Thursday, March 22, 2012

See's - Sweet Returns

See's is a chain of candy stores owned by Berkshire. I run a startup in the food business, and every time I see See's numbers, I find it incredible that a non-tech company could have these kind of returns.
See's in 1972,
Sales= $30mn/16mn pounds of candy at a PBT of $5 million
Capital Employed = $8 million

In 2007 :
Sales= $383mn/31mn pounds of candy at a PBT of $82 mn
Capital Employed = $40 mn
That's a pre-tax return on capital of over 200% in 2007 from selling bleddy candies! How is this happening? Are their auditors on a sugar high?

And to top it off, their growth figures look SO BORING. For 35 years, they annually have grown sales volume by 2% and sales value by 8%.

Turns out, extraordinary business results can be achieved from a combination of subtle pricing power and muted reinvestment in the business. All See's did was increase their price of candy by about 6% every year while having to spend very little on equipment, working capital and the like.

I just can't wrap my head around the fact that something that sounds so simple is so hard to achieve.

Sunday, March 11, 2012

A little less government, please?

'My idea of a perfect government is one guy who sits in a small room at a desk, and the only thing he's allowed to decide is who to nuke.' Ron Swanson, on Parks & Recreation
Okay, maybe I'll allow you a few regulatory bodies to keep everything in check, but I've always liked the general idea of less government.

So, though I don't really have an opinion on their politics, I was happy to hear a quasi-Chief Minister say this, rather than the usual spiel on roti, kapda, makan, bijli, sadak and pani.
'Eliminate the cause of corruption: interaction. Corruption happens when there's an interaction between public man and the government departments and officers. The minute you reduce or eliminate the interaction there will be no corruption.'
Twenty one years since the so-called end of the license raj, it still takes a dozen or more licenses to run a business in India. And behind every piece of paper lurks an excuse for extortion by agents of the state.

Monkey Business: Tasty Bite

Every once in a while, a company comes up on my radar that looks and smells delicious. Tasty Bite was one such. They make ready-to-eat Indian food for the US market, are the largest player in their niche and are the preferred private label supplier to many large supermarket chains. Sounds yummy, right?

WRONG! If ever a picture was worth a thousand words, heres one...they are down 60% in the past two years!
Whats the catch? Well, they seem to have a marketing entity which is held by the company promoters. The publicly listed company makes the product and sells it at a slender margin to the privately-owned marketing entity which presumably pockets a bulk of the profit. This is just a sample from the bag of Great Indian Promoter tricks that convert shareholder profits to private wealth, but more on that in future posts.

Luckily, I was able to figure this out before I'd swallowed too much - I burnt my fingers but not the kitchen :)

A Beautiful Business: Aravind Eye Care

Aravind Eye Care has been well profiled elsewhere. They use low-cost labor, high utilization of equipment and an in-house supply chain to completely CRUSH the cost of a cataract operation - they are profitable and yet 60% of their 300,000 yearly surgeries are free!

There is this idea of a beautiful business that I'd love to build and/or invest in. A beautiful business creates value for its customers, employees, shareholders and society by providing a product/service of quality. Its quality gives it pricing power, high returns on equity and an ability to grow on internal accruals.

Aravind Eye Care certainly shows that beautiful businesses can exist in India, provided you have the vision for it.

Investment Idea: Cravatex

In a market where every Johnny-come-lately is being valued at a few hundred crores, Cravatex's investment proposition is compelling. Uptil recently, an investor in Cravatex could buy the entire business of Fila India (and Proline Fitness Equipment) for just around a 100 crore. Profiled here and here.

Cravatex acquired the rights to distribute Fila only recently, and their distribution / marketing of Fila in India is yet to really kick in. As a comparison, even Relaxo Chappals are valued at 2.5 times Cravatex!

The key unknown is the quality of management - there is no reason to discredit them, they have done a good job with building Proline as a private business, but the question of whether they are kosher when it comes to creating shareholder value is still open.

The stock is up 50% in the last month - however, time will tell if the shoe fits for the long run.