A. INDIAN LOGISTICS SECTOR: Overview of Key Segments

The Indian logistics market is valued at ₹21-23 Tn (US$ 247-270 Bn) in FY 2025. B2B logistics primarily focuses on the bulk movement of goods for industrial and commercial purposes between manufacturers, suppliers, distributors and retailers. On the other hand, the B2C and C2C segments focus on smaller shipments catering directly to end consumers and individual needs.

The word “logistics” comes from defence, where Military logistics is the discipline of planning and carrying out the movement, supply and maintenance of military forces. Logistics as a sector is directly correlated with the infrastructure and geographic development of any country, as well as with e-commerce growth. You can take the example of China, the US, Germany, Japan, South Korea and India as well. Increased digitalisation along with rapid urbanisation are two triggers which support the day-to-day volume of logistics players — more importantly, the 3PL players. 3PL stands for third-party logistics where a company outsources all its warehousing, fulfilment, and shipping operations to a specialized external provider like BlueDart, Delhivery (DEL), SFX and XpressBees. There are two other models, 1PL and 2PL, whose usage is reducing due to the changing nature of logistics operations. (We will discuss this in the thesis section of SFX).

Structure of the Indian logistics market

In India, road transportation is the backbone of all the movement of goods. It forms a major portion of logistics operations. We will keep our discussion limited to road transportation only; including others will stretch the report. In road transportation, it includes Truck Load, Part Truck Load and Express Parcel Delivery. PTL (Part Truck Load, also called LTL — Less than Truck Load) is B2B freight where a client’s consignment doesn’t fill an entire truck, so the logistics provider consolidates cargo from multiple clients into one vehicle, runs it through a hub-and-spoke sortation network, and delivers each consignment separately. It sits between courier/express parcel (individual parcels, <50kg typically) and FTL (Full Truck Load — one client, one truck, point-to-point, no sortation needed).

PTL is operationally closer to express parcel than to FTL: it needs hubs, sortation and network density, which is exactly why it’s strategically interesting to express players. Per the Redseer data in the Ecom Express DRHP, PTL is ~60-70% unorganized (FTL is even worse at ~90-92%), versus B2C e-commerce logistics which is largely organised. Over 75% of fleet owners operate tiny fleets of 20-40 trucks, mostly older 2-axle rigid-body vehicles. Post-FY20, shares of organised PTL and FTL are on an upward trend from low single digits to above 50% in some segments. For DEL, PTL is the main lever of operating leverage, because DEL consolidates express parcels and PTL cargo onto the same mid-mile/linehaul network. The same trucks, hubs and sorters carry both. That’s pure operating leverage: Transportation (Express + PTL) adjusted EBITDA jumped from 3.7% (FY25) to 6.3% (FY26) largely on this.

The strategic chain matters: PTL network → volumetric/heavy e-commerce capability. DEL’s strong B2B part truck-load business provides a significant base for this lucrative volumetric e-commerce segment. Handling a 60kg washing machine for e-commerce uses PTL-type infrastructure (bigger vehicles, different handling, hub capacity), not parcel-network infrastructure. PTL is difficult to crack because it combines weak scale economies (no automation leverage), fragmented, relationship-locked demand, an unorganized price floor, hostile working capital, and a national minimum-efficient-scale requirement — a five-way trap where the entrant needs enormous patient capital to reach density, but the returns even at density don’t justify the burn. The express parcel market mostly consists of e-commerce volumes, which we will discuss now.

3PL E-commerce Logistics Deep-Dive

Let’s first break down the segments within the value chain of 3PL. The e-commerce logistics value chain is divided into three primary sections:

• First-mile: picking up shipments from warehouses/ sellers and bringing them to source mother hubs/sortation centres.

• Mid-mile: transporting shipments from source centres to destination centres.

Last-mile: delivering parcels from destination hubs to customers; last-mile is the most intricate stage of the process.

Segment breakup on marketplace: 3PL players cater to 40-42% of this logistics demand in FY 2025, with heavy reliance on faster-growing non-horizontal categories. Horizontal platforms continue to outsource to 3PL partners, with ~33-34% of all horizontal shipments outsourced as of FY 2025. Horizontal marketplaces include Meesho, Amazon and Flipkart, while non-horizontals include Nykaa, Myntra, Ajio and the long tail of D2C brands. These are commonly called vertical quick commerce. Vertical QC and D2C tail form 16-17% of total volumes of E-Commerce operations in India (including horizontal marketplaces as well). The 3PL industry will grow at a high double-digit rate for the next 3-5 years, where vertical QC will be a major volume contributor, along with outsourcing by captive logistics arms. (We will discuss this more in the thesis section).

Segment breakup on shipment weight: shipments under 5kg are ~93% of volume but only ~59% of value (FY24) in the 3PL B2C e-commerce market. That gap is the whole story. The <5kg bucket is high-volume, low-realisation, and the segment most exposed to captive insourcing (Amazon/Flipkart handle most of their own light parcels in-house already). The 5-50kg and >50kg buckets split the remaining ~41% of value roughly evenly, despite carrying far less volume, because >50kg shipments (washing machines, ACs, furniture) command disproportionately higher shipping fees per unit.

Segment breakup on delivery mode: express parcel (surface network, B2C) and hyperlocal/quick commerce (dark-store, sub-30-min) are different businesses with different cost structures, different competitors and different margin ceilings. What is express parcel? Same-day/next-day B2C parcel delivery, hub-and-spoke or mesh network, forward + reverse logistics for e-commerce shipments — this comes under express parcel. Most of the volumes in express parcel consist of horizontal and vertical QC. This industry will grow at a pace of high double-digit with the improving pricing. Not one business— it’s roughly 70% quick-commerce (10-20 min delivery for Blinkit/Zepto/Instamart) and ~30% on-demand hyperlocal (food delivery, pharma, floating-population pickups). Hyperlocal as a division is growing at a much faster rate than express parcel due to the trend of 30-minute delivery, but how much volume shifts to 3PL players with unit economics making sense is something one has to watch.

WHAT IS THE RIGHT TO WIN FOR 3PL PLAYERS OVER CAPTIVE LOGISTICS?

1. Peak demand management of E-Commerce and Quick Commerce Players: Captives means the internal logistics arm of E-Commerce players build fixed capacity for average daily demand. Every festive season, every flash sale, every 10x-a-year sale event creates a 3-5x demand spike that a fixed captive fleet cannot absorb without either service failure or expensive idle capacity the rest of the year. Mature players like Blinkit and Zepto outsource only 5-8% solely to cover the evening peak (5pm-midnight), when 40-50% of daily orders arrive. Maintaining idle riders for those hours alone is uneconomical; a last mile 3PL rider doing e-commerce in the day and available for QC in the evening is structurally cheaper than a dedicated employee working a 4-hour shift. Similarly, captive arms outsource their volumes to 3PL players for those pin codes where they’re inefficient and in a peak-demand scenario.

2. Geographic reach beyond captives existing infrastructure: Captives build density in the cities where they started, usually metros and Tier-1. Growth is now coming disproportionately from Tier 2+ India, where captives have not built physical infrastructure. Much e-commerce growth is now coming from smaller tier cities, and Amazon/Flipkart’s internal networks weren’t optimised for tier-4/tier-5 towns. It won’t suddenly be 80% next year— it’ll happen gradually. The incremental volume will directly flow into the third-party logistics industry.

3. Specialized handling (reverse logistics, high-value, heavy/volumetric): Captives are built for the standard, high-volume, predictable shipment. Anything outside that — reverse logistics, high-value items, heavy/volumetric shipments — requires specialised capability captives haven’t built. On reverse logistics specifically: “3PL providers are highly effective in reverse logistics due to their advanced quality-control systems and extensive reach extending to Tier-2+ cities.” Captives build their networks around the light parcel that dominates volume. Heavy and volumetric shipments require different vehicles, different handling equipment, and different last-mile logistics (two-person delivery teams, installation coordination) that captives haven’t built, because it’s a small fraction of their total volume. Heavy-item shipments are increasing because of the trend of quick commerce as well.

4. Customer experience and route optimization: Last-mile logistics is a critical customer touchpoint, requiring timely deliveries, low RTOs through flexible delivery scheduling, and innovations such as open-box delivery and doorstep verification. India’s unstructured addresses, language barriers and inaccurate pin codes make routing complex and often require manual intervention. The ability to continuously expand network coverage while increasing last-mile and hyperlocal fleet density in key demand centres through data-driven network planning remains a key competitive advantage and growth driver for 3PLs.

Using historical delivery data and Indian address patterns, SFX’s SF Maps has built a proprietary local mapping system tailored to how Indians actually write addresses. Since 8–10% of customers do not know their exact pin code, misroutes were previously 7–8%. SF Maps has reduced this to just 1–1.25%, significantly lowering logistics costs while improving delivery speed and customer experience.

How Logistics Operations Work from First Mile to Last Mile

Let’s see how a logistics operation actually works, and what first, mid and last mile operations are. First mile is mainly consists of seller place and logistics partner warehouse in a nearby place. Whenever you place the order, the logistics network gets activated. The seller gets the notification, once your order is ready, the first mile gets activated.

First Mile — Getting the Parcel Out of the Seller’s Hands

The journey starts at the seller’s doorstep. A gig rider picks up the parcel, scans it, and brings it to a collection point. That scan is the moment the parcel officially enters the system — everything from here is tracked.

At the collection point, the magic of consolidation happens. Your individual parcel gets bundled with hundreds of others into bags, and bags into truckloads. One rider covers 20 sellers. One truck carries 5,000 parcels. Without this bundling, you’d need a separate vehicle for every seller — economically impossible. First mile is the cheapest part of the operation precisely because consolidation absorbs all the complexity.

Mid Mile — Moving It Across the Country

This is the longest physical leg and has three components working together.

Sortation happens at a large hub warehouse. When the truck from the seller’s city arrives, every parcel gets sorted by destination, not by who sent it. An automated machine called a cross-belt sorter reads each barcode and physically ejects the parcel into the right lane. Patna in one chute, Kolkata in another, Mumbai in another. This machine is the brain of the entire network. The critical economics: it costs the same to run at 40% capacity or 95% capacity. More parcels through the same machine means lower cost per parcel, which is the entire logic behind scale in logistics.

Linehaul is the long-haul truck movement after sorting. But instead of sending a half-empty truck directly from Surat to Patna, companies use cross-docks — intermediate transfer points. The Surat truck goes to Nagpur, drops the Patna-bound bags, and those bags transfer to a Nagpur-to-Patna truck that’s already full from other cities. Full trucks cost less per parcel than half-empty ones. The logistics company doesn’t own these trucks — they hire vendors on contract. What they own is the routing software that figures out the most efficient combinations.

Automation is what separates the profitable players from the bleeding ones. Dimension-weight scanners measure every parcel to verify what the seller declared. Route optimisation software runs on billions of historical delivery data points. Every step that removes a manual decision removes cost.

Last Mile — The Hardest Three Kilometres

The truck arrives at a regional hub that splits freight across a cluster of smaller delivery centres. From the delivery centre, a rider loads 40 to 60 parcels onto his bike for his specific beat — a fixed set of streets he covers daily.

This is the most expensive leg by far. Roughly half the total cost of delivering a parcel sits here. Why? Indian addresses are unstructured. People aren’t home. Cash has to be collected, counted and deposited. Every failed delivery attempt is a full cost with zero revenue.

The profit equation is brutally simple. A rider doing 25 deliveries a day in scattered locations loses money. The same rider doing 60 deliveries a day in a dense neighbourhood makes money, because the bike, the time and the route barely change. This is what density means in logistics. Every extra parcel delivered in the same area is almost pure profit, because the fixed costs are already covered.

The Return Problem — Where It Gets Expensive

Two things can go wrong on delivery.

RTO — the buyer isn’t home or refuses the parcel. It never got delivered. The whole chain runs in reverse: back through the delivery centre, back on a linehaul truck, back to the seller. Two full journeys, partial revenue. For fashion sold on cash-on-delivery to Tier 2 buyers, this happens a lot, and it silently destroys margins.

Reverse pickup — the buyer got the parcel, tried it, and wants to return it. A rider goes back to the door, checks the item is intact, and ships it back. This actually pays better than a normal delivery, because the quality check is a premium service.

SFX and DEL both follow opposite models within the same industry. We will discuss this in the P2P comparison section.

Takeaways from Global 3PLs’ Performance

Market pundits always give an example of how logistics has not created wealth for global investors, and India will follow the same path. Before forming any opinion, it is best to understand how global logistics works. We will take the example of the US and China’s logistics models.

Learnings from the US Market

In the US, logistics was built around organised, large-volume shippers like Walmart, Target and Amazon. UPS and FedEx designed their networks for predictable, high-volume shipments with standardised parcels, prepaid delivery and almost no cash on delivery. The unit economics work because demand is concentrated and consistent.

When e-commerce exploded, Amazon built its own logistics network because demand was already concentrated on one platform. There was no fragmented seller base that needed a neutral 3PL. UPS and FedEx, meanwhile, remained infrastructure utilities with thin margins and high fixed costs, making them highly dependent on volume. This became evident when Amazon ramped up its own logistics, terminated its partnership with FedEx in 2019, and shifted deliveries in-house, causing FedEx to underperform the S&P 500 after 2014 before recovering with the post-COVID e-commerce boom. In India, Amazon and Flipkart…

While concerns remain that India could follow a similar path, the structural differences are significant: (1) Indian e-commerce is far more fragmented across three large players, (2) two major players appear to have reached the limits of insourcing while the third is facing execution challenges, and (3) unlike Amazon, the largest Indian e-commerce player competes primarily on value rather than one-day delivery. These factors make a repeat of the US experience less likely.

Learnings from the China Market

In contrast to the US, where a duopoly ensured pricing discipline with disruption largely coming from Amazon’s dominance in e-commerce, Chinese 3PLs have gone through multiple boom-bust cycles without delivering sustained compounding versus the MSCI China index. The sector rallied during 2015–17 on A-share listings, peak optimism around e-commerce parcel growth and industry consolidation, but entered prolonged underperformance from 2018 as competition shifted to market share, triggering intense price wars, declining revenue per parcel and margin compression. The situation worsened around 2019–20 as Alibaba and JD.com expanded their own logistics networks, pushing delivery costs lower. While COVID boosted volumes, profitability remained weak. Regulatory crackdowns, weaker cross-border e-commerce and high capital intensity further hurt returns. YTO outperformed peers largely due to its early A-share listing, Alibaba’s strategic investment and stronger execution, rather than any structural business-model advantage. Overall, China logistics has remained a slower compounding story with sustained underperformance versus the broader market.

Why the China Model Is Also Not India

China built its logistics miracle — ZTO, JD Logistics, SF Express — on three things that India does not have and likely will not have for a decade.

First, infrastructure. China has the best highway and expressway network in the world. Trucks cover 600-800 km per day. In India, trucks cover 350 km per day. That one number changes the entire economics of linehaul — more trucks needed, more fuel burned, slower turnaround, higher cost per parcel.

Second, platform concentration. China’s e-commerce is essentially two platforms — Alibaba and JD. When two clients control 80% of your volume, you can build a highly optimised, predictable network. You know exactly how many parcels are coming, from where, to where, on what day. India has Meesho, Flipkart, Amazon, Myntra, Nykaa, hundreds of D2C brands, social commerce, and millions of small sellers — wildly fragmented on both the sender and receiver side.

Third, address infrastructure. China has structured, standardised addresses across its cities and towns. India does not. “Near the water tank, second lane, ask for Raju” is not an anomaly in India — it is the norm in Tier 2 and Tier 3 cities. Every last-mile delivery requires a human judgment call that no algorithm fully solves. This is why last-mile costs 52% of total logistics cost in India, versus far lower in China.

Chinese logistics companies also benefited from enormous state-backed infrastructure investment and a largely organised formal economy. India’s economy is still 60-70% informal, cash-heavy, and structurally resistant to the kind of standardisation that makes logistics cheap. The key takeaway from China is that a fragmented 3PL landscape makes sustained compounding difficult. India, however, has already gone through industry consolidation and reached a relatively stable duopoly (with XpressBees currently going through a troubled period), which should support pricing discipline and stronger negotiating power for 3PLs.

No Country for New Men

India’s own logistics has gone through a period of more than 10 players at one point in time to now only 2-3 players, of which one player is not that aggressive. Every sector attracts capital in the initial stage of the curve, but it dries up if the business model doesn’t make sense for any number of reasons. The same happened with the logistics sector of India.

Over a decade ago, at the start of India’s e-commerce story, the express parcel opportunity attracted multiple PE-backed players, leading to subsidised competition. While e-commerce penetration is still ~7% and the opportunity remains large, investor focus has shifted from market growth to whether new players can take share from DEL, SFX and Blue Dart, which together hold ~80% of the 3PL market. The industry has already seen its #2 player exit, while the current #3 is facing challenges. With funding no longer abundant and scale now critical, new entrants are unlikely to build comparable networks, reinforcing our belief that the market will gradually evolve into a two-player industry.

As we discussed in the introduction part of the report, consolidation of the industry is a great place to be in if you know which player you have to bet on. India’s logistics sector is now more or less an oligopoly, with DEL and SFX having more than 75% market share.

Read the Timeline of the Ecom Express Case Study

The Ecom Express deal has largely eliminated pricing wars among 3PL players. Earlier, Ecom Express was taking Meesho volumes at unsustainable, often loss-making prices in certain pin codes simply to stay relevant in the market.

If I ask you. Who got the real advantage of the Ecom Express deal? DEL? No, it’s SFX, since Meesho was already outsourcing a big chunk of its volume with DEL, and they didn’t want over-concentration. Similarly, DEL doesn’t want to onboard more than the pre-decided volume from Meesho, because DEL’s Sahil Barua always believes in maintaining revenue concentration from each of its clients. That’s when SFX comes into the picture, from 7% market share to 25% of the 3PL market. (We will discuss the Meesho–Valmo angle ahead — don’t worry )

Have you ever watched Lord of the Rings? SFX, India’s second-largest 3PL company, is named after Gandalf’s legendary horse — a character from LOTR and faster than the wind. In fact, many internal projects of SFX are inspired by LOTR characters. For a company built around speed, density and last-mile delivery, it is a fitting name.

B. SHADOWFAX at a Glance

SFX Technologies is India’s #2 third-party logistics (3PL) company, built on a fully gig-based, asset-light delivery network rather than owned trucks or employed riders, spanning express parcel delivery, food delivery, quick commerce, hyperlocal, reverse logistics and mobility, all powered by a single multi-category rider fleet of ~2.6 lakh gig partners. Founded in 2015 as a food-delivery startup, it pivoted into e-commerce 3PL by 2018, survived a brutal industry price war through 2022-23, and turned adjusted-EBITDA positive in FY24 and PAT-positive in FY25, reaching profitability at roughly 25% of larger rival DEL’s revenue scale. FY26 was the inflection year: revenue grew 69% to ₹4,202 Cr and market share jumped from 16% to 25%, largely because of DEL’s acquisition of collapsed rival Ecom Express, redistributed volume across the industry, with Meesho as its dominant client (~48% of revenue). The company listed on the NSE/BSE in January 2026, is now debt-free with ~₹1,574 Cr of cash, and is pushing four new growth engines — Amazon onboarding, SFX 360 for D2C/SME sellers, heavy-shipment handling (Prime Large), and a vertical quick-commerce dark-store network to reduce its Meesho dependency and extend growth beyond the consolidation windfall. SFX is playing an unconventional playbook — a slight similarity with China’s ZTO Express playbook — compounding margins from today’s 3.8% adjusted EBITDA toward management’s 11-12% long-term target as density and diversification build out.

Survival, Scale, and Windfall — The Three Phases of SFX

Phase 1 — The Scrappy Start (2015–2017): Finding What It Wants to Be

SFX (SFX) started in 2015 with four IIT Delhi grads. Two founders, two early joiners who came within the first year. The idea was simple — there would be a lot of restaurants that would need a logistics ecosystem. At that point in time, each restaurant used to have its own delivery partner. Just like AWS came in and said, “I will pool all the resources and I will load-balance it for you — each of these restaurants will have their own peaks and troughs. If we have a common pool of workforce, we can actually load-balance it.” That’s how SFX started — onboarding a first customer, an uncle who ran a night kitchen in Delhi (midnight 12 to 4 AM). They tested the app every night, dropped them home at 5 AM. The company was still burning through its first rounds of capital — an Angel/Seed round of $0.3mn from Titan Capital in August 2015, followed by a $8.5mn Series A from Eight Roads Ventures. Revenue grew, but losses were severe. That was a tough phase for every hyperlocal delivery company. Many players used to give very low rates. SFX shied away from that — terminated contracts which were not making sense. Within the same year of incorporation, 2015, SFX acquired Pickingo Logixpress for ₹6 lakh — a tiny reverse-logistics operator — to enter the returns-pickup space. However, in 2017, the first bold step was taken by SFX by entering into Doorstep Quality Check for e-commerce returns — a rider would go to the buyer’s door, physically verify the returned item (same product, tags intact, undamaged), and only then accept the return. No competitor was doing this at scale. It sounds simple in hindsight. At the time, it was operationally radical — it required trained riders, a verification app, and seller trust that a third party would genuinely protect their interests at the doorstep. Because the founders had already built a gig-worker platform that could manage complex multi-step rider interactions — the same app that told a rider “go to this restaurant, pick up this food, deliver in 30 minutes” — they had the tech infrastructure, which they had built from scratch for their hyperlocal delivery, to handle a more complex instruction set for returns.

“If you can satisfy a person who is hungry and deliver food in 30 minutes to that person, then you can actually deliver a lot more things.” ~ Vaibhav Khandelwal SFX CTO

Phase 2 — Building the Engine (2018–2021): Chasing e-Commerce Scale

By 2017-18, SFX had proved one thing definitively. Its gig-worker platform worked. They shifted their focus to forward logistics, which is nothing but express parcel business for e-commerce and D2C brands of India. Entry was quite easy in the forward-logistics business because SFX was already well-versed and enjoyed a learning curve from the reverse-logistics business started in 2017.

Focused on building a crowdsourced gig platform over the first four years — rider onboarding, KYC, training, delivery within 30 minutes and meeting strict SLA requirements. Then, in the next 3-4 years, it built the “end-to-end logistics network.” The sequence matters. The gig platform came first. The logistics network was built on top of it. Every competitor built it the other way around — they built hubs and trucks and then tried to figure out last-mile workforce. SFX built the last-mile workforce first and then added the infrastructure that gave it something meaningful to carry. Raised $60mn from a consortium including Flipkart, Eight Roads, NGP Capital, Qualcomm Ventures, Mirae Asset, and IFC, valuing the company at approximately $250 million. Flipkart’s participation was a signal and a client relationship simultaneously.

Revenue grew 50x during this phase, from near-zero in FY16 to ~₹4,500mn by FY21. But cash flows were deeply negative. The company was burning money to build infrastructure faster than the revenue could cover it.

The best thing SFX has worked on is making the platform sticky for gig workers. Frodo — named after the hobbit who carries the ring across Middle-earth (an LOTR character) — is SFX’s delivery-partner lifecycle management system, handling everything from rider onboarding to weekly payout processing.

In a gig-economy business, payment failures destroy trust faster than any other operational problem. If a rider delivers 50 parcels and their weekly payout is wrong or delayed by even one week, they leave and refer their friends to competitors — which is a moat for SFX

The first automated sorting centre opened in Gurgaon in 2020 — this was the second smartest move by SFX. Why you will ask me? A manual sorting centre relies on human workers to read labels and sort parcels, resulting in higher errors, lower throughput and labour-linked costs. An automated cross-belt sorter reads barcodes at machine speed, sorts with near-zero error and processes 20,000+ parcels per hour. While expensive at low utilisation, at 80-90% utilisation it becomes the biggest cost-reduction lever, with every incremental parcel costing almost nothing to sort. This was the beginning of SFX’s mid-mile infrastructure story. By 2021, it had built a network of 47 middle-mile facilities across India. This was the moment the company transitioned from a hyperlocal-and-reverse operator to a credible end-to-end 3PL.

Phase 3 — Diversification, Near-Death (2022–2023) to Inflection (2024)

In 2021-2022, Indian e-commerce logistics was flush with capital. Ecom Express had just filed its DRHP. XpressBees was valued at over a billion dollars. DEL was preparing for its IPO. Every player was expanding pin codes, adding sort centres, and cutting prices to win volume from Meesho, Flipkart, and Amazon. The price war that would eventually kill Ecom Express was already running in the background.

SFX’s entry into quick commerce in 2022 completed its multi-category pooling model. Gig workers could now handle food delivery, e-commerce parcels, reverse pickups and quick commerce orders across different demand peaks, significantly improving rider utilisation throughout the day. The flywheel foundation, which is clicking now, was started in the year 2022. SFX was at the right place of outsourcing. The industry-wide average across all QC shipments was 14-17% outsourced to 3PLs, with SFX holding 23-27% share of that outsourced pool — the largest single 3PL by volume. Within the organised 3PL pool specifically, SFX’s share was approximately 50%.

Mature players (Blinkit, Zepto): 5–8% outsourced, solving peak demand. No large QC player wants more than 20% outsourced — captive fleet risk is real. The platforms outsource for surge management, not for core operations. This means SFX QC revenue is structurally a capacity overflow play, not a core partnership

In 2022, alongside the QC entry, SFX launched SFX Flash — an intracity C2C (customer-to-customer) on-demand delivery app. Think of it as a Dunzo or Porter equivalent. It’s not a major revenue driver for SFX currently— just a product offering for full-stack delivery capacity. FY22 and FY23 were the near-death experience for SFX. 3PL was facing a pricing war, QC and hyperlocal started to give a flywheel effect to the business model, was at a nascent stage. Too much dependency on Meesho (more than 50-60% of express revenue) coupled with negative operating margin and negative operating cash flow, and venture debt.

FY24 was the real turnaround year: revenue grew by 33%, a swing in operating margins from negative 7% to positive 1% and ₹131 Cr of operating cash flow positive. It was the simultaneous convergence of five separate forces that had been building for different lengths of time.

Force 1 Volume growing into fixed costs: Total orders grew from 259mn (FY23) to 350mn (FY24), 35% growth. Every incremental order in a dense cluster reduces per-order cost with zero incremental capex. The variable model ensures peak/off-peak periods do not erode margins the way they do for DEL. Partner expenses (riders) as a percentage of revenue fell from 54.7% (FY23) to 51.3% (FY24), which is a major cost for last-mile operators.

Force 2 Pin code explosion creating density where it previously didn’t exist. The single most dramatic operational statistic of FY24 is pin code reach: 7,955 pin codes (FY23) → 13,169 pin codes (FY24), a 65% jump in one year. Three factors drove this expansion: a scalable franchised last-mile centre model with minimal capital requirements, Meesho’s rapid expansion into Tier 2/3 pin codes, and the need to expand network coverage ahead of competitors while capital was still available. The touchpoint network grew from 1,817 to 3,093 in the same year — a 70% jump.

Force 3 Rider workforce rationalisation paying off. Hyperlocal orders moved from 49mn to 48mn — still essentially flat in volume. But the revenue remained stable while the express business grew, meaning QC was starting to anchor revenue per rider rather than diluting it. The flywheel seed, which was sown by SFX, has started to take off. Along with that, express service-level EBITDA turned positive, primarily driven by the mix shift toward higher-yielding value-added services (reverse logistics, same-day delivery) as a larger fraction of total volume. The order density on which the SFX model foundation was started has shown the initial signs.

Phase 4 — The Windfall and Listing (2025–2026): Right Place, Right Time

FY24 marked the final sign of last-mile unit economics making sense after a long period of 10 years. Ecom’s collapse resulted in the redistribution of express volume between SFX and DEL. Out of which, maximum volume transferred to SFX, and market share jumped from 16% to 25% in a single year. In FY25, SFX acquired CriticaLog India, a specialist in high-value, time-critical shipments (jewellery, electronics, pharma)— which marked the entry of SFX into heavy-weight items where SFX had zero presence as of now. In the same year, SFX turned bottom-line positive, followed by an IPO in January 2026 at roughly ₹7,200 Cr valuation. FY26 PAT was ₹112 Cr — 18 times higher than the FY25 base. With annual volumes of 58 Cr in FY26 combined 3PL, hyperlocal and QC orders, this marks the story of SFX from apna time ayega to apna time agya hai!

SFX has many internal business triggers and optionalities available, which are not priced into the business as of now, which we will discuss in the variant perception section.

Two Companies, One Market, Two Completely Different Bets

SFX and DEL are both contradictory to each other — one follows an asset-light model, which works on the last-mile flywheel effect; the other follows an asset-heavy business model — a pan-India integrated unified mesh network model. Still, SFX reached profitability at ~25% of DEL’s scale due to the variable-model advantage.

On the gross-block side, the difference comes in sorting centres and linehaul trucks. On one side, SFX leased the sorting centres, as they follow no capex ahead of anticipated demand. DEL built large automated sorting centres ahead of demand. Also, on the linehaul-trucks side, a good percentage of the trucks for DEL are owned by the company, as they focus on the PTL division as well, where owning trucks makes sense as you have better control over the supply side. SFX follows a contracted model — the difference is here only. If you see, DEL uses 20,000 trucks daily while SFX uses 3500 trucks daily. However, both own the automation belts as it’s a necessary expense. The automation belt reduces the human labour, that would also be a fixed cost. A manual sort centre needs 50-100 workers sorting parcels by hand. Those workers have to be paid whether volume is high or low. An automated sorter replaces them permanently with a one-time capital investment that then costs almost nothing to run per additional unit.

Gross Block and Asset Turns Difference between DEL & SFX

Biggest differentiator for SFX and DEL is the variable model, which SFX follows with their gig army. SFX’s cost structure is highly variable. Rider payouts account for ~52% of revenue, while partner expenses and transportation costs also scale almost directly with volumes. Leased facilities remain relatively flexible, and the only meaningful fixed costs are depreciation on owned sorters and corporate overheads, together accounting for roughly 9-10% of revenue. DEL’s cost structure is far more fixed. Its 20,160 trucks, 24,736 permanent employees and 15.4 mn sq. ft. of leased space continue to incur costs even if volumes decline. As a result, fixed costs account for a significantly larger share of DEL’s cost structure than SFX’s, reducing short-term operating flexibility. (In the thesis section, we will understand how the SFX gig model works.)

C. Investment Thesis: What We Are Betting On

1. Beneficiary of 3PL consolidation “luck is what happens when preparation meets opportunity” — SFX is a perfect example of this quote.

SFX 3PL Market Share is 27-29% at FY26-end.

The Ecom takeover, coupled with XpressBees facing internal challenges, made SFX a prime contender for Meesho–Ecom volume distribution. Meesho was the largest customer of Ecom Express handling 380 million shipments annually in 2023, which later got split equally between SFX and DEL. In the beginning, we discussed how consolidation creates wealth for the shareholder. Airtel from telecom, Indigo from aviation, and Ather from EV and maybe Eternal from QC in the future. Same will happen in India’s logistics sector — the narrative of logistics is “permanently pregnant but never delivers,” and it is turning into a structural theme on the supply-side economics story. There are two levers of topline growth in the 3PL industry: one is volume growth, and second is realisation growth. Earlier, volume was distributed between 3-4 players, and players like Ecom and XpressBees were playing a dirty game of pricing war, which was reversed post the Ecom takeover by DEL. Now, since the top 2 players hold 70%-plus market share, many unorganised players are facing challenges in matching the efficiency of organised players. The incremental volume will shift from the unorganised market, and on top of it, realisation improvement as well.

This is the bear-to-base case of the 3PL industry. The 3PL industry can grow at 18-20% CAGR in the next 3-5 years.

Annually, the e-commerce industry does shipments of 600 crore (FY26e), out of which captive share is 65% and 3PL share is 35%. Going ahead, even if this ratio remains in the same line, as such, profitability at captive units has not seen material improvement in FY25 (Ekart alone posted a net loss of Rs 1500 Cr). Amazon ATS is already working at 80-85% utilisation in their captive units, and logistics cost is too high for them. So, for the two biggies of the e-commerce industry, outsourcing will make sense (covered in the second point of thesis). Due to supply-chain complexities and the learning curve enjoyed by SFX and DEL, we can expect a further consolidation and improvement in realisation per parcel. DEL’s blended yield of ₹63 reflects its client mix — heavy parcels (up to 40kg count as express), B2B industrial freight, D2C brands paying ₹80-100, and PTL mixed into the blended number. SFX’s ₹52 yield reflects Meesho-type value commerce (650g avg parcel, ₹40-45 CPS) dominating its mix. The gap will narrow as SFX’s D2C share grows, plus reverse QC (₹65-80 CPS) grows as a fraction. Even if blended realisation remains in the same range and SFX market share inches up to 30% by FY28, only from the express parcel business, SFX can do a topline of 4000-5000 Cr plus, which is equal to FY26e numbers assuming only 1% CAGR improvement in realisation.

2. Asset-light model with a platform flywheel effect

As we discussed how SFX maintains an asset-light business model through the help of a variable-cost model. The last-mile operation is the most expensive, most complex, and most human-intensive part of the entire logistics chain. The operational sequence at last mile works like this. A parcel arrives at a last-mile delivery centre — a small warehouse or processing facility covering a specific pin code cluster. Inside, the day begins at 5-6am when the vehicle from the anchor hub arrives with the inbound bags. Workers open the bags and sort parcels to the beat level — a beat being a specific rider’s designated route covering 150-300 households in a contiguous geography. Each rider loads their vehicle with 40-60 parcels for their beat and departs. Indian addresses are unstructured — “House 3, near the water tank, second lane from the main road” is a real address. Before the SFX Maps system, a rider would navigate by memory, local knowledge and phone calls to buyers. SF Maps (SFX proprietary tech) now predicts delivery locations from historical data, corrects wrong pin codes before the rider departs, and routes the beat sequence to minimise travel distance. Each delivery requires a physical scan confirming handover. One wrong delivery or RTO — the client will debit the whole amount on the 3PL player. That’s why lost shipment is one of the important metrics to track.

For example, when we book an auto late in the night, they reject us. Riders also want: if you can give me the last order of the day which takes me closer to my home, I’ll be more sticky with you even though it may not be the most optimum route. When your technology has to marry the human power, that is where the real magic comes in. ~ SFX CTO Vaibhav Khandelwal

In the last-mile operation, your platform must offer something to riders which other platforms are not offering. SFX’s platform provides predictability of demand — for example, if I’m an SFX rider, I start my daily job at 7-8AM; post logging in, I have all the pre-assigned duties available which I have to complete in pre-determined hours. Post that, if I’m free, I can also do hyperlocal or other duties from a different platform where peak demand is causing outsourcing to the SFX platform. What makes the SFX platform attractive to riders versus a single-category competitor is category diversity. A food delivery platform offers work during lunch and dinner windows — roughly 4-5 hours of productive time per day. A SFX rider accessing all categories can work: express parcel drops in the morning (8am-1pm), a hyperlocal grocery or pharma run at noon, food delivery during the 1-3pm secondary peak, more parcel drops in the afternoon, and quick commerce runs from 6pm onwards. In this way, every incremental order which SFX gets on their platform helps them to fill the order density, helping them to reduce cost per parcel without compromising the earnings of the rider. It’s a pure classic example of matching the fixed demand with the variable supply — similar to how algos work in hedge funds.

The Density Flywheel:

• Low density: rider earns Rs.50/order × 20 orders = Rs.1,000/day

• High density: rider earns Rs.40/order × 30 orders = Rs.1,200/day

More categories available → riders earn more → riders prefer SFX → better rider retention → SFX can serve more clients reliably → more clients onboard → more categories available

After studying both DEL and SFX, three things which make sense for a variable model are:

• Own what generates returns every time it is used and scales without a proportional cost increase. Sort automation fits here — a cross-belt sorter processing 80,000 parcels per day costs nearly the same to operate as one processing 30,000 parcels per day.

• Lease or contract what creates fixed cost regardless of volume. Buildings, linehaul trucks and processing space fit here. A 50,000 sq. ft. sort centre costs the same to lease whether 10,000 or 100,000 parcels pass through it per day.

• Let others own what you pay for only when it produces revenue. Delivery vehicles and riders fit here, and 260,000 SFX gig partners.

One can study China’s ZTO Express business model; SFX’s business model architecture is based on the same fundamentals.

ZTO owns its sort centres and automation. It does not own trucks or employ delivery workers. Network partners — franchisees — handle pickup and last-mile delivery in their territories. ZTO charges a network fee per parcel that flows from franchisees through the system. The franchisee takes local market risk, employs or contracts local riders, and maintains local client relationships. ZTO takes the network economics — high-fixed-cost sortation infrastructure spread over enormous volume, generating near-zero marginal cost per additional parcel through the system.

SFX’s architecture at the last mile is effectively ZTO’s franchise model taken one step further — instead of a franchisee employing riders, the riders themselves are the micro-entrepreneurs. The franchised delivery centre model that SFX uses in low-density pin codes is structurally identical to ZTO’s network partner model — a local operator runs the centre under the SFX brand and tech stack, sharing economics with SFX on a per-parcel basis.

SFX Unit Economics Benchmark

ZTO’s cost per parcel fell 50% (RMB 2.8 to RMB 1.4) between FY16 and FY23, while revenue per parcel declined only 32%, driving margin expansion. SFX follows the same playbook: cost per parcel trends from ~₹54 to ₹48 while revenue per parcel remains stable at ₹52-53, as network density reduces costs faster than pricing pressure impacts revenue.

3. Why Meesho’s insourcing reversal makes this a thesis, not a risk

Meesho is one of the biggest customers of SFX, forming 45-50% of express parcel volume, and also one of the largest e-commerce companies in India in volume terms. Though the market believes Meesho insourcing could be a risk, my view is different here. Meesho started with Valmo in FY22, and in just 3 years, Meesho Valmo’s contribution increased from 2% to 48% in FY25 — during that time, SFX turned profitable. Even if you see, Meesho clearly said in their Q4FY26 earnings concall that Valmo as a mix will not cross more than 50-55% in the near term, but we have to closely keep an eye on the insourcing and outsourcing mix.

Why can’t Valmo insource 100% or 80-90% of their volume? See, it’s not an easy task to do. Amazon ATS and Flipkart ATS still do insourcing of 70-80%, and they’re incurring losses because of transportation expense. Amazon is still at breakeven, but Flipkart is loss-making.

Amazon Transportation Service Financials

Initially, Meesho started with Valmo, where they were securing the unutilised capacity of truck vendors at a lower rate per parcel. For example, if one truck is moving from Surat to Delhi which was operating at 50-60% utilisation, Meesho Valmo which is a software, not any logistics infrastructure setup, secured the remaining 40% unutilised capacity at a fairly cheaper rate, sourcing unorganised truck vendors who had no market power and would accept whatever rate Meesho offered. But as the volume grew and unorganised players were not able to match the rates which Meesho was demanding — as earlier vendors were accepting the rate because unutilised capacity was getting filled and rates were making sense for the remaining utilised capacity — so ultimately Valmo’s share reduced from 65% at one point of time to 50% as of now.

Meesho claims Valmo has reduced its logistics costs by nearly 10%, according to several people from the industry. That’s substantial, considering that it typically pays around Rs 40 as delivery costs on an average order value of Rs 300, whereas Meesho can source vendors at roughly Rs 36, because Meesho’s objective is not to make money from the logistics arm, which is a business of 3PL players.

During the beginning, that was a win-win situation for both Meesho and unorganised truck vendors, as the objective of Meesho is to use Valmo as their weapon for bargaining power against 3PL companies, so they could walk into every 3PL’s office and say, “my own arm delivers at ₹X. Match it or lose the volume.” Ecom was exactly doing that, only since Meesho was forming 60-70% of Ecom volumes, they had to take the price cuts to maintain the business. That’s where the pricing war was started by Ecom, and the DEL acquisition was a blessing in disguise for the 3PL industry. Eventually, Meesho started to go with both Valmo and 3PL players because out of 18000 pin codes that India has many pin codes exist where insourcing doesn’t make sense if you don’t have your own infrastructure network from first mile to mid mile; an unbundled network is difficult to manage, and a marketplace with courier service is a different game altogether, in which only Amazon is successful that too in the USA, where demography and infrastructure are completely different from India. So going ahead, Meesho will keep a mix of both insource and outsource logistics.

“At this point at 50%, we were the most, or at around that mark, we were the most optimised in terms of cost structure. And our belief is, as things keep kind of hanging, we’ll keep kind of adjusting basis the cost reality that we’re seeing.” ~ Meesho Q4FY26 Earnings Concall

Going ahead, SFX could be a proxy play to Meesho — India’s growth story — along with that, many optionalities exist which are discussed in thesis point 4.

Globally, e-commerce and 3PL have worked together — the best example is Alibaba and ZTO Express.

4. Optionalities which are not priced in

Optionality One: Outsourcing by Amazon and Flipkart could be one of the biggest optionalities for SFX, because you will get incremental volume. Generally, e-commerce players outsource their volumes in two scenarios — due to peak demand and weaker pin codes where 3PL players are more efficient. Amazon and Flipkart both follow different strategies. Amazon’s preference is more Tier 1 and metro cities, believing that if you want to retain customers, same-day and next-day delivery matters a lot. That’s where SFX’s last-mile operation comes into the picture. Recently, SFX has also onboarded Amazon, which, if I’m not wrong, is for heavy and volumetric categories, which have higher realisation than lower-weight parcels. The recent stake sale by the Flipkart gives us a hint that Amazon will increase their share of business with SFX going ahead. Also, Flipkart deferred their IPO plan as they first want to focus on profitability before going public, and since their logistics arm is loss-making, outsourcing the loss-making pin codes or where 3PL players are more efficient makes sense.

The captive arm operates at about 45-46 rupees variable, while 3PLs are at about 50-52 on a comparable variable basis (the 45-46 plus their fixed-cost component of 10-12 rupees). If you include fixed cost, captive arms would be slightly more expensive, but for captive arms that fixed cost is already sunk. They need to focus on utilisation now.

Optionality Two: Scaling up D2C and SME clients. D2C as an opportunity size looks too small for any 3PL player as of now — 40 Cr annual volumes in FY26, which is expected to grow at a much faster pace, 30-35% CAGR in the next 3-5 years, with better yield per parcel. The outsourced proportion is 100%, unlike horizontal platforms. D2C brands never build captive logistics because they are too small and too numerous. That makes D2C the only segment where 3PLs face zero insourcing risk. Scaling up D2C/SME clients is difficult, as first you need to reach a density of pin codes with higher utilisation which itself comes after a long gestation period. The right to win for SFX is their last-mile-facing platform; many D2C brands promise SDD and NDD; in order to fulfill that promise, you need someone like SFX which has started their model with reverse pickup, which is one of the major issues for any D2C brand as RTO is generally very high in some segments like BPC and apparel brands, and many D2C brands generally prefer two-three delivery partners; now we have to see out of them how much incremental volume SFX captures.

SFX’s current D2C market share is very low — 10%, against DEL and Blue Dart who are dominating this space. That gap is the single largest white space available to SFX in the entire express parcel market. In order to fill this space, SFX is not trying to compete with DEL; they’re trying to take market share of Blue Dart, who is a sleeping elephant in the whole logistics sector operating in a much higher premium price point with no less presence in last-mile operations across PAN India. So this is a white space available for SFX.

Optionality Three: Hyperlocal/QC and dark-store management — these two segments themselves have too many optionalities which one should not ignore. SFX started their business from hyperlocal only, later pivoted to express parcel. In Hyperlocal/QC, one segment which SFX is already catering to is peak-demand outsourcing by food delivery, QC and pharma apps. Also, the anchor-district concept of SFX — setting up small warehouses/dark stores in a 20-30km nearby radius — provides an edge to deliver orders under the SDD/NDD category; that’s where QC demand is picking up.

SFX handles ~100 Mn of the ~360-420 Mn outsourced QC shipments annually, making it the largest organised 3PL in QC, with roughly 50% share of the organised outsourced pool (the other 50% is fragmented across 80-100 smaller players, with Loadshare as #2).

The model works like this per parcel: Revenue ~₹55. Rider payout ~₹50-52. Margin ~8-10%. Lower margin than QC because the delivery window is longer (30-45 minutes) and orders per hour are lower (1.5 vs 2.2 for QC). Here the SLAs are tight — you need the right mix between own fleet vs dedicated fleet, which BigBasket takes from SFX and your efficiency per hour, which means orders delivered per hour, is better than an in-house captive delivery partner. This is the fundamental advantage, because SFX operates as a multi-category platform for gig workers.

Zomato/Swiggy operate at ~1.2 efficiency per order per hour. SFX operates at 1.8-1.9 efficiency. They work on 85-90% utilisation of the rider. A B2C company cannot operate beyond 70 — as soon as they trigger 70, they start hiring, distributing surges.

Though hyperlocal as a segment is growing at 50-60% YoY, it just contributes 20% of topline. However, the recent entry of Amazon in the QC war can be a good chance for SFX to grow their hyperlocal arm. That’s what they are doing: Amazon Now, launched in June 2025, operates ~300 micro-fulfilment centres and plans to expand to 300 cities with a ₹28 Bn investment. It integrated SFX as its last-mile partner in FY26 and outsources ~60% of deliveries, far higher than its express parcel business. Instead of building its own fleet, Amazon leverages SFX’s 260,000-partner network for instant rider density, making it one of SFX’s most strategic and attractive quick commerce clients. How many cities SFX gets from Amazon as a last-mile partner is in a wait-and-watch mode.

Dark-store management for vertical quick commerce is something new SFX is experimenting with from the last one year, initially started with 15 stores and targeting 100+ dark stores in FY27. Management claims they have proven unit economics with a payback period of 3-4 months and 20%-plus gross margins; they usually open dark stores post getting a minimum order guarantee from the particular brand. D2C brands need data and a last-mile-efficient player, which SFX can cater to if unit economics make sense at a larger scale with multi-category dark stores where they can store not only BPC items but also cater to different categories like pharma or pet care or supplements. In India, many D2C brands are opening every day which need players like SFX, Elastic Run and Loadshare. Though this remains a very interesting optionality in SFX’s business which one should keep an eye on.

“Two growth levers: (1) QC industry growing at 60%+ — all SFX has to do is hold market share with big players. (2) Mid-sized and smaller players — this is the next big bet. For smaller players, a shared infrastructure warehouse at low cost helps cross-utilisation, brings down warehousing cost and enables higher delivery speed.” ~ Industry Expert on SFX

D. The Devil’s Advocate on SFX ~ Anti-Thesis

1. More player entry in the 3PL industry leading to volume distribution and pricing war

Although the 3PL industry is more or less an oligopoly now, there exists room for one player, to be honest — that could be XpressBees or anyone else, I don’t know. You can’t eliminate this risk, because if any strong player with a better business model than SFX or DEL emerges here, then this e-com will get one more 3PL player and a pricing war may start again, which is not healthy for this industry, especially for SFX, as they are yet to achieve the lowest-cost service provider. DEL’s founder, Sahil Barua, always believes that the industry is now more or less consolidated, and he doesn’t see any reason for XpressBees to exist. Which itself is a big remark — have to see how this narrative unfolds, or one more player emerges which Meesho can again use like they have used Ecom Express before the DEL acquisition.

To reduce its dependence on e-commerce logistics, XpressBees has expanded its B2B business. According to Saha, B2B accounted for just 15-20 percent of shipments a few years ago but now contributes nearly half of the company’s business.

That shift, however, does not mean XpressBees is easing off on its B2C ambitions.

Mohit Sardana, chief executive of XpressBees’ B2C business, told Moneycontrol the company plans to open 500-700 new centres over the next three to six months, taking its network to more than 3,500 facilities.

“The overall industry is growing at around 20 percent, and if we grow between 30-50, we would be taking away share from existing players. As we open up the newer centres, we will also be increasing our overall serviceability areas,” Sardana said.

XpressBees, Sardana said, is well capitalised and will not need to raise funds immediately. The company has raised over $350 million from ChrysCapital, Elevation Capital, Gaja Capital, Norwest, TPG, Blackstone, OTPP and several other prominent backers.

XpressBees — Amitava Saha and Mohit Sardana latest interview

2. Capped on outsourcing and difficulty in scaling D2C and SME clients

We’re quite bullish on the outsourcing trend as discussed in the thesis section, but how much e-commerce player will outsource, no one knows — or is it like a SFX is going to gain market share on the back of reduced dependency of e-commerce on DEL; no one knows that too as well. Meesho too is not going to go aggressive on in-house logistics, as they will keep doing business with 3PL, which can help them to reduce logistics cost per parcel, which 3PL is addressing. We have to see how Valmo scales or Meesho itself chooses the path of going into the logistics business — then, ultimately, Meesho will be another 3PL player of this industry. Quite unsure on it, but can’t neglect it.

To reduce the client-concentration risk, SFX has started the D2C and SME segment, which itself is quite complex to handle — it is incredibly difficult to do a transition from a system designed to handle 20 lakh (~2 million) bulk parcels to managing a long-tail D2C client who might only ship one or two parcels at a time. Optimising both distance and time simultaneously for low-volume, high-frequency orders is an entirely different ball game. I agree SFX is taking market share of Blue Dart, but if D2C volume itself is growing at 25-30% CAGR, then why will DEL not be aggressive here? Why will they lose this market when they know the top-3 e-commerce players can actually cut volumes due to their own captive arms start making sense? These are some of the questions that one must keep in mind.

3. Slowdown in E-commerce and Gig Worker regulation

E-commerce demand remains the key growth driver. FY26 growth was largely driven by industry consolidation and share gains from Ecom Express. Once this normalises, growth will depend on overall e-commerce demand. While SFX’s lean cost structure limits the profitability impact of a slowdown, weaker demand would reduce growth and increase the insourcing risk as major e-commerce players continue expanding captive logistics.

Gig-worker model faces regulatory and execution risks. SFX’s lean, flexible network is built on ~260K gig partners. Any adverse regulation affecting gig workers or recurring shortages in partner availability could impact unit economics and disrupt operations.

E. Financials and Valuation: The Numbers Behind the Story

In 2016, SFX was doing sales of ₹10 Cr fast forward to 2026, SFX closed their books with ₹4,200 Cr sales and a net profit margin of 2.67%, which is the first profitable year in excess of ₹100 Cr profit after tax. Not only earnings but the asset-light model which SFX has built against their peer, who has followed a different approach altogether — raised more than 1-1.5Bn $ — against SFX, which has built the business in the same industry, reaching EBITDA breakeven at ~25% of DEL’s revenue scale. That too, just with 300 Mn $ capital investment since inception.

Coming to the balance sheet, SFX’s cash & bank balance is Rs 1500 Cr — the same amount which DEL paid to acquire Ecom Express. Now one can imagine how far SFX has come from one point of time struggling in a pricing war and cash burn to making an FCF of Rs 150 Cr plus and an ROCE of 10% projected to increase to 22-25% in the next 3 years. Now let’s come to the main point of valuations and how much the market is discounting in today’s price.

Assuming the express parcel business will grow in excess of 25% CAGR and hyperlocal will grow in excess of 35% for the next 3 years. Realisation will improve at 1% CAGR in the next three years. Along with that, partner expenses, linehaul and lost shipment as a percentage of sales will reduce, which will help SFX to achieve an adjusted operating margin to reach in excess of 8.5% in FY29 against 3.8% in FY26, resulting in the bottom line to accelerate from ₹112 Cr in FY26 to 500-520 Cr in FY29.

FCF could be in the range of ₹600-650 Cr in FY29. Capex will remain in 2-3% of sales, mainly for automated sorting centres and network infrastructure in last mile.

On the valuation front, it may look slightly expensive, trading at 24 times FY29EPS, though there are very few companies in the listed space which can achieve 5X bottom line in 3 years with other frameworks in check. So it should deserve the scarcity premium in my view, and all the debate that SFX should trade at a discount wrt to DEL. In my view, SFX has all the traits of platform companies with a flywheel effect, FCF positive, optionality not priced in, and earnings momentum which the market generally chases. Even if it trades at a discount to DEL, DEL itself can achieve 1200 Cr plus PAT in the next 3 years, so DEL itself should trade at at least 50-60K Cr market cap; even if the market gives a 50% discount to DEL, SFX looks a great deal at 12000 Cr market cap.

F. Conclusion: What I Think Actually Happens From Here

In any business, you need three things right — promoter, business and valuation. Here, I believe on the promoter front they have good shareholding compared to peers and other internet companies, no capital-misallocation decision, and, most importantly, the team of 4 IIT grads gives me confidence in their capabilities. No overlapping of power and decision-making. On the business front, SFX is genuinely a differentiated model; things are aligning for them as we discussed, unless and until some known-unknown risks arise in this sector again. Lastly, valuation at this price may look expensive to certain participants of the market, but when acceleration of earnings growth comes and your optionality’s TAM keeps on increasing, then one can pay a slight premium if you’re a growth investor and longevity of holding good businesses.

Re-Rating Catalysts

• Market share gain over the next 4-6 quarters, with a reduction in top-client concentration risk and the outsourcing trend.

• Improvement in operating margins despite investments in fixed assets.

• D2C/SME mix increases over the period of time, along with contribution from a higher-yield customer mix.

• Maturity of unit economics in QC, hyperlocal and dark-stores segment.

Hello folks, how you have been, and welcome to 26 new subscribers who have joined us in the last  month. I’m back with one more exciting blog, and this time the company is related to the hospital sector. The hospital sector has already given 54% return in the last  year, double of what Nifty 50 had given in the same time period (as of October 10, 2024). Recently, Dr. Agarwal’s Health Care has filed a DRHP with SEBI seeking a fresh issue of INR 300 crore as well as an OFS of 6.95 crore with an issue size of INR 3000 crore, though the valuation and final issue size are still pending. The company that we’ll be discussing in the blog is a subsidiary of Dr. Agarwal’s Health Care. No, I’m not discussing here whether you should subscribe to the IPO or not. LOL!

What do you interfere with from this stock price chart?

Sane person: Hi Shaurya! Why are you covering this stock? It’s already 180X post listing. Upside will be limited from hereon; let’s cover some other stock.

Curious person: Okay! Stock has given 20% CAGR till date, but do let me know what are key triggers from here for this stock?

If you fall in the first category bucket, please stop reading my blog from here, as your predetermined brain will not be able to absorb the whole thesis of this blog. If you’re from the second category bucket, then bear with me. I bet you will not be disappointed.

Following is the agenda of today’s blog:

1. Industry Overview

   I. Healthcare sector

   II. Eye Care Industry

   II. Hub and Spoke Model

2. Business Demystified

   I. Short history with promoter background

   II. Business Model

   III. Geographies of Centres

   IV. Management

3. Development Happening in Unlisted Space

4. DAEHL VS PEERS

5. Accelerator Pitch ~ Key Thesis

6. Key Risks

7. Financials and Valuation

1. Industry Overview

I. Healthcare Sector

The healthcare delivery market in India is expected to grow at 9-11% CAGR from ₹6.3 trillion in Financial Year 2024 and reach ₹9.1-9.3 trillion in Financial Year 2028. Even though we call India the next superpower, our healthcare statistics convey something else. India has 15 beds per 10,000 population, while for China and the USA this number stands at 29 and 43, respectively. In FY23-24, our healthcare expenditure as a percentage of GDP is a mere 1.9%, which the GOI aims to increase to 2.5% of GDP by 2025. If you’re visiting a hospital, there is a higher probability that you will incur 50% of major healthcare expenses out of your pocket. Such is the status of our healthcare sector.

The industry overview is for the new reader who doesn’t know about the healthcare industry. Skip this and jump to the eye care industry if you’re already well versed in the healthcare sector.

The healthcare sector is predominately divided into 4 types, with each having a different set of markets and customers. About 56% of the healthcare industry is covered by hospitals alone. Out of that, India has 69% private hospitals, and the remaining are government-owned.

Hospital includes regional as well as PAN India players too. Fortis, Apollo, Narayana Hrudayalaya, Max, etc. are some examples of hospitals. While domestic pharmacy includes Dr. Reddy, Glenmark, etc. Dr. Lal Path Labs and Metropolis are covered under the diagnostic segment.

While majorly there are two types of hospitals: single specialty and multi specialty. However, 4 types of hospital services exist, which are described below.

Single-specialty tertiary care hospitals: These hospitals treat a particular ailment (such as cardiac, cancer, etc.). Prominent facilities in India include the Escorts Heart Institute & Research Centre (New Delhi); Tata Memorial Cancer Hospital (Mumbai); HCGEL Oncology (Bengaluru); and Sankara Nethralaya (Chennai).

Multi-specialty tertiary care hospitals: These hospitals offer all medical specialties under one roof and treat complex cases such as multi-organ failure, high-risk, and trauma cases. Lilavati Hospital and Hiranandani Hospital in Mumbai and Apollo Multispecialty Hospital in Kolkata are examples of multi-specialty tertiary care hospitals.

Before deep diving into the eye care industry, which is one of the main agendas of this blog, let me take you to the key metrics to understand the hospital sector in a better way.

Sources of revenue: Hospitals have two sources of revenue: one is inpatients (IP), while the other is outpatients (OP). About 70% of patients are inpatients, so what is the difference between inpatients and outpatients? As the name suggests, IP includes such patients who stay in a hospital for more than one day, while OP includes such patients who stay for one day only. IP can be charged more than OP as they stay for > 1 day, which includes rental charges, consultancy, and a major part of the bill is surgery cost, which usually constitutes 60-65% of the bill.

Customer structure: Four types of receiving payment from customers are out of pocket, private insurer, PSU insurer, and government scheme. While cash or out-of-pocket expenses cover almost 50% due to the low penetration of insurance in India. In terms of profitability from the hospital angle, cash and insurance stand at numbers 1 and 2, while the government scheme is least favorable as it includes so much hassle in recovering dues from the government.

Let’s understand the most important topic while analyzing any business, Unit Economics, which many folks neglect. Having an understanding of revenue and cost drivers gives an edge while reading and analyzing any business, irrespective of the sector.

Let’s breakdown the key metrics in simple language. Occupancy signifies how many beds are occupied out of the available beds; occupancy also depends on the volume of patients; in the case of multi-specialty hospitals, occupancy is generally on the higher side. ALOS, or average length of stay, is generally used for inpatients as they stay for more than one day. Higher the ALOS, higher will be the occupancy, hence more revenue for hospitals. Outpatients are generally 3-4 times of IP as they usually visit for day only and hospitals can’t charge them more apart from consultancy, medicines, or day surgery (if any). Average revenue per occupied bed, or ARPOB, signifies how much revenue a hospital is able to generate from an occupied bed, which depends on the payer mix, like international patients have a higher ARPOB due to higher charges.

Move on to cost drivers, which are divided into two parts: capital cost and operating cost. Capital cost further consists of land and building, and equipment cost commonly refers to as a capex/bed. While operating costs include doctor fees, wages, rentals, facility management expenses, and repair costs. 20% is the blended operating margin of hospitals, as it’s difficult to reduce cost by a large extent. That’s why medical tourism is important for hospitals, as they can generate higher ARPOB, thereby higher operating margins.

II. Eye Care Industry Overview

In India, 1 out of every 5 individuals faces vision loss disorder, so out of the 140 crore population, 20% are facing vision loss disorder, or roughly 28 crore Indians. The economic value loss because of avoidable sight is estimated to be $27 billion in India. I’m assuming if you’re reading this blog, you may also be wearing spectacles. Am I right?

Even China is trailing us in vision loss disorder (Chalo! kahi to ham Indians aage hai). Don’t be happy. Eyes are a very important sense for our body; you can’t imagine your life without vision; it will be a complete blackout.

The eye care market in India has been growing at a CAGR of 11.5% between Financial Year 2019 and 2024 to reach the value of ₹378 billion in Financial Year 2024. Indicating a CAGR of 12-14%. This growth is higher than the CAGR growth rate of 9-11% projected for the healthcare delivery market in India during the same period.

In the eye care industry, qualified staff and experienced ophthalmologists are one of the key critical factors patients consider while selecting a hospital for treatment. Additionally, a patient-focused approach is a key factor in how patients choose their eye care service provider.

Segmentation of the Indian eye care market

The eye care industry is not so complex like other hospitals, where one has to keep tracking every key metric. The surgical treatment includes surgery such as cataract surgery, retina surgery, refractive surgery, glaucoma, and cornea-based surgery. About 80-85% of revenue comes from surgery treatment only, while non-surgery includes regular eye checkups and proper screening to prevent vision loss. Think like an eye doctor, where you can charge higher fees for patients regular checkups or cataract/laser surgery. The second answer is the second one. Simple as that.

The eye care industry is highly fragmented. The share of eye care service chains in India is about 13–15% of the total eye market. While the remaining share is taken by government-based hospitals, charitable/trust hospitals, and standalone clinics, which you can find in your locality, it indicates that the eye care industry is so unorganized where no PAN India player exists.

Key Eye Disorder in India

Out of the 5 commonly occurring types of eye disorders, cataract has the majority share; based on the National Blindness and Visual Survey in India (2015–2019), untreated cataract was the cause of 66.2% cases of blindness and of 71.2% cases of visually impaired cases.

Vision loss is such a huge issue for national development that GOI has introduced ‘Netra Jyoti Abhiyan’ to clear the backlog in the cataract surgeries in India. Each state and union territory has been allotted yearly targets for cataract surgeries. Cataract surgeries under the NPCB&VI increased from 6.7 million in Financial Year 2019 to 8.3 million in Financial Year 2023, against a target of 7.5 million in Financial Year 2023. This was on account of a slowdown in target accomplishment due to the COVID breakout. Out of 14 million cataract surgeries, GOI has done 8.3 million surgeries. So (excluding GOI) 5.7 million surgeries were done by private players for FY23. Even governments outsource their surgeries to private players out of that 8.3 million numbers. Going forward, the volume of cataract surgery in India is projected to grow at a CAGR of 4-6% between Financial Year 2024 and 2028 to reach the surgery volume of approximately 17-19 million in Financial Year 2028.

In India, on average, the cost for cataract eye surgery ranges from US$300 to $400  per eye, which is significantly lower than the average cost for cataract surgery in other countries.

India is dominating the global eye care market with performing 83 lakh cataract surgeries in FY 2022–23, surpassing the combined figures of the US, Europe, and China.

Other surgeries apart from cataract surgery are cornea, refractive, and glaucoma surgeries. Of the total eye surgery operated in India, the refractive surgeries contribute to about 8-10% of the surgeries; 40-50% of the Indian population is affected by refractive eye disorder, but the majority of the population solves this issue with the use of eyeglasses.

I will not go deep into each and every type of eye surgery; if you wish to read, I will share the link to DRHP below.

Growth Drivers for the Eye Care Industry in India

- Aging Population: India is experiencing a demographic shift, with more people entering the older age bracket. The share of the population in the above 60-year age bracket, which was just 7% in 2001, is expected to increase to 12% by 2026. The aging population will lead to a rise in the prevalence of eye disorders in India. Diabetes is more common in old age and is linked to a retinal disorder often known as diabetic retinopathy.

- Changing Lifestyle: A changing lifestyle, such as an increase in time spent on electronic devices, may increase the eye disorders. If you’re reading this blog, then you're as well covered in this growth driver.

- Rising Income Level: Rising income brings affordability for better medical services. For instance, in urban India, the number of people who do not want to wear eyeglasses or lenses is increasing and are opting for corrective surgeries like LASIK in order to correct refractive errors. Gen Z generation, right?

- High brand equity, network presence, and standard operating procedures (SOPs): Imagine you are facing problems in your eye. Where will you go to a professional eye hospital that has a good brand image or a nearby clinic (assuming the price difference is negligible)? There's a high probability that you’ll go with the first option; no one wants to compromise with their eye checkup. Do you?

A strong network of hospitals allows for better coordination between different branches, facilitating seamless patient care. In a competitive Indian eye market, where accessibility and convenience are crucial factors for consumers, a high network presence gives eye care service chains a competitive edge. SOP, or standard operating procedure, which means patients will receive the same quality of care regardless of location, helps the eye chain grab market share from local doctor clinics.

It is expected that more than 2,000 eye hospitals would be established across India in 5 year’s time by four to five large players.

III. Hub and Spoke Model

Hub and Spoke model applications are found in the airline industry, where hub is a central airport that flights are routed through and spokes are the routes that planes take out of the hub airport. Let’s take an example: Ganesh wants to travel from Punjab to Chennai, but there is not a lot of demand from Punjab to Chennai, hence it is not economical for any airline. So what airline do they fly Ganesh from Punjab to Delhi and then from Delhi to Chennai via connecting flight? Delhi is called the hub, and Punjab, as spoke.

A similar model is used by eye care hospitals, where they have three centers: primary, secondary, and tertiary. Following are the roles of the centers:

Primary Eye Care: Services in primary eye care include examination of the visual system, diagnosing for any abnormalities in the visual system, and prescribing aids such as glasses and contact lenses.

Secondary Eye Care: Services provided by the ophthalmologist in these centers include cataract surgeries, simple glaucoma surgeries, and other minor surgical procedures.

Tertiary Eye Care: These centers provide eye care for a complete set of eye-related diseases. Ophthalmologists with subspecialties in eye care diseases are staffed at these centers. These centers may also perform research and provide training to secondary centers.

In this model, a hub acts as a site of specialty areas, and the spokes are the connecting secondary centers. Patients first go to the primary center for an eye checkup, which is called a spoke acting as a first place to be visited by patients, and if situation permits, these patients are sent to the secondary center. These centers mostly perform cataract surgeries, and for any complicated surgery, these centers refer the patients to the tertiary centers of eye care located in the city. So you will ask me why there are 3 types of centers when the whole thing can be done in a single multiplex center?

The whole crux for going with the three centers is that the majority of patients who visit primary centers have refractive error or cataract disorder, which usually gets cured by glasses or cataract surgery if required. So why spend a big chunk of money on rents when you can handle your primary center with a small area? Unit economics will deteriorate for no reason. See the below-attached image to gauge how all three centers are different from the initial investment point of view (we will discuss more in detail in the unit economics part of this blog).

So let’s start with the deep dive analysis of Dr. Agarwal’s Eye Hospital, which is the only listed eye hospital chain, growing at a very healthy rate post-covid.

2. Business Demystified: Dr. Agarwal’s Eye Hospital

I. Short History with Promoter Background

Dr. Agarwal’s Eye Hospital was founded in 1957 by Dr. Jaiveer Agarwal and registered in 1994 as a company. DAEHL is a leading chain of eye hospitals with a predominant presence in Tamil Nadu. Under the able leadership of Dr. Amar Agarwal, the company has been a pioneer and leader in the Indian ophthalmology market with an established market position and healthy brand recall in the eye care segment.

Dr. Jaiveer Agarwal ji has introduced refractive keratoplasty with the cryolathe in India and was also the first to start cryoextraction in the 1960’s. He was honored with the prestigious Padma Bhushan by the Government of India in 2006. Dr. Jaiveer ji has started his journey with almost zero rupees; he doesn’t have a slit lamp (basically, a slip lump is used to examine the eye issue). He performed his first surgery for INR 250, out of which the patient has given him INR 200 as an advance, which Jaiveer ji has used to purchase the instrument before his first surgery.

Currently, Dr. Amar Agarwal, son of Dr. Jaiveer Agarwal ji, undertakes the operations of the group companies; he is also an ophthalmologist by profession.

“Since childhood, he has made me fascinated by this field,” Prof. Amar Agarwal said. I still remember my first glaucoma surgery was done with him sitting next to me and teaching me. I must have taken more than an hour, but he would not get upset at any step.” Narrates Dr. Amar Agarwal.

II. Business Model

DAEHL is the only listed hospital that is purely into an eye care chain. They are having a presence in the whole chain, from checkups to consultations to surgery and providing opticals to patients. According to the latest DRHP filed by its parent company, the holding company, which is Dr. Agarwal’s Health Care, has a market share of 25%, so a subsidiary will also be in the same line as the holding company. I will touch upon the structure of holding and subsidiary in the later part of the blog.

DAEHL mainly has three verticals where they derive the majority of their revenue: surgeries, opticals/lenses, and pharmaceutical products. In FY24, the company has derived > 60% of revenue from surgeries only, which is in line with what the holding company has derived from surgeries income.

The company operates under the network of the “hub-and-spoke” model, which supports high patient volumes and yields economies of scale, allowing greater accessibility and choice to patients while driving efficiency of crucial doctor resources across the network. The good part is that they don’t purchase any land or building; in fact, they take on a lease from their holding company, converting it into lease rentals, thereby saving upfront capital, and their breakeven point as well as ROCE is best in industry.

DAEHL CFO/Sales in FY24 stood at 28%, while for hospital leader it stood at 22%.

III. Geographies of Centers

The holding company has 165 facilities in India spanning 13 states and four UTs and 15 facilities across 9 countries in Africa. DAEHL only has a presence in India, not outside of India. So African facilities have nothing to do with DAEHL. While, as per the latest annual report of FY24, DAEHL is operating in 50 locations in India. However, the geographic concentration risk always exists in this company, as the majority of the hospitals are located in South India.

The holding company has increased its presence in West India, as reflected in the below-attached image.

Marketing expenses have doubled from FY20 to FY24 while they're 5 times FY21, which shows that the company is in expansion mode as visible from their geographical presence, from 22 locations in FY20 to 50 locations in FY24.

However, the company is going big in Maharashtra and nearby locations; that’s why you’ll see heavy marketing expenses in AR of FY24.

IV. Management

Management and good corporate governance should be two points on which every investor should focus; all other things are secondary. Finding a decent-growing company with well-run management is much more fruitful than finding the next big thing in the market with not so much experienced management.

I will not go deep into management and corporate governance analysis class. By going through the short history of the company and how Dr. Jaiveer Agarwal ji has started this company, and now his son, Dr. Amar Agarwal, is taking the company to new heights, there is no such requirement for CG analysis. Just attaching the DAEHL board of directors snippet from the latest AR, you can go through their educational qualifications, and YOE, it will clear all of your doubts.

3. Development Happening in Unlisted Space

Tracking down the unlisted space activity is much needed as both unlisted space and listed space go hand in hand. If any trend is visible in VC/PE space, there is a high probability that it will also emerge in listed space too. You have to keep tracking who is funding what, what’s their major thesis, and all. Similarly, I came across from Bastion Research X the recent funding happening in the unlisted healthcare sector.

During the last 2 years, globally, hospital chains have raised funding of US$ 9.8 billion, out of which India stood at number 1 and the USA at number 2 in funding by country data.

One thing that caught my eye was that Dr. Agarwal’s Health Care, the holding company of DAEHL, is number 3 in the top funding round across the world during the last 2 years.

According to private sources, TPG and Temasek hold approximately a 30% stake in the company (post-money valuation of approx. INR 4500-5000 crore), which they wanted to dilute either partially or fully in the coming IPO of the company. Will touch upon it in the key thesis section of the company.

Other notable major deals in the unlisted space are:

• Manipal Enterprise Heath: In April 2023, Temasek Holdings (Private) Limited, a Singapore-based sovereign wealth fund, acquired a 41% stake in Ranjan Pai-led Manipal Enterprise Health for Rs. 16,000 crore. This took the total stake held by the sovereign wealth fund from 18% to 59% and valued the company at Rs. 40,000 crore, making it the largest healthcare deal to date.

• CARE Hospital: In October 2023, private equity giant Blackstone acquired a majority stake in CARE Hospitals, which in turn had inked a definitive agreement to buy KIMS Health. The deal was worth ~$1 Bn ($700Mn for CARE and $360-420Mn).

• A few days back, it was reported that General Atlantic had acquired Ujala Cygnus, a leading hospital chain in northern India. Though the financial details are not disclosed, the deal has valued the chain at Rs. 1,600 crore.

Some other notable deals that happened in the eye care hospital chain are:

• In May 2024, Centre For Sight announced approximately ₹8.3 billion in investment from Chrys Capital.

Chrys Capital is founded by one of the veteran investors, Mr. Ashish Dhawan.

• In 2023, Quadria Capital, which is a private equity firm, announced investment in Maxivision Hospitals. The PE firm planned to invest ₹13 billion to acquire a stake in the eye care service chain company.

• In 2022, ASG Eye Hospitals raised ₹15 billion from General Atlantic and Kedaara Capital.

• In 2020, private equity firm InvAsent invested ₹700 million in Sharp Sight Group of Eye Hospitals.

This demonstrates the importance of VC/PE players interest in the Indian hospital chain. All these activities reiterate the fact that Indian hospitals in general are seeing insane levels of growth due to increasing income, aging population, increasing chronic illness, medical tourism, etc. Private hospitals will be a big beneficiary of this megatrend.

4. Accelerator Pitch ~ Key Thesis

If you’re contrarian, then your thesis must be well researched so that it can counter market participants critics. Let’s move on to the backbone section of this blog.

Unit Economics: Unlike other hospitals where unit economics are highly skewed towards inpatients, the DAEHL business model is skewed towards outpatients, as mostly patients visit for an eye check, consultation, or surgery. Even surgery doesn’t usually extend beyond 2-3 hours; hence, day-visit patients are more in eye hospitals. Hospitals save on bed requirements, which is the major capex for any hospital, as well as rental costs per area and staff requirements, which are generally low in comparison to any other traditional hospital. The eye care market had the highest OPBDIT and lowest cost of sales as a percentage of the operating revenue among the specialties considered for Financial Year 2023 due to lower capital and operating costs in the industry.

Lease Liabilities: Post-IND AS 116 lease liabilities have impacted so many companies, as they have to go with both the numbers pre- and post-numbers, especially companies belonging to QSR, airlines, and retail sectors. If anyone wishes to read—> IND AS 116

Coming back to the topic, DAEHL, like I told the company, doesn’t purchase land and buildings; what they do is they take on lease, resulting in a saving of cash flows. That’s why you will see company CFO/PAT is more than 80% during the last 5 years. The impact of lease liabilities for lessees is shown in two ways: the right to use assets, which are depreciated over the lease term, and interest on lease liabilities. Secondly, give the impact of payment of lease liabilities in the cash flow statement. Even after that, the company has doubled their CFO in the last 5 years.

Why is it a win-win situation?

Expansion: DAEHL saves upfront cash flow, which they can use to expand their business; the ROCE of the company after adjusting the lease liabilities is 30%, and the operating margin of 29-30%, which is industry leading, shows that the company is not getting the valuation that it deserves. The holding company, Dr. Agarwal’s Health Care, can use their subsidiary to expand their geographies at a faster rate, which they are doing too since they operate on a “hub and spoke model.”.

DAEHL continues to identify and relocate select mature facilities, which cater to a high volume of patients, and expects footfalls to increase further to nearby locations.

The holding company follows an acquisition-led inorganic expansion strategy, which includes business transfers as well as equity-based acquisitions. It helps the company  rapidly expand into new markets and allows us to tap into high-quality clinical talent by acquiring qualified doctors.

Operating in Niche Segment: DAEHL operates in an eye care chain, which itself is projected at a CAGR of 12-14% in the next 4 years. The growth in the eye care industry would be continued to be driven by a rise in income levels, awareness, an aging population, and a changing lifestyle. The recent study by CRISIL has estimated that the eye care chain has the second-best IRR in metropolises, while they have the highest IRR in non-metropolitan cities.

Why do they have the highest IRR? First think, then read it further. Hint: I have already discussed this part.

The eye care and dental care treatments, typically, do not require overnight hospitalization compared to other considered specialties. This leads to less requirement of land for these specialties and consequently lower expenditure as centers for both of these specialties usually operate on a rent/lease model.

Capital expenditure required to start a dental center is very low compared to an eye care center (₹3 million for a dental center vs. ₹80 million for an eye care center in a metro city). Additionally, revenue per center for dental specialty is very low compared to eye care specialty (₹7 million in one year for a dental center with 2 seats in a metro city vs. 80 million in one year for a tertiary eye care center in a metro city).

Holding Company IPO: One of the important thesis of DAEHL is the upcoming IPO of the holding company, which is in the same line of business. TBH, 50% of my thesis is on IPOs and their holding company valuation. As I already discussed about TPG and Temasek stakes and post-money valuation. Considering that PE firms usually invest in any company to take a minimum of 3-4X of their initial investment.

Out of the INR 3000 crore IPO, the fresh issue is of INR 300 crore, while the remaining is an offer for sale, which is INR 2700 crore, little more than 50% of the invested amount by these PE firms. So my sense is that they will cash in their first initial investment of INR 650 crore with an exit of 4X and the remaining they will sell post-IPO. Risk of PE overhang? will discuss this in the key risk part of this blog.

It’s very obvious in the capital market that if any company wanted to raise money from an IPO, they wanted a higher valuation, so to get a premium valuation in the range of INR 16,000-220,000 crores, holding company require that their subsidiary be in the best position as it's already listed. You can’t upset the existing investors of listed space, and it’s my gut feeling that the coming quarterly result of DAEHL is going to give earning surprises to many of us due to the coming IPO in January/February in FY25.

Holding company FY24 sales were INR 1,333 crore, while DAEHL FY24 sales were INR 320 crore, implying 24% of revenue from subsidiary.

5. DAEHL VS PEERS

For the sake of simplicity, I have taken the vintage players of the eye care industry for peer comparison.

Financial Comparison

DAEHL is the leader on all parameters, but wait, Shaurya! See the numbers of Eye-7 Hospital first; I know they have eye-catching numbers. But the fact that they are having presence in only New Delhi and not in any other states, as they geographically expand this number, will look otherwise. Every other player has an OPBDIT margin in the range of 25%, but PAT reveals a real picture; two of the players with 2-4% PAT margins might have long-term debt on their balance sheet. DAEHL has a CFO of INR 57 crore on the sale of INR 268 crore due to negative working capital days.

Operational Comparison

Since zone-wise bifurcation is not given. So I have taken holding company data.

Some interesting takeaways from the above data are:

• Among the peers considered, Dr. Agarwal’s Healthcare (holding company) and New Delhi Centre for Sight had the highest number of National Accreditation Board for Hospitals (NABH) accredited eye care facilities at 26 as of July 2024.

• New Delhi Centre for Sight and Dr. Agarwal’s Healthcare have the most diversified presence across the cities, with New Delhi Centre for Sight having 31 facilities in tier-1 cities and 33 facilities in other cities, while Dr. Agarwal’s Healthcare has 67 facilities in tier-1 cities and 98 facilities in other cities of India.

• About 62% of facilities of DAEHL are located in South India, similar to what ASG also has about 58% facilities in South India, but in FY24 DAEHL has derisked it by expanding into West India, particularly Maharashtra. One question from my side is why are they not targeting Delhi NCR for any specific reason? If you know, then please tell me in the comment section.

Dr. Arun Singhvi and Dr. Shilpi Gang are the co-founders of ASG Hospital Private Limited (ASG). Both are alumni of the All India Institute of Medical Sciences (AIIMS).

• DAEHL employee cost is highest in comparison to its peers as the company follows a doctor engagement model wherein a majority of our doctors work exclusively at our facilities on a full-time basis. For which company also provides consultancy fees to doctors so that they don’t leave the company and start their own clinic?

  

  The consultancy fees that companies pay to doctors have fixed and variable components, with the variable pay being dependent on the volume of business and revenue generated at the relevant facilities. The fixed component of their overall consultancy charges for doctors has reduced over time as a function of the growth in our facility revenues. The variable component of doctors’ compensation also depends on the nature of the facility at which they are engaged (i.e., whether it is an acquired facility or a greenfield one), the location of the facility, and the experience and profile of the relevant doctor.

6. Key Risks

• Merger Risk: The holding company and subsidiary company operate in the same segment of eye care, so the merger risk will always prevail post-listing. However, within 6 months of the IPO, no such risk exists.

  

• Ophthalmologist Shortage: India not only has a shortage of beds per 10,000 population. In India, the availability of ophthalmologists and optometrists is very low compared to the national need for these professionals. As of 2024, India has about 26,000-27,000 ophthalmologist which is about 1.8 to 1.9 ophthalmologist for 100,000 persons. Compared to the available ophthalmologists, India needs about 125,000 ophthalmologists to serve eye patients in India, which is approximately 8.7 ophthalmologists for 100,000 persons, signifying a workforce shortage in the eye care health services in the country.

• Competition from Private Clinics: In India, the majority of eye care chains are located in tier 1 cities, and tier 2 and 3 cities are dominated by private clinics. The risk of more and more opening of private clinics by the individual ophthalmologists targeting any specific can hinder the expansion of DAEHL. Though the company has a full-time doctor, they also get variable fees depending on the volume and locality of the facility. One more thing is that any clinic, whether it’s dental or eye care, is generally opened by a doctor when they are in the age group of 35–40 after gaining good experience in their field. So this risk can be mitigated as India is suffering from shortage of doctors.

  

• Private Equity Overhang: This is one of the biggest risks in listed space, PE overhang. I have already committed this mistake in my journey where I failed to time my entry due to this reason only. In the case of DAEHL, the PE overhang will remain for a certain period of time if PE don’t exit fully through the IPO route, and even if their stake remains in the company post-IPO, we have to see to whom they are selling to take the exit route. What happens in such a case that PE wants to exit, so they milk the growth of the company, and generally they exit when growth gets peak and at peak valuation too. It’s not necessary that they will be able to time their exit. They are not God; take the example of Zomato. Many PE and VC were sold, but Zomato was 2 times their selling price. But one has to track this risk very closely.

Hold on, Shaurya! Are you saying it’s like a PP Waterballs type situation? No, man, DAEHL has genuine business; how dare you mix it with PP Waterballs? LOL(:

7. Financials and Valuations

I have already discussed the financials of the company so many times and also covered it in the peer comparison too.

DAEHL has achieved the highest ever sales figure in FY24. The sales have increased from INR 140 crores in FY 21 to INR 320 crores in FY 24, at a CAGR of 23%. While profit as of FY 24 stood at INR 62 crore, more than 10x from FY21 profit. In FY21, the company faced some dip in operating margin, but after that, OPM stood above 25%.

The cash flow from operations has further improved from INR 39 crores in FY20 to INR 90 crores in FY24. Mainly on account of long payable days, which are 300+ days from the last 4 years. Promoter shareholding is above 70%; the majority is held by the holding company, while free float is less than 25%.

In the last 12 quarters, DAEHL operating margin was below 25% only once.

Now coming to the part of valuation, I have taken two approaches for valuation. One is relative valuation, while the second is comparing it with holding company coming IPO.

Taking a FY24 EV/EBITDA multiple of listed peers, if we go by the simple calculation, then a rough estimate of the IPO valuation of the holding company would be in the range of INR 15000-18000 crore, considering the issue size of INR 2500-3000 crore, and PE funds generally go with a higher valuation, especially during market frenzy. The market too is filled with liquidity, and the healthcare sector is performing well during the last 6 months; we can expect this valuation.

The holding company is last valued at INR 4500-5000 crore.

The Dr. Agarwal’s Health Care derives approximately 30% of revenue from DAHEL. If we assign holding company valuation to a subsidiary, as DAEHL is not so discovered stock, even no brokerage house provides any rating to it. It would be valued in the range of INR 3600-4000 crores after assigning a 20% discount. While the current valuation is INR 2600 crore. (October 11, 2024)

Secondly, if we apply the relative valuation, then DAEHL is trading at FY25 EV/EBITDA of 17-18x. (Considering lease liabilities) How?

In Q1 FY25, the company has generated sales of INR 100 crore, which is equal to 30% of full-year FY24 sales. The CWIP is going to get completed this year, and by FY25, the net block would be INR 400 crore, and considering that the company can easily do asset turns of 1.2 times, sales would be INR 480-500 crore and EBITDA would be INR 130-140 crore.

Thank you, readers, for staying with me till the end of this blog. Please provide your valuable comment, and if you like it, do like and subscribe to my substack for such exciting blogs in the future.

DRHP: Dr Agarwal Health Care

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Hello folks, how have you been? Welcome back to my new blog. I know I was absent from Substack for more than 1.5 years (pardon me for my absence). Now onwards, I will try my best to write one blog once a month. Moreover, in the future I will keep a mix of both long as well as short and crisp blogs.

The topic which I’m going to touch upon is the review of Quick Commerce Restaurants (QSR) Q1 FY25 result, along with the latest developments happening. Many of the readers who are in markets pre- or even post-covid knew that 1 year ago everyone was so bullish on the QSR theme, calling it a decadal theme or a once in a lifetime opportunity. But now, no one talks about it. Why? simple answer in Howard Marks language: I think it’s fair to say one of the key swings of the investment pendulum is between too much confidence and too little. That’s what happened with the QSR theme; everyone was so bullish one year back that no major earning surprise, that too at a time when valuations are way ahead before number speaks, has resulted in the de-rating of some stocks from this sector. Don’t forget a few players from this sector have provided the lesser return in comparison to benchmarks in the last year or so.

Decadal theme always demands decadal mistakes, everyone gets into FOMO and just starts chasing the stock, without any due diligence from their part. This phenomenon is now happening in defense and railway sector.

Following are the Agenda of today’s blog;

1. Current Landscape of QSR Sector

2. What Management is Saying?

3. What’s Happening in Unlisted Space?

4. Risks and Opportunities

5. Conclusion

1. Current Landscape of QSR Sector

This chart is for the new reader who doesn’t know about the food services market. Skip this and jump to the next paragraph if you’re already well versed in the QSR sector. Typically, the food services market is categorised into 4 broader types, in which our focus will be on QSR only. In the Indian listed market, following are the QSR players.

Now let’s start with Q1FY25 results comparison of all the listed QSR players.

Financial Performance

In Quarter 1 of Financial Year 25, median revenue growth was 8%, while gross margin has remained more or less in line (70%). Wait! Don’t get carried away by the half information; the majority of the YoY revenue growth was contributed by Jubilant FoodWorks (Dominos India Franchise) and Devyani International (Pizza Hut and KFC India Franchise). On the financial performance basis, the worst result reported by QSR in Q1 FY25 was by Barbeque Nation (will talk in detail). The rising competition in the QSR is already hurting the listed entities, which is visible in Q1FY25 result.

Operational Performance

Jubilant Foodworks (Domino’s India PAN India Franchise) has reported the best operational figure after straight 8 quarters, driven by delivery LFL growth of 12.1%, for which the major contributor was no delivery charges above INR 150 orders. RBA too had reported a fair set of numbers; the Indonesian business is finally bearing fruit for them, while they are focusing on creating efficiency in existing Indonesian stores. The Indian business has also shown an SSSG of 3.1%. On the other hand, Barbeque Nation has not shown any sign of recovery yet. In the last year, management kept blaming a higher number of vegetarian days as having impacted their sales. Actually, their problem is more with table turns; even I don’t see BBQ has so much pricing power left with them. Many regional players are giving tough competition to BBQ.

Coming to Devyani and Sapphire, both operate under the same brand, but the only difference is geographic distribution.

Even tough Devyani has a higher share of the non-vegetarian eating population, but Sapphire commands a higher ADS than Devyani in KFC segments. While both companies results were in line, management commentary has not hinted at any exciting development. KFC has shown some positive development, but Pizza Hut is facing tough competition.

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2. What Management is Saying?

One thing that is common in every concall is that demand is subdued to macroeconomic headwinds and consumer sentiment is too weak. The local players are giving tough competition to international players. Huh! I’m listening to this from the last 2-3 quarters. We should try to separate wheat from chaff. So let’s move on to 3-4 key takeaways from all the calls.

Jubilant Foodworks

• The company acquired new customers at its highest-ever rate, beating the industry trend. Moreover, Jubilant has not taken any price increase in the last 8 quarters.

• Delivery as a mix is growing. So there is also a consumer trend that Jubilant is also riding on. Delivery channel now contributes 69% in Q1 FY25. The waiving off delivery charges by the company is a cheery on the top type situation for JFL. Which has resulted in volume growth of 16% in India.

• In Popeyes, the management is focusing on the chicken eating markets; that’s why more stores are in South India. Also in Popeyes, delivery share is lower and dine-in is higher at the moment.

  Westlife Foodworld

• Management is taking new initiatives like Chicken Surprise, a new entry-level burger, bolstering the chicken platform. Introduced new menu items like the McFiesta range and mango-flavored desserts. The value platform was launched at the end of June or beginning of July, while the entry-level chicken burger was launched in June. The benefit will be seen in the coming quarters.

• Westlife has a robust value platform strategy and a pipeline of innovative products. Management is optimistic of higher average unit volume in the second half of the year. This is on account of a price increase of 3-5% in the coming quarters.

• Off-premise business grew by 6% YoY, led by delivery and drive-throughs. Off-premise contribution was 42% to total sales. WFL is aiming for a 15–18% contribution from McCafe by 2027, after a successful pilot project.

  Devyani International

• Management is increasing marketing spend on Pizza Hut due to the continuous decline in brand from the last 12-18 months. In Q1 FY25, store opening pace was relatively slow as management objective is to bring back the brand.

• Thailand business is demonstrating good growth with new store openings. After the Thailand acquisition, KFC is in a good position as brand positioning in Thailand is more mass premium as compared to India. Thailand showed positive SSSG in Q1FY25.

• FY25 store guidance stood at 150, out of which 100 will be contributed by KFC while remaining from Costa Coffee. Costa Coffee's aggressive expansion is on the back of improvements in scale of operation.

  Restaurant Brand Asia:

• RBA management is focusing on traffic and then driving SSSG through that route. India business shown straight 9th quarter same store sales growth, main contributors are dine in marketing program and increasing share of chicken.

• Management is focusing on not losing money in Indonesia by focusing on existing stores first. Popeyes Indonesia ADS stood at INR 97,000 for 10 stores. Just waiting for some headwinds to come, then they will start putting money behind brands.

  

• BK Cafe stores number stood at 370, while ADS is between INR 14,000 and 15,000 for BK Cafe. Management is looking to double this number in the future.

  Barbeque Nation Hospitality

• Month-on-month improvement in SSSG for the first four months of FY25, but still, SSSG for Q1 FY25 stood at -7.4%. Management is blaming Navratri for weak demand in Q1 FY25, but I know they will again blame vegetarian days in Q2 due to Sawan falling in July and August.

  

• According to management commentary, delivery is replacing the home cooking business and creating new demand. Hmm, Interesting!

  

• On the mature stores, BBQ did revenue per store of around INR 5.9 crores. With a restaurant operating margin of around 15%. In new stores, BBQ did revenue per store of INR 4.6 crores with a restaurant operating margin of 8%.

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3. What’s happening in Unlisted Space?

One cannot neglect unlisted space activity, especially at a time when the decadal theme is undergoing significant change every year. QSR in India is deeply funded by VCs, PEs, and seed investors. The major PAN India competitors that are emerging in this space are Jumbo King, Burger Singh, Biggies Burger, WoW Momo, La Pino’z, Chicago Pizza, and last but not least, Rebel Foods.

The unlisted QSR players are also giving tough competition to the listed QSR players on operational parameters too. The average daily sales of Jumbo King are far less in comparison to RBA and Westlife, but what matters is their unique format of stores. Jumbo King store size is 150-200 sq ft, as mainly they focus on high footfall areas and generally target one city at a time. After Delhi and Mumbai expansion, JK is focusing on South India. Similar is the case of Burger Singh; after expanding in the North East, they are targeting tier 2 and tier 3 airports.

Burger Singh on Recent Expansion; As Tier 2 and Tier 3 markets grow with expanding infrastructure, new airports are emerging in these cities. However, this growth has highlighted a significant market gap; customers at these airports often lack access to renowned branded foods. Burger Singh is addressing this gap by moving into these airports, ensuring that travelers in Tier 2 and Tier 3 cities have access to branded food. This expansion is facilitated by Burger Singh’s existing outlets and a well-established supply chain in these cities, enabling a seamless entry into the airport market.

Who would have thought McDonald's or even Domino’s would offer a meal for INR 99? To be honest, I have never imagined this in my dream.

Rebel Foods, a house of food brands, is also one of the successful cloud kitchens in India. Their brands are Oven Story Pizza, Mandarin Oak, Firangi Bake, Sweet Truth, and Faasos rolls. Recently, they also got a master franchise for Wendy’s India. Now they are targeting the dine-in segment through EatSure, little contrary to what I heard in recent conferences, where every management is increasing their focus on the delivery segment. Rebel Food is going offline. “Maybe they know better than me.”
It’s quite difficult to scale your outlets just on one brand; multibrands offer flexibility not just for expansion but to try new offerings according to changing customer preferences; even in the recent Elevation Capital QSR Podcast they have said the same thing. (Watch from 29:37.)

An entrepreneur in the cloud kitchen space said what’s become clear for platforms is the need for having multiple brands for different customer groups. “That would be based on price and the food segment. One brand won’t address all”.

4. My views on results: Risks and Opportunities in QSR Space

After so much data crunching and listening to market veterans. Let’s move on to our second-last part of this blog. Risks and Opportunities in the QSR Sector.

Focusing on Delivery Segment: The boom of food aggregator apps like Zomato and Swiggy has provided ease of access to a large population, and that too at lower prices than famous QSR chains. Delivery provides a wider audience, and food outlets are not required to penetrate every state of India. The main lever for jubilant growth in the latest quarter is none other than a rise in the delivery segment (20-minute delivery has finally borne fruit for them).

Focusing on Value Offerings: QSR can attract audiences in two ways; the first is offering value for money deals by value for money. I also consider taste, quality, interior, and less waiting time, not just by offering meals for INR 99 or 169 for premium ones.

Refurbished stores have potential to fetch more sales, trend which is visible in QSR chain.

Second is by providing some unique offerings that rivals are not providing. For example, JFL is offering Popeyes while RBA is offering BK Cafe, which is doing average daily sales of INR 14000–15000; operating leverage will kick in once stores get matured. But just focusing on price cuts will make these QSR vulnerable to more competition in the future. Jumbo King is focusing on the veggie offering, while Chicago Pizza is focusing on the mid- and premium segments.

Rise of E-commerce: Rise of E-commerce is not less than a curse for Dinein service. If I go to Zomato, there is a high probability that I will order my snacks from Non QSR. Many cloud kitchens are providing "value for money" offerings nowadays.

Zomato’s active restaurant base of 276k is much higher than the 5.5k stores of listed QSR brands as of Q1FY25. “Restaurants active with Zomato have increased to 51x total branded QSR stores in FY24 vs 22x in FY19.

I could agree on the fact Dine-in is impacted in Q1, due to the heat wave and election this time. But people’s need for convenience, which Zomato and Swiggy are providing them, even if one goes outside, there is a high probability that Gen Z always looks out for experience first. That’s what BBQ has also mentioned in his call.

Specifically for dine-in segment, which is where the product is not just food but also experience, also ambiance, service, all of these put together and you have a great meal with your dear ones, that is a segment that is continuing to remain.

One more thing that I want to clubbed with this point is that these foreign brands are not innovating enough, just focusing on brand pull strategy, which is not going to work in India. Let's see what the future holds for them.

Higher Rental Cost: QSR industry became the silent casualty of booming real estate as prices zoomed at a CAGR of 11% since Covid vs. 4.5% in 7 years prior. Causing high rental costs for F&B players in malls and prime urban locations. Thus impacting profitability and hindering expansion plans. That’s why you will see in the latest commentary that companies are cautious on their expansion plans; some are repositioning their brands, while others are focusing on existing stores first.

But going ahead, as price growth for real estate is expected to lower down to 6% in FY25, we might see margins of some of these F&B/QSR companies start recovering.

5. Conclusion

QSR is here to stay; India is such a big and fragmented market that one cannot implement US or Chinese market strategy here. One needs a different approach altogether. The rise of food aggregators brings a curse for QSR solely focusing on the dine-in segment. Companies need to differentiate themselves, whether it’s in terms of value offerings, experience, or creating internal efficiency. "Store managers are the people who run the show." It’s pretty clear that the brand pull strategy will not work in India, as Indians are price conscious. Also, solely focusing on delivery will not work, as Rebel Foods is coming offline after a year of experience in the online segment.

The rise of PE and VC activity in QSR space is also the testimony that QSR space has so much yet to explore. The only concern is which company will be the next big thing in India’s QSR space. If I have to select 2 QSR chains that are showing good future prospects, one will be Jubilant Foodworks, and the second is Restaurant Brand Asia.

Thank you, folks, for reading the whole blog.

Disclosure: Nothing in this blog should be construed as investment advice. Please consult your financial advisor.

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Most of the time in the market we have heard about a term called consistent compounder. So, what is a consistent compounder and how can we spot it. No one thinks when they purchase any stock as they are buying any consistent compounder. It’s a journey of the company in several ups and downs which transform them into consistent compounders. TITAN. Astral poly, Asian Paints, APL Apollo, Page industries, Marico, HDFC Bank, BKT, Relaxo and many more. All of them have several things in common: Large TAM, Unorganised to Organised, Aspirational management, Higher reinvestment rate and power to protect their moat whether it’s in terms of economic moat or any other moat.

Recently Piyush Goyal has said that the Indian footwear industry can increase 10 times in the near future. I don't know whether he will be right or wrong but in today’s blog we’re discussing one footwear company known as Metro Brands which was established in 1955 is one of the largest footwear retailers. MBL had opened their first store in Colaba, Mumbai and today they have 672 stores across India. Many of you are thinking that why am I writing blog on this company which is already known to the street and alpha can’t be created from here due to high base of market cap, But I personally think that market cap should be not be one metric to choose any company and sometimes consensus also made money in this market. Moreover MBL tick all the boxes which I have mentioned above regarding the consistent compounder.

This blog might be long and detailed so, hold on your seats and start with my analysis of MBL.

1. Industry

- Indian consumption story and structural shift

- Will China story play out in India

- Retail sector breakdown

2. Why do I like Metro Brands over other companies?

- Short History

- Business overview

- Manufacturing, outsourcing and vendor’s engagement

- Products, geographies and store footprints

- Store/Unit Economics of Metro Brand

- Management

3. Why should you look into Add- Spend and brand ambassadors?

4. MBL VS PEERS

5. Cravatex acquisition

6. Can they replicate their past growth (Accelerator pitch)?

7. Financials and Valuation

8. Key risks

1. INDUSTRY

FOOTWEAR SECTOR OVERVIEW:

I will try to cover only the main points which will help you to better understand this industry. The Indian Footwear market is valued at INR960b as of FY20, of which, over one-third is composed of high-ASP products predominantly catered by organized/branded players growing at 1.5x the rate of overall market growth (15% CAGR over FY15-20). The market is witnessing a unique transformation over the last few years and is expected to grow at CAGR of 15-17% till FY25.

Points which will help you to find opportunity in this sector:

- India is the second largest consumer of footwear in the world after China, however still per capita consumption is only 1.9 pairs per annum against the global average of 3.2 pairs.

- Major growth will come from an organized market led by urbanization, GST and increased brand awareness. Increased share of e-retail (online) as various modern retailers adopt an increasingly multi-channel approach to reach customers across varied age and income profiles.

- Women segment is expected to grow faster than the men's segment due to the increasing number of working women, changing lifestyles.

- Premium segment will increase the market share from 47% in FY21 to 49% in FY25.Going forward, the Indian Footwear market is expected to shift in favor of higher ASP segments – Economy, Mid, and Premium price segments. While the Mass segment, which occupies a dominant share, may clock 6-7% CAGR over FY20-25, the higher price point segment is expected to grow at a higher rate (10-11% CAGR).

- Tier 2/3 cities will drive the next leg of growth which will be led by north and south respectively.

- The Indian S&A market which remains highly under penetrated, is estimated to grow ~16% CAGR over FY20-25 and almost double (USD2.6b in FY20). The ASP of Sports Footwear is 75-150% higher than Casual Footwear.

- E- commerce footwear market is expected to grow at a CAGR of 26-30% till FY25.

Indian consumption story and structural shift

India's share of domestic consumption, measured as private final consumption expenditure, in its GDP was approximately 60.5% in FY 2020. In comparison China's domestic consumption share to GDP in 2020 was 39.24%. The median age in India is estimated to be 28.1 years in 2021. The households with annual earnings between US$ 5,000-10,000 have grown at a CAGR of 10% between FY 2012-2020 and their number is projected to further double by 2025 from 2020 levels. The consumption pattern also has moved towards higher spend on branded products and through organized channels.

You will see whenever the GDP of any country grows in which household consumption has a significant chunk, B2C companies have created a lot of wealth. It has happened in countries like the USA (Nike, Skechers ), and China (Li-ning and Anta). Similarly many retail companies have performed well during this period. Why does this happen?

Answer lies in per capita income. Whenever the per capita income of any country reaches that level where all the basic necessities of humans meet then they tend to fulfill their aspirational needs which they are not able to fulfill due to limited wages/salary. In the USA it happened in the year 1970 and in China it happened during the year 2005 after this inflection year both the country has seen a rapid growth in their GDP and per capita income too. In India it has already started after covid-19 struck or it may start during the period 2022-2025. During this period the trends like premium products, additional benefits In Indian mother language fizul kharchi starts. One thing which will drive this fizul kharchi is the young population as they are the one who will do active shopping every time Just waiting for their pay-check :)

I have done some data crunching from my side to understand why retail stories can replicate in India.

Many of you will say that China has saw decreased in their private consumption as a % of GDP and Yes you’re right but wait let me show you one data which describes that although private consumption as a % of GDP has decreased but Chinese people’s aspirational need for clothing, household facilities has not taken a hit after year 2003 you could refer the below mentioned image to understand this point.

Will China story play out in India

We Indian investors always had a habit of comparing India VS China investment cycle’s like what has happened in the past in China will happen in India as well. Somewhat it's true for footwear, retail and QSR sectors because humans are the same, their needs are the same after a certain point of time. So, will stories like Li-Ning and Anta sports play out in India?

CASE STUDY: Anta groups ( Taking this case study over Li-Ning as it match with metro brands)

Anta’s business adopted a wholesale distribution model in the China market and for more than 20 years this model has been effective in promoting the Anta business through a nationwide coverage that fulfilled different local business cultures and consumer preferences, it is today world’s 3rd largest sportswear company by revenue after Nike and Adidas. Anta has 3 business groups to facilitate multi-brand strategy: Performance Sports Group: Anta, Anta Kids, Sprandi Fashion Sports Group: Fila, Fila Fusion, Fila Kids Outdoor Sports Group: Descente, Kolon Sport.

Anta has focused more on the acquisition path; the company acquired sportswear brand Fila’s China business in 2009. The approach placed Anta as a mass market brand while Fila targeted the high-end sports market. Fila contributed more than 50% of the total revenue in FY 2020. In July 2015, Anta acquired Henan Material, which manufactures shoe soles in the PRC. In 2017, Anta Sports acquired the business of KINGKOW and formed a joint venture company to operate Kolon Sport business in China, Hong Kong, Macao and Taiwan.

Anta is also the strategic partner for the Chinese Olympic committee and has sponsored the winter Olympic games held in Beijing in 2022. Slowly and steady Anta has transformed themselves into apparel players which was reflected in their FY20 revenue also. R&D cost as a % of sales is one of the important metrics which must be tracked in B2C companies on which these two Chinese companies have worked well.

Retail sector breakdown

Footwear sector has 5 common models in which they handle their operations.

1. COCO MODEL- COCO stands for Company Owned and Company Operated, where the brand owns the franchise store unit and operates the business itself. Scaling in this model is a little bit difficult but brand value and customer relationship remain intact. Ex- DMART, Metro Brands.

2. FOFO MODEL- FOFO stands for Franchise owned and Franchise Operated, where the company gives its brand name to the franchise investor for a particular non-refundable sum (franchise fee) and for a pre-agreed time period. The Prices and merchandise for the outlet are decided by the brands. So, the franchise investor is the owner of the store, and all the operational cost has to be borne by the franchise itself. Scale is fast in this model but brand value is in danger. Ex- Vedant Fashion, Bata.

3. Omni channel- Merging of online and offline channels is called Omni channel. Presently metro is focusing on this model too as they provide less or no discount in this model.

4. Multi-brand outlet- It refers to retail stores that are not dedicated to one particular brand but keep various brands from the same category. Ex- Shopper Stop, Reliance Retail.

5. Exclusive-brand outlet- An exclusive-brand outlet refers to the format where the store is dedicated to one brand and exclusively shelves the products from the brand. Ex- Jockey, H&M.

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2. Why do I like Metro Brands over other companies?

SHORT HISTORY:

After talking about a lot of history, macros, US-China and data crunching, let's focus on Metro Brand, only first starting with a short past history. In 1955 the first ‘Metro’ store was set up in Colaba, Mumbai to become a nationwide chain of exclusive fashion footwear and accessories stores for the entire family. In 2000 MBL opened their first mochi brand MBO. I will use MBL as a short form of metro brand please don’t get confused between these two terms. Within 10 years of opening their first brand MBO they had reached 200 stores across India. In 2015 MBL tied up with Crocs for their exclusive right for crocs sale in India. Fast-forward in 2021 they had tied up with fitflop brand which deals with women casual wear. So MBL has a history of scaling their business operation through international brand tie-ups.

BUSINESS OVERVIEW:

In the Indian footwear sector every company is following a different strategy, a kind of monopolistic market where large players exist whose products are the same but still some difference exists between them. Relaxo and Campus follow the distribution model where metro and Bata follow the retail model in which investment and working capital are high but the brand creation and high gross margin favors them which has reflected in their return ratios too.

Metro follows a 75:25 ratio in which they try to keep 75% of their own brand sales and 25% of third party sales. Some of their own brands consist of metro, mochi, walkway , princess etc whereas third party brands consist of crocs, fitflop, clarks etc.

Generally third party brands have higher ASP as they are premium products and cost to MRP factors also play out into this. The online channel, which contributed 7.5% to total sales in FY21 improved to 8.4% in FY22. Going forward, 25-30% business should accrue from the omni channel, which saw growth double in the last couple of years.

MBL follows a Theory of constraints: The company adopts a disciplined Inventory replenishment system on a pull-based model to avoid excess inventory as per its store demands and requirements. The business is managed bottoms up, with the manager providing feedback on the merchandise to the buying team. Based on this feedback, it decides its products and merchandise.

MBL also follows a loyalty programme in which they provide loyalty points to customers and in exchange for the next purchase they provide some sort of discount on net bill value. METRO’s customer loyalty programs – Club Metro, My Mochi, and Crocs Club has more than 5.8m, 4.1m, and 0.9m members, respectively. In recent years, it has witnessed a high proportion of repeat sales from loyalty programs, with their share increasing to 54% from 45% of its total store product sales between FY19 and FY22.

Manufacturing, outsourcing and vendor’s engagement:

In footwear where many follow in-house production tracking these three factors become equally important as any disturbance in these three can erode your gross margins. MBL follow asset light model they generally outsource their manufacturing operations. They have a joint venture with M.V. Shoe Care Private Limited which is engaged in the manufacturing and sale of shoe care and foot care products under its own brand. About 85%-90% products are sourced from India while remaining they import from countries like China, Thailand and Brazil to meet seasonal demand and minimize their cost which is also highlighted in their gross margin which is industry best in the range of 55-57%. In the last three years they worked with 250 vendors out of which top 50 vendors contribute 77% of in-house production. MBL receives raw materials at their raw material warehouse in Bhiwandi, Maharashtra.

Products, geographies and store footprints:

Among their 5 main brands are mochi, walkway, metro, crocs and fitflop . Crocs average selling price is Rs1800 and crocs store take 600 sq feet which is a good in terms of revenue sq feet also. Crocs sales per sq feet is 29,403 which is higher in comparison to other brands, Walkway has lowest sales per sq feet among all the brands as walkway caters to low segment customers.

Most of their crocs stores are open before the monsoon season to take advantage of the rainy season.

Fitflop and crocs has an exclusively brand outlet (EBO), whereas metro which caters family and mochi which caters youth and walkway which caters to value brand customers are having MBO’s only. Most of their future growth will come from premium products and for it they had tie-up with fitflop which caters to women casual wear mainly working women’s. You can check out this informative video.

By FY25 MBL has planned to open 260 stores (Target given during IPO) which does not include Fitflop stores. MBL management is not adding brand just for sake they had highlighted this in their last concall which is a good trait.

Crocs has shown a good growth after its agreement with MBL and from 2019-2022 number of EBO’S of crocs has shown a growth of 23% CAGR whereas crocs sales grew by 30% from FY17-FY21.

Presently they had decided to open 5 stores of fitflop only but considering that if they get a good response they may open more stores in future. First store which was opened in express avenue mall Chennai has shown a good traction as of now indicated by management and they are promoting their newly open store through fashion influencers on instagram. Fitflop price range is between 5000-10000 and ASP is above 5000 but store requirement is only between 400-500 sq feet good for store unit economics. On the cost front, little costly as per me but not by MBL they had highlighted this in Q2FY23 concall.

Considering that they are targeting 260 more stores by FY25. Let see the store capex across the brands (Almost all the stores will be funded by IPO proceeds and MBL has healthy operating cash flow which will provide cushion to them).

Metro and mochi stores require high capex as they are generally present in Tier 1/2 cities and cater to the family and youth segment. Walkway security deposit is low in all of them due to higher presence in tier 2/3 cities.

RECENT TIE-UP

METRO has recently made a tie up with ECCO's footwear for retail expansion in India. ECCO Denmark-based brand that manufactures and retails premium leather shoes and accessories across 101 countries. Metro Brands will retail ECCO’s formal collection for both men and women in strategically selected Metro and Mochi stores located across India. ECCO footwear will also be accessible to consumers in India through the Metro and Mochi websites. Some details which I gathered about ECCO'S from Myntra website Price range - 5000-15000 so it will be a higher ASP third party brand will Target a premium segment categories - Casual, sports, formal shoes, heels, boots, flats will cater to both women's and men's.

MBL has PAN India presence and its high weightage is south zone followed by north and west zone. East zone contribution is less but after my fact check on their instagram page MBL is making a presence in east zone particularly in West Bengal. Approx 50-55% of MBL stores are in the high street area. MBL first try to gain traction of stores by tracking its performance for at least three years after which they decided whether to continue it or not either they closed down the store or relocated it. Every store that MBL opens has some sort of growth period after which the growth starts declining. The same is highlighted in the Q1FY23 concall.

That’s all for store footprint and geographies I believe that MBL is old and successful company with experienced management so they will target the geographies which has less penetration in terms of ASP and premiumization without wasting our time on this we should move to next part which is store/unit economics of store located in tier1/2/3 cities.

Store/Unit Economics of Metro Brand

Unit economics refers to the direct revenues and costs of a particular business measured on a per unit basis, where a unit can be any quantifiable item that brings value to the business. In simple terms unit economics helps to know the break-even point of any business. You can calculate the unit economics by tracking the payback period which is equal to initial investment/ EBITDA. A healthy unit economics will help you to gauge the ROCE/ROE which tends to re-rating of any stock.

METRO’s overall business economics is dominated by a healthy gross margin, lesser retailing costs, and lower store investments (capex and working capital). I had taken payback period data from one brokerage report which is trustful.

Puma has the best payback period in all of them only because of their EBITDA but at company level, their EBITDA it’s low among all of them. Coming to MBL, its payback period is more or less similar to BATA and Campus. MBL has the highest investment/sq feet but still their revenue/sq feet is highest among all of them due to higher contribution of premium products > 3000 price products. It reflects in their payback period of 2 years which is more or less equal to other listed entities. In future we may see an improvement from here as the company is targeting to open more stores in tier 2/3 cities where unit economics is more favorable. Snippet from Q1FY23 concall.

When we move to tier two, three towns, obviously as you know rentals and all other expenses are significantly lower when compared to say Metro cities. So just to give you an example in Metro city, a store doing 40 lakhs sales per month may generate 10% PAT, whereas a store in tier two or three, generating say INR 15 lakhs, INR 20 lakhs, sales per store per month may generate higher PAT. we will grow much faster in tier two, three towns as compared to say Metro cities, where we penetrated slightly earlier than them.

If they start penetrating the tier 2/3 cities with their higher ASP products which includes fitflop, crocs, FILA through their recent acquisition ( I will talk on this latter in this blog) their store economics will remain intact and creating ROCE on a large base will help them in future to become consistent compounder as long as they remain market leader in their segments.

Though this chart is not an apple to apple comparison, still we can see the unit economics of QSR and Footwear where average payback period of listed companies is 6-7 years and footwear companies have average payback period of 2-3 years. Royalty as % of sales is QSR space due to franchise and international brands for KFC,Burger King, and Mcdonald’s.

Management

MBL has some experienced management with one marquee investor on their board also. Mr. Utpal sheth you may know him if not then please check out this video after this blog you will never be disappointed :)

Without going into deep of management I am just attaching one chart which covers all the information about the promoter of the MBL. In unlisted space they have already proved themselves so I have faith in MBL promoters that they will continue their streak in listed space also. In investing 80%-90% bet is on the promoter of the company. But if you want to know how to judge management of any company then read Mr. Samit Vartak newsletter, I am attaching the link at the end of this blog.

3. Why should you look into Add-Spend and brand ambassadors?

I had read many reports on consumer retail companies in which many brokerage houses had covered the followers of their company on social media( Instagram, Facebook and Twitter) but as per me we should look into the followers of their brand ambassador. Why? Simple rational: anyone who wants to buy a product of any brand will get influenced by influencers or celebrities, he/she will not go and visit the social media platform of the company. Even though many of us want to buy the product which is worn by any famous celebrity or anyone, every day we scroll down the stories and posts of our celebrity, not any company social media handle. I have done some rough calculations of different footwear companies in which both metro and relaxo has good numbers according to my calculation.

But you will ask why I am looking towards brand ambassadors. What does it tell about the company? Brand ambassadors play a very important role in brand creation and company sales too. Relaxo is a very great example of how they created their brand in the niche lower end segment by onboarding bollywood celebrities Salman khan and Akshay kumar. You can check out the professor Sanjay Bakshi's relaxo lecture. You will understand the power of brand ambassadors and why you should track advertisement and sales promotion expenses and compare it with their peers.

Campus ad spend is increasing YOY but for relaxo and bata it had remained constant in last 5 years, MLB spend decreased in 2021 due covid ad and marketing spend has halted but as they move further there sales promotion is going to increase every year. Which they indicated in their latest Q2FY23 concall.

They are making tie up with international brand and in order to increase their brand reach they need to onboard any famous celebrity or increase their reach by the help of fashion influencers and we know fashion influencers can easily reach to customers through instagram or youtube channel and charge less fees in comparison to bollywood or sports personality. You can check crocs India instagram page to get to know their brand promotion through bollywood celebrities and fashion influencers.

We all know the reach of the celebrity which are mentioned in the above image, still I am not sure whether this sales expense will come in MBL or it will come in Crocs India pvt ltd as this advertisement is on Crocs India instagram. If you know then please let me know. Recently launched song Kesariya in which Alia bhatt has worn one boots in the shooting of this song is of metro brand only (though not 100% sure) and the shoes which was worn by made in India song of raja kumari famous american rapper is also of metro brand. So, slowly and steadily they are entering into the movie and song sphere.

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4. MBL VS PEERS

In the footwear sector you can’t compare and justify the valuation of any company as all of them are following different strategies. Relaxo has lower ASP SKUs whereas MBL and Campus has higher AP SKU’s. Relaxo cost of retailing is highest as they also follow distribution model whereas unit economics of MBL is best in industry, campus ad spend as a % of sales is growing YoY. So, we can’t compare any metric against any company and take our investment decision but still we can see some basic metric which will help us to know which player is doing good in which segment and which segment is growing.

In this chart we could see that MBL has the most balanced SKU’s portfolio, whereas some sports brands have a large proportion of SKUs in the premium segment and some are focusing only on the economy segment. In this chart total SKUs of MBL is missing which is 1419. Maybe in the future more players will come in the premium segment due to the fastest growing segment.

Relaxo plays a volume game where volumes are higher but ASP is lower, whereas MBL plays an ASP game where ASP are higher and volume is less. Due to increasing competition relaxo is facing inflation impact with more players coming in the mass segment, clearly they are failing because of their no to premium segment. Relaxo is facing competition in their mass segment due to new GST rules and entry of new players. Their chairman letter has also highlighted this in their press release of Q2FY23.

In terms of store the MBL has 1/3 more stores than the bata and in the same way campus has 1/6 more stores than campus as per FY22 data. Relaxo has no data available as they focused on the distribution model, but in Q2FY23 concall they had highlighted on opening more EBO’s. In average store size MBL stores remain in line of 1000-1200 in the last 4 years versus bata has average store size of 1500-1700 which is too decreasing after FY20. But as we move forward MBL average store size may reduce in future.

We can’t compare relaxo and MBL and justify their valuation that if one stock is trading at PE of more than 50-60 for a long time then the second stock should deserve an in line valuation. If we want to compare MBL then we should look into those companies which are focusing on the premium segment. In listed space bata and campus are two of them though both of them are not pure premium focused products but slowly they are moving towards it. For 9MFY23 Bata revenue contribution from product > Rs1500 is 40 % which is 33% in FY22.

Another listed company campus whose semi-premium segment is growing fast, some of their products are mind boggling, their mens shoes for price above 1500 has a really eye-catching design. The premium contribution in FY19 is 31% which grows to 41% in FY22, whereas their products below 1050 have fallen to 35% from 47%. This premiumization has resulted in their ASP growth of 7.8% CAGR in the last 4-5 years.

MBL sales contribution for products > Rs1500 is 86% in Q2FY23 out of which 43% is for product > Rs 3000 so, somewhat MBL has no peer which is close to this that’s why MBL deserves the scarcity premium which relaxo has enjoyed in the past.

5. Cravatex acquisition

In Q2FY23 MBL has informed that they had acquired Cravatex for Rs 202 Crore and in FY22 Cravatex had done a sale of Rs 156 Crore but had a debt of 163 Crore but still we have to see the growth part loan will be pay off as MBL has healthy operating cash flow. After this acquisition MBL will receive exclusive rights for Proline and for the sale and distribution rights of FILA across formats, including Exclusive Brand Stores, Multi Brand Stores, Airport Stores, Distribution, Online Marketplaces and Web stores, in India. The deal is for the whole brand that comes under Cravatex which includes Vans, matrix, johnson, horizon, stage and ziva.

Some snippets on Cravatex acquisition from Q2FY23 Concall:

- Fila is under penetrated by high opportunities in athleisure. Fila had extended local license with Cravatex for 30 years.

- FILA Average selling price probably in around 3000-5000. FILA is more like a hanging fruit type opportunity.

- FILA have net 20-30 EBO's (Franchise) but MBL wants to rationalize them into the COCO Model.

- Cravatex acquisition is for all brands but now they have decided for FILA and Proline operation.

- Licensing fees for FILA is market competitive.

FILA has a very interesting story if you want to know more then check this link FILA HISTORY

Cravatex management has not walked the talk in the past and after MBL takeover FILA is well positioned to take advantage of the growing S&A market. With acquisition MBL also got the right for the apparel segment in which they are not combining their operation but still arranging a team for it. In Q2FY23 management also highlighted that the apparel market is growing faster than the footwear market.

6. Can they replicate their past growth (Accelerator pitch)?

- Growing its presence in the e-commerce market where they provide no discount and maximum products are sold at full price. In Q2FY23 MBL achieved the highest ever E-commerce sales of INR41 Crores, which was up by 21% on a y-on-y basis. Going forward 25-30% business should accrue from the omni channel,

- METRO entered into a long-term exclusive agreement with FitFlop in Jan '22. With this agreement, METRO gained exclusive rights for sale and distribution across all formats, including EBO, MBO, distribution, and digital mediums in India. Catering to the fast growing Wellness category, it provides a range of flip flops and footwear in the Premium segment, which could be the next driver of growth.

- MBL has only 672 stores (Q2FY23) against bata which has 1600+ stores which provides a huge growth opportunity, in addition they have a target of adding 260 from IPO proceeds which doesn’t include FILA stores they have hinted this in Q2FY23 concall.

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- Cravatex acquisition has provided MBL a good opportunity to tap into the S & A market. Growing aspirational needs, rising income, young population and sports as a career provides good opportunity to grow in this segment.

- More tie up with third party premium brands which have a higher ASP will help MBL to improve their unit economics and play the premium game which is one of the fastest growing segments in the footwear sector. In Q1FY23 they have also highlighted this aspect.

7. Financials and Valuation

- MBL has sound financials and their strong operating cash flow will cater to their store expansion.

- Although sales have remained flat between FY19-FY21 but have shown a decent growth in FY22 with improvement in their margin profile too.

- The CFO/EBITDA conversion rate is also above 50% which is good enough in B2C. MBL has no long term borrowing whatever is shown in borrowing is lease liabilities due to Ind-AS 116 policy.

- MBL has a healthy operating cycle, store-level inventory turns stood at 3.2x, with INR6-7m of inventory and a revenue/store of over INR21.5m.

- In this Q2FY23 quarter MBL performance is good considering that its a seasonally weak quarter and they are able to maintain their gross margin in this environment.

Now coming to the valuation part, I will not do any excel work or reverse DCF projection like I did in my earlier blogs. So, In the retail sector where promoter holding is very high, low free float plus earning trigger presented in the company, what we have generally seen is that they always trade at premium on some rare cases they fall below their mean valuation metric and that’s the time we have to back up our trucks. I have done some excel work to understand how free float and elevated valuation can still make returns.

The above chart demonstrates how a high promoter holding and good earnings growth with elevated valuation can still make returns in this market. For comparison I have three consumption driven stocks DMART, Berger and Relaxo all three of them had shown a decent EPS growth with stock return more than the EPS growth rate in the last 5 years. In case of MBL it has all the above mentioned features and good growth triggers too can justify these valuation in future. In valuing MBL we have to create our own variant perception different from market POV, for which I have done one more excel work.

All 4 stocks which I have mentioned in this chart are well known to the market from the last 5-10 years but still they have provided decent returns. So, it doesn’t matter how large is the base or how much growth is priced in what we have to see for how long these companies can beat the street estimates then only returns can be made remember for these type of stocks where market already with its modeling valuing stocks on forward PE basis but return can be made when consensus estimate < your own estimate. (Your growth estimate should beat the consensus estimate). But yes you have to time your entry according to your margin of safety because high valuation brings high responsibility. With this our valuation part has come to end.

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8. Key risks

- Unlike a fleet of different in-house brands in Formal and Casual categories, Metro has only one brand in the fast-growing Sportswear category and sales is skewed towards third-party brands. This poses a risk in the long term to customer retention.

- If MBL is not able to turnaround the FILA business then it will not be able to grow its presence in the S & A market and may be a huge setback for MBL.

- In the past few years, several foreign brands have grown significantly, particularly in the fast-growing Premium Sports category, thus offering stiff competition to Metro.

- MBL wanted to expand its market share in tier 2/3 cities where consumers are price conscious and may be MBL not able to compete with its competitors.

- Footwear is one of the inflation impacted seasons. If prices of raw material remain at an elevated level then MBL may not be able to maintain their gross margin for which they are known in industry.

- MBL has made an agreement with third party brands like Crocs, fitflop termination in any of the agreements can cause havoc for MBL.

- MBL has a COCO model where the losses of inventory are borne by the company itself. Moreover MBL sells a maximum of their products at MRP with little or no discount.

- MBL has also decided to take its presence through e-commerce where competition is generally high. Most of the online players prefer to keep their product price lower than its peers for which MBL margin can deteriorate if they go for the same.

Thank You for reading the whole blog :)

Disclosure: Nothing in this blog should be construed as investment advice. Please consult your financial advisor.

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Samit Vartak newsletter

Sometimes people default to jargon when they have something to hide. We often see this when companies refer to cutting jobs (that is, making people unemployed) as ‘downsizing’ or ‘rightsizing’. Some of us use jargon for importance. We use it to make us sound more credible or knowledgeable than what we are. Perhaps the most common reason why we use jargon, is acceptance.

At the University of Munster, Germany, Dr Regina Jucks and Maria Zimmermann published ‘How experts’ use of medical technical jargon in different types of online health forums affects perceived information credibility: Randomised experiment with laypersons’. The results showed that using high amounts of jargon when talking to other medical experts resulted in higher credibility than using less jargon in these forums. Conversely the opposite was true.

Knowing the jargons and reasoning behind the jargons which are often used in investing community will help us to not get carried away by any announcement, news and take our independent decision. In this blog I will discuss such types of jargons which are common in Investor’s community and often used by companies sometimes to inform shareholders and sometimes to hide something from shareholders. I will try to cover some useful case studies too.

SOME OF THE JARGONS ARE:

TOPLINE GROWTH

Lion always chases his prey same way we Investors always chases revenue growth or revenue guidance. Even if margins remain same and topline grows it will create huge value for shareholders in long term. Retail company is great example of it.

Case Study - Avenue Supermarts (Dmart)

Dmart is a great example where volume growth has helped them to not only grow topline but also disproportionate growth in bottom line.

In last 11 years Sales has increased at CAGR of 27% whereas Net profit has increased at CAGR of 33%. But Revenue growth can be double sided sword for retail company where margin remain same and no volume growth takes place. For Example - In case of V-mart Retail after 2018 - 2019 there has hardly any growth in sales which results in constant Net profit in last 3-4 years.

Before coming into revenue growth conclusion we have to see whether this growth is structural or transitory. Difference between these two terms will help us to avoid mistakes in our Investing journey. Sometimes revenue growth can be one time.

Transitory revenue

Case Study - Lyka Labs

Due to Covid-19, The company received major orders for Remdesivir Injections under Job work from renowned Pharmaceutical Companies. Due to second wave of Covid-19 and large number of incidences of Mucormycosis post covid , the company received major Government Contracts for Liposomal Amphotericin Injection. The company’s profitability jumped significantly due to sales of this product.

As clearly visible in financials of lyka labs where both topline and bottomline improves drastically during Q1 and Q2 FY22 due to major orders for Remdesivir Injections which had used in treatment of Covid 19 during second wave. However anyone who has invested only on the basis of 1-2 quarter growth will have to pay market fees.

Case Study - S.Chand & Company ( Future transitory revenue due to NEP)

In FY19 and FY20 company had incurred a loss of 67 and 111 cr respectively.

“ Snippet from Credit rating report”

The reduced sales velocity is on account of dealers maintaining lower levels of inventory in view of expected implementation of New Education Policy (NEP) in FY20. In addition to this, the change in the management’s strategy from pushing sales to limiting copies in accordance with the market demand through preferred channel sales partners further impacted the sales. The sluggish sales coupled with the elevated cost structure built in FY18 for higher envisaged growth post the IPO issue led to operational losses for the company in FY19.

Same highlighted in FY19 AR:

Fast - forwarding in FY22 where company is giving a guidance of 20-25% growth in revenue without NEP implementation due to reopening of school and fast growth in their Ed-tech learning platforms ( Which is still in nascent stage). In such types of company where one time opportunity comes we have to time the entry according to our margin of safety.

Entry in these types of companies is important as most of the alpha is generated only when crowd don’t know about this, clearly buying a pessimism case.

Structural revenue

Structural revenue can happen due to any value migration like in case of value shifted from PSU banks to Private banks, market share shift from unorganised to organised like in case of Titan or any building material be it a APL Apollo Tubes, Astral. Chemical industry and agrochemical industry which is facing a tailwinds from last 2-3 years due to China + 1 and in presently Euro + 1 had shifted the market towards Indian chemical industry.

If you look into these companies they have beaten a index by a huge margin and some of them may beat in future too. Large TAM, unorganised to organised, demand or supply side moat are some common features in these type of compounders.

In Structural revenue we can break this into sub division:

- The Slow Growers: Single digit growth or growth equal to GNP

- The Stalwarts: Double digit growth

- The Fast Growers: Sparking growth

MARGIN EXPANSION

I fall in love with you every time I look into your beautiful eyes - anonymous

Similarly majority of us always fall in love with a company who can expand their margins, many of the readers will not agree on this but go and look a company whose margins had contracted during last 3-4 quarters and movement of their stock price.

Solara Active Pharma stock price has corrected by almost 70% after its margins contracted by peak of 25% to 4% may be its a short term hiccup due to any reason as I had not studies this company thoroughly but the main crux is the relationship of stock price and continuous margin contraction. Things go south when company gets peak multiple at peak margins previous case of Avanti Feeds and may happen in future with Tata Elxsi.

Taking a deep look towards transitory and structural margins helps us to make better decision.

Transitory margins

Transitory margins are often seen in commodity business. Companies which are having crude oil as their raw material often have seen margin expansion during crude oil price crashed.

Case study - Kanchi Karpooram

Company which is having >25% ROCE improvement in working capital grown its topline from 56 Cr in 2016 to 251 Cr in 2022 Mcap of 250 Cr with FCF of 65 Cr is available at just PE of 9 Value buy right! Even marquee value investor will not buy this company why?

Answer lies in their raw material susceptibility. KKL's major raw material is alpha pinene, which it imports from Indonesia Vietnam, Brazil and other European countries and accounts for majority of KKL’s raw material cost. Alpha-pinene prices have been volatile, thereby exposing the company to price risk.

During Covid first wave when there was strict lockdown their products camphor has seen huge demand because of medical usage in treatment during covid (Camphor is commonly used as an antibacterial, antifungal, and anti-inflammatory agent to treat skin conditions, improve respiratory function, and relieve pain). From Q1FY21 to Q3FY22 company has seen margin expansion due to lower price of their raw material and fall in import from china. However margins had started to contract from Q3FY21 onwards.

Credit rating report highlight:

Another example is of Bhansali Engineering Polymers Ltd where margin gets expanded due to crude oil price like in covid-19 lockdown. The company has to import Acrylonitrile monomers and Styrene which are the primary raw material for the company's operations which makes it heavily exposed to the risk of foreign exchange fluctuations.

Structural margins

Not all margins are transitory or one time some are structural in nature. This may happen due to change in product mix, backward or forward integration, change in industry, better economies of scale, better pricing power due to demand side moat etc.

Case study: Deepak Nitrite

During 2015 to 2019 margin of Deepak Nitrite had remained in between 11-16% but in FY2020 margin has expanded by almost 50% YOY. The main reason behind is setting up of capacities to produce value added derivatives of phenol and acetone through forward integration which is having high margin realization than their existing segments.

FY22 Annual report snippet:

We aim to add high-value solvents, which are backward integrated and have set aside ₹ 700 Crores for capital expenditure, which is expected to be completed by FY 2023-24. Life sciences, paints and coatings, among other industries, will greatly benefit from these products. (Deepak Phenolic Ltd)

Client addition:

Whenever any news come related to client onboard many of investors gets excited particularly one who are inexperienced or can’t judge the revenue contribution from new clients. Many of times I have seen when some client news gets publicly announced the stock starts showing run up for a while. when I was new in this market I had also made a mistake in this catching a stocks which are making high on such type of news clearly my FOMO.

RECENT EXAMPLE OF TIME TECHNOPLAST

In the month of may 22 news comes out that Time Technoplast subsidiary NED Energy Limited has signed Memorandum of Understanding (MOU) with TESLA POWER USA INC for orders worth Rs100 crore (appx). This is for supply of VRLA Batteries of different sizes for applications covering Power, Solar, UPS etc.

News has started its effect and within 3-4 days stock started making highs as people who are new in the market started thinking this order is from Elon Musk owned Tesla and many twitter had also started their pump and dump scheme. But latter they come to know that this tesla power is gurugram situated company LOL!

But the fact that management had already cleared about this tesla in their past concall. Even if one read the name of Tesla its clearly mentioned Tesla power not Tesla motors.

Now we have done with newbie’s who enters into any stock without any due - diligence just on the basis of some famous client onboard/order. But even experience one can make mistakes.

Case study: JHS Svendgaard Laboratories

Now, Imagine a company who has established an exclusive plant for specialised products to cater to a contract has hedged itself with due terms, however still the customer leaves/ violates the contract big risk!

An Indian Listed company named “JHS Svendgaard Laboratories” entered into a contract with P&G India to manufacture & sell the products which P&G required from JHS Svendgaard laboratories. Below is the snapshot of JHS 'annual report explaining the contract with P&G. P&G had become a 50% revenue contributor for JHS! But due to some reasons, the contract wasn't renewed/ terminated by P&G so the plants which JHS was using for the contract were suddenly of no use! Below is the snapshot from JHS AR explaining the scenario. This litigation was settled outside the court for an AMT of 206 Cr paid by P&G to JHS.

However some companies which are still into contract manufacturing manage the risk of client loss.

Case study: Aarti Industries

Aarti Industries is engaged in 3 long-term contracts. This contract has expected to generate 4000 cr over a span of 10 years.

In FY21, 1 of the contracts which Aarti Industries had engaged in (FY18) got canceled, upon receiving a termination notice from the customer, however as per the terms of the contract they are still liable to be paid the shortfall fees protecting the firm from the downside.

So, beside acting only on news we have to see how much revenue is lost in case of Aarti its good proportion of their revenue, but still they manage to remove the client concentration risk.

Snippets from Annual Report:

CAPEX

“Capex capex sabh kre capex kre na koi jab peak pr capex kre to downturn me sab pachtat hui” - cyclical investor

Capex are generally made in asset heavy industries for ex- tyres , chemicals, textiles etc etc. Company generally do capex when they are seeing high demand for their products or some kind of change is happening in industry. In India where capex cycle is going on presently majority of companies are doing capex due to China + 1, Europe + 1 and government PLI scheme.

SOURCE

Sometimes things turn opposite for company when they are doing capex due to positive growth demand but any kind of short term headwind clearly spoil next 1-2 year results.

Case study: Everest kanto cylinders

Due to government focus on expansion of CNG stations some companies which are supplying to OEM’s has seen a good demand in last year but as prices between CNG and petrol/diesel had started narrowing the demand for CNG vehicles is softening. CNG-run vehicle sales fell by 15 per cent between April and August this year, compared to pre-covid levels.

FADA recent remark:

“Due to rising CNG prices gap between the running cost of CNG and petrol/diesel has narrowed and it doesn’t make financial sense to invest in CNG vehicle. At the same time, demand has also taken a hit because the post of CNG vehicles is higher than the petrol variants”

EKC which is coming with his capex of 8,40,000 may see bottom line impact in case topline doesn’t grow and depreciation starts hitting P/L one capex goes live. In latest concall management has also hinted on demand softening.

So, where the moving variables is in government hand we have to extra cautious like in EKC case whole growth is only when price of CNG are lower and strong demand from end OEM users. Similarly many companies are doing capex for ethanol but whole growth is in government hand what if they starts procuring from limited players only or if they abolished there initiative. I maybe horribly wrong but I stay away from those companies where growth key is in government hand particularly for things which everyone needs (basic goods).

But sometimes capex in value added products will not help in bottomline but will also improve operating margin. Capex from internal accruals in VAP with higher capacity utilization and asset turnover will be a crazy combo.

Case study: SJS Enterprises

In latest concall of SJS management has said that they are doing capex of 100 cr in chrome plating parts which is VAP and revenue utilization as per them at full capacity will be around 300 cr.

Two main types of capex are growth and maintenance capex generally analyst community gets happy when any company announced their growth capex and sometimes they starts asking some questions which doesn’t makes any sense.

In recent SRF concall one analyst had asked one funny question related to their upcoming capex on which management has given this answer:

The whole purpose of this blog was to remove the jargons effect from the investor’s mind and take an independent decision by going deep in the jargons and understand their meaning and their likely impact in future.

Thank you for reading my blog :)

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Welcome to the 52 new members who have joined us since last blog. Yeh Dil Maange more was a continuation of Pepsi's advertising campaign in the mid-to-late nineties, which it had initially launched as an ambush marketing effort against Coco-Cola during the 1996 World Cup. Moreover Yeh Dil Maange more was used by Vikram Batra in Kargil War as a victory code. Pepsi had to face so many difficulties in entering Indian market at last in 1989 PepsiCo sowed its India entry through an agrarian route, despite opposition from several powerful people.

In today’s blog we’re discussing Varun Beverages one of the oldest bottler of PepsiCo India and second-largest franchisee (outside United States) of PepsiCo.

This blog might be long and detailed so, keep your Pepsi ready ( Yes no tea and coffee this time).

I will break my whole analysis in

1. Industry

- Introduction

- Raw material

- Oligopoly/ Imperfect competition

- Tailwinds

2. Varun Beverages-Business overview

-History

-Business overview

- Products and Geographies

- Distribution

- Agreement with Pepsico India

- Peer comparison

- Sustainable development steps

3. Entering into Other segments

4. Capex and Debt reduction

5. Financials

6. Accelerator pitch

7. Valuation

8. Key Risks

Capitalizing the under-penetrated Indian beverage market

The global non-alcoholic beverage market was worth USD 1,180 billion in 2020 and is projected to reach USD 2,175 billion by 2026, with a CAGR of 7.3%. Over 60% of the global market was accounted by carbonated soft drinks (CSDs), ready-to-drink (RTD) tea/coffee, energy drinks and sports drinks. Consumption of soft drinks in India is much lower than that in developed nations (at 44 bottles per capita in India v/s 1,496 bottles in US) due to lower per capita income/low household electrification. However, this is expected to change with increasing disposable income and growing electrification in rural part of the country on the back of several government initiatives.

While the market share of CSDs is the highest, the top-most socio-economic class is moving away from the consumption of CSDs to NCBs due to increasing health awareness. As per the Avendus report health F&B is growing at 20% CAGR (~1.5x of the total packaged F&B market growth).

Raw material

Some common raw materials which are being used for manufacturing of NCBs, CSDs are sugar, PET bottle, water, caffeine, food pulp and concentrate. The manufacturing cost is not a big issue for bottling company as reflected in their gross margins too. Across the globe bottlers are taking up a step to recycle PET bottles and backward integration for corrugated boxes, shrink wrap sheets, plastic cap closures, and plastic shells. Which helps them to reduce raw material cost, In India you can get PET bottle scrap at a minimum rate of Rs 20-30 per kilogram.

OLIGOPOLY/ IMPERFECT COMPETITION

Beverage industry is classic example of non-collusive oligopoly (having two to ten player selling differentiated products). It refers to the situation where the firms compete with each other and follow their own price and quantity and output policy independent of its rival firms. Beverage industry is dominated by two players in Indian market Coco-Cola and PepsiCo. There always exists an excess capacity under oligopoly market because of huge TAM.

Common features of oligopoly industry

- Avoid price war: Firm in oligopoly avoid price wars and focus on non-price front by spending more on adds and promotion.

Example- Coco-Cola and PepsiCo always avoid price wars and spend more on promotion and adds. Even you can see price of soft drinks hardly increase by 20% in last 5 years, while add spend of Coco-Cola and PepsiCo increased by average 30%-40%. Although add spend of Coco-Cola is inline in last 5 years.

- Interdependence: Reaction of other firm must be considered by a firm in oligopoly before taking a decision.

- Peculiar behavior: In oligopoly market when one firm cuts the price remaining firm also follow the price cut but if one firm increases its price, other firms do not follow the price rise. In economics it’s called Kinked Demand Curve.

Tailwinds

- Demographic Profile: India is a young country with individuals below the age of 30 years accounting for majority of the overall population.

SOURCE

- Rising Affordability and Urbanization: With more than 50% of India’s population falling under the working age category, there has been a rise in disposable income leading to a substantial change in the spending patterns.

- Electrification: 100% electrification of all villages in India along with improving quality of electricity supply will help enhance penetration of cooling infrastructure in these regions, thereby supporting growth of the industry. India is not a ‘soft drink’ market. It is a ‘cold drink’ market. Refrigeration is a key element in this tropical country, and it needs to be enhanced.

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DO YOU KNOW-Health-conscious consumers in India going increase from 108 Mn in CY20 to 176 Mn in CY26. .There will be 2x increase in Health F&B spending per capita by health-conscious consumers by CY26.

Varun Beverages-Business overview

COMPANY OVERVIEW

Varun Beverages Ltd is a RJ Corp group company who also owns Devyani International (franchise for Pizza Hut, KFC, and Costa Coffee). It is PepsiCo’s second largest franchisee outside the United States and they have been with PepsiCo for more than three decades since 1991. They operate in 6 countries that are India, Sri Lanka (contributes 1-1.5% of the total volume), Nepal, Morocco, Zambia and Zimbabwe. Within India they have franchise rights in over 27 states and 7 Union Territories. The only ones left are Jammu & Kashmir, Andhra Pradesh, and Ladakh.

What does a bottler do? They get the concentrate from the brand owner, that is Pepsi in this case, and manufacture the carbonated soft drinks (CSDs) and distribute it themselves. The price of this concentrate is decided by PepsiCo.

PRODUCT AND GEOGRAPHIES

VBL single-handedly accounted for more than 85% of PepsiCo India’s business. Now, it has a presence across India through its 37 state-of-the-art production facilities, along with over 100 depots, 2,500 owned vehicles more than 2,000+ primary distributors, 3 Mn+ outlets and 8,40,000 visi-coolers installed. Its product portfolio includes carbonated soft drinks (CSD), non-carbonated juice-based drinks, energy drinks and packaged bottled water (PDW).

North & East caters to major volume share of approx 67% and 33% respectively in FY21. Significant contribution of International market comes from Morocco, Zambia, and Zimbabwe of approx 21% in FY21. In FY21 CSD constitutes of 70% of revenue, water constitutes of 23% of revenue and NCB constitutes of 27% of revenue.

Refer below image to see the evolution of VBL. Till now VBL has spent Rs 36,719 mn for territory acquisition.

In Q1FY22 Sting volume was ~440% and contributed ~5% to VBL’s mix. In Q1FY22 it has grown ~131%. Sting, Tropicana and Dairy products are contributing about 10% in Q1FY22 and in Q2FY22 sting contribution increased to 10%.

The very recent acquisitions of West and South regions have been completed in H1CY19, resulting in 47% increase in the domestic volumes. While VBL is expected to benefit from the economies of scale in these adjacent territories, the ability to successfully integrate and increase profitability will be a key factor.

VBL’s international presence offers huge potential to grow and reduce geographical revenue concentration. Several inorganic international expansions by the company over CY12-21 resulted in the share of the Water segment rising to 23% from 9%. VBL has added one line in Zimbabwe which will be operational this season by the end of August’22.

STING VS RED BULL

Both Sting and Red bull is energy drink but one significant difference is price while Red bull price is 125 Sting comes at a price of 20. We know Indians are price savy if they have 125 rupees in hand they will buy 6 sting instead of 1 red bull.

But you will ask Sting is cheaper because it may have cheaper quality resources not exactly! Both have same quantity 250ml, same sugar, same caffeine even Sting has more caffeine then Red bull but one thing which is missing in Sting is taurine. As human being grow older our body & brain starts acting slow so taurine helps it to boosts physical performance fight against aging brain and provides many more benefits. Instead of taurine Sting has sodium which is less costly comparing to taurine.

Sting is clearly gaining market share from red bull. I have seen many young kids, adults they are opting sting instead of cold drink and red bull so, Sting is not gaining market share from red bull but also from Coke too as both comes in same price range. The difference between peak google search of Sting and Red bull had reduced drastically in last 2 years.

THREAT FOR STING

Recently a 13 year boy died due to consuming 4 bottle of sting in a day. Although in bottle it has been clearly mentioned that don’t consume more than 2 bottle in a day. Any more case like this is a real risk for VBL as sting is a game changing product in Indian beverage industry so, far there is no mention of age limit for consuming sting.

DISTRIBUTION

As a starting point, ~60% of VBL’s outlets are still without VBL’s visi - coolers. This is due to either infrastructure reasons like non-availability of regular electricity supply or stocking of competitor visi-coolers. However, for outlets which don’t have any visi -coolers, given that the cost of the machine is borne by VBL, the issue mainly boils down to infrastructure issues, which are improving driven by rising electrification in the country.

DO YOU KNOW: Shop owner gets the Visi - coolers from Pepsi by deposting nominal amount of cheque Rs10,000 as a security. Shop owner has a condition from PepsiCo and Coco-Cola to keep their products only in their provided visi-coolers or incase of other brand products they need to keep it in last. Pepsi has more brand than Coco-Cola so shop owner always prefer Pepsi visi-coolers an example of win-win relationship.

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The company increased its distribution network to 3.0 million plus outlets after two years of Covid related disruptions. The 3.0 million outlets include 0.4 million ‘Sting’ only outlets, 0.25 million international outlets. The company would be increasing its distribution footprints by 8-10% every year. In terms of distribution channels, the soft drinks market is divided into off-trade and on-trade. Off-trade sales take place at retail outlets such as grocery stores, hypermarkets, supermarkets, etc. On the other hand, on-trade sales are those which take place at food service outlets, restaurants, bars, clubs, etc. A major part of the sales (95%) is coming from off-trade sales for VBL.

Increasing the distribution network along with newly acquired territories should drive volume growth for VBL in the long run. Also, since acquisition of south & west in May 2019, VBL has still not had the opportunity to drive sales as it has missed out on the peak season due to Covid.

In CY15 VBL has 1731 distribution vehicle fast forward in Q1CY22 VBL has 2500 distribution vehicle. In CY15 VBL has 822 distributors which increases to 2000 in Q2CY22.

VBL has installed 8.40 Lakh+ Visi - Coolers (which they plan to keep adding 40,000 every year) which used to be around 4,50,000+ in 2016. They intend to add 80,000 retail outlets every year. As a smart investor you can keep an eye on this numbers every year, Visi-cooler is a proxy for VBL volume growth.

AGREEMENT WITH PEPSICO INDIA

VBL’s franchise agreement with PepsiCo extended till April 2039, the first time ever for 20 years. Earlier, it used to have contract only for a 10 year period, this makes VBL the only franchisee to have such long term contract.

As per the arrangement with PepsiCo, VBL has to set aside 20% of net revenues, out of which, 14% is paid to PepsiCo (8% as concentrate cost that VBL purchases from Pepsi and 6% for the payment towards ‘above the line’ (ATL) advertising spends). The remaining 6% is spent by VBL on below-the-line (BTL) marketing. I have done a rough calculation of last 5 years.

Key risk is PepsiCo india can anytime increase the price of concentrate cost which will impact the gross profit of VBL. In FY21 concentrate cost for VBL is Rs705 crore comparing to Rs516 crore in FY20.

For products, which do not involve any concentrates, VBL pays royalty of 1.3% for “Aquafina” and 1% for “Evervest Soda”. As such royalty is no big issue its hardly 0.1-0.5% of sales.

PEER COMPARISON

In India there is as such no listed player in bottling business but in terms of market share Coco-Cola has more market share than PepsiCo India. While PepsiCo’s market share as of CY19 was ~35% (consistent so far), Coca-Cola’s market share has dropped to ~56% in CY19 from ~61% in CY12. But one thing to keep in mind that although Pepsico has 35% market share. Market share of VBL in PepsiCo's volume in India has increased from 45% in CY16 to 85% in CY21, while HCCB has only 60% business of Coco-Cola.

In International space VBL has highest gross margin and large TAM to serve but lower per capita consumption with lower realization provides huge runway for growth. Increase in disposable income, electrification, affordability serve as a pin point for soft drink market in India. VBL has sold 569Mn units in FY21 whereas as per Coco-Cola AR21 HCCB has sold 4.3Bn units in India. Source- (Coco-Cola AR2021)

India’s per capita consumption of soft drinks is a long-term volume driver. India’s per capita consumption has posted 16% CAGR over the past decade and despite this, it is much below global average and not even comparable to beverage-heavy markets like the US. While India’s consumption patterns are partially different, there’s still significant room for growth even adjusted for the same. In fact, India’s consumption is lower than many African and Asian countries with lower per capita incomes.

SUSTAINABLE DEVELOPMENT STEPS

Water is main raw material for VBL given that some parts of India has water shortages. Any misuse of water by VBL will put them in difficulty. In May 2022 SC stays NGT order imposing penalty of over Rs 15 crore on Coca-Cola's bottling unit nd Rs 9.71 crore on Varun Beverages Ltd's Greater Noida unit on the issue of extraction of groundwater in an indiscreet and arbitrary manner, even in areas where the availability of groundwater is an extreme scarcity.
Varun Beverages has got into an agreement with GEM Environment Management Private Limited for recycling of their PET bottles via placing dustbins and vending machines. They specialize in collection and recycling of packaging waste. During H12022, 85% of the PET resin consumed by Varun Beverages was recycled they have target of 100% by 2023.

ENTERING INTO OTHER SEGMENTS: GROWTH TRIGGER

KURKURE PUFFCORN
In Q1CY22, VBL entered into an agreement to manufacture “Kurkure Puffcorn” for PepsiCo, it will start the production from Q3CY22 with an investment of around ₹ 22-23 Cr. This is their first extension into a non-beverage category.

This move could be a step towards something big over time as VBL is known to enjoy a strong relationship with PepsiCo. Addition of all the big food brands of PepsiCo will be a boost to the overall volumes and reduce seasonality of the business as well.

Kurkure, Lays, Cheetos and Uncle chipps are owned by PepsiCo.

TROPICANA

VBL is first company to get right for tropicana earlier it was done by third parties. Moreover tropicana is value added product and having only 2% mix in revenue it has enough room to capture more share of revenue which will help in margin expansion as happened in Q2FY22. Moreover in Q2FY22 in certain categories like CSD PET, Tropicana, Value added drinks capacity utilisation reached 100% juice contribution in Q2FY22 reached 9%.

MG has decided to further expand capacity in tropicana segment by next year.

THREAT FOR TROPICANA

Recently Maaza becomes Coca-Cola’s fastest growing brand in India. In FY21, Maaza had reported total sales of Rs 2,826 crore, higher than the sales of Coke.

You can compare ad of both tropicana and maaza.

VBL tropicana is competing with Coco-Cola maaza in same segment to increase its market share VBL or Pepsico India needs to bring some unique add which helps customers to recall brand easily. In FMCG brand recall is everything both company has done good job in advertisement for their products.

NO NEW LAUNCHES

Management has no plan to bring more products in market as they are already busy with Mountain Dew Ice, which is a completely new category: it’s a juice-based lemon drink, Tropicana, Sting, and Diary drinks.

It shows management quality to observe trend in market and no hurry to launch new products just for sake.

CAPEX AND DEBT REDUCTION

- During H1CY22, the net capex amounted to INR6.7b on account of new greenfield production facilities in Bihar & Jammu and brownfield expansion at Sandila facility.

- Further, VBL in process of setting up two large greenfield plant in MP & Rajasthan. Also, it is in process of expanding brownfield plant in Bihar.

- For CY23, VBL will add ~30% more capacity with capex amounting to INR12b resulting into additional revenue of over ~INR26b going ahead.

- VBL is doubling its capacity in dairy segment by end of CY23 which will add up to the revenue from CY24.

- VBL has added one line in Zimbabwe which will be operational this season by the end of August’22.

Net debt dipped by 950 crore to 2055.5 crore in last six months which is inline with management guidance given in Q1FY22. Net working capital reduced from 24 days in June 2021 to 17 days in June 2022. On further debt reduction management said that if they stop expansion they can be debt free but if opportunity is coming then there is no sign of worry on debt part as long as ROIC/ROCE > Cost of capital.

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VBL has also written off one machinery RGB producing lines amounting to INR318m during this quarter but the crux is that Coco-Cola president sanket ray in one interview has said that their Focus is on returnable glass bottles and smaller PET packs is paying off in tackling inflationary pressure. So. it may hit VBL in short-mid term if inflation remains here it will tilt market share towards HCCB.

Snippet from Coco-Cola India president interview:

FINANCIALS

- CFO of VBL has grown 10X in last 10 years. It’s only in 2020 where a slight drop was seen due to increase in trade receivables.

- Working capital has increased in last 3 years due to increase in inventories. Net WC days is reduced to ~17 days as on 2QCY22 from 24 days as on 2QCY21, as most of the raw material inventory stocked for the season has been utilized and the business has returned back to normalcy.

- CFO/EBITDA conversion has seen a slight drop in last 3 years but for B2C business as far as its above 70% there is no need to worry.

- While the topline has grown at CAGR of 19.3% EBITDA has grown at CAGR of 24% in last 9 years clear cut case of operating leverage and economies of scale if you don’t know these two term kindly check my last blog.

The Insights

The expectation infrastructure

First of all thanks to all 40 subscribers for subscribing my newsletter though I am not regular writer due to my time constraint but I will try my best to be regular and provide great insight In this post I am not discussing any company instead I am discussing the value triggers and value factors which every investor should keep in mind before analysing …

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4 years ago · 7 likes · Shaurya yadav

- From here net profit margin will show some improvement due to saving of interest cost and topline growth in next 3-5 years.

- The reinvestment rate(Capex/CFO) of VBL has remain more than 40% in last 9 years while in the year of large capex its shoots up to more than 100% higher the reinvestment rate less money required. Moreover higher the reinvestment rate with higher ROIC, higher chance of growth and PE re-rating.

ACCELERATOR PITCH

- Increase in per capita income with rural electrification, affordability and higher proportion of will help VBL in long run. CSD is a plus point for VBL which distributes juice in ~60- 70% of the total outlets. Currently juice has only 9% share.

- In coming 3-4 years the size of TAM is huge for CY23, VBL will add ~30% more capacity with capex amounting to INR12b resulting into additional revenue of over ~INR26b going ahead. VBL is doubling its capacity in dairy segment by end of CY23 which will add up to the revenue from CY24. Further, VBL in process of setting up two large greenfield plant in MP & Rajasthan. Also, it is in process of expanding brownfield plant in Bihar.

AS per MG guidance of Q1FY22 Bihar plant on mature stage will do approx 710 crore. Also, it is in process of expanding brownfield plant in Bihar due to 90% capacity utilization in Q2FY22

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- Per Capita consumption of India is only 24 bottles I will not compare it with country like US, Germany but even if the per capita consumption gets double from here it will benefit both VBL and HCCB.

- If VBL gets successful in manufacturing of Kurkure which is starting from Oct/Nov’22 then there may be a chance PepsiCo India will provides more business of puffcorn to VBL.

- Onset of earlier summer monsoon in India will also derives consumption of beverages. This year north India, Bihar, Jharkhand, West Bengal and Odisha, had experienced some extreme heatwave and moreover state such as MP, Orissa, Bihar, Jharkhand and Chhattisgarh have shown robust growth during the quarter.

VALUATION

There is no doubt that VBL enjoys premium multiple then its global average and inline with FMCG Food processing industry multiple.

There is the element of operating leverage with economies of scale which plays with the seasonality of demand. According to the calendar year Q1 & Q2 being the higher one and Q3 and Q4 on the lower side. Q2 is the peak of summer and Q4 is the peak of winter. 

Guidance:

The management is expecting double-digit volume growth going forward as the juices, energy drink, and dairy products segment are growing very well. It expects to sustain current margin levels, which can improve further if the price of key raw material – PET resins – softens.

By doing a quick reverse DCF analysis for the company we can see that the earnings growth expectation for them on the basis of their CY21 net profits comes at 22%-23% with an assumption of a terminal multiple of 30 times for next 10 years and a discount rate of 12%. In the past the management has been able to grow its net profit higher than 20% except for a few down years like COVID.

KEY THINGS TO WATCH IN FUTURE:

- Performance of south and west territories and the five underpenetrated territories of MP, Orissa, Bihar, Jharkhand, Chhattisgarh. All the territories, core territories of North and Northeast or the territories acquired from PepsiCo in south and west has grown in very secular way, 58%-59% in H12022.

- Movement in realization per case in Q2FY22 domestic realization increased by 6% due to price hike in select SKUs, reduction in discounts/incentives and improvement in mix. Realization per case will improve due to increase in juice mix which is only 9% of sale volume.

- Currently, VBL only do manufacturing of Kurkure the distribution is being done by PepsiCo India. If in future all the supply chain offered by PepsiCo to VBL then there will be huge value unlocking.

- Growth in visi coolers, distribution and retail outlets will act as a proxy for growth in VBL sale volume. In present VBL have 3 million retail outlets while Coco-Cola may still be higher as per VBL management.

KEY RISKS

- Pepsi agreement: VBL’s entire business is solely dependent on its relationship with PepsiCo. Though the franchise agreement was recently extended to 2039, any future changes in the contractual agreement will have major repercussions on VBL’s business dynamics. Apart from that, VBL has to set aside 20% of net revenues, of which, 14% is paid to PepsiCo and the remaining 6% has to be spent by VBL on below-the-line (BTL) marketing. Any major change in this arrangement will have a huge impact on VBLs profitability. However, in case of termination PepsiCo is required to provide a written notice of at least one year prior to expiration of such agreements. Also, there is a call option in place for PepsiCo to purchase the assets of VBL at an agreed price plus or minus 30% depending on the reason of termination.

- Seasonality factor- The April-June quarter is the peak season for VBL, where around 40% of the sales are recorded. This is due to the seasonal nature of its business as consumption takes place largely in May (summer season). We can expect the seasonality to reduce, as they expand more into international territories and enter into the food business going forward.

- Awareness towards healthy beverages - Increasing awareness with respect to high sugar content in CSDs is gradually leading to a reduction in its consumption, and thus, affecting volumes. Failure of not being able to expand its NCB business will cause VBL to take a back step among its competitors. Although VBL is switching towards NCB by launching new products such as tropicana, dairy products but in juice segment competition can come from domestic player like Dabur (real juice), Coco-Cola (Maaza) and Parle Agro (frooti).

- Susceptibility to changes in regulations- The domestic beverage industry remains susceptible to regulatory changes regarding the content in soft drinks, increasing environmental concerns over groundwater depletion, and discharge of effluents by bottling plants in India. Evolving issues related to the disposal of plastic may also impact the industry.

- Consumption pattern change or overall slowdown impact on growth-A slowdown in growth driven by significant changes in consumer preferences, leading to permanent loss of volumes. Also, overall slowdown in the industry either due to higher taxes and weak macro like COVID also remains a risk as the category is still relatively discretionary.

Thank You for reading whole blog :)

Disclosure: Nothing in this blog should be construed as investment advice. Please consult your financial advisor.

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In this post I am not discussing any company instead I am discussing the value triggers and value factors which every investor should keep in mind before analysing any company. Thanks to Arjun badola for recommanding me Expectations investing book. After reading this book one will able to understand all the moving parts of valuation. I will try to break all the parts with case studies of indian companies.

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INTRODUCTION:

The expectation infrastructure has three main pillar first is sales which includes volume, price and mix, operating leverage and economies of scale. Second is operating cost which includes cost efficiencies and third and last is Investment which includes investment efficiencies.

1. SALES

- Volume:

Volume which in layman language means quantity more the quantity of goods. It will increase sale of any company and if company has power to increase volume with no or partial increase in cost it will be win-win situation for any company.

I hope many of you have heard of APL Apollo and Astral Poly Technik the volume growth of both these two comapnies with maintaining their margins is one of the main reason for their success. Moreover APL Apollo purchased their main raw material steel from tata stell which provides disocunt on their bulk order. Similarily Astral diversified product and pan india presence helps them to control their cost and maintain their margins.

Now let’s see a topline growth of both the companies in last 10 years

From FY11 to FY22 APL Apollo had increased their sales at a CAGR of 27%. While EBITDA has increased 10 fold from 90 crores to 945 crore.

Same volume growth is resulted in the case of Astral where sale increased at CAGR of 24%. While margins expanded from 55 crore in FY11 to 750 crore in FY22.

SOURCE

- Price and mix:

A change in selling price means that a company sells the same unit at a different price, whereas sales mix reflects a change in the distribution of high- and low-margin products.

Introduction of value added products not only helps in more topline growth but also helps in margin expansion.

The transition from steel cylinder towards composite cylinder is helping Time technoplast in margin expansion as well as more realisation in revenue.

As highlighted by crisil report published on 25 january 2022 which clearly indicates the margin expansion due to value added products. (Credit rating report is one of the main tool which helps investor to get insights of companies which are not available in public domain)

In Q4FY22 CC MG has highlighted the same about the increase in business of value added products by 27% in FY2022. Morover the peak margin will be in the range of 18% of value added products ( currently margin are in the range of 13-14%) and revenue realization from VAP will be 2.5X more as guided by MG.

Similarily the trend of price and mix is happening in Fiem industries and SJS enterprises, If you have not read my analysis on SJS enterprises you can read by clicking on link below.

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The insights

SJS ENTERPRISES-only listed aesthetic components manufacturer

Hi this is my first post today we are discussing company which had been ignored by the market due to 800 Crore 100% OFS. Yeah you got it right It’s SJS enterprises only listed aesthetic manufacturer in India and presenting across the value chain of aesthetic components. SJS supplied 115mn + parts with more than 6,000 SKUs to ~170 customer locations in …

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4 years ago · 3 likes · Shaurya yadav

-Operating leverage:

Operating leverage measures the degree to which can increase operating income by increasing revenue. Basically company which are having more fixed cost and less variable cost can easily take benfit of operating leverage and have high gross margin.

Let’s undertand in simple terms Businesses invariably spend significant amounts of money before their products and services generate sales. We call these outlays preproduction costs. Preproduction outlays dampen operating profit margins. Subsequent sales growth, on the other hand, leads to higher operating profit margins.

You can understand this by refering to below image.

Increase in sale with fixed preproduction cost has helped to increase Operating margin by 3,65%.

Many of you have heard of TATA ELXSI an ER&D company. From FY2018 to FY2022 Company has increased their margin from 25% to 31%. The main reason behind this is increase in contract win by TATA ELXSI and as we know the main fixed cost of any IT company is Employee cost which altogether had remained fixed and increase in revenue with no or partial increase in fixed cost has lead to margin expansion. One more reason for increase in TATA ELXSI margins are location of their IT center which are located in semi urban areas.

Taken from

Margins of TATA ELXSI had increased in linear way from Q3FY20 to Q4FY22.

But for ER&D companies the employees cost can be double sided sword because when sale increase it will increase margins but when sales down and if there is less contarct win by company it will affect margins altogether as happened in Q1FY20 and Q2FY20 when margins are contracted from 26% to 18%. Same indicated by MG in 2019 CC.

Taken from

- Economies of scale:

Economies of scale stand out for lower cost per unit as volume increases. These economies give larger companies a cost advantage over smaller competitors; if large enough, they can deter new competitors from entering the marketplace.

Walmart has taken a advantage of it and grab the large market of US retail sector from very beginning. Similar startegy is adopted by Avenue supermarket. Both Avenue supermarket and Walmart adopt EDLP and EDLC policies which stand for Everyday Low Price and Everyday Low Cost. Hence, they change their prices on a daily basis depending upon what their vendor is charging. The key thing in this policy is that they procure the goods in bulk and they have an advantage with major discounts and further there are no middlemen which operate for them and they have their own independent procure department which keeps on looking into the cheapest price for a particular product. Purchasing at a lower average cost which is achieved through buying in bulk is one of the sources of economies of scale which can be termed as ‘purchasing’.

In fact walmart had adopted system in early 2022 where shop keep updating their price of goods on real time basis.

You can watch the rivalry between Amazon vs Walmart by clicking the link below.

Amazon vs Walmart

You can understand the economies of scale from below mentioned example.

As can be seen from the above table that cost has declined from 29 to 26 per ahead which signals the company is experiencing economies of scale.

2. OPERATING COST:

-Cost efficiencies:

Companies achieve cost efficiencies in two fundamental ways. Either they reduce costs within activities, or they significantly reconfigure their activities.

Companies either achieve cost efficiencies by controlling their fixed or variable cost.

Take an example of Balkrishna industries where company has control their cost by the help of low cost labour advantage and sourcing of rubber within the india which is main raw material cost in case of tyre manufacturing.

It’s clearly visible that BKT main cost advantage is labour cost where international player labour cost is 25-26% BKT has merley labour cost of 7%.

Similar trend is visible in raw material cost where raw material cost is reduced over the time which leads to margin expansions.

SOURCE

3. Investments:

-Investment efficiencies:

It means reduction in working capital which will helps company to invest less for same level of sales and operating profit.

Improvement in working capital days is one of the sign of investment efficiencies and question arises how woring capital days can be improved there are various reasons for it like low receivable days, high inventory turonover ratio etc.

As you can see in the example of Sreeleathers the debtor or receivable days has improved from FY12 to FY20 which leads to ROCE expansion from 4% to 13%. The main reason for reduction in debtor days is company sells its goods directly to the retail customers through showrooms and collects full payment upfront at the time of sale.

Improvement in receivable days also helped in high inventory turnover ratios. The reaason for it that instead of creating shoe manufacturing capacities in-house, the company is relying on outsourcing/other suppliers to produce shoes for it, which it then sells in its showrooms spread across India.

From this we come to an end of my second blog expectation infrastructure.

But be remember only these framwork is not a whole criteria for investment decison there are many other things we should look before investing any business.

SOURCE: Expectation investing

HAPPY INVESTING JOURNEY

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Hi this is my first post today we are discussing company which had been ignored by the market due to 800 Crore 100% OFS. Yeah you got it right It’s SJS enterprises only listed aesthetic manufacturer in India and presenting across the value chain of aesthetic components. SJS supplied 115mn + parts with more than 6,000 SKUs to ~170 customer locations in ~90 cities across 20 countries.

I will break whole analysis of mine in 10 parts-

1.Industry overview

-Introduction of aesthetic industry

-Products

-Raw material used

-End customers demand outlook

-Value chain analysis

-Tailwinds

2.SJS Enterprise-Business overview

-History

-Business overview

-Customers list

-Peer comparison

3.Acquistion of Exotech

- Why SJS acquire Exotech?

- Does acquisition really paid off?

- What to expect in future from acquisition perspective?

4.present management

5.Financials

6.Accelertor pitch

7.Risk

8.Things to watch in future

9. Final conclusion

10. Valuation

Aesthetic Components

INTRODUCTION:

The aesthetics component industry in India generated Rs 19.9 billion in revenue in fiscal 2021 and the industry is projected to grow at a ~20% CAGR to reach approximately Rs 49.2 billion by fiscal 2026. While product features and price are key elements, product aesthetics are critical in creating brand value for original equipment manufacturers (OEMs). Consumers give preference to products that are not only value-for-money but also aesthetically superior. Aesthetically superior products hold strong relevance for discretionary consumption products, such as automobiles and consumer durables.

PRODUCTS:

Products that are covered in aesthetic components are logos, decals. stickers, badges, optical plastics, chrome plated parts, IMD/IML Parts, 2D/3D dials.

Among the above products that most critical products are Logos, IMD/IML parts and Chrome plated parts IMD/IML are made by the process of thermoforming and injection molding you can refer the video to understand it’s process.

I will discuss only IMD/IML parts and chrome plated parts. So basically IMD/IML parts are made of Polycarbonate and polyesters. In the IML process, a plastic film is printed with decorative pattern, formed, cut to size and then inserted in the injection molding tool. During the injection molding process, the film becomes an integral part of the injection molding plastic, giving it a decorative look. While, in the IMD process, the printed pattern on the roller gets transferred on the injection moulded plastic. Unlike in IML, in IMD, the film does not become an integral part of moulded plastic. IMD is generally preferred where large volumes of flat decorated parts are to be made. While chrome plated parts are injection moulded parts coated with chrome to make the product visually more appealing. The usage of chrome parts has been increasing rapidly, especially in passenger vehicles, as OEMs are trying to distinguish models and variant by creating visual appeal with such parts.

RAW MATERIAL:

There are many common raw materials which are used to make aesthetic components these are plastic, PET, copper, nickel, aluminium, paints, metallized polyester, PVC, PC, inks, chemicals, adhesives polyester, polycarbonate or tempered glass. The PVC. polycarbonate films and polyester are common which is use in almost every aesthetic components ranging from overlays, Dials, Logos, Sticks and IMD/IML parts.

END CUSTOMER DEMAND OUTLOOK:

India’s 2W and Auto OEM’s demand had remained weak since after covid-19 emerges. The domestic two-wheeler production, remained flat between fiscals 2016 and 2021, with a large part of the subdued performance because of lower output in fiscal 2020, owing to transition to Bharat Stage (BS)-VI norms, and challenges heaped by the Covid-19 pandemic in fiscal 2021. However, during fiscals 2016 to 2019, the industry posted a growth of 9% CAGR, propelled by good monsoons, favourable economic situation, and rising exports. Production of passenger vehicles (PVs) in India recorded a healthy growth of 5.2% CAGR between fiscals 2016 and 2019 due to a spurt in domestic and exports demand. The key thing to watch out for Aesthetic components manufacturer is how the auto cycle plays out because indirectly their product demand depends on auto OEM’S and 2W Sales not only domestically but also foreign Auto market demand.

VALUE CHAIN ANALYSIS:

Analyses of auto ancillary includes following parameters such as:

• Business risk

• % of export revenue

• Location

• client concentration

• working capital management

• cost structure

• product complexity

• Pricing power to OEM’s and 2W

• Technology

On the basis of above parameter we will analyse SJS enterprises. Now we will start with analyses of SJS enterprises. But before it we will see some tailwinds which will favor this industry over mid to long term so keep reading..

TAILWINDS:

1. Growth in the underlying application segments:

Growth in OEM’s, 2-W and even washing machine refrigerator will helps in growing this industry and as Automobile sector moves towards EV it’s presence will increase in every products as EV use more aesthetic components than ICE vehicle.

2. Shift towards premium products/variants:

Consumers are emotionally attached with discretionary products, such as passenger vehicles, two-wheelers, where such products often symbolise their lifestyle. Therefore, consumers are increasingly willing to pay for aesthetically superior and differentiated products. Consumer preference is shifting towards bigger cars. Demand for small cars have declined from ~63% in 2015 to ~53% in 2021. In addition, the demand for mid- and top- variants of passenger vehicle models has seen a gradual increase over years. CRISIL Research further expects the contribution of mid plus top variant to increase 5-10% in the small car segment, followed by 15% in the large car and UV (Utility vehicles) segment by 2026.

3. Increasing penetration of superior aesthetic products across product categories:

The penetration of optical plastics, chrome-plated parts, IML/IMD parts is currently limited to specific variants across select models across passenger vehicles. But it’s presence will increase with time In the near future, OEMs are likely to make touch screens as a standard offering across majority models in mid and top variants with improvement in technology, internet connectivity and increasing customer preference for such features. With increasing penetration of touch based navigation systems, demand for optical plastics will get a proportionate demand fillip Most of the popular models are offering 7-10 inch infotainment screens in India across different models. On the other hand Globally, OEMs are keen on deploying 15-inch screens.

The intensity of chrome plated accessories has gone up from mere inclusion of chrome plated inner door handles to front grill, trunk lid liner, head light/ tail light cover, outer door handles etc. Over the years. The trend of increasing chrome plated part intensity in a OEM manufactured vehicle is likely to continue. As a result demand for chrome plated parts from OEMs is likely to grow rapidly in future.

4. Technology shift towards higher costing newer aesthetic products:

-Shift from 2D to 3D appliques/ dials-An aesthetic component manufacturer typically makes 2-3x realization per unit of 3D dial compared to a unit of 2D dial.

-Shift from analogue to analogue - digital appliques/ dials-- Popular two wheeler models such as Hero Passion Pro, Bajaj Pulsar 125, Hero Glamour offer analogue- digital dials which cost around 6-8x times of pure analogue dial.

-Shift from analogue to touch based navigation system in cars-An aesthetic component manufacturer makes around Rs 350- 500 per optical screen in a passenger vehicle depending upon size of the screen. OEMs are launching model facelifts with larger screen sizes compared to older version.

-Shift from chrome plated logos to 3D lux logos- An aesthetic component manufacturer makes 12- 15% more realization in case of a 3D-lux logo compared to chrome plated logo. For Shine motorcycle Honda Motorcycles has shifted from chrome plated logo to a 3D lux logo over the years.

- Shift from plain moulded components to IML/ IMD components- IML/ IMD dashboards cost around 1.5-1.6x times of non- IML/ IMD dashboard per vehicle depending on vehicle category

i. Dashboard trims in Ertiga and Ciaz in higher variants have been converted to IML designs from moldings in last 3-4 years.

ii. New generation Whirlpool double door refrigerators have started featuring IML decorated parts for superior aesthetic appeal. Such components were not existent in past models

SJS ENTERPRISES-Emerging Superstar in a Niche Industry

HISTORY:

SJS enterprises was started by K.A. Joseph Managing Director and ‘J’ in SJS. He along with his partner Srinivasan and Sivakumar started this in 1987, almost 35 years back. The two S in SJS stand for Srinivasan and Sivakumar If I’m not wrong. SJS evolved and started manufacturing what are known as operator control panels for dot matrix printers for companies like TVS and Wipro Innovation and creativity have been SJS prime focus and in 1995 - 1996 they started manufacturing automotive dials. The first Hyundai Santro model manufactured in India rolled out with SJS Dials. In 2015 Srini and Siva decided to retire and this is when Everstone invested in SJS with 51% or about Rs 350 crore ($54 million). With Everstone coming on board it took SJS to a new orbit because that’s the time when Sanjay thapar man behind minda industries success comes in SJS having more than 30 year of experience in auto industry.

For more detailed history of SJS please refer below image

BUSINESS OVERVIEW:

SJS is the manufacturer of aesthetic products present in all products whether it’s traditional, Value added or premium products having more than 6000SKU’S and 160+ customers exporting to 20 countries. SJS made decals, logos, IMD/IML parts, overlays, optical plastics and chrome plated parts for which they acquire Exotech for 64crore which we will cover latter in this blog.

PRODUCTS

Till 2018 SJS produced only logos, decals, 2D and 3D dials but after 2018 they had entered into premium products like IMD/IML, Optical plastics and chrome plated parts they had completed a significant portion of its capital expenditure project and shifted to its new manufacturing facility in September 2018. In 2021 they had acquired Exotech for manufacturing approximately 50 to 60 injection molding tools per year to meet the customization requirements of the customers. SJS typically enter into a customer relationship for a specific product line, seeking to demonstrate the quality and cost efficiency of our product and services. Thereafter, in order to increase share of their business with customers, SJS pursue cross-selling opportunities and seek to expand to other product lines and geographic areas with the customer and its related entities. MG commentary on the same..

From product cycle perspective 3D badges are typically delivered to customers within three days from the date of the sales order. While IMD/IML parts take approximately 1-2 months for delivery as it includes discussion with customer then designing it as per client preference and then showing the sample to client which is long gestation period but realization is more as compared to other parts that they supply.

The design-to-delivery lead time for Company’s products, depending on the nature and complexity of the product and the manufacturing process, typically ranges from approximately 15 days to six months. SJS revenue breakup from product segment.

Plant facility, warehouse, Raw material , employees and logistics:

SJS have six warehouses. These are located in Gurugram in Haryana, Rudrapur in Uttarakhand, Aurangabad and Pune in Maharashtra, Kanchipuram in Tamil Nadu and Mysuru in Karnataka in India. Company also has a warehouse adjoining their manufacturing facility in Bengaluru, located within the same premises. SJS Subsidiary leases a warehouse in Hosur in Tamil Nadu to cater to the requirements of one of its largest customers, TVS Motors. SJS manufacturing facilities and warehouses in India are located close to the automotive and engineering clusters where several of their customers are based. SJS warehouses work as our delivery points to key customers enabling us to meet their just-in-time delivery schedules, drives economies of scale and logistical efficiencies for their customers insulating them from supply disruptions and enhance our engagement with them. SJS warehousing arrangements are flexible in nature and therefore storage space can be increased or decreased depending on their requirements.

Company’s supply chain and logistics team of 14 personnel handles supplies of our products to their customers. For customers located outside India, SJS generally export their products through sea shipments. Costs associated with the transportation of their products are generally included in the purchase price. In a few cases, their customers(Domestic) may directly pick up the goods at their manufacturing facilities or warehouses.

As at June 30, 2021, Company had 509 full-time employees with an average tenure of 8.2 years. Company’s average attrition rate in the last three Fiscals was 13.29% with respect to its total workforce. Subsidiary had 105 permanent employees.

For more details on their warehouse facility refer below mentioned image

In the three month period ended June 30, 2021, approximately 37.70% of the raw materials that Company sources are imported from vendors outside India whereas the remaining 62.30% of raw materials and components are procured from Indian vendors. Further, in Fiscal 2021, approximately 33.74% of the raw materials that Company sources are imported from vendors outside India whereas the remaining 66.26% of raw materials and components are procured from Indian vendors. Our Subsidiary purchases raw materials from India. Company has long-term relationships of 10 years or more with several of key suppliers. They generally do not sign any agreement with one-time vendors whereas place purchase orders with regular suppliers and may enter into arrangements with certain identified vendors. SJS do not enter into any long-term volume commitment for procuring materials.

As per my understanding company purchases mainly their products from below mentioned suppliers.

Plant visit by IDBI capital and note on the same.

Customer relationship:

Relationship with 10 largest customers (FY21 Revenue) averaged ~15 years. Pursue cross-selling opportunities and seek to expand new product lines and geographic areas with the customer. Some of the name of customers are mentioned below.

Revenue from different clients are as follows:

SJS supplied to everyone with the sole exception of Hero as indicated by MG in Q3 CC

Now let’s see beyond the MG guidance on customer relationship and try to solve the puzzle(Try not to fall in storytelling) as we already know that domestic OEM’S and 2W such as TVS, HMSI, Bajaj auto, M&M and Suzuki all are preparing to launch their new products in FY22 and more aggressively in FY23 when black clouds gets top off from Auto industry and we live in India in we can easily see which new products are coming in market but what about Global OEM’s we barely track them so let’s see the position of Global OEM’s in present world and their new products launch which will accelerates the growth of SJS

Visteon, whirlpool and Marelli is three big customer of SJS So let’s talk about Visteon. Company in there Q1 Earning concall had mentioned that Visteon launched 16 new products in the first quarter and is setting the foundation for another year of robust launch activity. Key first quarter launches include a 12-inch digital cluster for the F-150 Lightning EV that recently launched with Ford and several center information display programs across multiple vehicle lines with Mazda, including their all-new CX-60 plug-in hybrid SUV. Additional key launches include a 10-inch digital cluster on the new Nissan Z and a 10-inch digital cluster on Honda’s first generation all-electric BEV crossover for the China market. So here in this case we can clearly see that their is increasing use aesthetic products in new launch by OEM’s. SJS will may supply Digital cluster or optical plastics to Visteon which further Visteon by applying their Technology helps their clients to fit digital cluster in cars.

Highlight of Visteon deal in Q1:

Secondly let’s talk about Whirlpool which is clearly seeing growth in India Major appliances as MG also highlighted in their Q1 concall

Just pasting image of three pillars of whirlpool so to get clarity if SJS client market is growing or not because ultimately if client doesn’t grow then how can SJS grow.

If one wants to know the complete information of SJS client like how many year of relationship, which plant supply which parts and end user segment so they can refer below mentioned image it will provide complete details some customer details had not disclosed but you can get cross check from images mentioned above.

PEER COMPARISON:

SJS has no listed player but it have competition from unlisted one. SJS competition snapshot is highlighted in below image.

Polyplastics Industries, Classic Stripes and S.J.S. Enterprises are the top three players in terms of revenue. S.J.S. Enterprises is one of the leading decorative aesthetics supplier with widest product coverage across decorative aesthetics pertaining to major vehicle segments; namely, two-wheelers, passenger vehicles and consumer durables.

1. Polyplastics Industries India pvt ltd:

Till 2020 they have huge debt of 249 crore which they managed to reduce 67 crore till 2021 march. Their major customer is MSIL. The Group has technological collaborations with overseas players like Sakae Riken Koygo (Japan) resulting in the availability of the latest technology, providing an edge over competitors. he average working capital utilisation was 43% during the 15- month period that ended in February 2021. Poly generally present in traditional segments wheel trims and wheel covers, door handles, etc. Although they produce chrome-plated plastic parts including emblems, automotive plastic-molded components. Low PAT margins, Moderate EBITDA margins, ROCE, High working capital intensive plus catering to PV only doesn’t provide cushion during bad auto cycle.

2. Classic strips:

CSPL is a leading manufacturer of automotive decals in the domestic market, with a focus on the 2W space – CSPL plans to increase its presence in the printed electronics segment, which caters to the automotive and white goods sectors, over the medium term. But the negative points are The company also faces obsolescence risk for certain decal products with the emergence of electric vehicles (which may not require few of the decal components) and digital consoles CSPL has extended sizeable financial support to the Group companies, with the overall funding of ~Rs. 205.6 crore as on March 31, 2021

3. Kongovi :

The company is involved in the production of chrome-plated automotive plastic components both for interior and exterior applications for the original equipment manufacturers of the passenger car industry. KPL supplies trims for interior and exterior applications, which are used for their aesthetic appeal. The components include grills, logos, garnishes, door handle covers, gear knobs, body moldings, mirror scalps and fog cover. The average working capital utilization stood at ~72% of the sanctioned limit during October 2020 to January 2022. Company is looking towards increasing their export share which will help them to increase their margins.

Kongovi has order book position of Rs. 123.8 crore for FY2023 positively. Negative point is that – KPL’s working capital intensity increased to 75.3% as on March 31, 2021, from 48.1% as on March 31, 2020, on account of an increase in its receivables during Q4 FY2021 which may still continue because company is looking to increase export share.

In conclusion I can say that there is no such direct mirror to mirror competition for SJS but they have only kongovi as a competitor as they are increasing export share but although it’s in traditional products.

In terms of financial position, Working capital (may increase due to export share target of 25% by 2025), global clients, High ROCE and healthy margins SJS is way ahead from it’s peers. It would be great if they onboard Hero also.

3.EXOTECH ACQUISTION

Why SJS acquires exotech?

Simple answer given by MG in concall.

Acquisition of Exotech was come at a time when there is growing need of chrome plated parts across OEM’s, 2W and home appliances. Exotech don’t have any strong client base but SJS do so by combining entity they are able to perform well in future.

Does acquisition really paid off?

In my opinion yes just see the concall highlight

Revenue of 71 crore by acquiring a company for 64 crore payback period is less than one year if we compare on sales basis not on cash because SJS acquired Exotech on cash deal. The purchase consideration of exotech was 64 crore including 23 crore of goodwill so they really had not paid too much for acquiring exotech which is fair deal.

But wait! It’s not their first acquisition they had acquired Delta Ram Enterprises, Sirisha Enterprises and SM Enterprises ('Selling parties') effective 1 May 2018 ('Acquisition date'). The Selling parties were earlier acting as sole selling agents of the Company and were providing end-to-end customer relationship and marketing services to the Company. The acquisition was made to gain the synergies of the business and the customers developed by the Selling parties and hence the management concluded this transaction to be a business combination as per Ind AS 103. Pursuant to this Agreement, the Company has acquired the business of the Selling parties for a total cash consideration of ₹100 million to be paid over a period of 2 years in 24 equal installment effective 01 October 2018.

And believe me it’s a good deal wait I will show you how

Just see the sales promotion expenses from almost 7 crore in 2019 in year which they acquired these three companies it’s gone down to 80 lakh in year 2021 Fair deal!

- What to expect in future from acquisition perspective?

In terms of region which they are focusing for acquisition is Europe( particularly turkey), southeast Asia and North America.

4.Current Management:

SJS MG is consisting of KPI in industry K.A Joseph is having More than 34 years of experience in aesthetics printing business. Leads the manufacturing operations for the Company and has spearheaded technological and product innovation over the years Also, a director on the board of Exotech. Sanjay Thapar is having 30 years of experience in the auto industry. Previously Group Chief Strategy Officer with Ashok Minda Group; MD of Minda valeo Security Systems. Landscape of SJS board is given below. Please go through it SJS is really experience MG.

Now coming to remuneration part in FY21 Sanjay Thapar and K.A Joseph had taken combined salary of 48.24million which is approximately 10% of FY21 PAT.

The main reason for which street had ignored SJS is because of 100%OFS but it’s not true that company which is doing 100% OFS is trapping retail or MF. In 2015 evergraph had taken an entry in SJS by taking 77.86% of shareholding at 350 crore. In IPO Evergraph had diluted their 40% holding ar 710 crore which means they have already made 5-6X in less than 6 years and K.A jospeh the MD of company had diluted his holdings from 20.74% to 15.28% he had received 90 crore for his dilution of 5% holding almost 50x Oh my gosh!! by the way good deal. It’s not like that IPO is overpriced it’s fairly priced PE of 33 for company doing ROCE>20% and generating FCF with margins>25% . where in past loss making Fintech getting listed on invisible PE! (Zomato, Paytm) no objection just saying.

Moreover 20% Holding of SJS will remain in lock in period till 10 November,2024.

And do you know the combined promoter holding is not 50.37% it’s 51.51% go to public shareholding and you will see Sanders consulting pvt ltd sanjay thapar is director of the company and he holds 1.14% from that company. For well being of employees SJS had granted ESOP (13.89.000shares) to 206 employees out of 509 at rs 263.86 almost 40% of employees gets covered in it that’s a good sign.

I know this blog is taking too much time but I had tried to cover every part so that it will help you and me also to later visit it and see my study on the same. So please read it till the end.

5. FINANCIALS:

So in terms of sales SJS had sale of 184 crore in year 2017 which is increased to 252 crore in year 2021 with healthy margins in line of 30%. SJS is High growth-Low capex -High ROCE – Cash Generating business model. It is net debt free entity with Rs 1bn cash on balance sheet.

- SJS sales had increased from 237 crore in FY2019 to 320crore(Including exotech revenue) in FY21 CAGR of 10.53%.

- On the other hand Margins increased from 27% in FY19 to 29% in FY21.

- FCFF/EBITDA and FCFF/PAT both had improved drastically which is a plus point.

- Healthy ROCE and improving cash conversion cycle.

- % of raw material of sales remain inline of 35-40% which will may go down due to exotech acquisition.

- High reserve plus no long term borrowing makes SJS balance sheet more stronger which will helps them in auto cycle downturn.

- Inventories and receivables day were increased quite a little mainly because of Auto cycle downturn but from now onwards if demand backs then it will be not a great problem.

6. Accelerator pitch

Let’s discuss the Accelerator pitch for this company

- Bet on premiumization, the changing shift of consumer towards mid and large cars will drive the demand for premium product indirectly benefiting SJS as realization in these products are much higher then traditional products like Logos, decals, 2D Dials etc.

- Target of 25% exports by 2025 which will drives the margins for SJS as we have seen in kongovi case where they have increased their margins which results in margin expansion from 16% in 2020 to 24% in H1FY22 similar thing can play out in SJS.

- Acquisition and turnaround of exotech will drive margin expansion and addition of new client in various regions.

- Revival of auto cycle I’m sure that by H1FY22 or FY23 we will see a sharp revival in auto OEM’S and 2W sale which will give a huge boost to SJS sale both in domestic market and export market as globally many leading auto players are preparing for their new model launch containing many aesthetic components than previous models.

7. RISKS:

Now comes a most important part of analysis as warren buffet says risk comes from now knowing what you’re doing. I will discuss 8 key risk which I see in company

- Delay in revival of auto cycle due to semiconductor issue and Russia-Ukraine conflict can further disturb the supply chain which will directly impact SJS sales.

- Unfavourable acquisition outside India will directly impact the financial position of SJS and in auto ancillary a good financial position is very important to survive a contraction of economy or auto cycle which usually happens after 4-5 years.

- Unloading of more shares in future by private equity and K.A joseph will create a bad image for SJS in market.

- Not able to pass raw material cost to customers due to bad pricing power will have impact on margins in long run.

- Concentration risk of clients although they have reduced it by onboarding more clients outside India

- Higher dependence on customers in automotive and consumer appliance industries and decline in their performance in India or globally could impact SJS’s business.

- Stiff competition from international player especially serigraph Inc. Serigraph expertise includes printing, advanced decorating technologies and graphic solutions for the Automotive, Appliance, Consumer, Medical, Power Sports and Point-of-Purchase markets with decorating plastics being the core business.

- SJS is exposed to risks relating to fluctuations in foreign currency exchange rates.

8. Key things to watch out for:

- Improvement in capacity utilization as at March 31, 2021, the annual production capacity of SJS and it’s Subsidiary’s manufacturing facility was 208.61 million and 29.50 million products, respectively and their capacity utilization rates were of 44.07% and 52.88%, respectively, in Fiscal 2021, and their revenue from operations during Fiscal 2021 were ₹2,516.16 million and ₹685.26 million,

- Share of export in percentage of total revenue

- Addition of more clients and introduction of more value added and premium products.

- Increase in number of employees particularly NPD and operation team. As of 31 June 2021 they have 509 employees more number of employees will present a demand coming from client side because these types of companies don’t hire usually like IT companies.

9. Analyses of auto ancillary includes following parameters such as:

- Business risk- Can say High because they are dependent on OEM’s and 2W demand which is directly related to economic situation of a country.

- % of export revenue- Moderate Till now only 16% but will increase in future as per MG.

- Location- SJS plant are present in nearby of their client manufacturing plant which is good it will save logistics cost.

- Client concentration- Moderate not so high but yeah they derive majority of revenue from 2W so it will be key to watch out the demand of 2W or client loss from 2W category.

- Working capital management- SJS have cash conversion cycle of 28-30 days( as per tijori finance) but it will increase due to increase in export share.

- Cost structure- Relatively in control till now SJS can easily pass cost to their clients due to complex products increasing applications.

. SJS have VAVE program in which they constantly try to reduce cost of raw materials.

- Product complexity- For traditional products it’s low but for value added and premium product it’s high entry barrier because OEM’S and 2W don’t wants to compromise on their interior and exterior design parts so that’s why they give their order only to existing supplier which has long period of relationship. SJS average client relationship is 15 years and till today they did not lose any clients.

- Pricing power- SJS is entering into premium products like IMD/IML, optical plastics, 3D Dials and capacitive overlays in which realization. ( Upto 1.8-2.0X) is much more than traditional products.

- Technology- SJS constantly upgrades their technology in order to remain ahead in market from their competitor. SJS is looking for deal which will provides them access to new technology.

10. Valuation:

We value a SJS considering the following facts in mind:

Growth Plan: SJS’s plan for sustained growth include a) Increase in geographical footprint through exports b) Focus on development of new technologies and advanced aesthetic products c) Expand its business through strategic inorganic growth opportunities and d) Increasing its share of business with existing customers.

 Sales to Double in Next 3-4 years: Based on its product profile, user industry outlook and new client additions Management is reasonably confident of doubling its sales over the next 3-4 years.

 Operating Margins to be ~25-28%: Despite changing product mix the Company is confident on maintaining its operating margins in the band of 25-28% over the next 2-3 years.

 Minimal Capex Requirement: SJS’s both the production facilities (Bangalore and Pune) are currently operating at ~50% utilization. Therefore, without incurring any meaningful capex, the Company has potential to double its sales from existing setup. However, given the very high demand in its Chrome plate business, SJS might likely be constrained by existing capacity and hence create some additional capacity over the next 12-18 months.

Key assumption are:

-Revenue growth rate of 20% till FY24

- PAT margin of 16%

- Share outstanding-3.04 crores

I have taken PE of 30 in bull case might be high but PE at IPO was 33 so that’s why I have taken. Similarly PE of 25 for base and 20 for bear case scenario.

If you find it useful then please hit the like button and leave a comment on what do you think about SJS enterprises.

HAPPY INVESTING JOURNEY.

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