Thread by @sahil_vi

2021.

Easy to move down the quality curve in 🐂 market.

Here are 21 companies that I studied in 2021 but decided not to invest in. #21 might blow your mind. 🤣🤯

Will also share some consolidated learnings. Please Retweet to help max investors. 🙏

🧵🧵🧵

Recently learned from a @Gautam__Baid sir video ( video on how to generate investment ideas):
something which is common to all achievers is their art of saying no. I have learned the same in my studies. This thread contains a list of ideas I said no to.

Format:
1️⃣ What I liked about that company.
2️⃣ What I did not like about the company.
3️⃣ Why I did not invest in the company.

Other investors can have a different perception about the company & investment & that is okay. Because & repeat after me:

#1 Neogen Chemicals
1️⃣ Specialized player in bromination space. Already working with innovators. Possibly best microcap CRAMS company.

Stuff I learned later on: They might also get into Li-ion battery electrolytes.

2️⃣ Since it is a microcap & inherently bromination space is small, the size of opportunities in bromine molecules is smaller ➡️ they have lots of molecules. In addition their inputs are also bulky ➡️ LONG working capital cycle ➡️ lesser cashflows

3️⃣ While puck was moving in right direction, at 50 odd times earnings it appeared to be expensive to me. Since then it has only become more expensive.

I don't believe in relative valuations. Need a margin of safety.

#2 Pokarna
1️⃣ Clear play on branded quartz sinks selling into US housing market. Play on capacity utilisation going up. Differentiated high quality products. China ban served as tailwinds (Although no direct competition, Quantra is much higher quality). BRETONSTONE technology

2️⃣ The overall housing market in US is slow growing. After initial pop due to market share gain, it would be hard to sustainably grow sales. I could not see the sustainability of growth here. In past too, capacity ramp up had been delayed

3️⃣ Slow growth of end user industry. Uncertainty over capacity ramp up. & What I thought were availability of more 'sustainable' growth stories meant that I did not invest in Pokarna. (Technically i held small tracking quantity for few months, then lost conviction).

#3 Apollo Tricoat

1️⃣ This was an investors dream. Total market dominance. Things made by structural steel. Door chaukhat, doors, windows frames, fences. Crazy high ROCE of 40%. High growth because product was so much superior to wooden products it was replacing.

Huge TAM (Total addressable market) with high growth. Parent company APL Apollo was helping with brand building via @SrBachchan . Working capital was NEGATIVE. Wow. Valuations were low.

2️⃣ Apl apollo was non commital about letting tricoat exist on its own. They saw it as an extension of apl apollo & were ambivalent about merger. Also were non commital about capex for capacity expansion. Didnt make sense since it was growing so fast.

3️⃣ Slowly, it became clear that APL apollo would merge tricoat into itself. APL apollo is semi commoditized & was at high valuation. So i felt short changed as a potential tricoat shareholder & ended up selling whatever quantity I owned.

At least to my mind, the merger was a huge value destruction event for tricoatshareholders. You were going down the value curve & being forced to own a commoditized company at higher valuations.

Thanks, but no thanks.

#4 Amara Raja Batteries

1️⃣ Low valuations. Always a good starting point. Absolute Dominance in Replacement market. Had some plans of getting into Li-Ion Batteries. Good return ratios. Consolidated industry structure.

2️⃣ Amara raja is an Auto anc at the end of the day. NO growth in end user industry is always a recipe for disaster.

3️⃣ I could see that EV space is very dynamic. It is incredibly hard to tell which battery chemistry would win. Hard to see whether amara raja would have a right to win (RTW) in the end game.
See Tesla Battery day For how dynamic this space is:

#5 Arman Financials

1️⃣ Read their concalls & it'll become clear to you why they are the BEST Micro Finance Institution out there. Return OF capital before Return on Capital. NO ever greening. Ethical lending. Up fronting pain & provisioning. Capacity to suffer.

2️⃣ As per VP scuttlebutt Armaan has 70% end users working in dairy industry. That is some crazy end user concentration. Too risky for my liking. MFI seems to have 1 big blow up event once in 3-4 years. Profits wiped out in year 3 or 4. Hard to get rerated with this.

3️⃣ Would I buy the best cement maker? Or the best steel maker? No. For that reason, I chose to not own armaan financial. The end user concentration does not make me comfortable. Growth looks relatively unsustainable unless they diversify the end user.

#6 Sandur Manganese

1️⃣ A mining company. Was deep deep value. Mining is a restricted activity. Licences last decades. Company did backward integration into power generation to reduce power costs. Amazing corporate governance.

2️⃣ Company was planning to forward integrate from mining iron to producing steel. I found this to be a worse capital allocation & a difficult thing for investors to stomach.

3️⃣ I found myself & my own style through investments like these. I realized that for me owning commodity type companies is very hard. No growth triggers. No certainty of growth. This helped me shape my investment style better.

#7 Indigo Paints

1️⃣ Newest decorative paints kid on the block. The david to Asian Paint’s Goliath. 30% growth for a decade. Did really well in Kerala & also in tier 3 or 4 towns. Aiming to grow 4x in 5 years. High return ratios. High pricing power.

2️⃣ Valuations were stretched at ipo. Valuations were stretched at the listing price. When indigo expanded into tier 1 cities, it would have to fight its David v Goliath battle even harder.

3️⃣ Stretched valuations meant that I did not apply to the IPO. Stretched valuations meant no margin of safety & so i could not & cannot take a large position here.

#8 Syngene
1️⃣ What a company. Head & shoulders above everyone else when it comes to biologics CRAMS. Forward integrating from CRO to become integrated CRAMS player. This business has very high entry barriers. It takes 10 years to create a new Bio CDMO player. Ask it from Stellis

2️⃣ To me the risk of this investment is the extrapolation investors are doing, looking at Wuxi & Samsung biologics’s growth & valuation multiples & demanding higher valuation for syngene. This frontending of returns is risky.

This is one company where the investors are more bullish than The CEO of the company. Ceo has repeatedly said: No hockey stick growth. Investors insist future will be similar to other bio CDMOs. Lets see what happens

3️⃣ Syngene itself has proved how hard it is to scale up Bio CDMO. It’s hard to see more than 15-20% growth here. Asset heavy. Entry barriers are definitely very high. But with low growth, In my understanding paying up a premium valuation takes away from my margin of safety

#9 Dharamsi Morarji Chemical Co
1️⃣ Dominant player in sulphur chemistry. Evolved from fertilizer to bulk chemical to specialty chemical company. Doing capex in bulk chemicals as backward integration for spec chem. Doing capex for CRAMS.

2️⃣ Their specialty chemicals like solfones are used in activities like tickets which were/are undergoing a downturn.

3️⃣ The lack of a clear growth trigger, spec chem being flat & large capex which was delayed by covid were some reasons i did not invest immediately. But I am watching it like a hawk. Attending concalls. Looking for growth to come back.

#10 Astec Lifesciences
1️⃣ Differentiated agro chem player embedded into innovator CDMO supply chains. Growing earnings at 20% CAGR. Changing product mix in favor of higher value added & agro chemical CDMO.

2️⃣ The person who created the company (Ashok Hiremath) is being phased out. Godrej has indicated that they might try to merge Astec with godrej agrovet (which is the holding co anyway).

3️⃣ The going out of current MD Mr Hiremath, the indications about reverse merger were all indicative of what the corporate direction is. To top that off, i was able to find better opportunities for >20% bottomline growth.

#11 Chemcrux industries
1️⃣ A niche microcap making intermediates for APIs with enviable return ratios. 3 year ROCE of 43%. They excel in High Pressure Oxidation, Nitration, Acetylation and Chlorosulfonation Chemistry.

2️⃣ Their plant is in ankleshwar which is one of most polluted towns in India. Whats more, they have been reprimanded by GPCB for polluting. Add to that their plan to expand capacities in same ankleshwar complex.

3️⃣ In the past co had few multi month closure due to pollution. Although co claimed to have great pollution control, their frequent run ins with GPCB meant that i could not build conviction here & thus did not own.

#12 Route Mobile
1️⃣ A Communication as a Platform Service (CPaaS) player who acts as intermediary between all companies & consumers for digital communication (SMS, Whats app, MMS). Good industry growth. Need for OTP only increasing.

2️⃣ I could not find any competitive advantages here. On top of that business is low margin. Felt like a commoditized service business. Route does have a clear opportunity to move higher up the value chain (interactive AI based Whats app services).

3️⃣ Could not buy a business without competitive advantages at high multiples. Since then, valuations have increased.

#13 Greaves Cotton
1️⃣ Is a leader in diesel 3W engines. > 50% market share. Wow. Supplier to Piaggio, Mahindra & Mahindra, Atul Auto. CREST CNG engines are under development. Also the owner of Ampere EV scooter brand.

2️⃣ The diesel engine is a sunset industry. In such an industry, no valuation is too low. Besides, entire 2W space has not seen meaningful volume growth for very long.

3️⃣ It’s hard to bet on OEMs for EV IMO. Its very hard to tell who will win. Plus, likes of Ola can bleed listed peers like ampere (greaves). Low operating margins here.

#14 Axtel Industries
1️⃣ Eat Dairy milk, Hershey’s? Axtel makes the machines that make the chocolates. Eat MDH spices? Axtel machines. Play on FMCG capex. Play on indian Ingenuity matching & surpassing european players like Buhler by providing quality at better price.

2️⃣ No concalls, so it is hard to know what is going on in the co. 15% growth was not anything to write home about.

3️⃣ I decided not to own Axtel because I could find better investment opportunities & their valuations (25-30 p/e) looked a bit stretched given their growth targets.

#15 Jyoti Resins
1️⃣ Jyoti Resins makes adhesives for wood working under the brand name Euro 7000. Optically good return ratios, margins. Optically cheap valuations.

2️⃣ Jyoti resins has some serious allegations of price manipulation from yesteryears. In addition, their P&L statement is artificially inflated due to capitalizing the expenses directly to balance sheet rather than taking it through the P&L.

3️⃣ Won’t go down the quality curve in a bull market. This is where i draw the line in terms of corporate governance.

#16 Prince Pipes
1️⃣ Emerging leader in CPVC pipes. Improving product mix. Improving margins. Decent end industry growth. Lubrizol tie up to create good backward integration with high quality CPVC.

2️⃣ Astral & supreme are leading well-entrentched players with leadership position in CPVC pipes. It is not clear how and if prince can win against incumbents. Astral does higher ad spends too.

3️⃣ Was not willing to pay a premium valuation when RTW is uncertain. Growth was good, but below my required threshold too.

#17 Garware High tech Films

1️⃣ In the value added polyester film business. Making Sun protection Films for Cars. Third largest player in USA. Monopoly in India. Product mix change improving for margin expansion. Only vertically integrated player.

2️⃣ They do not seem to recognise the challenge that XPEL poses. XPEL has an innovative direct to consider business model through which they are building the XPEL brand. Promoters are also taking huge fees thus short changing minority shareholders.

3️⃣ The company pays some 30-32cr of processing charges and 3-5cr of Rent to the
promoter owned private entities, one of the major beneficiary is Garware Industries Ltd (GIL). Could not stomach that.

#18 Strides Pharma
1️⃣ Most of the business is US generics, & thus commodity. Stellis is the gem embedded inside strides. A bio CDMO which is ready to blossom. A US generics biz which might have bottomed out.

2️⃣ Turns out the US generics business had not bottomed out. Turns out the margin for this business can break every lower low & become lower. Strides management is not exactly known for compounded value creation.

3️⃣ Since strides only owns one third of stellis, I ended up not buying ‘the beast’ for promise of the demerged ‘beauty’. Because it was clear that I did not have enough data to know how much of stellis would i own. How much could i suffer due to US generics?

#19 Camlin Fine Sciences
1️⃣ Leading Manufacturers of Antioxidants in the world with more than 30 years of experience. 3rd largest producer of Vanillin in the world. Strategic move to start blends which have higher margins.

2️⃣ Very complex geographical layout with manufacturing subsidiaries in many countries. End market seems to be small & slow growing for most products. So it’d be hard for them to gain market share, in some cases wresting it away from Clean sciences.

3️⃣ I put this in thee too hard bucket. Also hard to tell who will win between Clean & Camlin when they go head to head. Camlin claim to have same efficiency as clean, so hard to predict the winner.

#20 Fiem Industries

1️⃣ Large market share of all the lights used on two-wheelers. Large value migration from Halogen to LED lights. Fiem is leading the way. 2x the selling price though margins are similar. Ola sole supplier right now.

2️⃣ No growth in 2W volumes. Covid hit the industry hard. Without growth, value becomes value trap. I also could not understand why they are present in all EV 2W supply chains. What is the secret sauce in their LEDs?

3️⃣ Tracking closely. Have to see 2W industry volumes pick up before I can invest in india focussed Auto Ancs. In the lack of growth, dont really feel like investing.

#21 Etsy

1️⃣ Probably the best quality co in this list. Very innovative. Human commerce. Social Commerce. Want to put a human face to your e-com seller. Leader in machine learning. Innovative marketing.

Their GMS / active buyer has been rising which will fund the next leg of growth. People are shopping more on etsy than ever before. Urge their creators to make process videos & share. Customize your e-com purchase. So innovative.

2️⃣ I realised that the valuations dont leave much margin of safety on the table. That makes it really hard to take a large position.

3️⃣ Company can do well & still leave me poorer due to derating. This is why i did not invest in Etsy, even though the business is truly remarkable & exceptional. Has carved out a niche for itself.

My key learnings about myself through these 'NO's are:
1. I insist on a margin of safety.
2. I insist on there being significant topline growth
3. I do not want to bet on promoters who want to shortchange minority shareholders.
4. I wont buy that which I find too complex

<End of thread>

If you find the thread useful, please ReTweet the 1st tweet.

This thread took something like 6 hours to put together. Gathering all that evidence. Narrowing down to 21 companies from among maybe double that number that i actually studied.