H1 CY18: Developments around a Brand

BRAND is manifestation of corporate thinking.

It requires (1) vision - long term thinking AND (2) day-to-day execution to achieve that thinking. Relentlessly!

BRAND is not just a logo, tag or symbol or advertisements. Its trust with customer, trust with business partners, availability of product (which means, company needs to have financial strength to procure and manufacture and distribute), honor with the bankers and hustle 24x7x365 for decades. 

One can clearly observe across leaders in different industries that there is CONSISTENCY OF CONDUCT - which means - If the management is excelling in one practice, it wont be corrupt in other practices. One cant expect management to "fool" around with investors, when they are dealing - exceedingly well - with farmers, distributors, bankers, government and other partners.  

AND the ULTIMATE JUDGES ARE THE COMPETITORS - Its difficult to GAIN RESPECT OF COMPETITORS again and again. ChamanLal guys gave plenty of time on THEIR own concall to appreciate the KRBL management.  

And NIELSON has been rating IndiaGate as top/dominant/progressing brand every year. For many years!

There are 3-4 main pain points in investment community against KRBL - 

1) Allegations by news article - Yes! They are "allegations" using unproved narrative when there is no charge against company and case is subjudice - lets not flow in downward spiral with just the allegations. The channel didnt mention about sub-judice nature of the case, or evidences involved. The best persuasive stock to be added to the story was to link the narrative with a BIG NUCLEAR-BOMB WORD - "augu****"  - narrative was made to stick in the minds of the readers. The channel doesn't have any downside and the story may be a planted one. 

Historically, had there been identical cases against other reputed corporates? The answer is Yes!! - 
ITC was raked in by ED in 1995 - there were direct allegations against the company, directors and US partners. The case dragged on for years, but DIDNT affect the operations of the company. If history is any guide....

DABUR's director assets were seized recently by ED. 

Net net, my take on event is - keep thinking and revising the thesis, with additional information. 

2) Poor crisis management - I expected mgmt to handle it well, with written disclosures to the exchange. But usually, corporates find themselves as deer-in-the-headlight during such situations. Remember, Uber's cases and responses in India?

3) Auditors - were on track to be replaced last year and it was discussed in AGM. I hope they will be replaced this year. With so much floodlights on the management, expect good work ahead!!

4) Pabrai deal fallout - Pabrai was hard working enough to do his through due diligence, despite a non-resident and gutsy enough to PUT IN BIG MONEY ON THE TABLE. However, ED thing was a black swan - YET unproved/subjudice. Let the case play its course in the courts before handing over a guilty verdict to the management. We know what happened to ITC's operations from the history!

5) No Sales growth - It is the EASIEST industry to show sales growth at the expense of profits - its not difficult to generate volumes and sales. However, if one listens to the concalls, the focus is on perpetuity, premierization, and growth of profits. PERIOD. 

With the guidance of 12-15% volume growth + new varieties of regional rice + new health products, the company's vision is clear to move towards creating HEALTH PLATFORM. With that in mind, the company has (1) moved to increased branded portfolio (2) high priced, new varieties of rice (3) new and high value products like Chia/Flax/Qunioa/Sprouted rice etc which dont require aging, are FMCG in-nature. The work put in by the company to launch new products and conduct events/shows over past 6 months are commendable - all of which is available on social media. The changes in advertisement/product placement are evident (change in advertisements from social value, towards health benefits can be seen on packs/ads).

Brand is a cumulative affect of last 2 decades of efforts - No one else is moving in that direction, as there is no money+vision in the industry. Industry players are facing defaults from iran and banks are enforcing criminal proceedings against NPA accounts. 

The supply chain is unreplicable - HUL, marico, cargil, etc tried and failed. Its looks simple, but not easy!! Plus the supply chain from India to mid-east is unique to them- long presence of IG as high priced brand + cheap sourcing advantage of high valued items like Qunioa from India, where marketing/supply-chain/brand is the biggest pain point for  the farmers. Totally un-replicable!

15% vols, 10% pricing growth and new businesses - I expect a moonshot. The business should do well. 

----Not an investment advise---- 

H2 CY17 - The Fallibles

Poorer companies r getting jacked up/raising as much money as desired from poor retail guys - most dont exhibit sustainable earnings or major change in operations. Ironically, many good large cap companies havnt moved an inch in last 3 years, mostly due to no growth or degrowth. Professional investors r somewhat cautious and doesnt seem to be playing with leverage yet.

One can find young crowd from tier III/IV towns travelling in local metro, and trading on their new 4G mobile connection with slick apps - on one hand, its indicates consumption being accessible to everyone, great market potential unleashing in India, and potential of many new investors ready to on-board financial markets; on other hand, current excesses in the markets. All said and done, India is a must market to be in now. 

The FMCG player is working well. In classical Munger's coke way (Practical thought about practical thought), they are far far ahead of competition. The super cash flows are giving them enough ammunition to experiment with products and advertisements/promotions. Product wise, not only the core business is growing fast (developing new segments, capturing unorganized, and assailing organised market share), new additional products are way ahead than any other imitator yet. Also, the flow of advertisement is a case study in itself - its changed rapidly from Pavlovian conditioning to emotive to operant conditioning now. The new segments being churned out of traditional products are exemplary. 

Credit industry too is growing fast and is expected to grow by 30-35% over next 3-5yrs (as mentioned in most industry concalls). There would be clear shift from unorganised to organised players in the industry, as new private sector banks increase reach, product portfolio and ticket size. The unorganized market and unbanked population, even in Tier I towns like Delhi/Bombay is huge. The consumption, in this segment, is quite observable by travelling in local metro/buses and finding ever-growing flux of people from smaller towns. There has been a drastic change in just last 5 years - one can easily observe that the average age of travelers in local metro has gone down towards mid-twenties, travelling around either for higher education or for jobs. 

In my view, there can be some market-contraction. However, if one pulls out of mkts, it can pose a timing-risk against growing businesses. Few played the game of mkt-timing since last 1.5 years - only to repent. Few jumped back with deprival super-reaction and FOMO. Predicting mkt-timing is difficult, as many companies are sitting unleveraged, or have over capacity, or due to reflexivity in the markets (prices creates business environment - poor balance sheets start looking healthy if they are able to raise money at high prices and move forward)

Businesses which are working well and growing fast, with visible runway, may deal well with mkt-contraction - eventually, price is slave of the future earnings. No growth/degrowth/shady companies can face headwinds or some time corrections. Possibility of new long term capital gains taxes, rumored to be introduced, is worrisome. 

In such times of euphoria, lets not forget how fallible we can be, like Bruce Berkowitz Fairholme/Eddie Lampert and their SEARS. And Bill Ackman/Sequoia and their Valeant.