Pokarna The frog that can become a princess

Pokarna The frog that can become a princess Stock discussion 1

Law of diminishing returns “You make maximum money when things go from truly horrible to just getting better. The time of maximum fear and judgement (mis ? ) is the time to buy. “ “Better to be the first to squeeze an average quality sugar cane than to be the 5 th to squeeze a good quality sugar cane. Sirf chilka milega !” 2

How to antagonize friends and be unpopular while making money from market “You can’t make a lot of money buying what everyone is buying” You make maximum money when something goes from utterly hopeless to bad. . John templeton – maximum pessimism -= 3

Asymmetric risk-reward equation Promoter behaviour Random decisions based on passion, employement generation for family members Understands what’s capital allocation Business Strong profitability growth Actions in line with share holder needs Shrinking balance sheet/repayment of debt Strong topline growth “This party will never end” analystspeak Valuation Trades like at near bankruptcy valn Trades for zero growth 4

What attracted me to pokarna • Huge demand for quartz kitchen tops in the USA • Market is more than $ 2 bn and growing at 10 %+ • Better heat resistance, 5

Three businesses of pokarna Granite Quartz Profitability Value to shareholders Capacity/cap. ut il Capital employed (%) 40 % + EBIDA 25 % EBITDA 25 % ROCE and 60% ROE 20 % ROCE 8. 3 lac/N. A. 8. 85/70 -75% 65 % 30% 6 Apparel Profitable for family members as a hobby Forced charity, shall we say ? NA 3%

Management commentary – Q 1 FY 17 7

Incredibly strong cash flows and huge op leverage in quartz 8

Pokarna’s quantra has an unique chance of becoming a no. 3/4 in the US market Levers to improe ROIC Busness summary USP Ceaser stone quality at 2/3 rds the price • Average price realization is at $ 6 Vs $ 9 -10 for caeser stone • As yet, not present in DIY stores like home depot, ikea • Primarily sell through distributors and yet to establish a strong brand • Higher realizations as distribution ad brand get entrenched • Tie-up with a DIY home retailer that give volumes • Jumbo slabs of higher thickness that have disproportionately higher realizations 9 9

US market – large and growing Quartz is in the sweet spot of growth US housing is strong and growing 10 10

Entry barriers • • Huge capital outlay Access to quarries/RM Distribution network Ability to do mass customization on the production line • Access to technology and certifications “Kosher”, quality accreditations from retailers in USA 11 11

Mental model : All four engines are firing • • Improving sales and profitability Shrinking balance sheet/reducing debt Improving ROIC Changing management - Q 2 FY 16 – results presentation uploaded; Q 1 FY 17 – conf call and analyst meets; Repaid FCCB and came out of CDR in 4 years 12 12

Poke the karna 13 13

What’s the hair on the frog – Very few professionals in top management – seems to be a family run business – Lots of RPT – not material but a sign nevertheless. However, reducing in size and volume – Emotionally attached to the apparel business- see no light at the end of day for it. 14 14

What do industry experts say ? “Pokarna’s quality is amongst the best in quartz and granites “ – fellow exporter from Jaipur “Gautam Jain is very conservative and hence the reluctance to expand capacity by taking on debt. The FCCB and CDR debacle possibly is playing in his mind. ” Analyst tracking the company “Going forward, increasing capital allocation into quartz would be the driver of value. ” 15 15

Scuttle butting • Checked US port container landings and verified it with pokarna’s shipping data – it broadly matches • Checked with an ex-daltile employee to check on daltile’s criteria for choosing pokarna – feedback is positive • Checked with a Jaipur based granite and quartz exporter and he confirmed pokarna has the best brand name amongst indian firms in the US market 16 16

Snippets from AR ‘ 16 Quartz : • Focussed on jumbo slabs to improve realization • Formed a JV to enter Netherlands • Expanded distribution in the USA • Got kosher certification in USA • Implemented SAP 17 17

AR ‘ 16 snippets 18 18

Strong demand in countertops 19 19

Strong cash flows 20 20

Asymmetric risk-reward • “ What matters in the markets is how much money you lose when you are wrong and how much you gain when you are right. . ” • Stan Druckenmiller 21 21

But is past history at dissonance ? • Yes – a few mistakes have been made – Sticking to apparel – No professionalization – Not enough focus on quartz which is growing global market – Have always been cash flow positive – Have never diluted equity – Repaid the FCCB in full and CDR compense – Irrespective the company has delivered 1600% in 20 years (16 % IRR), not bad by any standard 22 22

What can go wrong ? • More money into apparel – unlikely • Company is not able to handle the large capex for quartz – medium probability as funds required are in excess of Rs. 200 Cr. • How soon the company can do this capex and monetize it wil drive whether this goes to the next level of Mcap 23

Recommendations • A good start would be Rs. 700 -760 which translates to a Rs 450 Cr. mcap • At an OCF of Rs. 140 Cr. This gives a near 25 % OCF yield and will be at 6 x FY 17 PE • This captures the downside risk adequately – do not see a more than 10 -20% downside unless there is a black swan 24

Potential upsides/optionalities • • • Stake sale to a global player Apparel shut down/sell out Improvement in granite division Improved visibility and transparency All of these should lead to a PE re-rating. The key thing is patience. 25

Comparing the positives and negatives • • Positives Early entrant into a global, fast growth segment High entry barriers Huge currency tailwinds Make in india beneficiary Negatives • So-so management but evolving well • Capital allocation still an issue but not a very material one • Professionalization has some way to go 26

Where can this go to • At a FY 18 EPS of Rs. 150 assuming this rerates to 10 -12 x this can go to Rs. 1500 or so. 27

• • Valuepickr AR 14, 15, 16 Equirus research reports on pokarna Inputs from a hedge fund that is short on Caeser stone, pokarna’s prime competitor in the USA 28

Disclaimer • “ When facts change, I change my stand. What do you do sir ? ” • I hold this stock having bought at near CMP prices 29

• Thank you 30