Usually excited by Indian specialty chemical industry estimated at 25bn growing 13 US Generics worth 50bn will go off patent in next 45 years Indian housing finance Housing for all schemes Huge opportunity for HFCs ID: 918773
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Slide1
Learnings…
Ananth
shenoy
Slide2Usually excited by..
Indian specialty chemical industry estimated at 25$bn growing 13%
US Generics worth 50$bn will go off patent in next 4-5 years
Indian housing finance – Housing for all schemes – Huge opportunity for HFCs
Global
agrochem
CRAMS is 30$bn
opportunity
…the demand scenario
Slide3Capital Cycle – From Capital Returns
Capital is attracted into high return businesses and leaves when returns fall below the cost of capital
The process is cyclical
The inflow of capital leads to new investment which increases capacity and pushes down returns
Conversely, when returns are low, capital exits, capacity is reduced and profitability recovers
Key is to understand how changes in capital employed in an industry is likely to impact future returns
Slide4Transformer industry - cyclicality
Slide5Transformer Industry
FY05-FY10 strong sales growth
FY09-FY10 every company reached peak operating margins
FY08-FY11 almost every company took significant
capex looking as ROE reached excellent
numbers (FY08,FY09)Demand stopped increasing, causing OPM to plummetFrom FY11-17 industry capex is downOnly TRIL took capex during this time
(management showing counter cyclical behavior ?)
ROE
FY09
FY08
Voltamp
42%
50%
TRIL
16%
17%
Bharat
bijlee
25%
44%
IMP
19%
28%
Slide6Management - capital
allocation
High profitability often leads to over confidence to managers and boost capital spending
In good times of a industry, demand forecasts tend to be too optimistic by managers
When returns are high, companies are inclined to boost capital spending
Stock prices usually go on capex announcements
Slide7Pharma ROEs
ROE
FY13
FY14
FY15
FY16
FY17
Alembic
32%
34%
31%
45%
20%
Torrent
30%
35%
30%50%25%Lupin25%26%26%20%19%Sun20%17%17%15%15%DRL24%25%23%18%13%Auro13%31%30%28%25%Glenmar22%18%12%24%14%
When returns are high, companies are inclined to boost capital spending
Slide8Significant increase in R&D/capex
Last few years excellent ROEs for pharma companies
Which is causing significant rise in capex/R&D spend in last two years
Last two years R&D spend equal to that of previous 5 year
Capex of last two years significantly higher than previous 5 years
Almost every company will increase US filings significantly in FY18http://forum.valuepickr.com/t/indian-pharma-industry-perspective/10477
ALL this means SUPPLY GOING TO INCREASE
Slide9Kenneth Andrade interview
SUMMARY
Usually supply side constraints give pricing power
Usually in a country like India, demand will increase 5-7%
But if capacity is not added in 3-4 years, profitability will increase disproportionately
Demand/Growth is difficult to predict
Supply is more predictable
Slide10Summary
Look at how the investments is happening across the
industry ( one of the main parameter is Fixed asset increase)
Don’t get excited just looking at one company doing big capex (look at the asset growth across the industry
) – the inside view
Focus on studying supply side and the competitive positioning evolving
instead of just demand
side drivers.
Read
and focus more industry related
articles regarding capacity increase/
capability increase
Look
for oligopolistic industries (easier to predict supply side
changes/capacity increases)
Supply side disruption can increase pricing power ( in real estate with RERA??)