I am not SEBI registered advisor and may have vested interest in below mentioned article. Please consult your advisor before taking any actions.
Introduction
From the CMD of Amrutanjan:
The company was founded in Mumbai by our founder Nagswara Rao Pantulu Garu. We went public in 1936. We are one of the three, essentially old pain balms in India. Amrutanjan, Iodex, and Zandu. Now Amrutanjan brand which started with the iconic yellow bottle is sold in more than three variants also formats like sprays and roll ons. Last year, we launched a pain patch. We are the first company in India to launch the pain patches in digital on Amazon. So, we are building up that format. We also have number one position in the roll-on format, both in the headache and body space. We are the first company to launch a sachet pain balm in the Rs 2 format. We are still number one there. And recently, as you know, a few years ago, we diversified into pain services, the first professional pain management clinic in Chennai. We treat hundreds of patients every year, largely for knees but also for back pain, people have expressed a very high levels of satisfaction. And as you know, in 2013- 14, we launched India's first low priced but high value sanitary napkin Comfy. Today, that brand is more than Rs 50 cr in revenue. Another success story. Amrutanjan is among the top 1000, we are on 615th position in terms of market cap and as you know, there are almost 6000 publicly traded companies in India and being within 600 position is within top 10% of publicly traded companies. (Source: AGM transcript 2021)
I’ll divide this article into 5 parts of my investing framework:
A business should:
1. Be within my Circle of Competence.
2. Have huge Opportunity size.
3. Be a Quality business.
4. Be run by Quality people.
5. Have a reasonable Price.
1. Circle of Competence
I fairly understand this business and as buffet says, you should be able to explain why you bought the stock to a 7yr old kid.
So the explanation goes this way: Balm banata hai jo aap dard hone par laga sakte hai, head ache hota hai tabhi apko relief dega, uske saath sanitary napkins banata hai jo ladies use karti hai, aur sports drink banata hai Gatorade jaisa.
2. Opportunity Size.
3 Segments of the business.
Pain Relief segment.
This segment is predominantly dominated by the flagship product Amrutanjan balm. Due to declining preference among the millennials and unaesthetic appeal of balm, Amrutanjan has introduced Roll-On format. Also due to customers preference towards pills like Crocin/Dolo, this segment is not a high growth segment.
Within the pain relief segment amrutanjan has innovated body pain segment with products which have a huge potential. Also this segment will grow bcoz of people engaging more into sports and working out.
2 . Women hygiene.
Amrutanjan entered into the highly competitive market of sanitary napkins in 2013 with it’s brand Comfy. This segment is fastest growing segment in the company.
The sanitary napkins penetration is lowest at just 20% of women between age 15 to 50 using it. Hence, due to affordable and cheaper product with quality this segment will grow multifold. This segment is now challenged by mensural cups and tampons, hence amrutanjan has also decided to foray into producing them in near future.
Beverages and other products.
This segment is low in sales and low in profitability and faces huge competition from established players. Nevertheless due to their niche product offering this segment can grow in top line although profitability may remain a challenge.
Other products like Decorn caps and Hand sanitizer are also part of their offerings.
3. Quality of Business.
The ideal business is one that earns Very High Returns on Capital and that keeps using lots of capital at those High Returns. that becomes a compounding machine.
Now check past 10 yrs Return on capital employed (ROCE) for Amrutanjan:
Substantially well above 15% threshold which I use.
Also the sales growth in the past has been about 13% CAGR without a single year of De-growth. Hence there is no Cyclicality in the business.
Are these earnings real? (Data considered is from 2012 to 2021)
Coming onto the Cash Flows, the company is able to generate free cash flows and has generated Cash flow from operations of totaling 339 crores and EBIT of 313 crores which implies that all the profits are converted into cash.
Out of cumulative 339 crores of CFO it has 208 crores of cFCF. This can be matched with adding cumulative Non-operating income of 64 cr( from 2012 to 21) and cumulative interest expense of 10 crores (208+64-10= 262 crores) with total dividends paid with DDT of 72 cr and Cash and investments balance of 168 cr (183-15, at 2012 and 2021) which equals to 240 crores (72+168) which matches with 262 cr of Free surplus cash flows.
The company has Zero debt. It has High avg nFAT of 10 times, avg inventory t/o of 18 times. Coming to managing WC, it collects cash within 40 days with inventory of around 2 months and trade payables of 100 days.
The company had avg gross margins in excess of 55% and avg operating margins of around 20%. The company faces a risk due to increase in the menthol prices and in times of high menthol prices the gross margin touched 52% and operating marging at 12%.
The company has been paying out about 25% dividends out of earnings.
The moat around this company is it’s legacy. Due to this it has a dominant share in south india and is now expanding to eastern regions like assam and west bengal.
The company has been implementing SAP and had also changed it’s auditors to KPMG 2yrs back. It’s quite rare for a sub 3000 crore company to have Big 4 as auditors. They are increasing the dealer networks rapidly.
4. Quality of Management.
The company is by Mr. Sambhu prasad around age 50 who is a 3rd generation owners of the company. He took charge of this company back in 2005 and has transformed the company with truly ethical practices and innovative products. It is quite rare to see a 3rd generation promoter having the same passion for doing business as his ancestors had.
Mr. Sambhu has skin in the game as the promoter holding is about 50% with no pledged shares and almost 95% of his total net-worth is in Amrutanjan. There is no equity dilution in last 10 years.
On capital allocation he definitely stands out as after his charge in 2005, he has disposed off several non-core non- profitable businesses. In 2008 he sold off the land of non-profit making business and paid a huge dividend which shows the friendly nature of management towards the minority shareholders.
He is determined to take Amrutanjan Head-to-head with the FMCG giants and this is shown by the advertisement contracts he has got for various amrutanjan prodcuts.
Shraddha Kapoor for Comfy Pads:
Recent advertisement featuring Olympic champions Mirabai Chanu and Bajrang Punia for pain relief segment.
CSK team sponsored for pain relief segment
5. Reasonable Price.
The business is trading at 40 PE which is expensive. Even considering it grows revenues at 25% CAGR (Too optimistic) for a decade, the revenue would be around 3300 crs with NPM of 10-12% which gives around 350 crs of NPAT and can be easily valued at 25 times, hence the valuation would come to around 8750 crs after a decade, which implies a stock price return of approx 15%, which is a good return.
Another way to assess the valuation is to check the expenses which the company is expensing out which has long term brand building benefits, expenses like R&D or Advertisement. In reality these expenses should be capitalized as they have benefits arising for the longer term but due to accounting standards they are expensed out in P&L hence the earnings look deflated and as a result if you add back a portion of these expenses to net profit the PE multiple will decrease to mid 20’s.
Hence, paying a mid 20’s valuation for such high quality business definitely provides margin of safety.
Concluding, I will buy this stock in staggered manner to allocate about 7-8% of my portfolio.
Key Risks
Amrutanjan faces risk of menthol prices volatility which has dampened the margins previously. Among the Balm segment it has favorable market share. In comfy brand it faces huge competition from P&G (whisper), Johnson & johnson (Stayfree), Unicharm (Sofy). In the pain relief segment also there is huge competition from products like Volini, Moov etc.
Key threat remains from competition from established players like Dabur, patanjali entering into Pain relief and sanitary pads segment due to low entry barriers. Recently Dabur has entered into Diapers segment which means a potential threat for sanitary pads segment also.