent advice in that regard. Use of, and access to, this website or any of the links or resources contained within the site do not create a portfolio manager-client relationship between the reader, user, or browser and website authors, contributors, and their respective employers. The views expressed in, or through, this site are those of the individual authors writing in their individual capacities only.

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