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Saplings Capital Profile picture
@CapitalSapling
Sep 20, 2020 • 9 tweets • 3 min read • Read on X
1. We a see a trend these days to compare operational cash flows to net profits and judging the quality of a company based on this rather simplistic metric. Through this thread we seek to dispel this myth through an investee sapling of ours. #saplingcapital #Saplingframework
2. One of our most favorite technical pesticide manufacturing sapling has often been ridiculed for not generating operating cash flows in line with net profit.
If all that were required to identify great companies was to compare OCF to profits everyone would be a super investor.
3. Going in depth and scratching beneath the surface helps and in this case it required one to study the nature of the trade.The company is one of the largest exporter of technical grade pesticides.
4. The main competition comes from china which for the past 10 yrs used to provide its european customers a credit period of 6 months. This was the trade company functioned in for a large part of its existence.
5. In addition, manufacturing of technical pesticide requires diverse chemicals such as phenol etc not commomly available in india atleast before deepak phenolics came in.Thus companies stocked up on important feed material to ensure smooth operations, soaring up inventory levels
6. Also if one were to do a simple supplier check of company, he would have known that company avails of large cash discounts by paying immediate basis.
7. This if anything is actually a great indicator of company's balance sheet.Not many companies are able to pay in time in India let alone availing cash discounts.
8. Now all of this reduces the operating cash flow optically but none of this impacts the core moat of the company, which is manufacturing niche technical pesticide, come first time in India at scale.
9. Meanwhile the stock is a 100 bagger in last 10 yrs. Excel investors will miss out becuse they fail to realize that their is a real world out there. Where things arent really as smooth as they want then to appear on their excels. End @moatseeker @Rachitpandey299 @chiragdashj

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More from @CapitalSapling

Saplings Capital Profile picture
Jul 30, 2021
Some companies that deliver future returns have hair on them to begin with.
#Camlinfine is one ex, has been going a transformation internally (not visible optically at present) and is now on strong footing with installation of commissioning of Diphenols capacity in Dahej.
Diphenols capacity helps them save on freight which was hitherto spent on importing from Italy.
This capacity makes them one of the very few players in the world with captive capacity of diphenols.
The diphenols derivatives to come will have substantially higher margins.
The optionality remains in terms of the bumper outcomes that can come from their agreement with Lockheed Martin for supply of speciality chemicals that go into energy storage( a huge sunrise opportunity) over the next few years as the supplies begin.
Read 4 tweets
Saplings Capital Profile picture
May 25, 2021
Great thread. #Garwaretechfilms is one of the few small caps, thats able create a brand in advanced markets. They compete with the likes of 3m in the US and while it gets valued as a commodity company, it deserves to be trading as a speciality consumer company.

Disc: Invested
A barometer of company's brand strength is it gross margins & Payment terms. GM% are at a great 65% at present( vs 38% for the commodity film companies) and the company offers no credit and works on a cash & Carry model.
Hard to find an Indian company that sells in the US in cash
One of the best models is for the company to sell to many small customers & that too in retail. Garware Hitech's customers are the 4000 paint tinters in the US. Their existing brand recognition amongst the tinters for the window films will work well for it paints film business.
Read 5 tweets
Saplings Capital Profile picture
May 13, 2021
Even for a small cap investor a large % of his PF should be optimized for "Capacity to suffer & durability" rather than for pure upside.

In country like India, if one stays invested long enough the demographics & its upwardly mobile percapita income will take care of the upside.
This calls for a supply side excellence which creates a capacity of suffer through difficult periods or actually demonstrates antifragility and thrives under stress through the strength of its reputation and balance sheet by acquiring assets in distress.
A classic ex of this is APL apollo, over the last decade where most metal convertors have struggled, APL has demonstrated anti fragility thrived by using its superior balance sheet to acquire assets from companies that were in distress like the plant bought from Shankara.
Read 6 tweets
Saplings Capital Profile picture
May 6, 2021
#PixTransmission is a dominant small cap in its duopolistic market of V-Belts, essential in all manufacturing sectors.
Company due to robust demand has recently approved further capex of 60 crores.
Promoter increasing stake.

Disc: invested from 300 levels.

Much more to come!
Indian Market is dominated by Pix & Fenner, V-Belts has repeatable purchase as the product wears out after a limited time.
Due to its use in every industry, it is required that the manufacturer have v belts in 1000's of sizes and every size has a different mold.
This inventory of molds calls for a significant investment, which acts as a moat for the incumbent.
Since v belts are used across India, the vendor is required to have most of its variants stocked with dealers across the country.Pix has a significant distribution moat in India.
Read 15 tweets
Saplings Capital Profile picture
May 4, 2021
Investing in Small cap domination eventually leads to big wealth creation, Don't overoptimise for valuations here, in-fact optimize for Moat, if the company's business Castle is well moated, the long runway of opportunity will ensure you make a hell of a lot of money regardless.
The likes of Astral and Page hardly ever traded at conventionally cheap valuations since the beginning of last decade, but have still generated immense wealth for investors who have held it with the scarce commodity called "Patience".
While one might think that we chose the likes of astral and page selectively in hindsight, but the truth is truly moated small caps are hard to come by.
And being lenient with valuations is an act to be committed only with a select few.
When in doubt skip!
Read 5 tweets
Saplings Capital Profile picture
Mar 15, 2021
A successful consumer tech company should always be valued significantly higher than a normal consumer company.
Opportunity size is large for both but the digital distribution of the tech company services allows it traverse the opp landscape faster than a normal consumer company.
Since capex is not a challenge in setting up a tech business, therefore a tech company has to create alternate barriers, thus the need to drive business velocity as network effect is true barrier to entry.
To get to that scale, tech companies have to sacrifice near term eps.
If public market doesnot agree with this, its the markets' loss, these companies will either stay private or raise equity from Nasdaq.

So in true tech if the public market participants want the alpha, they have to devise alternate methods to assess a company and its valuations.
Read 7 tweets

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